New Institutional Economics and Economic History

The University of Wisconsin La Crosse has posted several videos of talks given at a conference there on New Institutional Economics and Economic History

JOHN NYE (GEORGE MASON UNIVERSITY) “HUMAN CAPITAL, BIOLOGY, AND INSTITUTIONS” COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

PHIL KEEFER (INTER-AMERICAN DEVELOPMENT BANK) “COME TOGETHER? ECONOMIC DEVELOPMENT AND THE CHALLENGE OF COLLECTIVE ACTION” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

GARY LIBECAP (UNIVERSITY OF CALIFORNIA-SANTA BARBARA) “THE ROLE OF INSTITUTIONS AND HISTORICAL ANALYSIS IN ADDRESSING CONTEMPORARY PROBLEMS” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

KEYNOTE ADDRESS: LEE ALSTON (UNIVERSITY OF INDIANA) “WHERE THE PATHS INTERSECT? ECONOMIC HISTORY AND THE NEW INSTITUTIONAL ECONOMICS" COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

The Ironic Origins of Libertarianism

From I Chose Liberty: Autobiographies of Contemporary Libertarians

“some liberty-loving soul had donated a copy of John Hospers’s Libertarianism: A Political Philosophy for Tomorrow (1971) to my local public library. While I doubt I would find Hospers’s book impressive today, at the time it was a thrilling read. I had never heard the “standard libertarian arguments” before. (Bryan Caplan)

 “When I was about thirteen, I decided I wanted to read all of the good books in the public library. …. At the public library I found Ayn Rand; my grandmother also recommended her to me. Capitalism: The Unknown Ideal had a big influence on me, as did Atlas Shrugged. Hayek and Rothbard followed shortly thereafter.” (Tyler Cowen)

“I had some unusual early influences. In the eighth grade I borrowed an H.L. Mencken book from the city library. I couldn’t understand why everybody didn’t think and write like he did. Also, I became enamored of the Barry Goldwater legend.” (Karen De Coster) 

“That experience led me to the public library and a host of books on economics, one of which was a book whose table of contents I could not understand and which had never before even been checked out: Mises’s Human Action.” (Robert Formaini) 

capitalism, institutions, and history

Related to yesterday’s post, here are a couple of reviews of Geoff Hodgson’s Conceptualizing Capitalism by Christian Barrere and Mehmet Kerem Coban.

Speaking of Geoff Hodgson (editor of the Journal of Institutional Economics), I just got an email from Cambridge University Press letting me know that BRADLEY A. HANSEN and MARY ESCHELBACH HANSEN (2016). The historian's craft and economics. Journal of Institutional Economics, 12, pp 349-370 was just published.

Is capitalism a useful concept?

Thanks to Tom Cutterham at the Junto for blogging about the Capitalism and Slavery session at the meeting of the Organization of American Historians.

I have been very critical of the “New History of Capitalism” NHC, which is the label that has been applied to much of the recent work in this area. Mostly, I have criticized it because it is bad history. The worst problems are that they tend to provide misleading historiography and simply make things up. The description of Beckert’s talk doesn’t do anything to alleviate these concerns.

It is particularly ironic that Beckert should point to “an active act of forgetting” since that is largely what he has been promoting. Rather than developing a truly novel argument, Beckert has simply tried to wipe out the work of earlier historians. The role of force has been prominent in the work of numerous scholars from Carlo Cippola’s Guns, Sails and Empire, to O’Rourke and Findlay’s Power and Plenty, and even Jared Diamond’s Guns, Germs and Steel. The use of force to maximize profits is the essence of Fogel’s analysis of slavery, which he repeatedly referred to as a dynamic capitalist system.  It is not just traditional economic historians that actively forgotten, John Clegg and  Peter James Hudson show how Beckert and Baptist also disregard the work of radical scholars.

The work of Edward Baptist is built on an even more misleading myth, the myth that he is telling the half that has never been told. Rather than responding to criticisms of his argument and evidence claims that people who disagree with him refuse to accept the legitimacy of slave testimony. Ed Baptist speaks for the enslaved, like the Lorax speaks for the trees. If you disagree with him you are denying the voice of enslaved people. The fundamental problem with Baptist’s claim is that the story has been told. Unlike the trees, enslaved people spoke for themselves. Charles Ball and Solomon Northrup don’t need to be filtered through Baptist. The half has been told. If you haven’t heard it, it’s because you chose not to listen until a professor at a prestigious university said it. Moreover, the economic historians that disagree with Baptist have not at any point rejected the statements of former slaves about the brutality of slaveholders. Their arguments are premised on the belief that enslaved people were brutally beaten to force them to work at maximum effort. Instead they argue that these accounts by former slaves to not provide evidence that increases in productivity were the result of improvements in torture that led to improvements in picking techniques over time.     

Even if the most prominent authors in this field were not doing really bad history, one can question the extent to which capitalism is a useful construct for analysis. In this regard, Caitlin Rosenthal’s attempt to define capitalism is an interesting development among new historians of capitalism and I am curious to see how it plays out. It is new development because to the extent that other historians follow her, I think it will force people to confront the more fundamental question: Is capitalism a useful concept for the analysis of societies?

