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?