The Mellon Tax Cuts of the 1920s

Opponents of tax cuts claim that the large income tax cuts in the 1920s caused increased inequality and the Great Depression. For instance, Robert S. McElvaine writes in “I’m a Depression historian. The GOP tax bill is straight out of 1929” Washington Post’s PostEverything Perspective that

The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007 (when trickle-down economics, tax cuts for the hyper-rich, and deregulation again resulted in another economic collapse).

In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression.

In that decade, the mass-production American economy became dependent on mass consumption. For it to work, the masses need a sufficient share of the national income to be able to consume what is being produced.

Republican policies in the ’20s instead pushed to concentrate more of the income at the top.

On the other hand, proponents of tax cuts have used the 1920s tax cuts (sometimes referred to as the Mellon after the Secretary of the Treasury Andrew Mellon) to illustrate how tax cuts can fuel so much economic growth that they generate increases in revenue. For instance, back in 2003, Veronique de Rugy argued that

The decade of the 1920s had started with very high tax rates and an economic recession. Tax rates were massively increased in 1917 at all income levels. Rates were increased again in 1918. Real GNP fell in 1919, 1920, and 1921 with a total three-year fall of 16 percent. (Deflation between 1920 and 1922 may also help explain the drop in tax revenues in those years, evident in Table 1).

As tax rates were cut in the mid-1920s, total tax revenues initially fell. But as the economy responded and began growing quickly, revenues soared as incomes rose. By 1928, revenues had surpassed the 1920 level even though tax rates had been dramatically cut.

She also notes that Between 1922 and 1929, real gross national product grew at an annual average rate of 4.7 percent and the unemployment rate fell from 6.7 percent to 3.2 percent. 

I am not persuaded that either of these stories clearly establishes connections between cause (tax cuts) and effect (inequality, economic growth, Great Depression).

Both stories attribute a great deal of economic influence to a relatively small federal government. Prior to the Great Depression, the federal revenue typically accounted for less than 5% of GDP. 

Moreover, income taxes accounted for only about half of federal revenue (Statistical Abstract of the United States for 1926 Table No. 169) Neither opponents or proponents of tax cuts explain  how changes that are so small relative to the whole economy could have effects as large as they suggest.

In addition, many of the changes during the 1920s were part of a reversion to pre-War patterns.The federal government lowered income tax rates during the 1920s, but it lowered them from the rates that had been imposed during World War I. By the end of the 1920s the top marginal rates were still almost double what they had been before the War.

Source: http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Likewise, the available evidence suggests that inequality of both income and wealth increased during the 1920s, but they were also moving back toward the rates that had existed before the war.

Source Piketty, Thomas, and Emmanuel Saez. "Income inequality in the United States, 1913–1998." The Quarterly journal of economics 118, no. 1 (2003): 1-41.

From a longer run perspective, the rapid decline of World War I and increase in the 1920s was a blip in a trend of decreasing inequality that was not isolated to the U.S.

Source: http://voxeu.org/article/american-growth-and-inequality-1700

Moreover, taxes were cut for all income groups and both the amount and the share of taxes paid by lower income groups decreased.

Source: de Rugy

Even if there is not a clear connection between tax cuts and inequality, inequality did increase. Could that increase in inequality have led to underconsumption as an important cause of the Great Depression? It seems unlikely.

Although inequality increased during the 1920s, it was not immiserating working class people. After the recession of the early 1920s, real wages generally increased until the Great Depression.

Source: http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Dramatic decreases in consumption expenditures were certainly a cause of the severity of the Great Depresion, but they were not an initiating factor. Consumption fell after a tightening of monetary policy and the stock market crash. Consumption fell because of decreases in wealth and income, but also because of increases in uncertainty about the future (Romer 1990, Romer and Romer 2013) and because of the need to reduce current consumption to make installment payments and avoid repossession (Olney 1999). The initial problems were exacerbated by continued bank failures and decreases in the money supply. Economic historians continue to explore the extent to which the problems in money and banking were the result of Federal Reserve failures or problems with the international gold standard. Given the small initial size of the federal government it should perhaps not be surprising that economists tend to find the causes of the Great Depression in monetary rather than fiscal policy.