Up to this point NHC have acted as if it is, but it is not clear to me that the work supports this conclusion. Beckert provides a good illustration of the problem. Beckert asserts that capitalism is not necessarily characterized by the things people normally associate with it:  wage labor, markets and contracts, property rights, and the rule of law. Sometimes it is associated with these things, but sometimes it is not. There are different capitalisms with different characteristics. But what makes a system capitalist as opposed to something else?  When discussing the expansion of cotton production in the Soviet Union, he explains that “Such recourse to the state in postcolonial and postcapitalist societies was not a return to the war capitalism of the eighteenth and early nineteenth centuries, but a sharpening of the tools and an enhancing of the methods of industrial capitalism.” (page 436) If the Soviet Union provides an illustration of industrial capitalism I’m left wondering if there is anything that is not capitalism. And if everything is capitalism what does the concept add to our understanding? Rather than using it as a tool, Beckert seems to toss the word capitalism in every once and a while, occasionally changing the adjective in front of it, to add a little flavor to the dish.  I think it is this sort of use of capitalism that prompted Lou Galambos to suggest that the NHC was primarily a clever marketing ploy.

Personally, I am skeptical of the extent to which capitalism can be a useful analytical concept. Economists, economic historians, and business historians do not seem to me to have had much success with it as a tool for analysis. Economics departments used to frequently have courses on Comparative Economic Systems, which were largely about comparing capitalism and socialism. Even before the fall of the Soviet Union and China’s turn toward markets these courses seemed to be running into a dead end. The differences among the capitalist and socialist countries often seemed more relevant the similarities. Economists generally turned to the analysis of specific institutions, rather than trying to classify entire systems.  It seems to me that much of the recent work in economic history has tended to undermine simple notions about capitalism. Things like individualism and private property seem to predate what had been thought of as the emergence of capitalism in England, and a lot of work since Pomeranz Great Divergence has challenged conventional notions about the significant differences between the West and the Rest.

I am not suggesting that historians abandon the study of capitalism. Historians can’t really avoid studying capitalism. “Capitalism” is a term that people have used for a long time to express their beliefs about certain kinds of economic systems since the early 19^th century (according to my very old copy of Raymond Williams Keywords). To the extent that ideas about “capitalism” have played an important role in shaping people’s thoughts and actions historians must study “capitalism.” But, at least for the most part, this hasn’t been what the “new historians of capitalism” have been doing. The NHC treat capitalism as an analytic concept. They write as if there is an objective thing called capitalism that by means of historical analysis they can make concrete statements about. 

Behavioral Whatever

I’m going to start a new discipline called behavioral physics. Unlike traditional physics, which assumes that objects just fly apart from each other, behavioral physicists recognize that a phenomenon they call “gravity,” prevents this from happening.  Or maybe I will create behavioral evolutionary biology based upon the concept of natural selection, rather than the assumption that everything just stays the same, which traditional evolutionary biologists rely on. The way a physicist or biologist would feel reading those sentences is the way that I feel most of the times I read about behavioral economics.

The latest irritation is an article from the New York Times about getting doctors to stop over-prescribing antibiotics. Getting doctors to stop over-prescribing antibiotics is a good thing. Personally, I worry more about the negative consequences of overuse of antibiotics than I do about the negative consequences of the overuse of painkillers. On the other hand, their suggestion that they are able to solve this problem because behavioral economics has remedied the flaws of traditional economics is nonsense.

They describe how various attempts to get doctors to stop prescribing unnecessary antibiotics have failed because they “are all based on the assumption that physicians are rational agents who will do the right thing if provided proper information and incentives. But,” they ask, “what if doctors are a little irrational, like the rest of us? They may over-prescribe antibiotics out of an unrealistic fear that the patient could eventually develop complications and need them, or because it is easier than arguing with a patient who insists on getting them.” The situation they just described is practically a definition of a rational choice. Prescribing the antibiotic has a benefit for the doctor (the patient is happy) and no cost to the doctor. 

Nevertheless, they go on to explain that “Over the last few years, our research team has developed several new approaches to reducing unnecessary antibiotic prescribing, drawing on insights from behavioral economics and social psychology. These disciplines acknowledge that people do not always behave rationally and are strongly motivated by social incentives to seek approval from others and compare favorably to their peers.” I have no idea what they mean by rational.  There is nothing irrational about being motivated by social incentives or wanting to compare favorably with peers. One of the characteristics of traditional economics is that economists don’t care what your preferences are, or where they came from.The only thing that is really required for rational behavior is that you respond in predictable ways to changes in the costs and benefits of a choice, which brings us to the interventions they introduced.

In one of their interventions “whenever doctors prescribed an antibiotic that was not clearly called for by the diagnosis, the electronic health record system asked them to provide a short “antibiotic justification note.”” Wait a minute, did they just say that they increased the cost to the doctor of prescribing an unnecessary antibiotic, and doctors chose to write less unnecessary prescriptions. Let me see if I’ve got this straight. As the cost of doing something increases, other things equal, people will do it less. Thank God for behavioral economics. If only someone had thought of this before, they could have given it a name like “the law of demand” and taught it in every principles of economics course.

Next week, I think I’ll invent behavioral history, which, unlike traditional history, relies on critical analysis of primary sources. You can play along too. It’s easy. Take any discipline, x. Identify one of the primary features of that discipline, y. Assert, contrary to all evidence, that x does not do y. Claim that the new discipline “behavioral x” does y. Repackage some standard results from x as startling new results of “behavioral x.”

Stories about economic historians

Here is an article in the Chronicle of Higher Education about Deirdre McCloskey. I have to say that I feel the same way about Deirdre’s recent work that Jim Holt does: "She has read the library, and won’t let you forget it." I am afraid many people no longer enjoy listening to her, even when she might be right. The problem is less the move away from cliometrics and toward culture than it is the voice that she chooses to use. Here, for instance is Noah Smith’s reaction to McCloskey’s review of Piketty.

This is a long but fascinating story about the economic historian Nathaniel Leff.

