Tuesday, April 27, 2021

The History of Fredericksburg, VA and the Idea of Reparations


The following excerpt is from The History of the City of Fredericksburg, Virginia prepared by Silvanus Jackson Quinn for the Common Council of the City of Fredericksburg in 1908.  Unfortunately, it does not provide any citations for the story. Nevertheless, parts of the story ring true: the initial hope that justice would be done, the disappointment when it was not, the loss of faith in the government institution, and the authors repetition, a half century after the events, of the belief that it was absurd to think that formerly enslaved people should be compensated.







Saturday, April 24, 2021

A model of Levy's economic theory?


Last week I wrote some thoughts about Jonathan Levy’s new book Ages of American Capitalism. My copy of the book arrived, but I have been too busy with classes to get to it. I did, however, find it interesting that a new working paper from the NBER presented a model of business cycles that (to me at least) sounded very similar to Levy.

Here is how I described Levy’s theory:

“My reading of Levy’s second and third theses together is that he thinks that a preference for holding wealth in a liquid form needs to be overcome to get capitalists to put their assets in things like new farms and factories etc. That this something extra can come from government or culture or both, but it tends to come and go in booms and busts, and growth is a result of the booms. I think there is a lot to this as a story of American economic history, business cycles are certainly one of the central features of American economic history, but I think this story is missing important elements as well.”



The new paper is Risky Business Cycles by Basu, Susanto, Giacomo Candian, Ryan Chahrour, and Rosen Valchev. No. w28693. National Bureau of Economic Research, 2021.


Here is the abstract:

“We identify a shock that explains the bulk of fluctuations in equity risk premia and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction.”

This is from the conclusion, and I think it is much clearer than the abstract or introduction:

“This paper shows that fluctuations in risk premia can be major drivers of macroeconomic fluctuations. Our empirical analysis suggests the possibility of a major causal pathway flowing from risk premia to macroeconomic fluctuations, and our theory embodies one such a pathway. In our model, heightened risk premia cause recessions because they drive reallocation of saving towards safer stores of value, which simultaneously have low instantaneous marginal products. Thus, our theory contrasts with many business cycles models that emphasize the effects of intertemporal substitution, and instead puts risk premia and their effects on precautionary saving at the center of macroeconomic propagation. In this respect, our model bridges a gap between the tradition of risk-driven business cycles `a la Keynes and the central lessons of modern macro-finance summarized in Cochrane (2017)”

Thursday, April 8, 2021

My First Impression of Jonathan Levy's Ages of American Capitalism



I have pre-ordered a copy of Ages of American Capitalism: A History of the United States but it does not ship until the 20th. Consequently, my first impression is based upon excerpts of the book that are publicly available. The publishers page for the book provides a very extensive (more than 180 pages) preview; click on Look Inside. You can also preview scattered parts at the book’s Google Books page.

I'll admit that Levy’s previous work has tended to leave me thinking that his reach often exceeds his grasp, sometimes by too much. I find his goals interesting, but then end up shaking my head at the results. He writes a book about how Americans dealt with economic risk in the nineteenth century. That sounds interesting. But he begins by claiming that what we think of as risk didn’t exist before the 19th century. It is easy to find examples prior to 1800 of people writing about risk in the same way that we do now. He tries to develop a definition of capital and capitalism for use in the history of capitalism, building on the work of Thorstein Veblen, but he confuses Veblen’s references to pecuniary magnates with the notion of a pecuniary magnet. In his latest book Ages of American Capitalism Levy seeks to provide a new American economic history. He states that what has been lacking in the New History of Capitalism (NHC) is engagement with economics, but he also wants to take a broad view of economics, incorporating politics and culture. Sounds good. So, how did it turn out in Ages of American Capitalism?

Levy’s conceptual framework is central to the book and one of the merits of the book is that he makes it explicit from the start. The introduction presents three theses about the essential features of American capitalism, the first of which provides his definition of capital.

Thesis #1: “Rather than a physical factor of production, a thing, capital is a process through which a legal asset is invested with pecuniary value in light of its capacity to yield a pecuniary profit.”

Thesis #2 “Capital is defined by the quest for pecuniary profit. Without capitals habitual quest for pecuniary gain there is no capitalism. But the profit motive of capitalists has never been enough to drive economic history, not even the history of capitalism.”

Thesis #3 The history of capitalism is a never-ending conflict between short term propensity to hoard and the long term propensity to invest. This conflict holds the key to explaining many of the dynamics of capitalism over time, including its periods of long term economic development and growth, and its repeating booms and busts.”


His definition of capital is crucial because “capital is the framework employed to make sense of economy and economic change.”  Its not obvious why it is better to have capital refer to the process rather than the asset that has gone through the process. It seems awkward to me, but its not my biggest concern.

