Hartman on Public Choice

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The 1894 Act to reduce taxation

Steven Weisman argues in the Washington Post that most people believe the tax rate they pay is fair, but worry that the rich don’t pay their fair share.  I just wanted to elaborate a bit on the history of the income tax.  Weisman writes about the introduction of an income tax during the Civil War and then states that

“The income tax disappeared when the war ended. But it returned on the eve of World War I, enabling President Woodrow Wilson to raise the marginal income tax rate to 70 percent. Wilson called paying taxes a “glorious privilege” and a way for the businesses profiting from military buildup to give back. Sen. Hiram Johnson of California even attacked “the skin-deep dollar patriotism” of those who favored war but opposed taxes on the wealthy.”

The tax did disappear when the war ended and did return on the eve of World War I, but that was the second time it had returned.  The first time was in the 1890s. I suspect it was an editorial decision to leave this episode out. Weisman has written a book about the history of the income tax and certainly knows about the events of the 1890s. Unlike him, I have no space constraint on my blog so I have room to recount the story of the Wilson-Gorman Act. If anyone wants the references for the information below see chapter seven of my book on the Farmers Loan and Trust Company.  

Generally referred to as the Wilson-Gorman Act, or simply the Wilson Act, the official name of the 1894 income tax legislation was "An act to reduce taxation, to provide revenue for the government, and for other purposes." The tax reduction referred to in the Act was a reduction in tariff rates. To make up for the reduction in tariff revenue, the Act imposed a two percent tax on incomes over $4,000. “The object,” the lawyer James C. Carter later explained, “was to redress in some degree the flagrant inequality by which the great mass of the people were made to furnish nearly all the revenue, and leave the very wealthy classes to furnish very little of it in comparison with their means.” 

In addition to being part of the wealthy classes, executives of trust, banking and insurance companies had additional reasons for opposing the new taxes. In addition to the individual income tax, the Act also imposed a two percent tax on the income of corporations. This tax alone would have raised considerable opposition, but the leaders of these particular financial firms were even more troubled that the Act exempted financial institutions organized on a mutual plan from the tax. They wanted to have the law ruled unconstitutional but, there were two obstacles to challenging the law in court. The first obstacle was that the Supreme Court had already rejected a challenge to the constitutionality of an income tax. The income tax imposed during the Civil War had been challenged and upheld.  The second obstacle was that §3224 of the United States Revised Statutes, declared that “No suit for restraining the assessment or collection of any tax shall be maintained in any court.”  Thus individuals and corporations subject to the tax could not directly oppose the collection of the tax through the courts. Only after they had paid the tax under protest could they mount a legal challenge.

William D. Guthrie, a partner in one of the most prominent legal firms in New York: Seward, Guthrie, Morawetz and Steele, believed that the first obstacle was really no obstacle at all. In his opinion, the previous decisions upholding income taxes were in error and, therefore, the Court was not bound by them. The second obstacle was a little more difficult, but Guthrie thought that there was a way around it as well. He believed that a “suit in equity, with the remedy of injunction, often affords the most prompt and satisfactory relief where property rights are involved.”  But to bring the case within equitable jurisdiction it was necessary to show that “there is no plain, adequate and complete remedy at law.”  An injunction could not be obtained simply by arguing the law was unconstitutional. “Before the aid of a court of equity can be invoked,” he explained, “it must appear that the enforcement of the tax would lead to a multiplicity of suits, or produce irreparable injury, or, where the property is real estate, would throw a cloud upon the title of the complaint, or that there is an element of fraud or breach of trust, or some other ground of equitable jurisdiction.”  He concluded that “if a trust company should be about to voluntarily comply with an unconstitutional tax law, and should decline to accede to the request of a shareholder asking the trustees to pay under protest and to contest the legality of the tax, a suit might be brought against the trustees to restrain them from violating their duty.”  The case would not technically be a case to prevent the collection of the tax but a case to prevent a corporation from violating its duty to its shareholders. Nevertheless, the Court would be forced to rule on the constitutionality of the tax.  Guthrie worked to initiate two cases based upon this plan, one with the Farmers’ Loan and Trust Company and the other with the Continental Trust Company.

The boards of trustees of both companies agreed to adopt a resolution “somewhat to the effect that while there is doubt about the constitutionality of the Act, they are not disposed to hamper the Government in collecting its revenue, and that they will, therefore, set aside from the profits of last year a sufficient amount to pay the income tax and will pay it when it becomes due.” After the announcement, Guthrie made a formal request on behalf of Charles Pollock that the company seek the advice of the courts or pay the tax under protest. Charles Pollock was a citizen of Boston and, since 1892, the owner of ten shares of stock in the Farmers’ Loan and Trust Company. The board of directors refused to comply with Pollock’s request and Guthrie filed a bill in equity on behalf of Pollock and all other similarly situated stockholders seeking to enjoin the Farmers’ Loan and Trust Company from paying the tax. The bill claimed that the tax was unconstitutional, that Farmers’ would violate its duty to its shareholders if it paid the tax voluntarily, and that great injustice would be done if the tax were paid. 

Newspapers throughout the country speculated as to who was ultimately footing the bill for the case: New York businessmen, the trust companies, or simply wealthy New Yorkers such as the Astors.  The speculations were largely correct.  Guthrie’s corporate clients were the ones funding the case. Essentially, the lawyers on both sides of the case were working for the trust companies.

Historians have tended to emphasize the personal income tax and the issue of whether or not it was a direct tax:  Article I, Section 8 of the Constitution requires that “Duties, Excises and Imposts, Shall be Uniform throughout the United States.”  Although the personal income tax has received the most attention, Guthrie and his team placed considerable emphasis on the tax on financial institutions and the issue of uniformity.  In Guthrie’s view, “Congress has no power, at the expense of others owning property of the same character, to foster and aid private trading corporations, such as building and loan associations, savings banks and mutual life, fire, marine, inland, and accident insurance companies or associations, which serve no national purpose or public interest whatsoever and which exist solely for the pecuniary profit of their members.” 