New York City Trust Companies

I am working on a paper about trust company failures in New York State between 1875 and 1925, which I will be presenting at the meeting of the Economic and Business History Society in Montreal. I ran across a bunch of illustrations stored on my computer that I had collected while working on the Panic of 1907. Since they did not make it in to the paper in Business History Review  (here is an earlier ungated version) I decided to post some of them here.

Here are two maps showing the location of trust companies in Manhattan in 1907. They were created by Karen Hogan, who was a Geography major here at the University of Mary Washington. They illustrate the geographic difference between the traditional downtown trust companies and the uptown trust companies that experienced most of the runs.

These two are pictures of runs on the Trust Company of America and the Lincoln Trust Company from the New York Tribune on October 24 and 25, 1907.

Here are two pictures of the main office of the Knickerbocker Trust Company. One shows how it looked in 1893; the other shows how the main branch looked in 1907. They illustrate the rapid growth of the first of the uptown trust companies.

This is an advertisement from the Van Norden Trust Company, the furthest uptown of the uptown trust companies. It illustrates how much their strategy differed from the focus of traditional trust companies on business clients.

Recent Essays on Slavery and the "New" History of Capitalism

Robert Wright asked Does Enslaving Others Help the Economy or Not? at a Historians Against Slavery Symposium. He argues that the claim that slavery was the driving force behind economic growth is both wrong and potentially dangerous:

“These good folks are trying to lay the grounds for reparations but at the same time putting living people at increased risk of enslavement by providing developing world officials with yet another reason not to clamp down on human trafficking, debt peonage, child soldiering, and so forth. If slavery made the U.S. wealthy, as Baptist and his buddies claim, such officials reason, then aren’tantislavery efforts just another imperialist attempt to keep their nations impoverished? Perhaps slavery should even be encouraged. Maybe slavery is immoral, they reason, but the ends justify the means.”

I have previously addressed the argument that slave produced cotton as a driving force in American economic development. I would also say that it is not clear to me why the benefits to slaveholders, or non-slaveholders who benefited, are relevant to the issue of reparations. My understanding of the law (at least in countries with a common law tradition) is that compensation should be based on the damage done to the party that was harmed not on the benefit gained by the person that caused the harm. If your negligence causes an accident in which I am injured I seek compensation for the damage done to me: my medical expenses, lost wages, pain and suffering, etc. It is no defense on your part to claim that you gained only minor benefit from your negligence.

The Racist Dawn of Capitalism by Peter James Hudson reviews books by Beckert, Baptist, Johnson, and Draper. On Baptist he writes

“This “half” has, in fact, been told—multiple times and more often than not by black writers, some of whom are fleetingly mentioned in Baptist’s footnotes. But the claim that African Americans built the world is simply wrong. Baptist’s book is marked by such rhetorical excesses, which lend themselves to a blinkered and narcissistic American exceptionalism. The result is an oversimplified view of capitalism and slavery that ignores the historical contributions to modernity of Africans in the Caribbean and in Africa itself.”

The Eviction Economy

Matthew Desmond wrote an interesting piece in the New York Times, drawing on his new book on eviction, but I’m not sure that the economics implicit in his analysis and the economics implicit in his remedy are consistent.

The analysis seems to be that landlords and lenders are not just earning a profit from dealing with the poor they are earning extraordinary profits from the poor:

“Landlords like Tobin aren’t making money in trailer parks or ghettos in spite of their poverty but because of it. Depressed property values offer lower mortgage payments and tax bills. In poor areas of the cities, rents are lower, too — but not by much. In 2010, the average monthly rent in Milwaukee’s poorest neighborhoods was only $50 less than the citywide median.

Landlords renting to poor families can charge slightly reduced rents but, owing to far lower expenses, still command handsome profits. As a landlord with 114 inner-city units once told me, speaking of an affluent suburb near Milwaukee: “In Brookfield, I lost money. But if you do low-income, you get a steady monthly income.”

He also points out that

“Exploitation is not confined to the housing sector alone. It thrives when it comes to other essentials, like food. Inner-city bodegas take advantage of families’ lack of transportation to increase grocery prices, effectively reducing the value of food stamps. The payday lending industry exploits poor people’s lack of access to credit by offering high-interest loans and collecting over $7 billion a year in fees.”

I say that I am not sure that his remedy, housing vouchers, is consistent with his analysis because while housing vouchers will increase the demand for housing on the part of low income households, it will only increase the supply if the increase in profits attracts more investment. If, however, landlords are already making higher than normal profits and the supply is not increasing, why should we expect the housing vouchers will be able to induce more affordable housing rather than simply going to even higher profits?

I agree there is a problem. But we need to understand the causes of the problem. There are essentially two reasons for high prices (rents or interest rates): either the cost of production is high or there are barriers to competition that enable sellers to earn monopoly profits. If renters are being exploited, in the sense that landlords are getting a greater rate of return than other people who take similar risks, then we need to find out what is preventing others from entering the market. Removal of these barriers to entry should drive down prices and profits. If on the other hand, there are actually high costs associated with lending or renting in low income neighborhoods we need to think about what might be done to reduce those costs. Desmond’s analysis seems to point toward monopoly but his prescription seems to point toward high costs of production.   

One other alternative is that the prices are not actually that high, but many people are still unable to afford them. If that is the case, then the issue is fundamentally one of redistribution. But then the story is not really about exploitation. 

Some thoughts on "Reassembling the Economic"

Kenneth Liparito recently published an essay on “Reassembling the Economic: New Departures in Historical Materialism” in American Historical Review. 

1.       

