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:

Economic History in 2016

This is my subjective assessment of some of the major developments in economic history in the last year. Most of the papers I cite are from 2016 (or at least the versions I cite are from 2016) A few are from earlier, but you can just think of it as the long 2016. It seemed long. By the way, I intend to do a another post that focuses more on developments in American economic history.

Measuring Long Run Economic Performance

One of the most significant developments in economic history over the last several decades has been the work to improve our estimates of long run economic performance. Responding to challenges presented by Pomeranz’s Great Divergence and obvious weaknesses in Madison’s estimates, a number of economic historians have worked to develop better estimates of economic performance in Europe and Asia over the very long run. Economic historians continue these efforts but also recognize the limitations of what they have done and, possibly, what they can do.

Stephen Broadberry has done much of this work with a number of different co-authors.  For a recent example see Roger  Fouquet and Stephen Broadberry. "Seven centuries of European economic growth and decline." The Journal of Economic Perspectives 29, no. 4 (2015): 227-244.

Deng and O’Brien raise numerous questions about the usefulness of these estimates for Asia.

New estimates of long term economic performance have prompted new attempts to explain differences in long term economic performance. 

State Capacity and Economic Growth

Economic historians have long recognized that the countries that led the way in modern growth, England and Holland, also led the way in the development of state capacity (the ability to tax and borrow to spend on public goods.) But recent work has attempted to establish this relationship more generally and identify the specific mechanisms by which state capacity contributed to economic growth. Recent work has focused on the combination of state capacity and constraints on state action. The problem, of course, isn’t new: it is the fundamental Hobbesian problem, but economic historians are trying to understand how effective solutions evolved.

See the survey paper on state capacity by Noel Johnson and Mark Koyama (available through Noel’s website). The published version of Johnson and Koyama is "States and economic growth: capacity and constraints" Explorations in Economic History.

And this recent Economic Journal paper by Mark Dincecco and Gabriel Katz

Religion and Economic Growth

Related to the work on state capacity, economic historians have shed new light on the relationship between religion and early modern growth. The idea that there might be some connection between economic growth and religion has a long history. This connection was, for instance, central to the stories told by Max Weber and R.H. Tawney.  What is new is that economic historians have gathered evidence and employed techniques that enable them to identify specific mechanisms through which religious beliefs and institutions influenced economic performance.

See, for instance,

Eric Chaney on Religion and the Rise and Fall of Islamic Science

Anderson on Inquisition and Scholarship

Jared Rubin’s forthcoming book

Anderson, Johnson, and Koyama Jewish persecution and weather shocks

Johnson and Koyama Jewish communities and city growth

This working paper  by Dittmar and Meisenzahl on the religion, politics and public goods in Germany during the Reformation

English Wages and Industrialization

Recent research on wages in England have challenged Robert Allen’s theory of the industrial revolution. Allen’s theory was attractive in its simplicity: relative prices drove the Industrial Revolution in England. People invested in machines because labor was expensive and coal was cheap. Several recent studies have, however, challenged the evidence of high wages in England.

See Jane Humphries and Benjamin Schneider

And these great videos of Humphries describing the project.

See also Judy Stephenson’s work on the building trades and her blog post about the papers presented at a workshop on English wages.

You can also look at these blog posts for descriptions of the state of the debate Pseudoerasmus  and Vincent Geloso. By the way, based upon the volume of tweets, blog posts, papers, and working papers I am beginning to believe that Vincent Geloso must actually be the name of a consortium of economic historians.


Note: This post was edited on December 4, 2017 to add a link to he published version of the Johnson and Koyama paper on state capacity.

Bankrupt in America

We received our copies of Bankrupt in America: A History of Debtors, Their Creditors, and the Law in the Twentieth Century 

 

also available at Amazon

I previously posted an overview of the book but here is a description of each of the chapters.

Chapter 1 Introduction

The introduction acquaints the reader with what is already known about bankruptcy in the twentieth century, describes the methods used in the book, and previews the central argument. The chapter begins with a broad overview of the laws and procedures governing the collection of unpaid debt at the state and describes federal bankruptcy. The text highlights the interplay between state and federal law. It introduces the interdisciplinary literature on bankruptcy, emphasizing the need for an analytic framework that integrates the story of changes in the bankruptcy law with the story of changes in the bankruptcy rate. It places the framework and methods within the contexts of New Institutional and cliometric traditions.