Justice Fuller delivered his opinion on April 8. The Court held the law to be invalid in so far as the tax on income from real estate was held to be a direct tax that was not apportioned among the states and the tax on municipal and state bonds impinged on the power of states to borrow. Fuller went on to observe, however, that many of the central issues of the case had not been settled. Justice Jackson had been absent and the remaining justices had not been able to arrive at a majority opinion on whether the entire income tax was unconstitutional. “Upon each of the other questions argued at the bar,” Justice Fuller noted, “the justices who heard the argument are equally divided, and, therefore, no opinion is expressed.”  Because of the importance of the unanswered questions, both sides asked for a rehearing before the full Court. In the meantime, Guthrie attempted to ready other challenges to the Act. Though he did not proceed with them after the application for a rehearing of the Pollock case was quickly accepted by the Court, and the rehearing was scheduled for May 6,7, and 8.

Counsel on both sides made essentially the same arguments they made at the original hearing. The decision of the Court was announced on May 20. The majority of the Court determined the income tax imposed in the law to be invalid. The vote was five to four with Fuller, Field, Brewer, Gray and Shiras in the majority and Harlan, Brown, Jackson and White dissenting  

The victory of the anti-tax forces in 1895 is generally regarded as a fleeting one. The Sixteenth Amendment (1913) allowed for direct taxes that were not apportioned among the states and Congress soon passed an income tax. But the view that Pollock v. Farmers’ Loan and Trust Co. lost its relevance with the passage of the Sixteenth Amendment arises from a tendency to focus solely on the second hearing of Pollock v. Farmers’ Loan and Trust Co. and the issue of the personal income tax. The opinions in both the first and the second hearing of the case contained other rulings on taxation. In both opinions, the Court ruled that the federal government could not tax the bonds of states and municipalities.

Some feared that the Sixteenth Amendment would overturn the exemption of state and municipal bonds. The wording of the Sixteenth Amendment was quite broad. “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without any regard to enumeration.” But it only overturned the portions of the Pollock opinion dealing with income. The exemption of income from state and municipal bonds expressed in Pollock was not explicitly overturned by the Supreme Court until 1988 in South Carolina v Baker.  Even then the Court did not reject Fuller’s logic in the Pollock case. Instead, it declared that the case law regarding intergovernmental relations had evolved.  Justice Brennan explained that “under the intergovernmental tax immunity jurisprudence prevailing at the time, Pollock did not represent a unique immunity limited to income derived from state bonds. Rather, Pollock merely represented one application of the more general rule that neither the Federal nor the State Governments could tax income an individual directly derived from any contract with another government.”  The rule applied to an employee’s income and rental income from a state government as well as interest payments on its bonds. Brennan went on to explain that ruling in Pollock no longer applied because this underlying rule had since been rejected. “The rationale underlying Pollock and the general immunity for government contract income,” he declared, “has been thoroughly repudiated by modern intergovernmental immunity case law.”   

By the way, if you were wondering about the picture, it is photograph of Guthrie's Long Island estate.

Constraining the state's ability to employ force

"Constraining the state's ability to employ forces: the standing army debates, 1697-99" by Shawn Humphrey and Bradley A. Hansen was just accepted by the Journal of Institutional Economics.

Abstract: Britain's Glorious Revolution of 1688 is one of the most widely studied cases of institutional change. Recent institutional analyses of the Glorious Revolution, however, have failed to address one of the central issues in political science: control of the state’s comparative advantage in violence. This paper examines this issue through analysis of the standing army debates of the late 1690s. Participants in the debates disputed whether a standing army or a militia would be the most effective institutional arrangement to guard against threats from abroad and tyranny at home. Both sides of the debate analyzed the effects of a standing army in terms of the incentives that it created for soldiers, citizens, the monarch, and foreign governments.

Loan Sharks

(Chicago Tribune Nov. 7, 1897)

Discussion about restricting payday lending has been in the news recently.

We first became interested in how states regulated attempts to collect debts from wage earners because bankruptcy rates look like this (see Hansen and Hansen 2012) Where it is easy to collect a large portion of someone’s wages people are more likely to file for bankruptcy.

As best I can tell, something like payday lending has existed about as long as paydays have existed. And as long as there has been payday lending, people have worried about the negative consequences of it and tried to place restrictions on it. In the late nineteenth and early twentieth centuries, many state legislatures restricted the ability to use garnishment or wage assignment. A wage assignment was a written statement that allowed the lender to collect from your employer if you did not pay. Some states prohibited wage assignments, others required spousal approval, or placed limits on the amount of wages that could be assigned. Some employers also attempted to prevent them. Armour, for instance required employees to sign a statement saying they would not assign their wages.

One problem states faced in regulating small lending was due process challenges. In addition to the due process clause in U.S. constitution many states also have due process clauses in their constitutions. The legal arguments involved substantive due process, which tends to raise fundamental questions about the appropriate role and operation of government. (See Hansen and Hansen 2014 on the evolution of garnishment and wage assignment in Illinois)

Due process clauses tend to say something like “no one may be deprived of life, liberty, or property without due process of law.” The first thing to note is that you can be deprived life, liberty and property. It just has to be done the right way. What does due process mean? There are two aspects: procedural due process and substantive due process. Procedural is what most people tend to think of when they think of due process. Did the state follow the rules? Did you, for instance, have access to an attorney? You will not find substantive due process in the constitution. It is a name given to what courts were doing. Consequently, people can disagree about exactly what it is. The description that best fits cases that I have read is that the court asks if the regulation is a reasonable means to obtain a legitimate public purpose. So, in the case of wage assignment restrictions, there was no question that the rights of the wage earner and the lender were being restricted. The problem to court faced was determining whether the restriction was a reasonable means to obtain legitimate public purpose. Some courts said that there was no state interest in interfering with how a grown man used his wages. Others said that there was a legitimate public purpose because loan sharks impoverished the working poor who then became a burden on the public. Behind the question of whether a regulation of “loan sharks” is a legitimate public purpose is an even more fundamental question: Who decides what a legitimate public purpose is?  Is it the legislature or the court? Courts went back and forth on this until the 1930s. Since the 1930s, courts have made a distinction between what they regard as economic rights and what they regard as civil rights. On economic rights they defer to the legislature. Consequently, cases like Kelo that may surprise the public should not surprise people familiar with American legal history.    I think legislatures are generally less restricted in their ability to regulate small lenders than they were in the early twentieth century. Moreover, the federal government been in the business of trying to eliminate loan sharks at least since the 1968 Consumer Credit Protection Act. 