Lipartito understands North, Wallis and Weingast very differently than I do.

According to Lipartito

“In Violence and Social Orders, North and his co-authors look back over the centuries, concluding that economic growth is fostered by “open access orders.” In these societies, the state relinquishes its monopoly of violence, allowing private institutions to flourish.” (108)

He claims that

“A more balanced assessment of institutions comes from the pens of Daron Acemoglu, an MIT economist, and James Robinson, a Harvard political scientist. In Why Nations Fail, they ambitiously survey world history, cataloguing the political and institutional conditions that lead to good or bad economic outcomes. The pattern they uncover is similar to North’s closed versus open access orders. The main difference is that closed societies, dominated by elites who refuse to share resources and wealth, cannot be blamed solely on the state. Private actors are equally avid in pursuit of rents, and frequently create the type of state that serves their interests. “Wealth creators” in all societies are vested in protecting their positions, and their wealth can be translated into political power.”

In my reading of NWW I don’t see an argument that the state relinquishes its monopoly on violence. To the contrary, what the state relinquishes is direct control over access to and allocation of resources. You don’t get a charter because you are a friend of the King or have connections in Albany; you get a charter because you agree to abide by the same rules as everyone else that gets a charter. The state very much maintains its authority to enforce these rules. The issue is not state versus private power so much as it is getting a state that effectively promotes economic growth.  McCloskey has described her approach to modern economic growth as a story of how culture evolved to encourage more people to “Have a go.” NWW is more about the institutional side of that. By the way, I think both matter, and I know that Doug thought both mattered.

2.       I think Lipartito’s failure to appreciate the recent work by economic historians on the role of the state also limits his view of recent work on the Great Divergence. First it should be noted that recent work suggests that the evidence does not really support a divergence as late as Pomeranz first argued. On the other hand, there is more attention to the diversity of both the European and Asian experiences, and research has definitely moved away from simplistic stories of despotic governments inhibiting growth. The most rapidly growing countries during the early modern period also seem to have been the ones with the most well developed central governments in terms of taxing and spending.  Consequently, economic historians are still very much interested in the role of the state but are more focused on the specific activities they engaged in. See, for instance, recent work by Dincecco; Johnson and Koyama; and Vries; and  Broadberry.

By the way here is Patrick O’Brien on Ten Years of Debate on The Great Divergence after ten years. More generally, a lot of work by O’Brien and others (Broadberry, Deng, and Ma) can be found in the LSE Economic History working papers here.

3.       This is obviously a pet peeve of mine. Lipartito gives far too much credit to the New Historians of Capitalism. For instance, he suggests that because of their work we no longer see Southern slave holders as pre-capitalist the way that Genovese did. The only way to make this statement is to accept the false historiography offered by people like Edward Baptist, who tries to hide the fact that economic historians, going back to the late 1950s, had been accumulating evidence that slave holders acted as profit maximizers. Beckert writes Fogel completely out of the historiography of slavery in the United States. This isn’t just a matter of disagreement about how extensive the references to the prior literature should be. If other people have previously made one of your central arguments you must cite them. If there were a Ten Commandments for academics I am pretty sure that would be one of them. It is also not a conflict between the methods of economists and historians; the podcast Historically Thinking has a great discussion between two historians, Al Zambone and Bob Elder, about the troubling implications of Baptist’s historiography. One can also challenge the assertions about what the new historians of capitalism have brought to the table. I have noted before that Beckert’s book reminds me of the old saying that “There is much here that is new and much that is interesting. Unfortunately, that which is new is not interesting, and that which is interesting is not new.” The interesting parts are the discussions of the industrial revolution (mostly Robert Allen’s theory), the role of force in promoting trade (Findlay and O’Rourke, and others, have made this argument); the capitalist nature of slavery (Conrad and Meyer and Fogel and Engerman said this a long time ago). What’s new is the argument that cotton, slavery, and empire were not just important parts of economic history, they were the key to how the west got rich and capitalism was born. But this is the part of the argument that is least substantiated by evidence.

4.       I’m not sure that Lipartito has found the best way forward. This is in large part because I am not entirely sure what he is trying to say:

This is what I am talking about

The New York Times covered a project by Edward Baptist to collect runaway slave ads. The website for the project states that "Such ads provide significant quantities of individual and collective information about the economic, demographic, social, and cultural history of slavery, but they have never been systematically collected.” I added the underline.

Yet another illustration of the superiority of the New History of Capitalism. Why didn’t economic historians think to use this valuable resource? Why didn’t they try to systematically collect this data? It must be because of their narrow mindedness: their ideological and methodological constraints.

Oh, wait a minute. Here is a link to a working paper by Suresh Naidu and Jeremiah Dittmar based upon the 29,000 runaway slave ads they collected. This isn’t new. They received funding from Institute for New Economic Thinking and they have been presenting the work at conferences for about 4 years now, including the Economic History Association and the Organization of American Historians. 

Earlier, John Komlos had done a study that involved more than 10,000 ads. 

All  of this isn't to say that it is not potentially a good project and one that may add to our knowledge, but can you honestly say that it has never been systematically collected?

for the sake of argument: the evidence against the new history of capitalism

I was referred to the other day in a conversation on Twitter between Adam Ozimek and Marshall Steinbaum about economic history and the New History of Capitalism (NHC). I don’t know either of them, though I did like Ozimek’s Econ Talk with Russ Roberts. Steinbaum asserted that NHC is really the way to go, that NHC people are not playing fast and loose with evidence, and that “Economic history is constrained by methodological narrow-mindedness and thus circumscribed,” whereas “HoC actually entertains arguments that simply don't get a hearing in Econ, thanks to ideology,” He also claimed that the competence and honesty of econ is in question and that my response to Cowie is just more economist overreaction to “apt criticism.” Ozimek wanted someone to argue with Steinbaum. Twitter isn’t really well suited for argument; a real argument should have at least clear claims and evidence. Moreover, I haven’t seen any indication that the NHC people are interested in real argument.