 What about the alternative argument that the Mellon tax cuts spurred economic growth. Higher income individuals did pay a larger share of income tax after tax rates decreased, but it is not clear that this was because tax cuts spurred rapid economic growth? Here too, I'm skeptical.

The 4.7 percent rate of growth from 1922 to 1929 that de Rugy mentions is very sensitive to beginning and end dates. Much of it comes from very high rates at the beginning and the end. The annualized growth rate from 1923 to 1928 was a much less spectacular 2.8%.

https://measuringworth.com

It seem likely that the lower rates simply meant it was no longer worthwhile for high income earners to incur the costs associated with tax avoidance. This was primary the reason that Mellon gave for the tax cuts. 

I'll try to keep an open mind, but I am not yet persuaded that the Mellon tax cuts were able to generate very large macroeconomic economic effects despite the relatively small role of the federal government generally and the federal income tax specifically prior to the Great Depression.

Clegg on Capitalism and Slavery

I just ran across John Clegg’s  "Credit Market Discipline and Capitalist Slavery in Antebellum South Carolina." Social Science History (2017): 1-34. Clegg got a lot of attention a couple of years ago for "Capitalism and Slavery." in which he criticized the approach of New Historians of Capitalism, especially Edward Baptist. Clegg’s critique was based in part on work that he had done on the role of credit among slaveholders in South Carolina, and that work is presented more fully in this new paper.

Clegg follows Robert Brenner in terms of focusing on competition for the means of production as the driving force behind capitalist growth. Capitalists are forced to increase productivity to survive as capitalists. Clegg’s twist is to add the need to use credit to finance the purchase as land and slaves as the mechanism that drove this competition in the South. He has interesting information about the development of debtor creditor law and the extent to which slaveholders experienced foreclosure.

Clegg explains that

I claim that the ability of creditors to seize the land and slaves of insolvent debtors compelled slave owners to specialize for the market and increase productivity. It did so because most slave owners were in debt, and those who failed to repay their debts at the going rate would end up losing their land and slaves, and thus cease to be slave owners.

He concludes that

if the debt constraint I am describing was operative, then identifiably capitalist outcomes—market orientation, profit maximizing, technical innovation—are in an important sense independent of mentality. This is because slave owners who were not interested in specializing for the market, maximizing profit or adopting cost-reducing innovations would end up losing their slaves to those who were. On this view, capitalist patterns of behavior can be the unintended consequence of competitive selection operating via credit markets

That description made me think of Armen Alchian’s Uncertainty, Evolution and Economic Theory, which made essentially the same argument in defense of economic theory.  I should also mention John Nye’s "Lucky fools and cautious businessmen: On entrepreneurship and the measurement of entrepreneurial failure." The Vital One: Essays in Honor of Jonathan RT Hughes. Research in Economic History 6 (1991): 131-52 which makes a similar sort of evolutionary argument regarding entrepreneurship. 

P.S. If you weren't paying attention when Clegg's first paper came out you might to check out the Junto for some of the discussion it generated.

Our Lady of Guadalupe

Hartman on Public Choice

Andrew Hartman has an essay at The Baffler arguing that “libertarianism is a political philosophy shot through with white supremacy. Public choice theory, a technical language nominally about human behavior and incentives, helps ensure that blacks remain shackled.”

I have pointed out before that I am not a libertarian. I have been critical of libertarians on several occasions (for instance, here and here) . I am not associated with George Mason, not paid by the Koch brothers, and not really a big fan of James Buchanan. So why bother writing this? I do have an interest in public choice, and I find the recent attempts to bind racism, Buchanan, public choice, libertarianism, and the Koch brothers into  a neat little bundle ridiculous.

Below are quotes from Hartman’s essay (in bold) and my responses to them.