On the other hand, I don’t think the fundamental economics has changed much. There are three basic problems: low income people often need to borrow money, they have no security for a loan other than their future wages (and sometimes a car), and it is expensive to lend to low income people. As I noted before, the problem is not new. People often focus on the interest rates and suggest that lenders are making extraordinary profits by exploiting the poor. The alternative explanation is that the interest rates are high because the cost of providing such loans is high. I tend to lean toward the second explanation. The primary reason I lean toward the second explanation is that I don’t see substantial barriers to entry in small lending. If a lender is making extraordinary profits by lending at an implicit rate of say 30%, why doesn’t another lender enter the market, charge 28%, attract all the customers, and make a real killing? Why don’t banks enter the market? They have reputation for liking profits. Moreover, why doesn’t someone start a non-profit payday lender? The non-profit should be able to easily cover its costs and provide lower cost loans to people. Actually, people have tried things like this and failed. They found that it was more costly than they anticipated. There are several good reasons why it is costly. First, the loans are small, which means the administrative cost tend to be a large fraction of the loan. Second, unlike banks that lend other people’s money, payday lenders lend their own money, and thus have a lower rate of return on capital.

So, what should be done? I don’t know. What I do know is that getting rid of payday lenders will not get rid of the need that low income people often have to borrow, and the more that you restrict legal options, the more room there will be for illegal options. What we shouldn't do is take away the option without providing an alternative and then pat ourselves on the back as if we solved the problem.

P.S. Usury laws have also restricted the ability to legally make loans to low income wage earners. They existed throughout most of American history (see Rockoff 2003 on the history of usury laws and Benmelech and Moskowitz 2010   on the political economy of usury laws. 

John Murray

Sad news. John was both an excellent economic historian and a really nice guy. Below is the text of the email about his death from EH.net. He will be missed by many people and in many ways.

John Murray, Joseph R. Hyde III Professor of Political Economy and Professor of Economics at Rhodes College, passed away on March 27, 2018 in Memphis, TN at the age of 58. 

He was born on April 9, 1959 in Cincinnati, and became the first member of his family to attend college.  He worked at a variety of jobs to pay his tuition, including phlebotomist, house painter, roofer, and ice cream vendor, graduating in 1981 from Oberlin College with a degree in economics.  He later added an M.S. in mathematics from the University of Cincinnati, and the M.A. and Ph.D. in economics from The Ohio State University, where he wrote his dissertation under the tutelage of Rick Steckel.

John taught high school math before pursuing his graduate work in economics.  After finishing at Ohio State, he accepted a position at the University of Toledo, where he remained for 18 years before accepting the Hyde Professorship at Rhodes College in 2011.

He had a lifelong penchant for learning, spending a summer studying the German language in Schwabish Hall in 1984, and summers as an NEH scholar in Munich in 1995 and at Duke in 2013.  He also spent 2009-10 studying Catholic theology and philosophy at the Sacred Heart Major Seminary in Detroit.

Murray was the author of two books and co-editor of a third.  The most recent, The Charleston Orphan House: Children’s Lives in the First Public Orphanage in America, published by the University of Chicago Press in 2013, was the recipient of the George C. Rogers, Jr. Prize, awarded by the South Carolina Historical Society for the best book on South Carolina history.  His first book, Origins of American Health Insurance: A History of Industrial Sickness Funds (Yale University Press, 2007) was named one of ten “Noteworthy Books in Industrial Relations and Labor Economics” in 2008 by the Industrial Relations Section, Princeton University.

He published book chapters, monographs, encyclopedia and handbook contributions, and numerous articles in refereed journals including the Journal of Economic History, Explorations in Economic History, and Demography.  His clear, crisp writing style and ability to explain complicated economic concepts made him a frequent choice to write for the popular press as well.

His research interests were varied.  His most recent work centered on coal mine safety, post bellum African-American labor supply, and families in 19^th century Charleston.  He published extensively in the areas of the history of healthcare and health insurance, religion, and family related issues from education to orphanages, fertility, and marriage, not to mention his work in anthropometrics, labor markets, and literacy.

He was a scholar and a teacher, who believed deeply in the value of a liberal arts education, arguing that “a rigorous education, based on the traditional great books, teaches students great things—compassion for others in the human condition, the value of striving for greatness, the need for self-awareness, and humility in those efforts.”  He won awards for his teaching at Ohio State and Toledo.

He was the director of the Program in Political Economy, a rigorous interdisciplinary major at Rhodes College.  He taught a variety of economic history courses, including courses on demography and economic development, as well as mathematical economics, freshman calculus, introductory statistics, and econometrics. Then on the weekend he donated his time to his local parish, teaching Sunday School.

He was also generous with his time on a professional level, frequently reviewing books, and serving as the Book Review editor for the Journal of Economic History from 2014-16.  He was a member of the editorial board of four journals: Explorations in Economic History (2008-15), the History of Education Quarterly(2016-19), Social Science History (1996-98 and 2006-14), and theJournal of Economic History since 2015.  He served as the Associate Editor of Social Science History from 2001 to 2006.

He was a trustee for the Cliometric Society and served on its Program Committees, and was active in the Social Science History Association, holding numerous positions.  He also served on numerous university committees at both Rhodes College and the University of Toledo.

More than a respected academic and award-winning author, John was a devoted husband and proud father.  As impressive as his professional accomplishments were, his career always came second to his family.  Conversations with John would eventually lead to family, and hearing him talk about them left no doubt about his true passion.

John is survived by his wife Lynn and their twin daughters.

The Importance of Douglass North

 

I just listened to an episode Econ Roots, in which Mike Munger was interviewed about the importance of Douglass C. North. Like myself, Munger went to Washington University and worked with North. His answer to why North was important was that “he had a view of economic history that took time seriously.” He notes, for example, that North would ask about where preferences came from rather than taking them as given.

It is a great podcast episode, but my personal answer to the question would be slightly different because I had recognized the importance of explain changes in institution over time before I read North. As an undergraduate at the The Evergreen State College the two books that had the biggest impact on me were Samuelson’s Economics and Thorstein Veblen’s Theory of the Leisure Class.