In the interest of real argument, however, I will try to make clear the evidence behind my claims about NHC. The other day I claimed that “The primary features of the new history of capitalism seem to be hostility toward economics (including economic historians), ignorance or disregard of the work done by economic historians, and a willingness to play fast and loose with numbers.”

Perhaps someone can explain why these examples do not represent a problem with the NHC and then provide specific examples of how methodological narrow-mindedness and ideology are constraining economic historians. Later I’ll try to make the positive case for economic history.

Hostility Toward Economics:

Introduction, Zakim and Kornblith Capitalism Takes Command page 5: “The cliometric habits of economic historians are a case in point, for they consistently flatten the history of market society by “bracketing” whatever proves too difficult to integrate into a quantifiable universe of price series, wage averages, or productivity regressions. Long arcs of development resting on “data” retrofitted into axiomatic categories of growth or stagnation, invariably result in highly cogent patterns of secular change. The revolutionary disruptions essential to “capitalism” reorganization of society―conflicts over the very forms of capital and their legitimacy, or the political negotiation over the boundaries of property rights and contractual obligations, or concern over the effects of competition on the civic life of the polis―are then dismissed as exogenous to the organic logic of exchange, and so irrelevant to a history of the economy. That is why studies in economic history so often reproduce capitalist ideology itself, separating economic activity out from the murky realms of the unmeasureable and assigning it an autonomous operating principle.”

Baptist page 72 of Capitalism takes Command: “the evidence strongly suggests that –left to their own devices –neither economists nor the banking dynasts they often serve have learned the lessons of the past.”

And of course one can refer to Cowie’s essay. None of these claims are backed by specific cases.

Disregarding the Work of Economic Historians:

Baptist claims that economists and historians have accepted the claim that slavery was inefficient. One of his primary claims in Half Has Never is that he shows, contrary to what all these economists believe, that slave owners were profit seekers and slavery was dynamic capitalist system. Thanks to surveys conducted by Bob Whaples  it is demonstrably false that economic historians believed that slavery was an inefficient pre-capitalist system. Baptist can only make the claim by disregarding the mountain of work produced by economic historians, going back to Conrad and Meyer in 1958.

Beckert writes about slavery without referring to Fogel and about the use of force in spreading markets without citing Findlay and O’Rourke.

Hyman on p. 27 of Borrow cites Pete Daniel “Shadow of Slavery” that debt peonage trapped sharecroppers in “grueling oppressive lives” but does not cite the seminal work of Ransom and Sutch on debt peonage.

Playing Fast and Loose With Numbers:

 Julia Ott, When Wall Street Met Main Street, first page of the first chapter: "Severe financial panics in 1873 and 1893 punctuated a prolonged economic depression, as prices, profits, per capita output and productivity growth fell steadily from 1873 to 1896." Not true. If you don’t already know that this isn’t true see measuringworth.com

Louis Hyman page 18 Borrow: The American Way of Debt “Though a national bank was founded in 1791, its first incarnation lasted only forty years as Jacksonian populism triumphed over federalism.” There were two separate banks. You can see the physical evidence of this if you visit Philadelphia.

Here is Edward Baptist’s nonsense exercise in national income accounting:

“here’s a back- of- the –envelope accounting of cotton’s role in the US economy in the era of slavery expansion. In 1836, the total amount of economic activity―the value of all the goods and services produced―in the United States was about $1.5 billion. Of this, the value of the cotton crop itself, total pounds multiplied by average price per pound―$77 million―was about 5 percent of that entire gross domestic product. This percentage might seem small, but after subsistence agriculture, cotton sales were the largest single source of value in the American economy. Even this number, however, barely begins to measure the goods and services directly generated by cotton production. The freight of cotton to Liverpool by sea, insurance and interest paid on commercial credit―all would bring the total to more than $100 million (see Table 4.1).

                Next come the second- order effects that comprised the goods and services necessary to produce cotton. There was the purchase of slaves―perhaps $40 million in 1836 alone, a year that made many memories of long marches forced on stolen people. Then there was the purchase of land, the cost of credit for such purchases, the pork and the corn bought at the river landings, the axes that the slaves used to clear land and the cloth they wore, even the luxury goods and other spending by the slaveholding families. All of that probably added up to about $100 million more.

Third order effects, the hardest to calculate, included the money spent by millworkers and Illinois hog farmers, the wages paid to steamboat workers, and the revenues yielded by investments made with the profits of the merchants, manufacturers, and slave traders who derived some or all of their income either directly or indirectly from the southwestern fields. These third order effects would also include the dollars spent and spent again in communities where cotton related trades made a significant impact another category of these effects is the value of foreign goods imported on credit  sustained the opposite flow of cotton. All these goods and services might have added up to $200 million. Given the short term of most commercial credit in 1836, each dollar “imported” for cotton would be turned over about twice a year: $400 million. 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 US population―who in that year toiled in labor camps on slavery’s frontier.”

Again, the biggest problem is not that he does not understand national income accounting (he obviously does not); the biggest problem is that he is just making up numbers.

Both Baptist and Beckert note that cotton was the majority of U.S. exports, but do not note that exports were a small part of the American economy.