Chapter 2 The Intended and Unintended Consequences of the 1898 Bankruptcy Act

Chapter 2 examines the origins and consequences of the 1898 Bankruptcy Act. The authors of the law were business owners who wanted an efficient procedure to deal with the failure of other businesses. They gave little thought to personal bankruptcy, and the law that they designed for businesses erected no substantial obstacle to the discharge of consumer debt. As access to consumer credit expanded, personal bankruptcy grew both relative to business bankruptcy and in absolute terms. However, personal bankruptcy did not grow evenly across the U.S. Households sought the protection of bankruptcy law mainly in states where garnishment of wages was easy. The growth in personal bankruptcy led to a shift in beliefs about the causes of bankruptcy and the purpose of bankruptcy law. Initially, creditors, debtors, legislators, judges and other legal professionals agreed that the purpose was to satisfy the claims of creditors efficiently. By the end of the 1920s, many interested parties stressed the importance of providing relief to debtors, who were portrayed as victims of unscrupulous creditors such as loan sharks. The increase in bankruptcy also led to changes in organized interest groups. Legal professionals began to work alongside creditors to try to shape the law.

Chapter 3 An Emphasis on Workout rather than Liquidation

As bankruptcy rates increased in the 1920s, creditors and legal professionals sought to increase in the efficiency of administration. However, as the nation slipped into the Great Depression, reformers found that neither the country nor Congress was interested in their ideas for improving efficiency. Business bankruptcy increased rapidly at the start of the Depression, and President Hoover pushed Congress to add ways for businesses and farmers to develop repayment plans and avoid liquidation. As the Depression wore on, however, business bankruptcy became less of a problem because new business formation was low. Personal bankruptcy cases continued to increase in states with pro-creditor collection law. Representatives from those states, especially Walter Chandler from Tennessee, argued that workers wanted to pay their creditors if they, too, could have a procedure that granted them more time. Congressional debates around the proposals that eventually became Chapter XIII (now known as Chapter 13) pitted those who viewed the procedure as a means to enable people to pay their debts and avoid the stigma of bankruptcy against those who balked at the idea of making the courts a collection agency for creditors. This theme was reprised several times over the next 70 years.

Chapter 4 Personal Bankruptcy after World War II

The bankruptcy rate was very low during World War II, but it increased quickly after the war ended. As growth in consumer credit returned to its pre-Depression trend, so did growth in the personal bankruptcy rate. Bankruptcy grew everywhere, but it rocketed past its previous peak in states with pro-creditor garnishment. Although personal bankruptcy increased, few cases were filed under Chapter XIII. Demand by debtors for Chapter XIII probably was not as great as its Depression-era advocates imagined it to be. People rarely used the procedure for spreading payments over time except in places where bankruptcy referees pushed it.

Chapter 5 The Renegotiation of the Relationship between Consumers and Their Creditors

Pro-creditor garnishment law was a key driver of the bankruptcy rate for the first two-thirds of the twentieth century, but it did not survive the consumer rights movement of the 1960s. By 1970, Congress and the Supreme Court limited the ability of states to maintain and enforce pro-creditor collection laws. Chapter 5 shows that the federal restrictions on garnishment law, especially the Consumer Credit Protection Act, reduced the state-to-state variation in the bankruptcy rate and caused the national bankruptcy rate to level off. Although the growth of bankruptcy in the 1950s and 1960s led to calls for reform of federal bankruptcy law, the effort moved slowly. By the time recommendations for bankruptcy reform were made to Congress, bankruptcy rates were no longer regarded as a problem. Almost all of the changes to personal bankruptcy in the 1978 Bankruptcy Reform Act encouraged debtors to file.

