Economic History Update

Eric Hilt has a new paper on “Economic History, Historical Analysis and the "New History of Capitalism."  He is presenting the paper at the Penn Economic History Forum. The paper reviews eleven books that have figured prominently in the New History of Capitalism. It summarizes many of the complaints that economic historians have made about these works but still makes a plea for increased dialogue between economic historians and historians of capitalism.

The Annual Meeting of the American Economic Association will have a session on Cliometrics in Historical Perspective: In Remembrance of  Robert Fogel and Douglas North (follow the link for abstracts of the papers):

A Cliometric Counterfactual: What If There Had Been Neither Fogel nor North?

Claude Diebolt

France National Centre for Scientific Research and University of Strasbourg

Michael Haupert

University of Wisconsin-La Crosse

What Fogel and North Got (Spectacularly) Right, and What They Got (Modestly) Wrong

Deirdre McCloskey

University of Illinois-Chicago

Douglass North, Cliometrics, and the New Institutional Economics: Continuity or Divergence?

Lee Alston

Indiana University and NBER

Cliometrics and Econometrics

Robert Margo

Boston University and NBER

Here are a couple of links related to Joel Mokyr’s most recent book A Culture of Growth: the Origins of the Modern Economy:

Here is review by Brad De Long

Here is an interview with Mokyr

Recent Capitalism and Slavery Stuff

The Junto has been hosting a weeklong series of posts about Slavery’s Capitalism. I blogged about the book here back in August. Part of the discussion in the comments section at the Junto has considered the use of terms like “essential.”

Speaking of “essential”, yesterday Dartmouth hosted what should have been a very interesting debate “Was Slavery Essential to Capitalism?” Doug Irwin was the moderator. Unfortunately, you had to be at Dartmouth to see it, but I heard from Irwin that the Chronicle of Higher Education planned to cover the debate. The participants were Alan Olmstead, Caitlin Rosenthal, Sven Beckert and Trevon Logan.

Speaking of Trevon Logan, I was re-reading his paper A Time (Not) Apart: A Lesson in Economic History from Cotton Picking Books, which I had assigned to my Economic History  class. For what it’s worth, I highly recommend the paper to economists and historians, as well as to people who aren’t economists or historians.

History of Capitalism at AHA

Here is an interesting session scheduled for the meeting of the American Historical Association. Abstracts of each paper can be seen by clicking on the paper title. I have read the first two papers and like them a lot. The Lamoreaux and Wallis paper applies the North, Wallis and Weingast framework of movement from limited access orders to open access orders to the United states by examining changes at the state level during the antebellum period. If you wish to read the paper, it can be found quite easily by searching google scholar. The Rhode and Olmstead paper is a pretty devastating critique of the sloppy quantitative analysis of some of the most prominent “New Historians of Capitalism,” especially Baptist and Beckert. Similar arguments have been made online by me, Pseudoerasmus, and others, but the Rhode and Olmstead paper is very thorough. I haven’t read the Rosenthal paper, which seeks to provide a definition of capitalism that is consistent with both wage labor and slavery. I am somewhat skeptical that capitalism can be a useful analytical concept. The term carries too much baggage. Nevertheless I look forward to reading her paper at some point in the future.

Perspectives on the New History of Capitalism

AHA Session 321

Sunday, January 8, 2017: 11:00 AM-12:30 PM

Centennial Ballroom B (Hyatt Regency Denver, Third Floor)

Chair:

William Summerhill, University of California, Los Angeles

Papers:

The “New History of Capitalism,” Cotton, and Slavery
Paul W. Rhode, University of Michigan; Alan L. Olmstead, University of California, Davis

States, Not Nation: The Sources of Political and Economic Development in the Early United States
Naomi R. Lamoreaux, Yale University; John J. Wallis, University of Maryland, College Park

Slavery, Capitalism, and Commodification
Caitlin Rosenthal, University of California, Berkeley

Comment:

Eric Rauchway, University of California, Davis

Session Abstract

Research within what scholars have come to call the "New History of Capitalism" has revitalized interest in economic history among historians. This session provides an assessment of this work from diverse perspectives. One paper highlights significant problems in the interpretation of evidence in major studies within the New History of Capitalism that focus on slavery and the cotton economy. A second sheds new light on the critical role played by states in key changes that underpinned political and economic modernization in the antebellum era. And a third paper problematizes the scope of phenomena encompassed by capitalism, as the term is presently employed, in order to craft an operational definition that accommodates both wage labor and slavery in antebellum America. Taken together the papers identify pitfalls in both traditional and new interpretations of antebellum economy and polity, while pointing the way forward for historians who seek to undertake research on the fundamental economic and political issues of the era.

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.

Are You For Real

I just received an email asking me to sign a statement by "Economists Concerned About Hilary Clinton's Economic Policies." I'm thinking it must be a joke. At the bottom it states that its mailing address is 725 Fifth Avenue, which is the location of Rump Tower. Surely, it must be a joke.

If someone wanted me to sign a statement by "Human Beings Concerned by Pretty Much Every Word That Comes Out of Trumps Mouth" I would happily sign that.

I can't imagine how someone could listen to Trump and be concerned about Clinton's economic policies. Trump talks about defaulting on the national debt, like he has defaulted on so much of his own debt. Of course he can't do this for a while because he will need to borrow a lot to pay for his ridiculous tax and spending "plan."

I have to admit even if I thought his economic plans made sense, and even if I believed that a man who can't open his mouth without a lie coming out would follow through on them, I would not vote for him.

A man who says he will use torture should not be president.

A man who says he will kill the wives and children of suspected terrorists should not be president.

A man who says that he will discriminate against people based on their religion should not be president.

A man who says he will torture people should not be president.

A man who disrespects POWs and the families of people who gave their lives in service of their country should not be president.

A man who could only take the oath of office by lying should not be president.

These are the actions of an evil man. You con't elect an evil man and still be a good country.

How can you worry about Obamacare, or Clinton's tax policies when there is so much more at stake. Obamacare and higher taxes on the wealthy will not ruin the country. Trump will.

By the way, I did not sign the statement.

What Did Historians A Generation Ago Think About Slavery?

This post is an expanded version of a comment that I submitted over at The Junto in response to Benjamin Park’s review of Matthew Karp’s This Vast Southern Empire. The Introductory paragraph states that “A generation ago it was common for historians to talk about the “regressing” southern states in the decades preceding Civil War,” but that “scholarship from the past couple decades have put that myth to rest. Michael O’Brien demonstrated that southerners were intellectuals who contemplated the most sophisticated issues of modernity. Edward Baptist showed how the slave institution increased in strength as the financial staple in America’s capitalistic order. Walter Johnson and Sven Beckert displayed how slaveholders were at the forefront of an increasingly global economy.”

            My only concern in regard to this very informative and well written review is the introductory paragraph. I think the introduction buys into a false historiography of slavery that some authors, most notably Edward Baptist, have been trying to sell. I don’t believe that it accurately characterizes the state of history a generation ago.

            I suppose we could argue about what constitutes a generation ago, but I happened to have a copy of an undergraduate American History textbook from almost 30 years ago: George Brown Tindall’s America: A Narrative History Volume, 2^nd edition (1988). Tindall wrote on page 371 that “More often than not the successful planter was a driving newcomer, bent on maximizing profits. While the profitability of slavery has been a long standing subject of controversy, in recent years, economic historians have reached the conclusion that the slaves on average supplied about a 10 percent return on their cost.” He went on to note that slaves were the most profitable investment available in the South, and that incomes in the South were not only comparable to the wealthiest countries in the World, but that in the newer cotton lands incomes were among the highest in the United States. The view that he presented to undergraduates almost 30 years ago was of a thriving and successful southern economy based on slave labor. There is no indication that he thought this was a controversial interpretation.

            Unlike Tindall, some more recent authors have tried to present a version of the historiography of slavery that has been stripped of a half century of research by economic historians, as well as the fact that much of that research had been incorporated into history texts.