Olmstead and Rhode presented extensive analysis of the NHC misuse of quantification in a paper presented at the Cliometric Society session at ASSA. Anyone really interested in the topic should contact them about their working paper on the topic.

In the end, my problem with the new history of capitalism isn’t so much the bad economics as it is the bad history. What makes for good history? There are actually a lot of things that go into making good history, but I think that the most essential is a critical approach to sources, both primary and secondary. History majors at University of Mary Washington take a two course sequence in historical methods. The first course focuses on historiography. The second course focuses on the use of primary sources. The new historians of capitalism need to retake both.

I have no problem with legitimate criticism of economics or economic history. I have been known to criticize them myself. See, for instance, here. And if you think I am some right wing ideologue that hates the NHC people because they criticize capitalism, see here and here for my response to free market economists who misuse history. The difference between my criticism of economics, economic history or NHC and their criticism of economic history is that I point to a specific problem, provide evidence that it exists, and show that the problem has led to erroneous conclusions. The NHC critiques of economics provide no evidence. 

What are the important questions or topics are economic historians are not working on because of ideology or methodological narrowness? Is it slavery and coercion? See Fogel or Fenoaltea. Corruption? See Wallis.  The use of state power? See Findlay and O’Rourke. The importance of ideas? Take a look at Mokyr or McCloskey. Inequaltiy? See Lindert. The development of financial markets and dealing with risk? Where do I even begin? You could claim that economic historian's methods limit the answers they can arrive, but, as  I pointed out earlier, many of the conclusions are the same ones NHC is now taking credit for. 

Finally, I should note that the nature of the NHC claims about economic history make them virtually immune to real argument. After all, how can you believe anything I say when I am obviously just speaking for the banking dynasts that I serve? 

More on Cowie on Economics

There were a couple of other points about Cowie’s critique of economics in the Chronicle that I wanted to address but did not have time for the other day. Cowie claims that

 “smug in their security, economists are the least likely to cite other disciplines. Perhaps the most disturbing thing is the remarkable extent to which graduate training in the field is similar across institutions and departments — a stark contrast to other disciplines. And most of that graduate education is driven by textbooks and textbooks alone. To other social scientists and humanists, that is an astonishing proposition, and evidence of the field’s range of ideas.”

The argument that that economists are the least likely to cite others is from "The Superiority of Economists," in the Journal of Economic Perspectives. Unlike Cowie the authors of this study do note one of its limitations. They do not include books in their analysis, and economics is much more focused on journal articles than most disciplines. Books tend to count very little, if at all, in economics departments at research universities.

Moreover, anyone concerned with the issue should be familiar with the actual numbers. This is the table from the article

The percentage of citations to articles in journals from other disciplines is very low in economics, but it is not high in political science or sociology.

Cowie’s other point about the training of economists also suggests that he does not understand the role of articles in economics. Graduate study, and undergraduate study, in economics tends to be relatively uniform. Even heterodox economists tend to make sure that their students are well grounded in the standard theory and methods, and textbooks play an important role in graduate education. The role of textbooks is, however, primarily limited to the first year. After the first year the focus shifts to journal articles or, if you have a professor who is working on the cutting edge of a topic, the latest working papers (that’s what happened when I took Norm Schofield’s social choice and welfare class). In addition, much of the most important parts of graduate education take place outside of the class room in the seminars and workshops.  Economists do not spend three to five years reading textbooks. They spend most of their time learning how to write papers that can be published in peer reviewed journals.

It also turns out that Cowie’s essay in the Chronicle was pretty much verbatim a speech that he gave last year at a conference on the education of economists. I’m serious. He gave a talk at a conference on educating economists. Here is the video. The video is relevant because he ad libs a few times, and those ad libs turn out to be pretty informative.

One of the ad libs has to do with his reference to Robert Frank’s experiments on the prisoner’s dilemma (about 33 minutes in). Cowie jokes that he would like to have someone explain to him “why this is such a popular way of understanding the world” since he has “never actually been in a prisoner’s dilemma scenario.” Anyone who actually tries to talk to economists and wanted to know why they are interested in this game would know that it is model that illustrates the problem of maintaining cooperation when individuals have an incentive not to cooperate. The problem is pervasive. People often face situations in which they can benefit from cooperation but also have incentive to individually depart from that cooperation on the job. For instance, when employees shirk on the job or employers don’t properly credit them for all of their time or for overtime they are departing from a cooperative outcome. I usually point out  to students that much of modern political theory arises from a prisoner’s dilemma scenario because Hobbes stated

I put for a general inclination of all mankind, a perpetual and restless desire of power after power that ceaseth only in death.

And 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 prisoner’s dilemma is not important because we will all become prisoners or because cooperation always fails. It is important because cooperation is often difficult, but to understand how we overcome the difficulties and maintain cooperation we need to understand the underlying problem. One can disagree about the role of the prisoner’s dilemma in social analysis but to assert that one simply doesn’t understand why it matters reflects a degree of willful ignorance.

Even more telling are Cowie's comments related to Piketty’s work (41 minutes into the video). He recites the long quote from Piketty that he included in the Chronicle essay. He then states that “Piketty is a lousy historian. He doesn’t even get his facts right, oftentimes.”  He points out that one historians review called the history in it abysmal. He goes on, however, to say that “I use the data all the time. I’m hoping the data is clean because I use it blindly and I think it’s very powerful.” What? All the stuff I know about he gets wrong, but I’m going to keep blindly using his numbers because I like what they say. This is precisely the problem that I have with much of the new history of capitalism. Advocates of it tend to throw out old historical standards of source criticism in favor of producing the argument that they want. Perhaps he should focus on the beam in his own eye than the mote in his brothers. 