Levy presents his view of capital as an alternative to the economic approach that defines “capital as a physical factor of production” declaring that this “is far too narrow a definition of capital.” As an economist Levy’s claims about how economists use the term capital are just puzzling. It doesn’t require much familiarity with economics to know that economists use the word capital in multiple ways. Levy has taken just one of the ways the word is used by economists and does not seem to have fully understood that one way. In models of economic growth economists typically use capital to refer to inputs that were produced in the past. This definition of capital as a factor of production includes factories and equipment as Levy suggests but also things like roads and bridges. Moreover, capital as a factor of production is not just material things. Both physical capital and human capital are included.  More to the point, capital as a factor of production is just one of the ways economists use the term capital. Economists also write about capital requirements for banks, international capital flows, and capital asset pricing. When economists talk about capital flight, they are not referring to people dismantling factories, packing up equipment and shipping them out of the country. They are talking about financial flows. The capital account refers specifically to financial flows as opposed to the current account which measure goods and services. None of these are about capital as a factor of production; in fact, they about the sort of assets with a capacity to yield a profit that Levy wants to consider. Economists have, in fact, long studied the sort of the valuation of assets based upon their expected future returns that Levy seems to be describing.

Although these multiple uses of the term capital may be confusing, especially for non-economists, none of them can simply be discarded. He says capital as a factor of production is too restrictive, but it is intended for a specific purpose, a very important one: the analysis of economic growth as measured by increases in real output. Increases in output can come from either increases in inputs or increases in productivity (getting more output from a given amount of inputs). This sounds obvious. If you produced more output either you used more inputs or you got more output from the same amount of inputs. Although obvious it is very important to keep in mind.

Levy wants instead to build a theory of economic development based largely on his reading of Keynes, emphasizing the psychological aspects of Keynes.  Liquidity preference is also central to his framework, but again in ways that are somewhat confusing to an economist. Specifically, he wants to insist that liquidity refers primarily to the ability of an asset to store value rather than the ability to either use it as a medium of exchange or quickly convert it to a medium of exchange. The latter attribute is what economists generally mean by liquidity. I could provide examples illustrating why they are distinct concepts; however, Levy acknowledges that they are distinct and potentially independent yet chooses to insist that liquidity refers to both attributes.

Why does he care so much about liquidity? Although he does not want to use capital to refer to the factor of production that is produced in order to produce more in the future, he is very concerned with what I would call physical capital. My reading of Levy’s second and third theses together is that he thinks that a preference for holding wealth in a liquid form needs to be overcome to get capitalists to put their assets in things like new farms and factories etc. That this something extra can come from government or culture or both, but it tends to come and go in booms and busts, and growth is a result of the booms. I think there is a lot to this as a story of American economic history, business cycles are certainly one of the central features of American economic history, but I think this story is missing important elements as well.

Levy doesn’t just drop the use of the term capital to refer to a factor of production he drops the framework for understanding economic growth that goes with the conception of capital as a factor of production. In his Business History Review paper on Capital as Process Levy cited Solow’s Contribution to the Theory of Economic Growth when explaining that “aggregate production functions began to consist of two physical factors of production, capital and labor, which mechanistically combined to produce a physical output.” But he missed the point: “the Solow growth model is most useful for us as a framework laying out the general issues and questions. It emphasizes that to understand growth, we have to understand physical capital accumulation (and human capital accumulation, which will be discussed in the next chapter) and perhaps most importantly, technological progress (Acemoglu Introduction to Modern Economic Growth.” Technological progress here is understood very broadly as anything that increases productivity. It can be reflected in better machines, but also better plants, better animals, better organization, etc. Estimates by economic historians support the need to look at increases in capital and technological progress.

Here are recent estimates by Broadberry and de Pleijt for a much longer time in England


Here are similar estimates for the 19th century U.S. from Bob Gallman in The Cambridge Economic History of the United States

Both in Levy’s introduction, where he lays out his conceptual framework, and in the parts of the book that I have read technological progress does not appear as a central concern. Yet for economists studying economic growth or for economic historians studying long term change technological progress is a central concern. Ironically, it was also central to many of the economists that Levy claims to have been influenced by. For Marx “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society.” Or Schumpeter: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” (Chapter 7 Capitalism, Socialism and Democracy) Schumpeter even emphasized the importance of finance to innovation, and a number of economists and historians have made this a central theme in their research.

For instance, here is a passage from the introduction using Ford to illustrate Levy’s theory


The expansion of production is attributed to the ability to overcome liquidity preference, the willingness to invest in a fixed physical factor of production. Many economic historians would have emphasized Ford’s obsession with standardization and how that enabled he and his engineers to develop moving assembly line production. It wasn’t just about building a bigger plant; the key was building a better plant. Productivity improvement appears to be assumed as an underlying condition in Levy’s framework. If people invest in fixed factors of production, growth will come. I think this is also reflected in the fact that there does not seem to be much context provided for the American story. Levy begins the story with mercantilism and British imperial policies as the force that provided the confidence to invest in land and slaves, but he does not put American economic history in the context of the emergence of modern economic growth around the same time that America was being settled. In contrast, recent economic history textbooks, like Walton and Rockoff do place the U.S in the context of the broader issue of the emergence of modern economic growth.