IN DECEMBER 1992, AN OBSCURE ACADEMIC JOURNAL published an article by economists Alexander Tabarrok and Tyler Cowen, titled “The Public Choice Theory of John C. Calhoun.” Tabarrok and Cowen, who teach in the notoriously libertarian economics department at George Mason University, argued that the fire-breathing South Carolinian defender of slaveholders’ rights had anticipated “public choice theory,” the sine qua non of modern libertarian political thought.

That obscure academic journal is The Journal of Institutional and Theoretical Economics. While it may not be The Baffler, it has been around for over 150 years, and Nobel prize winners, such as Oliver Williamson, Douglass North and Ronald Coase have published in it.

Public choice theory, which grew in stature across the late twentieth century and is now a bedrock conservative doctrine marketed to right-wing policymakers by the billionaire Koch brothers, has indeed tilted the scales of justice in favor of the white, rich, and powerful.

Libertarians seem unaware that Buchanan’s public choice theory is the thing without which their philosophy cannot exist. Milton Friedman does not refer to Buchanan or public choice in Capitalism and Freedom. Robert Nozick does not mention Buchanan or public choice in Anarchy, State and Utopia. David Boaz can put together a 600 page Libertarian Reader that has just a handful of references to public choice and no readings from Buchanan or Tullock. On a personal note, I was once invited to a lunch where John Allison former head of BB&T and a well-known libertarian spoke. I remember him talking a lot about Aristotle, but I don’t recall any mention of Buchanan or any other public choice theorists. I’m not suggesting that there are not libertarians who like Buchanan’s work, but I don’t see a case for the claim that it is regarded as an essential ingredient.

In marking Calhoun’s political philosophy as the crucial antecedent of public choice theory, Tabarrok and Cowen unwittingly confirmed what critics have long maintained: libertarianism is a political philosophy shot through with white supremacy. Public choice theory, a technical language nominally about human behavior and incentives, helps ensure that blacks remain shackled.

Cowen and Tabarok did not mark Calhoun as a crucial antecedent of public choice. To the contrary, they argue that economists have ignored Calhoun. It would be more accurate to say that they argue that although Calhoun did not influence the development of public choice theory, there are some interesting similarities. They note some of these similarities, but also point to significant differences. Including the differences that enabled him to include support for slavery in his philosophy.

The sheer volume and intensity of these protests suggest that MacLean’s observations have hit a nerve. And by historicizing the putatively neutral and scientific character of Buchanan’s research, MacLean has apparently shaken the pediment supporting the altar of this libertarian saint. 

Apparently, Hartman regards it as noteworthy that calling someone’s friend a racist would strike a nerve. I’m not sure what to make of that. As for neutral. I don’t know of anyone who would argue that Buchanan’s work was neutral. Buchanan had values that he argued for throughout his career. There is just no evidence that racism was one of them.

Just as Calhoun developed his novel political philosophy in response to the growing fear among his class of southern slaveholders that a Northern majority might seek to abolish slavery, Buchanan’s public choice theory was an innovative approach to resisting federal enforcement of civil rights in the South.

Hartman simply parrots MacLean here. They use innuendo to create a link between Buchanan and segregation, while ignoring the well documented intellectual context in which Buchanan was working. Buchanan was one of a number of people in the 1950s and 1960s working on applying economic or rational choice methods to the analysis of politics.

Buchanan saw his work as part of this broader movement. The following quotes are from a talk he gave on public choice theory at Hillsdale College in 2003

“Public choice should be understood as a research program rather than a discipline or even a subdiscipline of economics. Its origins date to the mid-20th century, and viewed retrospectively, the theoretical “gap” in political economy that it emerged to fill seems so large that its development seems to have been inevitable. Nations emerging from World War II, including the Western democracies, were allocating between one-third and one-half of their total product through political institutions rather than through markets. Economists, however, were devoting their efforts almost exclusively to understanding and explaining the market sector.” He goes on to explain that he “entered this discussion with a generalized critique of the analysis generated by the Arrow Black approach.” He also describes the 19^th century thinker who influenced his work. No, it was not Calhoun. It was Knut Wicksell.