Chapter 6 The Triumph of the Consumer Creditor

Bankruptcy rates rose after 1978. The debtor-friendliness of the 1978 changes set the stage for a new bankruptcy crisis, but the increasing importance of banks that issue credit cards was the most important force. The Supreme Court’s 1978 decision in Marquette National Bank of Minneapolis v. First Omaha Services Corp. led directly to the growth in the market for credit cards. Banks could now profit from offering cards to high-risk consumers, and this put more people on the path to bankruptcy. Card issuers used some of their profits to lobby for changes to bankruptcy law. Studies by creditor-funded organizations, such as the Credit Research Center, supported a narrative in which lax bankruptcy law and lack of stigma led households to file for bankruptcy even when they could pay, imposing a so-called bankruptcy tax on honest debtors. In 2005, Congress passed a bankruptcy reform bill supported by banks and credit card companies, over the objections of many legal professional, scholars, and even some creditors. Today personal bankrupts must use Chapter 13 repayment plans unless they can show that they do not have sufficient income to repay. Credit card issuers won the argument that retailers began in the 1930s.

Chapter 7 Conclusion and Epilogue

The conclusion reviews four themes in the evolution of bankruptcy and bankruptcy law. First, long run growth in personal bankruptcy comes from growth in the supply of credit at the extensive margin. Businesses regularly invented new ways to grow through consumer lending, and the relaxation of usury restrictions facilitated riskier loans. Second, state laws governing the collection of debt are key to interpreting geographic and temporal patterns in bankruptcy. The interaction of state collection law and bankruptcy law caused bankruptcy rates to be higher in states with pro-creditor collections. Pro-creditor collection law also magnified the effect of the growth in the credit supply and the effect of recessions on the bankruptcy rate in those states. Third, people matter. A small number of individuals had outsized influence on the history of bankruptcy. Fourth, stories matter. Beliefs about bankruptcy are typically expressed in stories about what brings people to bankruptcy. In some stories, debtors are driven to bankruptcy by unscrupulous creditors or economic crises. In other stories, unscrupulous debtors take advantage of overly generous laws, imposing the cost of their default on others. The direction bankruptcy reform took depended upon which story carried the day.

Recent NBER Meetings

 

Yes, NBER charges for downloads of working papers, but you can watch some recent meetings for free. By the way, it has also been my experience that you can usually find ungated versions of most NBER working papers if you look around.

 

I think both the Race and Stratification Economics and the Development of the American Economy meetings should be of interest to readers of this blog.

 

The final presentation at the Race and Stratification meeting is University of Mary Washington economics alum Lavar Edmonds, who is currently working on a Ph.D. in economics at Stanford, presenting his research on the impact of HBCU trained teachers.

 

I also liked that the Race and Stratification meeting about how one could incorporate race and stratification economics into introductory economics courses.

 

NBER Race and Stratification Working Group on YouTube

 

https://www.nber.org/conferences/race-and-stratification-working-group-spring-2023

 

Caste-based and Racial Wealth Inequality in India and the United States

Ishan Anand, Indian Institute of Technology Delhi

 

Discussants:

Ellora Derenoncourt, Princeton University and NBER

Ashwini Deshpande, Ashoka University

 

Perceptions of Racial Gaps, their Causes, and Ways to Reduce Them

Matteo F. Ferroni, Boston University

Stefanie Stantcheva, Harvard University and NBER

 

Discussants:

Michael Kraus, Yale University

Candis Watts Smith, Duke University

 

Unequal Gradients: Sex, Skin Tone, and Intergenerational Economic Mobility

Luis A. Monroy-Gómez-Franco, University of Massachusetts, Amherst

Roberto Vélez-Grajales, Centro de Estudios Espinosa Yglesias

Gastón Yalonetzky, Leeds University

 

Discussants:

Art Goldsmith, Washington and Lee University

Chantal Smith, Washington and Lee University

 

Teaching Discrimination in Introductory Economics: An Approach Incorporating Stratification Economics

Jorgen M. Harris, Occidental College

Mary Lopez, Occidental College

 

Complementary Investments Over the Life Course and the Black-White Earnings Gap

Sonia R. Bhalotra, University of Warwick

Damian Clarke, Universidad de Chile

Atheendar Venkataramani, University of Pennsylvania and NBER

 

Estimating Disenfranchisement in U.S. Elections, 1870-1970

Jeffery A. Jenkins, University of Southern California

Thomas R. Gray, University of Texas at Dallas

 

The Determinants and Impacts of Historical Treaty-Making in Canada

Donn. L. Feir, University of Victoria

Rob Gillezeau, University of Toronto

Maggie E.C. Jones, Emory University and NBER

 

A Simple Model of Group Conflict, Inequality and Stratification

Daniele Tavani, Colorado State University

Brendan Brundage, Colorado State University

 