The neo-classical economics of Samuelson immediately made sense to me. I found the use of models to analyze individuals maximizing subject to constraints and interacting with other people doing the same to be an incredibly powerful tool.

Then I read Veblen. Veblen argued that economic theory was fine as far as it went, but it didn’t go far enough. In his first book, The Theory of The Leisure Class (1899), he explained that, "The institutions are, in substance, prevalent habits of thought with respect to particular relations and to particular functions of the individual and of the community: and the scheme of life, which is made up of the aggregate of institutions in force at a given point in the development of any society, may on the psychological side be broadly characterized as a prevalent spiritual attitude, or theory of life." (Veblen 1912, 190) Thus, “the evolution of society is substantially a process of mental adaption on the part of individuals under the stress of circumstances which will no longer tolerate habits of thought formed under and conforming to circumstances in the past." (Veblen 1912, 192) To Veblen this process of cultural change should be the central concern of economists: He argued that both the preferences and constraints that economic theory takes as given change over time and answering the biggest questions in economics requires understanding how they change over time.

So, I was persuaded of both the utility of economic theory and the need to explain how the things that influences those choices, including preferences, change over time.

I know that Doug read Veblen when he was younger, but I don’t think he was influenced by him, at least consciously. I don’t know if he ever read Samuelson. Yet what North provided me was a link between institutional change and economic theory. And the link ran in both directions. He provided an approach that made it possible to talk about the impact of institutions on market performance and to use economic theory to try to understand how institutions changed. The idea of transaction costs provided a means to connect different institutional arrangements to the performance of markets. Transactions costs create a wedge between buyers and sellers. The more resources you must use trying to enforce agreements or protect your property the less mutually beneficial trades will exist. Effective institutions can lower the cost of transactions, encouraging trade, investment, and innovation.  Economic models can also be used to try to explain differences in institutions and how they change over time. The first thing I read by North was a “Framework for Analyzing the State in Economic History,” followed immediately by Structure and Change. In both he used a simple model of a wealth maximizing ruler to explain institutions that do not maximize economic output. He asked why wealth maximizing ruler might not create rules that maximized output for the country, creating the largest possible pool of wealth to extract revenue from. The answer in this model was that the ruler faced a transaction cost constraint and a competition constraint. The wealth maximizing institutions might entail higher costs of collecting taxes than institutions that lead to lower levels of output. For instance, selling a monopoly might be an easy way to raise revenue but not one that is likely to maximize output. This is the transaction cost constraint. The competition constraint arises from the fact that wealth maximizing institutions might be ones that enhance the power of potential competitors to the ruler. For instance, international trade might increase output but also increase the wealth and power of people who present a potential threat to the ruler.

For me, Doug’s work meant that I didn’t have to choose between Samuelson and Veblen.

 

North, Douglass C. "A framework for analyzing the state in economic history." Explorations in economic history 16, no. 3 (1979): 249.

North, Douglass Cecil. Structure and change in economic history. Norton, 1981.

Stephen Mihm and the State of Financial History

The winter 2016 issue of The Journal of the Early Republic includes several papers from a conference on Economic History’s Many Muses, held at the Library Company of Philadelphia.

The papers consider a wide array of topics and approaches within history. Two were of particular interest to me as an economist/economic historian: Caitlin Rosenthal and Stephen Mihm. Both authors have been associated with the “new history of capitalism,” and both wrote essays that explicitly address the relationship between economists who work on historical issues and historians who work on economic issues. Rosenthal argues that both sides need to work to break down the barriers between the two. I agree.

I’m not sure that Mihm shares that goal. His essay on financial history was the one most closely related to my work in economic and business history, yet it presented a picture of the state of economic history generally and financial history specifically that I found largely unrecognizable.

The essence of Mihm’s argument was that financial history has largely disappeared:

“Financial history, as well as economic history more generally, was once a vital part of both the historical and economics disciplines. And then it effectively vanished, save for a few isolated individuals in the academy. Understanding how and why that happened may help frame the challenges facing practitioners of the “history of capitalism.” He argues that historians largely abandoned the field to economists and that “the move to economics departments ended less happily than it began. Increasingly, economic historians in economics departments served to substantiate existing models and formulas, where historical inquiry was not really the point. Economic historians found themselves marginalized.”

Yet when you actually look at some evidence you are more likely to come to the conclusion that Ran Abramitzky did, that “economic history is far from being marginalized and overlooked by economists.” Abramitzky finds that “economic history today is more respected and appreciated by the average economist is also reflected by an increase in economic history publications in the top-5 economic journals. The decline in economic history in the top-3 journals that McCloskey documented has been reversed, and the percentage of economic history publications in the top-3 journals has gone back up to its heydays of the 1920s and 1930s, although QJE has replaced the JPE as the most historical journal (Table 1). 4 Similarly, the number and percentage of economic history papers published in the top 5 economic journals (AER, QJE, JPE, Econometrica, Restud) has doubled over the last twenty years (Figure 1), in part, reflecting a broader trend in economics away from theory and into empirical work.”

In short, the rumors of economic history’s demise have been greatly exaggerated. There have been some setbacks. My own alma mater, Washington University in St Louis, is one of the worst examples. On the other hand, many highly regarded economics departments in the United States still have multiple economic historians: Harvard (Eric Chaney, Melsissa Dell, Claudia Goldin, and Nathan Nunn); Stanford (Avner Grief and Ran Abramitzky); Yale (Naomi Lamoreaux, Tim Guinane, Jose Antonio Espin Sanchez); Northwestern, (Joel Mokyr, Robert Gordon, Joe Ferrie); Berkeley (Barry Eichengreen, Brad De Long, Martha Olney, Christina Romer); Michigan (Paul Rhode, Martha Bailey); Vanderbilt (Peter Rousseau, William Collins, Claudia Rei, Andrew Goodman-Bacon); U.C. Davis (Alan Taylor, Katherine Eriksson, Greg Clark, Chris Meissner); UCLA (Leah Boustan, Michela Giorcella, Dora Costa, Walker Hanlon). Other departments, like George Mason (John Nye, Noel Johnson, Mark Koyama, and Carlos Ramirez) have built up very strong programs in economic history in recent years. And this is just the United States. As best I can tell economic history seems to be thriving in Europe as well. Moreover, several of the economic historians that I just listed focus on financial issues, and Rutgers (Hugh Rockoff, Eugene White, and Michael Bordo) practically has a financial history department.