Oddly, Hartman cites S.M. Amadae, but seems to have missed Amadae’s description of this broader context, Amadae describes Buchanan’s early essays as responses to the work of Ken Arrow and his Calculus of Consent (with Gordon Tullock) as “a new analysis of the rapidly forming study of politics that had been articulated by John von Neumann and Oskar Morgenstern, Duncan Black, Arrow, and Arrow’s student Anthony Downs.” (Amadae 136)

Buchanan was part of a movement to develop a rational choice approach to politics. He also had normative views about what government should do. These beliefs were essential to James Buchanan, but not central to public choice.  Being interested in a rational choice approach to politics does not require that one hold any specific set of normative beliefs. A rational choice approach to politics has been followed by people as disparate views of what should be as James Buchanan, Amartya Sen, Howard Rosenthal and Jon Elster.

Other people involved in the development of a rational choice approach to politics, such as Anthony Downs,  Amartya Sen and Mancur Olson, also viewed Buchanan’s work as part of this broader movement and engaged his arguments in their work.

If Hartman is right, then he and MacLean have seen through a false facade that fooled all of these other scholars. Buchanan somehow managed to hide his true motives from all of them, tricking them into believing that, like them, he was  trying to understand collective decision making, when in fact he was simply working to preserve race based segregation.  

As opposed to wishing to free the masses from a state controlled by the capitalist elite, Buchanan wished to free the capitalist elite from a state controlled by the unruly masses. And this returns us, suitably enough, to John C. Calhoun.

Public choice theory is interesting and important because recognizing that the state is composed of human beings means that the state can be controlled by an elite that oppresses the masses or a majority that oppresses a minority.  The outcome depends upon the institutions for making public choices. Some of us hope that it is possible to have institutional arrangements that protect the majority from a despotic elite and protect minorities from the tyranny of the majority.

In the end, there is no evidence for Hartman’s argument and considerable evidence against it. Public choice theory did not develop out of the work of Calhoun nor was it an outgrowth of attempts to preserve segregation in Virginia. Buchanan was influential in the development of public choice, but public choice theory is not synonymous with the thought of James Buchanan.  Buchanan and public choice theory are not the sine qua non of modern libertarianism. In fact there is no necessary connection between public choice and any set of normative beliefs.

In the end, I am puzzled why Hartman would choose to write an essay about something that he obviously has so little interest in? He doesn’t appear to have made any attempt to learn anything about the history of public choice theory beyond reading MacLean.  He could have written a better informed essay if he had read the Wikipedia page on public choice.

Some Recent Podcasts

If you are interested in the economy of colonial America listen to two recent episodes of Liz Covart’s Ben Franklin’s World: The Revolutionary Economy and The Politics of Tea. Of course, the politics of tea is about the economics of tea.

If you want to know about the economic divergence between Western Europe and the Middle East listen to Jared Rubin discuss his recent book on Garreth Petersen’s Economics Detective.

If, on the other hand, you are interested in listening to two intellectual historians who do not know anything about public choice theory discuss a book about public choice theory by another intellectual historian who does not know anything about public choice theory you should definitely check out Andrew Hartman and Ray Haberski discussing Nancy McLean’s Democracy in Chains on Trotsky and the Wild Orchids

New Books in Economic and Business History

The Business History Conference's blog The Exchange has a list of new and forthcoming books in economic and business history. There are several that I am looking forward to reading

Anne Fleming, City of Debtors: A Century of Fringe Finance (Harvard University Press, December 2017)

Douglas A. Irwin, Clashing over Commerce: A History of US Trade Policy (University of Chicago Press, November 2017)

Naomi R. Lamoreaux and John Joseph Wallis, eds., Organizations, Civil Society, and the Roots of Development(University of Chicago Press, December 2017)

Qian Lu, From Partisan Banking to Open Access: The Emergence of Free Banking in Early Nineteenth Century Massachusetts (Palgrave, October 2017)


Laura Philips Sawyer, American Fair Trade: Proprietary Capitalism, Corporatism, and the 'New Competition,' 1890–1940(Cambridge University Press, December 2017) 

Business History's Introspective Mood

Business history appears to be in an introspective mood.