Discussants:

Pablo Beramendi, Duke University

Patrick L. Mason, University of Massachusetts Amherst

 

Racial Disparities in the Tax Treatment of Marriage

Janet Holtzblatt, Tax Policy Center

Swati Joshi, Brookings Institution

Nora R. Cahill, Brookings Institution

William Gale, Brookings Institution

 

Not so Black and White: Uncovering Racial Bias from Systematically Misreported Trooper Reports

Elizabeth Luh, University of Michigan

 

Economic Inequality and Stratification after a Natural Disaster

Anita Alves Pena, Colorado State University

 

Role Models Revisited: HBCUs, Same-Race Teacher Effects, and Black Student Achievement

Lavar C. Edmonds, Stanford University

Discussant:

Michael Gottfried, University of Pennsylvania

Karolyn Tyson, Georgetown University

 

 

NBER Development of the American Economy Program meeting on YouTube

 

https://www.nber.org/conferences/development-american-economy-program-meeting-spring-2023

 

A Penny for Your Thoughts

Walker Hanlon, Northwestern University and NBER

Stephan Heblich, University of Toronto and NBER

Ferdinando Monte, Georgetown University and NBER

Martin B. Schmitz, Vanderbilt University

 

Legal Activism, State Policy, and Racial Inequality in Teacher Salaries and Educational Attainment in the Mid-Century American South

Elizabeth U. Cascio, Dartmouth College and NBER

Ethan G. Lewis, Dartmouth College and NBER

This paper was distributed as Working Paper 30631, where an updated version may be available.

 

US Educational Mobility in the Early Twentieth Century

Martha J. Bailey, University of California, Los Angeles and NBER

Abdul Raheem Shariq Mohammed, Northeastern University

Paul Mohnen, University of Pennsylvania

 

The Value of Ratings: Evidence from their Introduction in Securities Markets

Asaf Bernstein, University of Colorado at Boulder and NBER

Carola Frydman, Northwestern University and NBER

Eric Hilt, Wellesley College and NBER

This paper was distributed as Working Paper 31064, where an updated version may be available.

 

Germ Theory at Home: The Role of Private Action in Reducing Child Mortality during the Epidemiological Transition

James J. Feigenbaum, Boston University and NBER

Lauren Hoehn-Velasco, Georgia State University

Sophie Li, Boston University

 

“Muddling Through or Tunnelling Through?”: UK Monetary and Fiscal Exceptionalism during the Great Inflation

Michael D. Bordo, Rutgers University and NBER

Oliver Bush, Bank of England

Ryland Thomas, Bank of England

Public Goods, Private Roads, and the Case of Scandinavia

In We Can Build the Roads, and Other Things Too Mike Munger argues that roads are not public goods and that the examples of Sweden and Finland support this argument. I think there are a few problems with this argument.

One problem arises from the way we tend to explain public goods in economics. We tell students that they are non-rival and non-excludable. Rival means that one person’s use of a good diminishes the benefit for other users: if you drink my coffee that will diminish the benefit that I get from it. Excludable means that it is possible to exclude other people from using a good at a reasonable cost. In fact, I generally do not have any problem keeping people for drinking my coffee. The most common example of a public good is national defense. The benefit you get from us not being invaded by North Korea does not diminish the benefit I get from it, and it would be very difficult to exclude either of us from those benefits. The problem with public goods is that because people can get the benefit without paying, they will tend to free ride, and the good will be underprovided. Munger points out that that roads are often rival and people can be excluded. Interstate 95, which runs through Fredericksburg, is a good example. Heavy traffic makes it rival more often than not, and we have new toll lanes that you have to pay to use.

Munger notes that what most people think of as public goods, things like roads and public education, are not “pure public goods.” But it is not unreasonable for people to think of many of these things as “public goods,” in the sense of things that the state may have a role in providing, even if they are not “pure” public goods. Rivalry and excludability are matters of degree, and to the extent that something has the characteristics of non-rivalry and non-excludability positive externalities tend to exist. While I may be able to exclude you from direct access to the good, I can’t completely prevent you from getting some of the benefits. When the fire department puts out the fire in my house, you are better off because it won’t spread to yours. Yes, I can exclude people from a school and after a point it becomes rival, but if someone does get an education, I can’t exclude other people from benefiting from that as well. I can exclude people from getting flu shots, but I can’t exclude them from the benefits of others getting the shot. What people tend to think of as public goods are goods that many people believe to have significant positive externalities. Standard economic theory tells us that the market equilibrium will tend to underprovide goods with positive externalities, and that government action (or possibly some other sort of cooperative action) might be able to move society to a point where the marginal benefit to society and the marginal cost to society are closer to being equated. Just because you can have a private road, or a private school, or private security does not prove that there are not benefits to public provision of education, and roads, and police.