Ironically, Mihm’s argument that financial history all but vanished is most forcefully refuted by his own footnotes. He cites numerous recent papers by Rockoff, Grubb, Wallis, Sylla, Bodenhorn, Rousseau, Knodell, Calomiris, Schweikart, Lamoreaux, and Wright. Moreover, the list could have been even longer. Mihm does not include references to important recent work by economic historians like Eric Hilt and Matt Jaremski. And this is only counting people who have written on early America. The list is much longer if one turns to Europe or America after the Civil War.

Mihm’s footnotes also seem at odds with his text on specific issues. For example, when he acknowledges that economists have given considerable attention to some topics, like “free banking,” he suggests that “a significant portion of past scholarship by economists has been motivated in order to produce a historical brief to support the abolition of central banks or the deregulation of banking.” The term “free banking” seems to conjure notions of some sort of financial equivalent of “free love.” Free banking, however, did not mean that anything goes. Free banking de-politicized bank chartering. It moved finance in the United States toward what North, Wallis and Weingast describe as an open access order. It was not a world without rules. It was a world in which everyone had to follow the same rules. Everyone had to follow the same rules about capital requirements, specie redemption, and security backed note issues. Ironically, although Mihm cites numerous authors who have written on free banking (e.g., Rockoff, Rolnick and Weber, and Economoupolous), he does not cite some more libertarian leaning economists (Lawrence White and George Selgin) who have written on financial history. His fellow NYU grad and University of Georgia colleague George Selgin, who has written extensively on the money and banking, doesn’t get a single mention.

Similarly, he claims that “Also understudied are the ways that “bringing the state back in,” to use the famous words of Theda Skocpol, requires a recognition of the central role public finance played and its corresponding entanglements with private finance.” Yet he cites a number of the papers by Sylla, Wallis, Lamoreaux, and others that do exactly this.

Reading Mihm’s paper it is easy to see why Cathy Matson, who organized the conference and introduces the papers, would suggest that a “A new kind of financial history would retrieve the themes of tariffs, taxation, and especially banking from the special preserve of economists. Its historians would ask such questions as who underwrote banks, how was bank money used, how was its value created, what was the extent of banking power at different times in North American history, what are the links between banks and slavery or the rise of wage labor?” In other words, this new financial history would do what financial historians, both economists and historians, are already doing.

Some Thoughts On the United States as a Developing Nation

There is a lot of anxiety about the state of the economy. Coronavirus is spreading, the stock market is falling, treasury yields have reached an all time low. So, of course, I decided to write a long post about the American economy in the early nineteenth century. 

                In  "The United States as a DevelopingNation: Revisiting the Peculiarities of American History." Past & Present (2019) Link and Maggor seek to direct our attention toward the peculiarity of America’s economic history by encouraging us to consider the United States in the first half of the nineteenth century as a developing country. They also suggest that the key to understanding this transformation may lie in industrial development policies at the state level. Link and Maggor encourage historians to think about the United States as a developing country, and how it escaped from the path followed by other developing countries. So, this post is me thinking about the U.S. as a developing nation.

On one hand, the U.S. was obviously a developing country. On the eve of the Civil War, real GDP per capita was still just under $3,000 (in 2012 dollars). Currently GDP per capita around $3,000 would place you around countries like the Philippines, not the bottom but well below high income countries. If we take this perspective, however, all countries were developing in the early nineteenth century, and the term would not have much value. By 1850, the United States was already among the highest income countries. It ranked high in GDP, GDP per capita, industrial production, literacy, and school attendance. By most measures the U.S was one of the most developed countries in the World by the mid-nineteenth century.

The United States as a Developing Country?

Estimates of income and output before the twentieth century are difficult, and reasonable people can disagree about them. Making international comparisons adds to the difficulty. But the disagreements are about where the U.S ranks among the top countries, not whether it is one of them.

The United States had among the highest levels of per capita output in the World at its founding. By the middle of the nineteenth century, rapid population and continuing increases in per capita output gave the United States the 5^th highest total GDP. China and India depended upon their large populations to place them at the top of the list. The US, like the UK and France had both a large population and high GDP per capita.

Table 1. Aggregate Product Relative to American

	1850	1870	1890	1913
U.K.	1.42	.97	.67	.41
France	1.43	.73	.44	.28
Germany	.45	.45	.33	.28
China		1.90	1.09	.58
India	2.42	1.20	.66	.32
Australia	.03	.06	.07	.05
Argentina		.02	.03	.06
Canada	.07	.06	.05	.06

Source: Gallman 2000,  3 and 4.

Table 2. Average Annual rate of Growth of Real GDP 1820-1913

Argentina	6.0 (1870-1913)
U.S.A.	4.1
Canada	3.8 (1850-1913
Australia	3.5 (1870-1913)
Netherlands	2.4
Germany	2.4
Denmark	2.3
Belgium	2.1
Finland	2.1
Brazil	2.0
U.K.	2.0

Source: Gallman 2000, 5.

Table 3. Per Capita Output Relative to American

	1850	1870	1890	1913
UK	1.3	1.33	1.21	.95
Netherlands	1.04	1.07	.99	.78
Belgium	.99	1.07	.99	.78
Denmark	.93	.78	.71	.71
France	.92	.76	.69	.65.
China		.21	.18	.13
India	.30	.23	.18	.12
Australia	1.69	1.55	1.41	1.04
Argentina		.53	.63	.72
Canada	.70	.66	.66	.79

Source: Gallman 2000, 20.

Lindert and Williamson estimate that real incomes in the United States were higher than England during the late colonial era, fell during the Revolution, passed the UK again in the early 1800s, but then fell back again during the Civil War.

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

 

Agriculture was the most important sector of the American economy in the first half of the nineteenth century. Though it should be noted that by 1850 services accounted for about 40% of output, leaving 60% for commodities, and agriculture accounted for about 60% of commodity output. So, agriculture accounted for about 36% of total output (for sources see here). Although agriculture was still the most important sector, the United States was already one of the largest industrial economies by the middle of the nineteenth century.