Business History Review has a special issue on debating methodology in business history.

The latest issue of Business History examines the role of narrative in business history.

In First View at Enterprise and Society you can find Water Friedman’s  talk “Recent Trends in Business History: Capitalism, Democracy, and Innovation” from the meeting of the Business History Conference.

In general, business history seems to be an unusually introspective field. 

The introduction to the special issue of Business History Review, for instance, provides this list of recent work on methodology in business history:

“Recent examples include Naomi R. Lamoreaux, “Reframing the Past: Thoughts about Business Leadership and Decision Making under Uncertainty,” Enterprise & Society 2, no. 4 (2001): 632–59; Mary O’Sullivan and Margaret B. W. Graham, “Moving Forward by Looking Backward: Business History and Management Studies,” Journal of Management Studies 47, no. 5 (2010): 775–90; Geoffrey Jones and Walter A. Friedman, “Business History: Time for Debate,” Business History Review 85, no. 1 (2011): 1–8; Daniel M. G. Raff, “How to Do Things with Time,” Enterprise & Society 14, no. 3 (2013): 435–66; Matthias Kipping and Behlül Üsdiken, “History and Organization Studies: A Long-Term View,” in Organizations in Time: History, Theory, Methods, ed. Marcelo Bucheli and R. Daniel Wadhwani (New York, 2014), 33–55; Abe de Jong, David Michael Higgins, and Hugo van Driel, “Towards a New Business History?” Business History 57, no. 1 (2015): 5–29; Stephanie Decker, Matthias Kipping, and Daniel Wadhwani, “New Business Histories! Plurality in Business History Research Methods,” Business History 57, no. 1 (2015): 30–40; and Christina Lubinski and Daniel Wadhwani, “Reinventing Entrepreneurial History,” Business History Review (forthcoming).”

New History of Capitalism meets the History of Economic Thought

Jonathan Levy has a paper forthcoming in Business History Review, “Capital as Process and the History of Capitalism.” If you have access to the journal it is available on First View. He attempts to develop a definition of capital that is useful for the study of capitalism. I should be grading papers right now so I will make this quick.

Unfortunately, it bears many of the hallmarks of some of the most celebrated work in the new history of capitalism.

1. Misunderstanding basic economics: Here for, for instance, is his description of the problems associated with thinking of capital as a produced means of production

And yet, because it equates capital with a produced physical factor of production, the materialist conception is a highly restrictive definition of capital. For the writing of history, there are chiefly three almost natural consequences of the materialist restriction. First, because of its emphasis on a produced factor of physical production, capital becomes almost synonymous with industrial machinery and equipment. Second, likewise the materialist capital concept abstracts from money—treating monetary and financial dynamics as extrinsic to both capital and the “real economy” in general. Third, for reasons to be explained later, the materialist capital concept is a temporally static concept. Thus, in addition to money it also abstracts from historical time—or at least, in pursuit of analytical clarity, it abstracts from the many eventful historical processes that are extrinsic from the point of view of the physical characteristics of the masses of objects that materialists define as capital.

Reference to a principles of economics textbook would have made clear that capital is not synonymous with industrial machinery and equipment.

2. Use of sources that can at best be described as sloppy. I have been interested in Veblen since I was an undergraduate. Levy seems interested in Veblen as well. When I checked the places where Levy specifically quotes Veblen this is what I found. Levy is in bold  

“At the most abstract level, capital, in this line of thought, is what Thorstein Veblen once called a “pecuniary magnet.”^{11 (Levy page 5)}

^“11 Thorstein B. Veblen, “On the Nature of Capital II: Investment, Intangible Assets, and the

Pecuniary Magnate,” Quarterly Journal of Economics 23, no. 1 (1908): 104–36.”