Not only are rivalry and excludability matters of degree, they are not necessarily the same in all situations. A road is a piece of land that can be used by some sort of traffic. Merely being a road does not make something inherently public or private. The question “Are roads public goods?’ doesn’t really make sense.  If I owned a ranch in Wyoming and built a road on that ranch, nothing about that road would make it a public good. Similarly, if I build a road in a new housing development that only connects to one public road way there are unlikely to be benefits to people who do not live there and excluding people is unlikely to be an issue. On the other hand, the street that I live on in downtown Fredericksburg is non-rival most of the time and it is hard to imagine any scheme for excluding people that would be worth the cost. Personally, I am perfectly happy paying my taxes and not having to participate in its management.

The broader point about economics here is that we shouldn’t think of economic models as a bunch of bins to sort things into: “This goes into public goods. That goes in common property.” Or “This market goes in perfect competition; that one goes in monopoly.” Instead, the models help us to understand the influence of things like rivalry, excludability, product differentiation, and barriers to entry. All of which are matters of degree, not simply yes or no.

What about the examples of Sweden and Finland? Munger suggests that they support his argument that roads are not public goods:

A recent report from the Devoe L. Moore Center gives this description:

Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs…. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads.

Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses.

There are two lessons here, and both are important.

First, many of the things we expect from the state are not public goods. They could be more efficiently and effectively handled by other kinds of cooperation.

Second, roads in particular are emphatically not public goods, and many other nations have solved the problems of road use and financing by decentralizing provision and control. For some reason, the U.S. has allowed itself to become a socialized road system, with no sense of any local ability to improve roads, fix potholes, or cooperate with your neighbors. With available technology, and with the even better technology now being developed, roads can be operated locally and voluntarily. And that’s actually true for many activities we now simply assume are restricted to the state. Some creative rethinking can put us on the road to a better tomorrow.

This description makes the private roads in Sweden and Finland sound very important, and it seems to imply that we don’t have private roads in the United States.

Private roads in Sweden and Finland account for a lot of miles but very little traffic. This is from a paper by Sven Ivarsson, vice chairman of the Board of the National Federation for Private Road Associations in Sweden, and Christina Malmberg Calvo, the World Bank.

“The Swedish road network measures 419,000 kilometers (see Table 1). The Swedish National Road Administration (SNRA) manages one quarter of the network (98,000 kilometers), and the municipalities 10 percent (38,000 kilometers). The remaining two thirds (283,000 kilometers) are privately owned and managed roads. The SNRA roads carry 70 percent of the traffic, the municipal roads 26 percent of the traffic, and the private roads the remaining 4 percent of the traffic. While the private roads arguably constitute a low volume network, some serve vacation home areas and about 50 percent are forest roads mainly opened for commercial purposes, about one third of the private roads carry more than 100 vehicles per day, including some up to a 1,000 vehicles per day throughout the year. This paper focuses principally on the 50 percent of the private road network which is owned and managed by communities, half of which receive state subsidies.”

The situation is similar in Finland. In the 1990s,

“Finland has a surface area of 338 000 km2 and 5 million inhabitants. The road system includes 105 000 km of private roads in residential areas, 77 000 km of public roads maintained by the Finnish National Road Administration (FinnRA), and 23 000 km of city streets and municipal roads maintained by local authorities. Traffic volume on private roads is approximately 1000 million km per year, which is 2.5 percent of the total traffic volume in Finland.” Tiina Korte Also like Sweden many of the roads are through forests, and about 70% of lumber starts on private roads.

