Business History and the Great Divergence

Luca Zan and Kent Deng “Micro Foundations in the Great Divergence Debate: Opening Up a New Perspective” LSE Department of Economic History Working Paper No. 256 Jan. 2017

Abstract

Prevailing approaches in historical studies adopt a macro view and place an overwhelming emphasis on the Industrial Revolution as a major discontinuity in Western development. On the contrary, recent research in accounting, management and business history has suggested a different direction. When opting for a micro-level focus, crucial discontinuities in management and accounting in the West can be traced back to the Renaissance Period. The paper thus searches for ‘micro foundations’ in managing and accounting practices to address the on-going debate on the East-West divergence. Despite the obvious problems with source availability, we outline a new research agenda for the debate.

Geoffrey Jones Business History, the Great Divergence and the Great Convergence Harvard Business School Working Paper 18-004

Abstract

This working paper provides a business history perspective on debates about the Great Divergence, the rise of the income gap between the West and the Rest, and the more recent Great Convergence, which has seen a narrowing of that gap. The literature on the timing and causes of the Great Divergence has focused on macro analysis. This working paper identifies the potential for more engagement at the micro level of business enterprises. While recognizing that the context of institutions, education, and culture plays a role in explanations of wealth and poverty, the paper calls for a closer engagement with the processes of how these factors translated into generating productive firms and entrepreneurs. The challenges of catching up were sufficiently great in the Rest that initially ethnic and religious minorities held significant advantages in raising capital and trust levels, which enabled them to flourish as entrepreneurs. Yet by the interwar years, there is evidence of a more general emergence of modern business enterprise in Asia, Latin America, and Africa. Many governmental policies after 1945 designed to facilitate catch-up ended up crippling such emergent business enterprises without putting effective alternatives in place. The second wave of globalization from the 1980s provided more opportunities for catch-up from the Rest. Firms from emerging markets had the opportunity to access the global networks that replaced large integrated firms. There were also new ways to access knowledge and capital, including through management consultancies and hiring graduates from business schools. The upshot was the rise to global prominence of firms based in the Rest, including Foxcomm, Huawei, HNA, Cemex, and TCS.

Steinbaum on Public Choice

Marshall Steinbaum has published a sort of review of NancyMacLean's Democracy in Chains in which describes “the racist origins of Public Choice theory” and suggests that everyone should read Democracy in Chains “despite its rhetorical shortcomings.”

Steinbaum seems to unquestioningly accept MacLean’s claim that Buchanan’s “study of how government officials make decisions became “public choice economics.”” (MacLean xxiii) In making public choice theory and Buchanan's though synonymous, Steinbaum and MacLean strip public choice of all context other than that related to Buchanan. Buchanan, however, was only one of a number of people attempting to apply economic methods (rational choice and models) to the analysis of both politics and political philosophy. Duncan Black’s work was published before Buchanan, and Ken Arrow, William Riker, Vincent Ostrom, Amartya Sen and others were working on this approach in the 1950s and 1960s at the same time as Buchanan. To the best of my knowledge, none of them appear in Democracy in Chains. They are not listed in the index. The point is that there were a lot of people interested in applying the economic approach to politics. Many of them did not have the same normative preferences as Buchanan. It is this broader approach to public choice that you will find in Mueller’s text on the subject. It is even what you will find here at the Library of Economics and Liberty. Public choice is more than James Buchanan.

By the way, this is more of a defense of public choice theory than it is of Buchanan,Virginia, or UVA. The University of Virginia was an avowedly racist and sexist place in the '50s and '60s? UVA was both all white and all male (until the 1970s). To the best of my knowledge neither Buchanan or anyone of his colleagues at the time made any effort to change that. Of course that could be said of most of the men at UVA and a lot of other universities at the time. The liberty they were most concerned with seemed to be the liberty of men like themselves. 

I'll also say that I have no intention of reading the whole book. If you want to say I have no right to criticize it until I have read the whole thing, go ahead. I don’t care. I don’t have enough time to waste on historians that I do not trust. This is particularly true for a subject that I do not regard as my area of expertise. If it is nineteenth or early twentieth century American economic history I can quickly identify inconsistencies and errors, but for other topics I need to have some faith in the historian. For me the bottom line on MacLean’s book is still that there are numerous instances where she did not honestly represent her sources. Misrepresenting your sources is more than a rhetorical shortcoming.