Scott Reynolds Nelson reviews Jefferson Cowie

Related to yesterday's post, Scott Reynolds Nelson reviews Jefferson Cowie's latest book.

"Cowie shows a mastery of the fierce debates in labor history, political history, women’s history, and political theory. He’s weaker, however, in his discussions of the South, economic issues, and the Gilded Age."

Nelson explains that Cowie

"briefly examines, then dismisses, the international economy by saying that Gilded Age America sat behind a tariff wall. In fact, American tariffs in the 1880s were tiny compared with those of Germany, France, Russia, and the Ottoman Empire.

Cowie’s Gilded Age pits workers against robber barons, who used the labor efficiencies of steam engines and huge factories to play one ethnic group against the other. That’s true enough but also a cliché. The biggest Gilded Age productivity gains were in smaller Northern industries where skilled German immigrants supervised Eastern European semi-skilled, literate, and numerate machine operators. The standard of living in the South, which had neither, fell behind for half a century.

This is not to romanticize the Gilded Age, which saw atrocious death rates in industrial accidents and brutal attacks on strikers. But workers’ standard of living was, by international standards, rising compared with its low point in the 1850s.

Cowie further suggests that a pivotal national election in 1896 allowed workers to be "incorporated" into the Republican Party, thus destroying the Populist coalition. But the critical election was actually 1894, and it followed an international financial crisis for which workers blamed Democrats.

If understanding the American Gilded Age requires seeing the international scene, so does understanding the New Deal. As Eric Hobsbawm, Alfred Chandler, and Thomas Sugrue have separately argued, the New Deal high-wage system succeeded only between 1945 to 1973 when the United States had few international competitors. By 1973, Japanese and German firms had retooled to challenge American monopoly power in world markets, forcing U.S. plant closings, loss of union jobs, and an international redistribution of labor.

Cowie likewise dismisses the international oil shocks of 1973 and 1979 as only contributing to the inflation of the 1970s; America’s war in Vietnam was the primary culprit, he asserts. But the oil shocks and the retooling of Germany and Japan together contributed to the failure of the American steel, auto, chemical, and appliance industries."

It is possible that Jefferson Cowie might not be the best person to turn to for advice about understanding the economy, past or present.

More Silliness from the History of Capitalism Folk

In the chronicle of Higher Education Jefferson Cowie asks “Why Are Economists So Small Minded?”

Sections from the article are in bold.

History is valuable, and, if the education of economists were more of an intellectual endeavor than a pipeline to careers in finance, it could be one intellectual component in a basket of approaches to get students to think more widely. Unfortunately, economic historians tend to be busy reducing history to the application of contemporary models to old data sets. And they don’t like to talk with people in the history department very much.

He quotes approvingly from Piketty:

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

Hard to imagine why economists wouldn’t want to talk this historian.

Professor Cowie: “Let’s chat about your childish passions, ideological speculation, and petty preoccupations.”

Economist: “Maybe some other time.”

I don’t know what he means by “reducing history to the application of contemporary models to old data sets.” He of course does not provide any specific examples, just generalizations. The economic historians I know of are collecting evidence to create new data sets and developing theories to try to better understand the past.

The criticism that economists are preoccupied with purely theoretical mathematical models is not supported by the evidence. For instance in the latest American Economic Review (Feb 2016) 7 of 9 papers are empirical. It is not some unusual special issue. All the recent John Bates Clark Medalists have won for their empirical work. It is like these critics, like Cowie, picked up their critique of economics from their adviser, who got it from their adviser, with the trail going back to somebody in the 1960s or 1970s.

What really irritated me was the suggestion that economic historians should be more like the historians of capitalism.

In the past several years, there has been a resurgence of interest in the history of capitalism. What once might have been called the study of "political economy" is an emerging intellectual framework combining an array of methods and questions with a return to putting capital at the center of the historical narrative. The hope of those engaged in the history of capitalism is to challenge the clinical modeling of social life. There is not one thing we can call "capitalism," after all, but a contingent historical assemblage of work, investment, production, politics, and trade from the 15th-century spice trade through slave cotton to today’s digital labor.

The new historians of capitalism tend to be more consciously ecumenical in their research and interpretive methods. Their strength is the opposite of mainstream economics. As the historian Louis Hyman has put it:

"When the story calls for linear regression, they use linear regression. When the story calls for the backstory of the commodity, they de-fetishize and figure out the story. When gender is the dominant force in the archive, they use feminist theory. Leveraging the ease of data analysis, the historians of capitalism display a return to numbers that has been lacking in historical scholarship of late. While math is widely used, its models are not lionized. Data does not displace the human element in history, but complements it. It is used to clarify and explain, but not be so complex that it can’t be conveyed to normal humans."

Which historians of capitalism, other than Hyman himself, are using regression analysis? I have read Baptist, Beckert, Mihms, Hyman, Ott and Levy. I don’t recall seeing it there. Maybe, it was and I forgot. If it is there, I look forward to someone reminding me where. 

The primary features of the new history of capitalism seem to be hostility toward economics (including economic historians), ignorance or disregard of the work done by economic historians, and a willingness to play fast and loose with numbers.

It would be nice if they would learn enough about economics not to write about things like "productivity per person." And I can’t count how many times I have seen someone repeat Baptist’s entirely made up number about the share of GDP accounted for by slave produced cotton as if he had actually done something. He is the most egregious example, but he is not alone. There are other examples from other historians of capitalism that I have mentioned in previous blog posts.