One might think that Veblen used the phrase “pecuniary magnet” in this paper. He did not. He did use the phrase “pecuniary magnate.” But a magnate is not a magnet. Veblen is referring to people, “captains of industry,” not capital. If Veblen ever referred to capital as a pecuniary magnet it was not in the cited paper.

Oddly enough, Berch Berberoglu made this same mistake earlier this year. Since neither references the other one has to conclude that they made the mistake independently.

“By becoming the exclusive legal owners of capitalized goods, capitalists over time had politically and legally “cornered” the market in immaterial “technological expedients.”⁴²” (Levy page 14)

“⁴² Thorstein B. Veblen, “Fisher’s Capital and Income,” Political Science Quarterly 23, no. 1 (1908): 117.”

Again, one might think that the quoted phrases appear on page 117; they do not. Like “pecuniary magnet” they do not appear anywhere in the paper.

 “Addressing culture, Veblen argued that capital was merely one economic “method of

doing things” in the world among others.⁴⁴” (Levy page 14)

“⁴⁴ Thorstein B. Veblen, “Why Is Economics Not an Evolutionary Science?” Quarterly Journal of Economics 12, no. 4 (1898): 389.”

Levy is at least in the ballpark this time. Veblen uses the phrase “methods of doing things.” He does not, however, use it on page 389. Page 389 is devoted to his critique of the hedonistic conception of man, not an argument that capital was merely one economic method of doing things.

“If capital has no fixed, authentic value, the question becomes, as Veblen put it, “Whose imputation of value is to be accepted?”⁷¹ (Levy page 20)

“⁷¹ Veblen, “Fisher’s Capital and Income,” 120.”

This time Levy almost nailed it. The quote is in the paper, and he only missed the citation by 5 pages; its on page 125.

At what point does putting quotation marks around things that were not a actually said by the person they are attributed to become a problem in historical scholarship.

I Blame Foner

The author in New York Times  By the Book today was Jesmyn Ward, author of Sing, Unburied, Sing and Salvage the Bones

These are her answers to two of the questions:

What’s the last great book you read?

“The Half Has Never Been Told: Slavery and the Making of America Capitalism,” by Edward E. Baptist. It taught me so much about slavery and how slavery enabled America to become America. Every time I left my house after reading it, I saw the world differently. I saw the legacy of human misery underpinning it all.

What’s the most interesting thing you learned from a book recently?

From “The Half Has Never Been Told”: “All told, more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million-odd slaves — 6 percent of the total U.S. population — who in that year toiled in labor camps on slavery’s frontier.”

In other words, the most interesting thing she has learned from a book recently is an inaccurate assessment of the role of slavery in the American economy that was concocted in Ed Baptist’s imagination and presented in one of the worst books by an academic historian that I have ever read.

I blame Eric Foner. Foner is not the only one to blame, but he certainly deserves a large share of the blame. Foner praised the book in The New York Times and did not point out that Baptist was simply making things up. Foner is a famous historian with a long record of impressive scholarship. It is not unreasonable for non-historians to place their faith in his assessments of work in American history. We all count on recognized experts to give us some guidance in areas that are beyond our personal expertise. Foner, however, failed them. He took a shot at economists, repeated Baptist’s misleading historiography, and failed to note the fundamental flaws in the book.

The flaws truly are fundamental. The claim that slavery was the driving force behind American economic development was central to Baptist’s book. I have seen the book cited on this point by numerous people. Yet Baptist did not actually estimate the importance of slavery; he did not even try. He made a up some numbers, added them up and compared them to an actual estimate of GDP. The way he added up the numbers did not make sense. He is clearly unfamiliar with the problem of double counting or the difference between the sales of newly produced goods and the sales of assets. Even if he had looked in a principles of economics textbook to learn the basics of national income accounting, however, it would not have solved the fundamental problem: he was just making up the numbers. Non-historians are likely say to themselves, “These numbers must be okay; it was reviewed by famous historians, like Eric Foner, and they did not say anything.”  Eric Foner, however, does not have that excuse. Nor do other historians who refused to call bullshit on Baptist. Foner owed the readers of the New York Times a critical reading of the book, and he let them down. Personally, I think this unwillingness to call bullshit on other historians, just because you like their conclusions, is a serious threat to the integrity of history.