Table 4. Leading Countries in Total Manufacturing Output (index numbers relative to U.K. = 100 in 1900)

1860	1913
United Kingdom  45	United States 298
China 44	Germany 138
India 19	United Kingdom 127
France 18	Russia 77
United States 16	France 57

Source Bairoch 1982, 284

Table 5. Leading Countries in Per Capita Manufacturing output (level relative to UK=100 in 1900)

1860	1913
United Kingdom 64	United States 126
Belgium 28	United Kingdom 115
Switzerland 26	Belgium 88
United States 21	Switzerland 87
France 20	Germany 85

Source: Bairoch 1982, 286

Table 6: Productivity in manufacture equaled or exceed the UK by the 1840s.

	Agriculture	Manufacturing	Services	Total
1839/1841	78.1	159.7	84.8	93.8
1849/1851	98.9	162.7	65.2	89.9
1859/1861	100.0	152.8	73.0	95.0
1969/1871	92.4	145.1	77.4	94.0
1879/1881	103.9	146.3	103.6	98.1
1889/1891	96.7	167.8	104.1	100.3
1899/1901	112.0	170.9	116.1	114.8

Source: Broadberry and Irwin 2006, 261

The growth of industrial extended back to the 18^th century and took place at a steady pace. The figure below show Davis index of industrial production

.  

Industrial production in the U.S., like GDP per capita, began the nineteenth century at relatively high levels and continued to grow rapidly.

In addition to income and industrial production, the United States was one of the leading countries in educational attainment by the mid-nineteenth century.

Table 7. Adult Literacy in selected countries

Country	Ca. 1850	Ca. 1900
Sweden	90	99
United States	85-90	94
Scotland	80	97
Prussia	80	88
England and Wales	67-70	96
France	55-60	83
Austria	55-60	77
Belgium	55-60	81
Italy	20-25	52
Spain	20	44
Russia	5-10	28

 Source: Cameron 1993, 220

Table 8. Primary School Enrollment per 10,000 pop.

Country	1830	1850	1900
United States	1500	1800	1969
Germany	1700	1600	1576
United Kingdom	900	1045	1407
France	700	930	1412
Spain	400	663	1038
Italy	300	463 (1860)	881
Russia		98 (1870)	348

Source: Cameron 1993, 220

The Position of the U.S. in the Global Economy

The United States was one of the leading economies on almost every dimension by 1850, but Link and Maggor emphasized a different aspect of the economy: its position in the global economy.  Its exports were dominated by primary goods, and one product dominated all others:

"In 1850, the US was primarily a supplier of slave-produced cotton to industrializing Europe. American economic growth thus remained embedded in established patterns of Atlantic commerce. One hundred years later, the same country had become the world’s undisputed industrial leader and hegemonic provider of capital.”

They go on to note that

“The very triumph of the US has obscured how peculiar this trajectory, in fact, was. Not only did the US overcome its status as a peripheral exporter of cash crops; it also managed to defy the global division of labour that buttressed the liberal–imperial world order of the late nineteenth and early twentieth centuries. That era’s ‘Great Specialization’ (Findlay and O’Rourke), moulded by European and particularly British imperialism, divided the world into exporters of raw materials and primary products, on the one hand, and exporters of manufactured goods, on the other. Under this division of labour, the industrial core, primarily in Western Europe, turned ever more intensely to manufacturing, drawing for raw materials and agricultural produce on the resources of other countries far and wide. Countries elsewhere around the world, in turn, exported primary commodities in return for European finished goods. The trajectory of the US, however, ran askew of this divide. Neither core nor periphery, the country simultaneously exported an ever-growing stream of raw materials and agricultural produce while also rapidly industrializing. By the First World War, this former slave-owning, cotton-producing republic had become a net exporter of manufactured goods.”

Like the United States, Argentina and Australia both had high levels of GDP per capita and growth during periods in the nineteenth century, but then experienced extended periods of stagnation from the late 19^th century to the mid -20^th century.

I still think there are a couple of problems with this perspective on the U.S as a developing country. First, although the United States became a net-exporter of manufactured goods, its most valuable exports continued to be primary products, especially cotton. Exports of machinery did not begin to surpass exports of cotton until the 1930s.

Table 9. Value of selected exports in 1911

Export	Millions $s
Cotton	585
Wheat	77
Petroleum	105
Machinery	151
Iron and Steel	79
Automobiles	16

Source Historical Statistics EE569-589

          Moreover, the foreign sector was a relatively small part of the U.S. economy. Link and Maggor emphasize the atypicality of the U.S.’s shifting role in the global economy, but another way in which the U.S. was atypical was its relative self-sufficiency. In Argentina before the WWI the foreign sector equaled more half of GDP (Campos https://voxeu.org/article/riddle-argentina). The foreign sector not only accounted for a smaller fraction of GDP than developing countries, it accounted for a noticeably smaller percentage of GDP than in the developed countries in Western Europe (See Table 10).  The foreign sector as a share of GDP was small and declining in the nineteenth century. Focusing on the U.S role as an exporter of primary product may make sense in terms of understanding its role in the international economy, but it is not clear that its role in the international economy was a central part of the economy.

Table 10. Foreign Sector as a Percentage of National Product

Country	Date	Percent	Date	Percent
UK	1837-45	26	1909-13	51.5
France	1845-54	21.9	1908-10	35.2
Germany	1872-79	36.7	1910-13	38.3
Canada	1870-80	30.9	1911-13	32.2
Australia	1861-70	53.4	1911-13	41.9
U.S	1834-43	14.5	1904-13	12.2

Source: Kuznets 1967, 19-20.

Variation Within the United States

                How does one reconcile the picture I have presented of the United States as one of the most developed countries with Link and Maggor’s characterization of the United States as a developing country? One possibility is that the United States was both. It was two economies. One was a developing country, dominated by agricultural exports, lack of industrialization, and low levels of education and innovation. The other was one of the leading countries in income, industry, education and innovation. A distinctive feature of the United States in the middle of the nineteenth century was the extent to which the features associated with underdevelopment were associated with one part of the country, the South, and the features associated with the North.

