More Silliness from the History of Capitalism Folk

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

Sections from the article are in bold.

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

He quotes approvingly from Piketty:

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

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

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

Economist: “Maybe some other time.”

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

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

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

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

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

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

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

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

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

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


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

Was the Gilded Age a Gilded Age?

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

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

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

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

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

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

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

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

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

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

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

Can we maintain our present rate of increase of consumption?

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

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

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

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

Recent Working Papers in American Economic History

Price Fishback How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s

NBER Working Paper No. 21925

The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners’ Loan Corporation’s purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation’s loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.

Joseph Davis, Marc D. Weidenmier

America's First Great Moderation

NBER Working Paper No. 21856

We identify America’s First Great Moderation, a recession-free 16-year period from 1841 until 1856, that represents the longest economic expansion in U.S. history. Occurring in the wake of the debt-deleveraging cycle of the late 1830s, this “take-off” period’s high rates of economic growth and relatively-low volatility enabled the U.S. economy to escape downturns despite the absence of a central bank. Using new high frequency data on industrial production, we show that America’s First Great Moderation was primarily driven by a boom in transportation-goods investment, attributable to both the wider adoption of steam railroads and river boats and the high expected returns for massive wooden clipper ships following the discovery of gold in California. We do not find evidence that agriculture (i.e., cotton), domestic textile production, or British economic conditions played any significant role in this moderation. The First Great Moderation ended with a sharp decline in transportation investment and bank credit during the downturn of 1857-8 and the coming American Civil War. Our empirical analyses indicate that the low-volatility states derived for both annual industrial production and monthly stock prices during the First Great Moderation are similar to those estimated for the Second Great Moderation (1984-2007).

John Komlos and Brian A'Hearn respond to Bodenhorn et al on the antebellum decline in stature.

The Decline in the Nutritional Status of the U.S. Antebellum Population at the Onset of Modern Economic Growth

NBER Working Paper No. 21845

The decline in the physical stature of the American population for more than a generation beginning with the birth cohorts of the early 1830s was brought about by a diminution in nutritional intake in spite of robust growth in average incomes. This occurred at the onset of modern economic growth on account of rising inequality and an increase in food prices, which brought about dietary changes through the substitution away from edibles toward non-edibles. In a recent working paper, Bodenhorn, Guinnane, and Mroz question this consensus view, suggesting that a decline in heights in a military sample may not be representative of the population at large. They argue that increasing wages in the civilian labor market may well induce an increased proportion of shorter men to volunteer for military service thereby driving down the mean height of soldiers even if the height of the population remains unchanged. However, they neglected to examine whether labor market conditions did actually improve during the Civil War in such a way as to induce shorter men to enlist. Had they done so they would have found just the opposite: during the course of the war real compensation in the military increased by some 39% to 66% relative to civilian earnings. This should have led to an increase in military heights if the logic of their model were accurate, when in fact they declined. Both the historical evidence and an assessment of the model indicate that failing to consider patriotism as a powerful motive for enlisting was another serious error. A thorough analysis of the Union Army height data, considering recruiting periods as short as 90 days during which labor market conditions could not have changed markedly indicates that there can be no doubt at all that the decline in the height of soldiers beginning with the birth cohorts of the early 1830s is representative of the trend in the physical stature of the male population at large. The implication is that there was a widespread diminution in nutritional status of the population in the antebellum period.

Ellis Tallman and Gary Gorton

How Did Pre-Fed Banking Panics End?

How did pre-Fed banking crises end? How did depositors' beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.

What I've Been Listening To

Liz Covart’s Ben Franklin’s World is a podcast on early American history. Recently she has teamed with the Omohundro Institute to produce podcasts on Doing History. I was a fan of the old Making History podcast and I am happy to see someone again trying to fill this niche.

Daron Acemoglu at the Economic Rockstar Podcast

James Heckman on EconTalk

And

Valerie June

Economist's empirical judgments

The Economist article I wrote about the other day cites work by Anthony Randazzo and Jonathan Haidt. The paper “Are Economists Influenced by Their Moral Worldviews? Evidence from the Moral Foundations of Economists Questionnaire” they conclude that moral judgments influence economist’s judgments and that “the long recognized line between positive and normative analysis is much blurrier than widely understood.”

Here are the questions they asked of 131 economists. The responses are grouped by economist’s self-definitions: Keynesian, Neo-Classical, New Institutionalist, and Austrian.

The scale goes from 1 (strongly disagree) to 7 (strongly agree), with 4 corresponding to neutral. Randazzo and Haidt emphasize that there were able to show a correlation between moral views and empirical judgments, but what strikes me is that most of the scores for Neo classical and New Institutionalist (who together account for about 58% of those surveyed) on the empirical statements seem to fall between 3 and 5. In other words, they were not sure. I regard that as the correct response to most of the questions.

I am pretty confident that differences in bankruptcy rates between states are largely explained by differences in collection laws. I have studied this a lot. I do not know whether current levels of inequality are harming economic growth. I have not researched the topic. In addition, I think it is a difficult question to answer.

People who label themselves Keynesian appear to be more likely to be pretty sure about a lot of things. Austrians appear to be more likely to be pretty sure about most things.  In between them are the bulk of economists who seem inclined to resort to the economist’s traditional response: It depends. 

I think that economics provides a very useful approach to answering important questions. But you have to use economic theory to guide the hard work of empirical research. You can’t just kick back in your armchair and conjure up the answers. Unless you are very familiar with the empirical research on a question (preferably having done some of it yourself) you should be very cautious about your answer. Even if you are very familiar with the empirical research, you should still be cautious when considering complicated problems. 

Why we don't worry about cholera (in the U.S.)

Nice piece by Michael Keenan Gutierrez about eradicating cholera in New York, largely through public investment in sewers. I think he may have overemphasized the ability of the wealthy to avoid exposure. Oliver Hicks the president of the Farmers’ Loan and Trust Company, for instance, died during the 1832 outbreak. The cynic in me suspects that the deaths of the wealthy may have played a disproportionate role in promoting public investment. Bob Higgs also emphasized the importance of public investment in sewers and water filtration as a source of decreasing mortality in the U.S. in his Transformation of the American Economy, 1865-1914, which is not only mandatory reading for anyone interested in economic history, but free. I’m generally not a huge fan of the Mises Institute, but I thank them for making this book available to so many people. Here are a couple of tables from the book illustrating the impact of public investment in sewers and water filtration.