As for me, as long as people keep citing his book, I will keep pointing out that Baptist is a charlatan.

Economic History to Read, Listen and Watch

Read:

Mark Koyama on the rise of religious liberty

Victoria Bateman on Why bigger states are more progressive

Listen:

Gregory Clark on Rationally Speaking on What Caused the Industrial Revolution? (and the why it is so difficult to answer that question)

Noel Johnson at the Economics Detective on The French Revolution, Property Rights and the Coase Theorem

Watch:

Alan Taylor on credit booms and crises in economic history

Deirdre McCloskey on How we got rich

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." 

The Golden Age of Economic History?

At Marginal Revolution Tyler Cowen responded to a reader:

C. inquires:

Why do we live in the golden age of economic history? Was there something identifiable that caused the subfield to grow in esteem? Some new technology that changed the costs of research (not that I can see)? Something else?

Mark Koyama should write a Medium essay on this, but in the meantime here are my thoughts:

1. We now know much, much more about the earlier economic histories of China, India, and some other locales.  The rise of more and better graduate students from the emerging economies, or for that matter from Europe, has been essential here.

2. Some of the turn toward economic history came with the financial crisis, and the search for longer-term parallels, which meant looking back in history, most of all to the Great Depression.

3. Although the advance of cliometrics started a long time ago, we are now finally at intergenerational margins where economic historians are as quantitatively well-equipped as most parts of the applied micro spectrum.

4. The stranger the time period, the more people will have to look to broader stretches of history for understanding.  Yes, this one is an uh-oh.

5. Some applied micro fields have become a little more boring, so that has helped a partial shift of status to economic history.  Public data sets have been exhausted, and a lot of economic history data sets are “weird or idiosyncratic” data sets, which now are “in” and I predict will stay “in” for a long while to come because they offer the possibilities of both new discoveries and moats.

6. An academic trend that hasn’t yet been exploited usually ends up exploited, sooner or later, once the right nudge comes along.

5b, 6b. In chess, the top players are opting for the Giuoco Piano once again.

7. Competing economic models are more “allowed” in the subfield — not everything must be neoclassical — which has opened economic historians to more wide-ranging questions.  Economic history remains a good place to pursue the questions about economics that initially interested many people as undergraduates.

8. Academic attention is more media-driven these days, and good economic history papers usually have a story of some kind, and perhaps also a historical personage, event, or institution of broader interest.

The post prompted a lot of discussion on Twitter. My initial response to the question is

1.       While I often argue that economic history is doing very well, I’m not sure that this is the golden age. There is a lot of great work going on in economic history. Economic historians are doing well at publishing in top journals, and many of the top econ programs have strong fields in economic history. On the other hand, there are still not a lot of economic history jobs in JOE. The problem with a golden age is that it seems to imply that this is as good as it gets. I would still like to see more jobs in economic history, more students studying economic history, and a wider audience for good economic history. I would like for economic history to be more widely regarded as central to the study of economics. At the very least, I would like to see Washington University, where I studied with Doug North and John Nye, have economic history as a field again.

2.       I think there has been an important technological change: the ability to take high quality digital photographs of archival documents. This change has benefited history generally, but economic history has probably benefited most. Archives used to be places where people scribbled notes (with pencils). You were limited by how much time you could afford to spend in the archive and how quickly you could scribble. Now, archives are places where people take pictures, which can at relatively low cost (thanks to software and the ability to offshore transcription) be converted into text or data that you can analyze. Creating useable data sets from primary sources is still difficult and time consuming, but less so than it used to be.