Private roads carry 4% of traffic in Sweden and 2.5% in Finland. I don’t know what percentage private roads carry in the United States. That’s right, there are private roads in the United States. As a matter of fact, there have pretty much always been private roads in the United States. Private roads were very important in early America. A lot of research has been done on such roads by people like John Majewski, Dan Klein and Daniel Bogart (see here for instance). There are still many private roads.  If you have spent any time in rural areas, you have probably come across signs on roads that say “Private Property. No Trespassing.” Private roads run to some rural homes, and across private forests, farms and ranches. Here is a template for a private road agreement provided by Orange County, VA.  The agreement provides for a group of people to privately provide for a road.

Points 4 through 7 are interesting

(4)   No public responsibility. Said construction and maintenance is under no circumstances a responsibility of the County, Virginia Department of Transportation (VDOT), the Commonwealth Transportation Board, or any other public entity.

(5)   Emergency services. It is understood that failure of the owners to adequately maintain the Roadway may inhibit the ability of the County to provide emergency services to the parcels, any liability for which shall be borne among the owners.

(6)   School bus service. The provision of Orange County public school bus services on this private road are not guaranteed or implied.  The suitability for any private road for school bus services and routes shall remain at the discretion of the Orange County School Board.

(7)   Liability. It is understood that the County and its agents shall not be liable or responsible in any manner to the developer or the property owners along the road, or to their contractors, subcontractors, agents, or any other person, firm or corporation, for any debt, claim, demand, damages, action or causes of action of any kind or character arising out of or by reason of the activities or improvements being required herein.  It shall not be eligible for acceptance into the State Secondary System of State Highways for maintenance until such time as it is constructed and otherwise complies with all requirements of the Virginia Department of Transportation for the addition of subdivision roads current at the time of such request.  Any costs required to cause this road to become eligible for addition to the State system shall be provided from funds other than those administered by the Virginia Department of Transportation and by Orange County.

The difference between the Scandinavian examples and the U.S example is that Orange County is telling people who want a private road not to expect anything from the government. People in Sweden and Finland, on the other hand, appear to believe that there are positive externalities associated with maintaining the population even in remote parts of the country, and, therefore, subsidize low volume private roads in those parts of the country.

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.

More on the recession of the early 1920s

I saw the other day that James Grant’s The Forgotten Depression had received an award from the Manhattan Institute. The book argues that the economy recovered quickly from a “Depression” in the early 1920s because the government did not intervene, and that this provides a lesson for our times. On the same day I read a new paper in the Journal of American History, “Before the Roar: U.S. Unemployment Relief after World War I and the Long History of a Paternalist Welfare Policy,” by Daniel Amsterdam.  You would think they were written about two different countries. Amsterdam describes numerous government responses (largely at the state and local level, but in some cases promoted at the federal level) to unemployment during the recession in the early 1920s.

I have to say, I find The Forgotten Depression and its reception a bit puzzling. It seems to me that the need to identify examples of times when the economy recovered quickly without government intervention is motivated more by politics than by economic theory or historical evidence. Why should a recovery be quick? If a credit boom leads to a severe misallocation of resources, why would we expect that reallocation after the boom would occur at any particular speed? Where is there in, for example, Austrian Business Cycle Theory a method of predicting how many months a recovery will take? Why, even in the absence of government intervention, might it not take years for reallocation to occur?

I can understand making an argument that, other things equal, markets should adjust more quickly when there are fewer restrictions placed upon them. But 1920 and 2008 are so far from other things equal it is difficult to make useful comparisons. The two periods differ fundamentally in terms of the source of the boom and bust. The misallocation of resources, by peacetime standards, was driven by the war.  In addition, Grant focuses on the federal government’s response to unemployment, but before WWII spending by state and local governments (as well as regulation) exceeded that of the federal government.  Just because the federal government did not do something in the past does not mean that government did not do it. One would need to look carefully at state and local actions to understand the role of “government” during the recession of the early twenties. Amsterdam does not provide a complete picture of state and local action, but it is a good start.

And, yes, I called it a recession, not a depression. If we choose to call the early twenties a depression then almost every downturn in U.S. history should be called a depression. Grant rejects recent estimates of historical business cycles by Christina Romer. Perhaps Romer’s estimates are in error, but I do not find the lyrics of “Aint We Got Fun” to be persuasive evidence that she erred.

The graph below shows percent change in Real GDP (1890-1950) based on the Millennial Edition of Historical Statistics (Ca 9). The recession of the early 1920s was simply was not unusually long or severe compared to other downturns.