Trust Company Failures and Institutional Change in New York, 1875-1925

My paper "Trust Company Failures and Institutional Change in New York, 1875-1925" is now available under First View at Enterprise and Society.

Here are the first two paragraphs

The State of New York created the first trust company in 1822, when

it granted a corporate charter to the Farmers’ Fire Insurance and

Loan Company, later renamed Farmers’ Loan and Trust Company,

and authorized it to act as a trustee. As the name suggests, Farmers

and other early trust companies, like the New York Life Insurance

and Trust Company and the Massachusetts Hospital Life Insurance

Company, also sold insurance, and they provided trusts as an alternative

to insurance. Trust companies later used their trust powers

to facilitate the development of corporate finance by serving as registrars

and transfer agents for corporate securities and as trustees for

corporate mortgages. Trust companies also accepted deposits; by the

middle of the nineteenth century, some of these deposits could be withdrawn

on demand including by check. Thus, by the late nineteenth

century, trust companies in New York occupied a unique position in

the financial system by combining functions associated with banks

with functions associated with trustees.

Between 1875 and 1925, the number of trust companies in New York

State increased from ten to 110, and the total resources of trust companies

increased more rapidly than those of state banks or savings

banks. Trust companies have been characterized as early examples

of “shadow banks,” operating outside the laws and regulations that

applied to commercial banks. However, as with other financial institutions,

New York State trust companies rarely failed. Between 1875

and 1925, the superintendent of banks only intervened eleven times

to deal with troubled trust companies, and in several of these cases

the trust company reopened. Despite this rarity, these failures provide

a path to understanding the overall success of trust companies.

The path leads through institutions: failures played a leading role in

shaping the institutions that governed trust companies. Consequently,

failures shaped the expectations and actions of everyone involved

with trust companies: depositors, shareholders, and executives.

Some recent history and economic history

The latest issue of History Now from the Gilder Lehrman Institute is about the history of the blues and jazz. It has this nice list of links to music.

There has been a lot of discussion recently about state capacity and the evolution of norms. I think it is safe to say many economist historians regard both as essential to understanding long run economic performance.

On state capacity, here is Koyama on Salter on Johnson and Koyama. And here is Koyama on Political Decentralization and Innovation in early modern Europe and The Economist covers the work of Anderson, Johnson and Koyama on poor harvests and violence.

On the evolution of norms:

Pseudoerasmus “Where Do Pro-Social Institutions Come From?” originally published as a blog post but recently published on Evonomics.

Peter Turchin writes that

“Cultural Evolution is a new interdisciplinary field whose intellectual roots go back only to the 1970s (unless, of course, you count Charles Darwin; but in a sense any new development in evolutionary science can be traced to Darwin). In this new field, “culture” is defined as information, which can affect human behavior, that is socially transmitted—through books and manuals, by teaching, or simply by observing and imitation. Cultural variants are information packages that cause people to behave in alternative ways. Cultural Evolution, then, studies how and why frequencies of cultural variants change with time, just as biological evolution focuses on the changing frequencies of genetic variants.”

       

Of course North placed a great deal of emphasis on the importance of changing beliefs (especially in Structure and Change and later works) but this also reminds me of Veblen, who argued that “institutions are, in substance, prevalent habits of thought with respect to particular relations and to particular functions of the individual and of the community” and that "the evolution of society is substantially a process of mental adaption on the part of individuals under the stress of circumstances which will no longer tolerate habits of thought formed under and conforming to circumstances in the past." He argued that these prevalent habits of thoughts influenced both the objectives that people sought to achieve and the means that they perceived to achieve them. Consequently, their evolution should be the primary concern of economists.

In addition, Jared Rubin and Murat Iyigun have a paper on the Ideological Roots of Institutional Change

BTW there is actually a connection between the first link and the last link in this post.