3.       I agree that the increase in the relative importance of empirical work in economics has benefited economic history. Donaldson’s Clark medal suggests a willingness to recognize good empirical work regardless of the time or place it examines.

4.       There is a lot of interest in questions that require us to look at history: long run growth, the productivity slow down, inequality, racism, and financial crises. Of course, these things can and should be analyzed with economic theory as well, but combined with the turn to empirical analysis they present an opportunity for economic history.

5.       There has been an increase in popular interest in economic history, but the work that has received the most attention (New History of Capitalism) has often done more to misinform than to educate. I hope an equivalent of Gresham’s law does not apply to economic history, but it remains to be seen.

Treasure Island

The New York Times reports on attempts to redevelop my old home. We moved to Treasure Island (T.I.) in 1973, when I was 10, and lived there until 1980. It was a Navy base, but most of it was occupied by housing for the families of enlisted men, mostly Navy, but also Coast Guard and Marines. Officers families lived on Yerba Buena Island. Yerba Buena Island (YBI), while Treasure  built for the Golden Gate Exposition, a fair to celebrate the opening of the Golden Gate and Bay Bridges in 1939. TI was converted to a Navy base during the War. I don't remeber exactly when the base was decomissioned, but I think it was in the early '90s.

some interesting talks and a couple of articles

I’m surprised I had not come across these videos before. They are from a conference at Williams College on Historical Persistence in Comparative Development. This was the lineup for the conference

How Deep are the Roots of Economic Development?; Fertility and Modernity 

Enrico Spolaore, professor of economics at Tufts University and research associate at the National Bureau of Economic Research (NBER).

Forced Coexistence and Economic Development: Evidence from Native American Reservations

Christian Dippel, assistant professor of economics in the Global Economics and Management Group at the UCLA Anderson School of Management

4:30 p.m. Climate and the Slave Trade

James Fenske, associate professor in the Department of Economics and deputy director of the Centre for the Study of African Economies at the University of Oxford

8 p.m. Keynote Address: The Global Spatial Distribution of Population and Economic Activity: Effects of Nature, History, and Agglomeration

David Weil, James and Merryl Tisch Professor of Economics at Brown University and research associate of the NBER

Engineers, Entrepreneurs, and Development in the Americas

William Maloney, lead economist in the World Bank’s Development Economic Research Group, former professor of economics at the University of Illinois, Urbana-Champaign

The Effect of the TseTse Fly on African Development

Marcella Alsan, assistant professor of medicine at the Stanford University School of Medicine, core faculty member at Stanford’s Center for Health Policy/Primary Care and Outcomes Research

Malthusian Dynamics and the Rise of the Poor Megacity

Dietrich Vollrath, associate professor of economics at the University of Houston

 “Unfinished Business”: Historic Complementaries, Political Competition, and Ethnic Violence in Gujarat

Saumitra Jha, associate professor of political economy at the Stanford University Graduate School of Business

The European Origins of Comparative Development

Ross Levine, Willis H. Booth Chair in Banking and Finance at the Haas School of Business at the University of California, Berkeley

Bowling for Fascism: Social Capital and the Rise of the Nazi Party

Nico Voigtländer, assistant professor of economics in the Global Economics and Management group at UCLA Anderson School of Management

The Long-Run Effects of the Scramble for Africa

Stelios Michalopoulous, assistant professor of economics at Brown University, faculty research fellow at the NBER, external research associate of the Centre for Competitive Advantage in the Global Economy at the University of Warwick

Intergenerational Mobility and Institutional Change in 20th Century China

Noam Yuchtman, assistant professor in the Business and Public Policy Group at the Haas School of Business at the University of California, Berkeley and faculty research fellow at the NBER

The videos of the talks can be found here on youtube.

Here is Slave Consumption in the Old South: A Double Edged Sword by Kathleen Hilliard at the American Historian

Erik Hilt’s Economic History, Historical Analysis, and the “New History of Capitalism” in the June Journal of Economic History can be accessed for free until the end of June