I was very optimistic when I first heard about the new history of capitalism. I am the person that it should appeal to. I believe that history should play a larger role in economics and that economists should pay more attention to other disciplines. I did a Masters in Economic History from the LSE before getting a Ph.D. in Economics. While doing those degrees, I took graduate courses in other disciplines: sociology at the LSE and political science at Washington University. Most of my work does not contain fancy math or statistical analysis. If the new historians of capitalism were actually doing what Hyman says they are doing I would still be optimistic, but they are not. They are content to throw out dated critiques of economics, generalization about economist’s motives, and made up numbers about what happened in the past. The new historians of capitalism need to do better. Their audience deserves it.


Note: This post has been edited from its original version, which did not make clear that the second section from the article  was Cowie quoting from Piketty.

Was the Gilded Age a Gilded Age?

 James Livingston argues in the Chronicle of Higher Education that we are not living in a second Gilded Age, primarily because the original Gilded Age wasn’t actually what people think it was.

"First of all, what was the Gilded Age? The term comes from Mark Twain and is generally used to describe the period from about 1870 to about 1900. It is widely regarded as a time when big business came to dominate the American economy and Robber Barons ruled.

 Livingston argues that, in fact, labor ruled and capitalists were the losers:

“In the so-called Gilded Age, real wages increased dramatically but labor productivity didn’t, so capitalists suffered. Extraordinary economic growth happened, no doubt about that then or now, but workers were, as the capitalists complained, the principal beneficiaries. For example, real wages in the nonfarm sector increased roughly 30 percent between 1884 and 1896 (unemployment wasn’t rising), but productivity flatlined. The opposite is true of our time.

Why, then, did workers win the class struggle of the late 19th century? Not because they were represented by trade unions. Only 10 percent of the labor force belonged to such a thing. And not because they weren’t militant — between 1881 and 1905, when the Bureau of Labor Statistics kept meticulous records, the number of strikes, lockouts, establishments affected, and participants increased at a rate that would panic contemporary observers. With almost no union representation, workers won — they were the victors in the majority of strikes and lockouts measured in the late 19th century by the BLS.”

I agree with some of Livingston’s interpretation. The late nineteenth century was not just a period in which capitalists oppressed labor to make larger and larger profits. On the other hand there are several specific elements that I am not so sure about.

Because there are no citations I am not sure where the evidence comes from. I am also not clear why 1884 to 1896 would be a particularly useful period. The statement about unemployment is confusing because estimates of unemployment for the nineteenth century find the unemployment rate in 1896 to be considerably higher than 1884. J.R. Vernon (1994 Journal of Macroeconomics) estimated unemployment at 4.01% in 1884 and 8.18% in 1896. Romer and others estimated it was over 10 % in the mid 1890s. I also don’t know of any evidence that productivity growth flatlined during the Gilded Age. Estimates I am familiar with show quite the opposite. The following table is from Abromowitz and David

What did happen to real wages and labors share during the Gilded Age? The following table is from Measuring Worth. It shows the annualized growth rates for several series from 1870 to 1900.

US	1870 to 1900
Consumer Price Index	-1.46%
Unskilled Wage	-0.05%
Production Worker Compensation	0.64%
Nominal GDP per capita	1.11%

The wage series are in nominal terms, but you can see that in the case of production workers nominal wages increased and in the case of unskilled workers it fell less rapidly than prices. The workers represented in these two series would have experienced increases in real wages, but their nominal wages were not rising more rapidly than nominal GDP per capita. It is also not clear that capitalists were in a losing battle. For instance, the following graph, also using data from Measuring Worth, shows the nominal value of a $1 investment in the S&P Index in 1871, assuming that dividends are reinvested each year.  

Overall, I think Livingston’s interpretation suggests too much of a zero sum game between labor and capital. If labor gained, capital must have been losing. The available evidence is consistent with both labor and capital doing well during the late nineteenth century.

Can we maintain our present rate of increase of consumption?

“we cannot long maintain our present rate of increase of consumption; …the cost of fuel must rise, perhaps within a lifetime, to a rate injurious to our commercial and manufacturing supremacy; and the conclusion is inevitable, that our present happy progressive condition is a thing of limited duration.”

I was reminded of this quote last week by the many reviews of Robert Gordon’s new book The Rise and Fall of American Economic Growth . The quote is not from Gordon. It is from the English economist Stanley Jevons, writing in 1865. The point is that economists don’t have a great record of making predictions about when modern economic growth will end. I think economists are actually pretty good at predicting a lot of things, but you do not receive a crystal ball with your Ph. D.

Schumpeter distinguished between the adaptive response and the creative response. The adaptive response is what economic theory does well. When the price of one good rises you reduce your consumption and switch to relatively cheaper substitutes. These sorts of changes are predictable. The creative response is not predictable. In retrospect you can usually tell a story, consistent with economic theory, about the invention of the spinning jenny, or kerosene, or transistors, but you can’t predict it beforehand. Modern economic growth comes from these fundamentally unpredictable creative responses. I would agree with Gordon that the innovations during the late nineteenth and early twentieth centuries had a particularly large impact on physical well-being, especially water purification and sewage systems, areas in which there is apparently still some work to be done. I do think, however, that he understates the impact and the potential future impact of recent developments in science and technology on people’s lives.

I am optimistic that as long as people have the opportunity to be creative, innovation will continue. As for headwinds in the U.S. (factors militating against continued growth) I also think we should not think about the U.S. as if the rest of the World did not exist. I am hopeful that more than a billion people in Asia will have more opportunities to add to the stock of knowledge than they did in the past, and that the whole World might benefit. Of course, I could be wrong too.