The Importance of Honesty in Historical Research

I am not now, nor have I ever been a fellow at the Mercatus Institute or any other institute that receives funding from the Koch brothers. I have never received any funding from the Koch brothers. To be honest, I haven’t received much funding from anyone else either. I know several people at Mercatus (Mark Koyama, Noel Johnson, and John Nye), and I have been there a couple of times when the Washington Area Economic History Seminar was held there. I am not a libertarian, I have, in fact, written several blog posts critical of libertarians generally as well as specific people affiliated with Mercatus: Walter Williams, Arnold Kling, Bryan Caplan and Tyler Cowen. Finally, I never met James Buchanan and if I have ever cited him I can’t think of where it would be. I hope this establishes my bona fides as not just another shill for the Koch brothers.

Now that I have gotten that out of the way, I find the arguments that some historians are making in support of Nancy MacLean’s Democracy in Chains mindboggling.

MacLean quoting Cowen: “the weakening of checks and balances would increase the chance of a very good outcome.”

Cowen’s full quote: “While the weakening of checks and balances would increase the chance of a very good outcome, it also would increase the chance of a very bad outcome.”

This is scholarly malpractice. Are there really professors who would accept this from a student? It is indefensible, yet Andy Seal defends it:

This is the document in question, “Why Does Freedom Wax and Wane?” although there is also a second version available on-line here. (That becomes somewhat important, as you’ll see in a moment.) The crucial sentence in question is—in full—the following: “While the weakening of checks and balances would increase the chance of a very good outcome, it also would increase the chance of a very bad outcome.” When MacLean quoted this sentence, she left out the “While” and the “it also would increase the chance of a very bad outcome.” Thus, in her book it appears as “the weakening of checks and balances would increase the chance of a very good outcome.”

Her critics see this as prima facie evidence of a bad faith effort to distort Cowen’s meaning to make him appear to be anti-democratic. I think that’s immediately debatable, however, because by her lights any open-minded contemplation of the possibility of weakening checks and balances is anti-democratic. And that’s what Cowen is doing here: entertaining the possibility that weakening checks and balances could produce a desirable outcome.

Let’s think about it this way. If I said, “While permitting five-year-olds to be employed in manual labor would increase the chance of a very good outcome, it also would increase the chance of a very bad outcome,” what could we conclude? That I was advocating child labor? No, that would be too much. But that I was open to the idea? Yes, that’s a fair reading of the sentence.

He claims that her version of the quote does not show bad faith “because by her lights any open-minded contemplation of the possibility of weakening checks and balances is anti-democratic.” But consider Seals’s example: “While permitting five-year-olds to be employed in manual labor would increase the chance of a very good outcome, it also would increase the chance of a very bad outcome.” Who believes that it would be acceptable to quote him as saying: “permitting five-year-olds to be employed in manual labor would increase the chance of a very good outcome”? What if I told you that it is okay because in my lights any open-minded contemplation of the possibility of child labor is supportive of child labor? Would it be okay then?

This is not a small matter. I can’t just brush this issue aside and look at her broader argument because I can't trust somone who does this. Her claims may very well be correct, but I am not going to be persuaded by her argument because I can’t trust the evidence that she puts forward in favor of them. I don’t care what a historian’s political leanings are, I need to be able to trust that they are honestly representing their sources. 

Internet Videos and Economic History

I frequently post videos related to economic history, usually recordings of presentations at seminars or conferences. For the most part I like being a professor at a liberal arts college, but I must admit I do miss the seminars of a research university. There were economic history and political economy seminars every week at Washington University when I was there. Now I even find it difficult to get to the Washington Area Economic History Seminar, which takes place once a month. Consequently, I really appreciate it when people record and post such presentations.  

There is another kind of economic history video: videos that are meant specifically for instruction. Some of these simply record the lectures that are presented in a regular economic history course. Two of these that are pretty good are Greg Clark’s World Economic History and Martha Olney’s American Economic History.

There is yet another category of videos: videos created which present interpretations of economic history created specifically for the internet. I have looked at two such series recently. Unfortunately both have serious problems of content and style.

One series is the videos associated with the EdX course on the history of capitalism created by Edward Baptist and Louis Hyman the other is a series of short videos presented at learnliberty.org.