This, of course, is not a new argument. The view that the South was some sort of “colonial dependency was one of the primary targets of Fogel and Engerman in Time on the Cross. While Fogel changed his position on a number of issues by the time he finished Without Consent or Contract, this was not one of them. He still argued that high incomes and rapid growth of per capita income in the South between 1840 and 1860 underscored “the dubious nature of attempts to classify the South as a ‘colonial dependency.’” Several authors have suggested that Fogel and Engerman overstated the case. First, Wright (1978) argued that 1840 and 1860 census years were not representative; 1840 was below trend and 1860 was above trend.  Consequently, differences between those two years would tend to exaggerate growth. Second, Cohn (1981) argued that the Fogel and Engerman estimates, like the Easterlin estimates before them, mis-measured services, and that reasonable corrections eliminate the advantage of the South over the Midwest. Third, I think some of the comparisons Fogel makes are somewhat misleading. He notes that only some parts of the North had higher incomes than the South, but the more than half the U.S. population lived in New England and the Mid Atlantic, the North’s high income areas, while only 6 percent lived in the Southwest Central, per capita incomes in the other subregions of the South were below the lowest subregion in the North.

I tend to lean toward the Ransom and Sutch side on the debate about the economic development of the South:

 “Economic historians have portrayed the South as a modern, well developed economy that utilized its comparative advantage in staple crops to produce a per capita income that ranked among the richest economies of the world in the middle of the nineteenth century. However, this interpretation of the South as a “modern” economy in the mid-nineteenth century rests on a very narrow interpretation of the available measures of economic activity. Even if we grant that the southern economy experienced high levels of income growth in the antebellum period, the fact remains that the continued growth of the southern economy depended on continued expansion into new lands in the west; a sustained demand for cotton in the industrial world, and the preservation of a chattel labor system that stifled investment.” (Ransom and Sutch 2001, 265).

Table 11. Income per capita (1840$s)

	1800	1850	1860
New England	56.44	167.28	178.51
Mid Atlantic	68.46	149.83	184.37
East North Central		120.13	136.83
West North Central		112.47	141.09
South Atlantic	73.99	104.81	126.90
East South Central		103.85	133.96
West South Central		140.7	171.20
Mountain		195.94	229.03
Pacific		1,009.05	525.81
Original 13 Colonies		137.9	163.85
U.S.		132.66	158.35

Source: Lindert and Williamson 2016, 102.

Table 12. Growth of Per capita Income (% per annum)

	1800-50	1850-60	1800-60
New England	2.20	.65	1.94
Mid Atlantic	1.58	2.10	1.66
East North Central		1.31
West North Central		2.29
South Atlantic	.70	1.93	.90
East South Central		2.58
West South Central		1.98
Mountain		1.57
Pacific		-6.31
		1.74	1.48
		1.79	1.42

Source: Lindert and Williamson2016, 102. States included in each census region can be found here.

                The North clearly held the lead in industrialization as well. The table below shows the value added in manufacturing in each state in 1850. Free states, which accounted for about 2/3 of the population accounted for more than 80% of value added in manufacturing. Moreover, the manufacturing activity in the South was mostly located in the border states of Maryland, Virginia, Kentucky and Missouri, three of which, although slave states, did not secede.

Table 13. Manufacturing Output, 1850

Free States	Value of Manufactures $s	% of Total		Slave States	Value of Manufactures $s	% of Total
New York	237,597,249	23.50%		Maryland	32,477,702	3.21%
Pennsylvania	155,044,910	15.33%		Virginia	29,705,387	2.94%
Massachusetts	151,137,145	14.95%		Kentucky	24,588,483	2.43%
Ohio	62,647,259	6.20%		Missouri	23,749,265	2.35%
Connecticut	45,110,102	4.46%		Tennessee	9,728,438	0.96%
New Jersey	39,713,586	3.93%		North Carolina	9,111,245	0.90%
Maine	24,664,135	2.44%		Louisiana	7,320,948	0.72%
New Hampshire	23,164,503	2.29%		Georgia	7,086,525	0.70%
Rhode Island	22,093,258	2.19%		South Carolina	7,063,513	0.70%
Indiana	18,922,651	1.87%		Delaware	4,649,296	0.46%
Illinois	17,236,073	1.70%		Alabama	4,528,878	0.45%
California	12,862,522	1.27%		Mississippi	2,972,038	0.29%
Michigan	10,976,894	1.09%		Texas	1,165,538	0.12%
Wisconsin	9,293,068	0.92%		Florida	668,335	0.07%
Vermont	8,570,920	0.85%		Arkansas	607,436	0.06%
Iowa	3,551,783	0.35%		Total Slave	165,423,027	16.36%
Total Free	842,586,058	83.33%

The South also lagged the North in educational attainment. The next table shows literacy and school attendance in 1850 ranked from highest to lowest. The same pattern can be seen in both measures of education. New England states, followed by Mid-Atlantic and Midwestern states, with Southern states at the bottom. The percentages are based on the free population. Clearly the rates of education in the South would have been even lower if they were calculated for the whole school age population in the South.

Table 14. Literacy and School Attendance, 1850

State	Literacy of Free Adults	Literacy of All Adults	State	School Attendance
New Hampshire	98.3%		Maine	87.3%
Maine	97.9%		Vermont	84.9%
Connecticut	97.5%		New Hampshire	84.5%
Vermont	96.3%		Massachusetts	72.5%
Rhode Island	95.7%		Connecticut	71.7%
Wisconsin	95.7%		Michigan	69.7%
Michigan	95.5%		Ohio	67.1%
Massachusetts	95.1%		New York	65.8%
New York	94.0%		Rhode Island	62.9%
California	93.5%		Pennsylvania	59.9%
Pennsylvania	93.2%		Indiana	54.7%
Ohio	92.7%		Illinois	54.0%
New Jersey	92.4%		Wisconsin	53.7%
Iowa	90.0%		New Jersey	52.6%
Mississippi	89.1%	42.5%	Iowa	46.4%
Illinois	88.9%		Tennessee	46.2%
South Carolina	87.2%	37.6%	North Carolina	44.5%
Missouri	85.8%	75.8%	Kentucky	42.9%
Texas	84.5%	62.3%	Delaware	42.7%
Maryland	83.1%	71.9%	Missouri	40.5%
Louisiana	82.8%	43.2%	Mississippi	40.2%
Indiana	82.5%		Louisiana	37.7%
Alabama	81.1%	44.4%	South Carolina	36.2%
Florida	81.0%	44.5%	Georgia	35.6%
Georgia	81.0%	46.8%	Maryland	35.6%
Virginia	79.8%	54.0%	Alabama	35.4%
Kentucky	79.4%	63.4%	Arkansas	34.5%
Delaware	76.0%	74.6%	Texas	32.6%
Tennessee	75.4%	58.0%	Virginia	30.0%
Arkansas	74.0%	56.7%	Florida	26.1%
North Carolina	69.5%	48.1%	California	10.3%