The passage raises other questions about Levy’s framework as well. Specifically, the assembly plant and other Ford facilities were illiquid for the Ford Motor Company. Henry Ford’s investments were, however, illiquid by choice, not necessity. Ford chose not to go public until the 1950s. How do Levy’s explanations regarding preferences for liquidity play out through corporations. One of the primary benefits of corporate form is asset shielding, the ability to keep the assets of the corporation legally distinct from the assets of the shareholders. Why would an individual investor in a publicly traded corporation be concerned about the liquidity of the corporation’s assets? Why would management? It may be that the story still works but it is not obvious. I’ll be curious to see how he deals with in the 20th century parts of the book.


So, there are things that I would do differently than Levy. That, of course does not necessarily mean that Levy’s choices were wrong. There are, however, some things in the book that are wrong. The primary problem I had with much of the early work in the New History of Capitalism was not about methods or conceptual framework it was about things that were wrong, things that were contrary to readily available evidence. Of course, in any 900-page book mistakes will be made, but at some point, they can become numerous enough and egregious enough to present a problem. I was not fact checking every page or even searching for factual errors, but I could not help but notice some.


This is a map of trade around 1750.


Unfortunately, any map of trade with North America in the mid-1700s that does not include tobacco from Virginia and sugar from the West Indies going to England is probably doing more harm than good. Findlay and O’Rourke Power and Plenty (2007) 234-235 has very detailed tables of trade in the years leading up to the revolution if you are interested. To give credit where credit is due, I think they may credit McCusker and Menard.


Page 41 “In 1607 the Virginia Company brought roughly six thousand settlers to the Jamestown colony.” Roughly is doing an awful lot of work here; the number of settlers was 105. I still cannot imagine how this ended up in the book and how no one noticed it.  


On page 225 “Half of all U.S. railroad corporations tumbled into bankruptcy” and a few pages later “During the 1890s, no less than one-third of the U.S. railroad sector was placed in bankruptcy.” People often use the word bankruptcy to refer to insolvency including insolvent railroads, but for most of the nineteenth century there was no bankruptcy law in the U.S. You could not declare bankruptcy or be put in bankruptcy. Even when there was a bankruptcy law railroads tended to go into receivership because unlike bankruptcy receivership tended to be directed at maintaining the railroad as a going operation. I care about this more than most people (see Hansen, Bradley. "The people's welfare and the origins of corporate reorganization: The Wabash receivership reconsidered." The Business History Review (2000): 377-405.) but what really caught my attention was the numbers. They are wrong.

This is from H.H. Swain Economic Aspects of Railroad Receivership


The next two might not bother some people but they are kind of pet peeves of mine.

On page 15 he points to Hobbes description in Leviathan of mankind driven by “a perpetual and restless desire of power after power that ceaseth only in death,” as a reflection of the belief that But Hobbes is not the appropriate citation for belief in unlimited desires because he goes on to explain that “the cause of this is, is not always that a man hopes for a more intensive delight than he has already attained to; or that he cannot be content with a moderate amount of power; but because he cannot assure the power and means to live well, which he hath at present without the acquisition of more.” As a description of infinite human desires. But Hobbes point was exactly the opposite. He went on to explain that “the cause of this is, is not always that a man hopes for a more intensive delight than he has already attained to; or that he cannot be content with a moderate amount of power; but because he cannot assure the power and means to live well, which he hath at present without the acquisition of more.” The perpetual pursuit of power was not driven by unlimited desires; it was driven by the situation, which Hobbes viewed as essentially the same as a multi-person Prisoners’ Dilemma.

On page 40 he describes Malthus theory and then notes that it is “no wonder the Scottish historian Thomas Carlyle in 1850 branded political economy the dismal science.” Carlyle labeled economics the dismal science in his 1849 Occasional Discourse on the Negro Question; he did so because many economists opposed slavery, which Carlyle believed should be reintroduced into the West Indies.


So I have concerns bout the conceptual framework and was struck by some surprising errors, but there are things that I liked. I like that he tries to create a coherent narrative of American economic development rather than just examining a bunch of separate topics or events without trying to connect them in any way. I like that he shows how colonists adapted rather than adopted English institutions, building on recent work by people like Claire Priest. I like that Levy seems to take a Lindstrom/Mayer view of early American development, emphasizing the importance of intraregional trade in early American development. This contrasts with much NHC writing on slavery that still cited North’s model of interregional trade without any reference to the research contradicting the model.  In addition, he notes at several points that although international trade was important to many people it nevertheless accounted for a relatively small share of total production.

So where does this leave me regarding whether Levy’s reach exceeded his grasp by too much in Ages of Capitalism? Undecided. I still have over 700 pages to read. I said this was a first impression. It is going to depend on the extent to which he was able to make productive use of his framework and the extent to which he was able to keep the errors within reason.