Not surprisingly, the history of capitalism one is bar far the worse. Thanks to these videos anyone with an internet connection can be misinformed by Baptist for free. Take for instance his analysis of the Panic of 1837 in this video. There are so many things wrong with his presentation that I plan to do a later post specifically about the Panic of 1837, but for now just listen to the part that starts about 52 seconds in. He suggests that increases in cotton output caused cotton prices to fall (be early 1836 they were creeping down) and that this made cotton textile producers in England nervous. What? That’s right cotton textile producers were nervous because the costs of production were falling. If you are thinking that makes no sense, you are right. Not only does this story not make sense it is factually incorrect. Cotton prices did not start creeping down in early 1836; they were going up. Prices in New Orleans remained over 14 cents a pound into early 1837. See Gray, Lewis Cecil. "History of Agriculture in the Southern United States to 1860, 2 vols., New York, 1941, Vol. 2 page 1027 or the price data available here at the Center for International Price Research.) Prices plunged after the Panic, but that doesn’t fit Baptist’s story. Baptist wants overproduction of cotton to have caused the Panic.

Like Foghorn Leghorn, Baptist says “Don’t’ talk to me about facts, son. I’ve already made up my mind.” As I mentioned earlier I’ll deal with the rest of this story of the Panic later. In his book Baptist claimed that slaves accounted for 1/5^th of the nation’s wealth; in the video on Northern and Southern Capitalism he ups it to 1/3 and adds the phrase “by law,” as if there were a law declaring the percentage of wealth that would be attributed of the value of slaves. In the video on Incentives and Slavery he again claims that enslaved people used the phrase “pushing system.” But the estimates about wealth are unfounded and the phrase pushing system was invented by Ed Baptist, not enslaved people. (Please search scholar.google.com for papers by Olmstead and Rhode on the New History of Capitalism.)

The problem with the Learn Liberty videos is more a problem of emphasis. For instance, in the video on the Civil War it states that slavery was the cause of the War but spends 4 of the 5 minutes talking about tariffs and internal improvements. The video on the Great Depression doesn’t talk about the role of the gold standard. It really has too much some people think this and other people think that without any attempt to evaluate what they think, as if all opinions are equally valid.

Of course, the videos of seminar presentations that I like also do not provide all of the documentation of a book or paper, but they are directed at an audience of people that have expertise on the subject. Such an audience will be much more likely to detect obvious bullshit like Baptist’s.

I said that there were problems with both content and style. The problem with the style is that they do not make good use of the visual medium. They are primarily one person talking to a camera. Baptist and Hyman do, however, have a lot of books behind them: I guess they must know what they are talking about. The Learn Liberty videos make some use of visuals, but it is more eye candy to keep your attention than actual information. How some graphs, maps, and tables. If you are going to go the trouble to produce a video about economic history show us a how a spinning wheel and a spinning jenny worked. Show us reaping by hand and a  mechanical reaper. Show us what it is like to pick cotton, and how a cotton gin worked. I’ve never understood how someone can have a real sense of the industrial revolution without seeing some of these things. As they exist now these talking to the camera videos are far inferior to books which provide more illustrations and documentation or good podcasts, which provide interaction between author and interviewer.

Nebraska, The Good Life

We spent the last week in Kearney, NE visiting family. Kearney is easy to find; it is at the bottom of where the Platte dips south. 

My parents were both from Nebraska. We lived in south central Nebraska until we moved to San Francisco when I was 10. My brother moved back after high school and my parents moved back after my dad retired from the Coast Guard.  I know many people consider Nebraska to be the middle of nowhere, which would make Kearney the middle of the middle of nowhere, but it is actually a great place to visit for anyone interested in American history.

This week Mary and I went to the Stuhr Museum of the Prairie Pioneer in Grand Island. I hadn’t been there since I was a kid. Some things I learned on this trip

1.       The first African American to play football at the University of Nebraska, George Flippin was the son of a former slave who had become a physician. George Flippin also became a physician and founded the first hospital in Stromsburg, NE.

2.       The first “successful” sugar beet processing plant in the U.S. was established in Grand Island in 1889.

3.       Plains Indians used old ledgers to create art. Here is a website with some examples

Here is a video that will give you an idea of how much there is to see at the Stuhr Museum.

If you are in the area you can also go about ten miles south of I 80 to Minden, NE and see Pioneer Village. Here is a video that gives a small sample of the things you can see at Pioneer Village.

If you are traveling through Nebraska either museum is worth the detour. 

If you are interested in the history of the Great Plains they are worth a trip.


P.S. the "Kear" in Kearney is pronounced like "car."