Source: Social Explorer, 1850 Census

Innovation, as measured by patents, shows a similar pattern to education: New England followed by Mid-Atlantic and Midwest, with the South taking up the rear.

Table 15. Annual Patent Rates (patents per million residents)

	1840-49	1850-59	1860-69	1870-79	1890-91	1910-11
New England	55.5	175.6	483.3	775.8	772	534.3
Middle Atlantic	51.7	129.4	332.3	563.4	607	488.6
East North Central	16.6	57.3	210.3	312.3	429.9	442.3
West North Central	9.5	22.9	95.4	146.5	248.7	272
South	5.5	15.5	26	85.8	103.1	114.4
West		24.8	164.5	366.7	381.6	458.4
U.S. Ave	27.5	91.5	195.7	325.4	360.4	334.2

Source: Lamoreaux and Sokoloff 1999, Table 1

              

  To what extent are these differences due to slavery rather than other differences between the North and South? John Majewski has tried to understand the problem by studying slave and free areas with similar geographies. Recently he compared the Limestone South with free areas adjacent to it. He argues that despite agriculture, urbanization and manufacturing that resembled the Midwest more than the rest of the South, like the rest of the slave states these areas failed to achieve the democratization of education and innovation that characterized the North. Even when they provided funding for education it appears to have gone primarily to the children of the wealthiest families. For instance, in Kentucky funding was provided based upon the number of children, but high tuition made school impossible for poorer families, so the state funding simply provided a subsidy to the education of the children of wealthy families. Consequently, innovation suffered as well. Majewski found that “In 1860 alone, Ohioans filed for 329 patents, or about 141 per million residents. Despite having a similar economic structure as Ohio, the resident of the Limestone South filed for fifty-two patents in 1860 or about 50 per million residents (Majewski 2015, 293).”

       

         Majewski’s work emphasizes the outsize role of slaveowners in the political system even in places where slavery was of less importance economically, a point that Egnal emphasized. Even in states where the economy was not dominated by cotton production, slave owners, especially large slave owners, could play a disproportionately large role in the political system.

Table 16. Slave Ownership and Political Representation

State	% white families owning slaves	% lawmakers owning slaves	% families owning more than 20 slaves	% lawmakers owning more than 20 slaves
Arkansas	18.5	53.6	1.6	10.3
Tennessee	22.3	41	1.6	7
Virginia	30..8	67.1	3.2	22.9

Source: Egnal, Clash of Extremes, Table 7.2.

Noting the similarities between the South and countries that relied upon exports of primary products suggests a counterfactual. The North was already among the highest income, most industrialized countries, but If Southern secession succeeded, what would the Confederate States of America have looked like 50 or 100 years later. Would it look more like the North or like Argentina, or Brazil? 

Conclusion

I’m sympathetic to Link and Maggor’s desire to develop a better understanding of the history of the American economy that does not treat growth American growth as inevitable, as a merely an unfolding. But the task is actually a daunting one because the most notable feature of American economy history is that when one steps back and looks at the big picture it does appear to be almost inevitable. The figure below shows American per capita GDP graphed on a log scale. 

When you use a log scale the slope of the line reflects the rate of change. If you see a roughly straight line that means that the percentage changes from year to year are relatively constant. That is the case with the United States. What is remarkable about this is that the U.S appears to have experienced significant structural changes that did not alter the course of economic growth. After the Panic of 1837, states re-wrote their constitutions and changed the way they promoted transportation and financial development. The Civil War caused the destruction of labor and capital, and ended slavery, wiping out much of the wealth of the South and fundamentally altering its economic institutions. The Depressions in 1893 and 1929, led to reactions against the political parties that had been in control that facilitated major economic changes. The list goes on: shifts from periods of high tariffs to periods of low tariffs, a shift from free immigration in the nineteenth century to restricted immigration in much of the twentieth century, two World Wars, the Cold War, and the expansion of federal government relative to state and local governments, central bank or no central bank, state banks or federal banks.  Nothing appears to make any difference. Yes, there are business cycle movements, but only the Great Depression appears as even a blip in the long run.

But, as I said, I am sympathetic to Link and Maggor. This apparently inexorable growth requires explanation. And incantations about capitalism and entrepreneurial spirit won’t do the trick.  

References

Bairoch, Paul. "International industrialization levels from 1750 to 1980." Journal of European Economic History 11, no. 2 (1982): 269.

Broadberry, Stephen N., and Douglas A. Irwin. "Labor productivity in the United States and the United Kingdom during the nineteenth century." Explorations in Economic History 43, no. 2 (2006): 257-279.

Cameron, Rondo E. A concise economic history of the world: from Paleolithic times to the present. Oxford University Press, USA, 1993.

Coclanis, Peter A. "Tracking the Economic Divergence of the North and the South." Southern Cultures 6, no. 4 (2000): 82-103.

Cohn, Raymond L. "Antebellum regional incomes: Another look." Explorations in Economic History 18, no. 4 (1981): 330.

Egnal, Marc. Clash of Extremes: The Economic Origins of the Civil War. Hill and Wang, 2010.

Engerman, Stanley L., and Kenneth L. Sokoloff. Economic development in the Americas since 1500: endowments and institutions. Cambridge University Press, 2012.

Fogel, Robert William, and Stanley L. Engerman. "Time On The Cross: The Economics Of American Negro Slavery." (1974).

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