            My comment ended at this point, but I will add some detail about the aspects of research in economic history that have been neglected in some recent work on the history of slavery.

            There are three areas of research that have been largely ignored in a number of recent works on the history of slavery:

1. Research on the economic nature of slavery. Beginning with the work of Conrad and Mayer in the 1950s and extending through the work of Fogel and Engerman in the 1970s and Fogel in the 1990s, economic historians had accumulated a mountain of evidence that slaveholders were profit maximizing capitalists, that they were able to generate increases in productivity over a long period of time, and that they were optimistic about the future of their economic system.  To the extent that recent historians have claimed credit for demonstrating that slavery in the American South was a dynamic capitalist system they are taking credit for something that had already been done.

2. Research on the role of slave produced goods, particularly cotton, in American economic development.  Recently, I noted that several authors in Slavery’s Capitalism rely upon Doug North’s theory of economic growth through interregional trade driven by the South’s specialization in cotton export production. Yet numerous economic historians had compiled evidence that North’s interpretation overestimated the role of interregional trade and underestimated the role of intraregional trade for economic development. The evidence did not support the conclusion that cotton was the driving force behind economic growth. Second, much of the work done on early industrialization has emphasized the role of intraregional trade. Much of early industrialization appears to have been directed at local demand not demand from the South or Europe. See Robert Gallman,"Self-sufficiency in the Cotton Economy of the Antebellum South." Agricultural History 44, no. 1 (1970): 5-23; Lawrence A. Herbst, "Interregional commodity trade from the North to the South and American economic development in the antebellum period." The Journal of Economic History 35, no. 01 (1975): 264-270; Colleen M. Callahan, and William K. Hutchinson. "Antebellum interregional trade in agricultural goods: preliminary results." The Journal of Economic History 40, no. 01 (1980): 25-31; Diane Lindstrom Economic Development in the Philadelphia Region  and, more recently, David Meyer Roots of American Industrialization or see his essay on Industrialization in EH.Net’s Encyclopedia.

            Ignoring the vast scholarship on the subject leads to things like Baptist’s attempt to quantify the relative importance of slave produced cotton, which should be regarded as one of the most embarrassing moments in the history of American history, as he spends two pages making up numbers and then summing them. See here.

3. Research on the negative consequences of slavery for long term economic development. Gavin Wright. "Old south, new south." NY: Basic Books (1986); Stanley Engerman and Kenneth L. Sokoloff. Economic development in the Americas since 1500: endowments and institutions. Cambridge University Press, 2012; Nathan Nunn. "Slavery, inequality, and economic development in the Americas." Institutions and economic performance (2008): 148-80. As Robert Wright has recently argued, the fact that enslavers grew rich does not necessarily imply that slavery enriched the economy as a whole.

While there is a lot of good work being done on the history of slavery, progress will be limited to the extent that new scholars buy this false historiography and fail to address the work done by economic historians over the last half century.

Don't People Read Solow Anymore?

Unlearning Economics had long blog post this morning, reviewing Dani Rodrik’s Economics Rules at Pieria. As one might guess from his name, Unlearning Economics thinks Rodrik is too attached to neoclassical economics and insufficiently supportive of pluralism. I generally, disagree with him. I am an economic historian and an institutional economist, but I am fundamentally a traditional economist. My favorite class to teach is Principles of Microeconomics. I like using very simple models to demonstrate things like the influence of barriers to entry and product differentiation on the performance of firms, or the influence of elasticity on who bears the burden of a tax. I often struggle to see the added value of, for instance, behavioral economics. But what struck me about the post was this passage.

“Though he doesn’t claim so himself, Rodrik’s methodological approach could be considered a more sophisticated restatement of Milton Friedman’s famous paper The Methodology of Positive Economics, which similarly sought to defend economic models from charges of unrealism and irrelevance. While Friedman argued that the unrealism of a theory’s assumptions does not matter as long as the theory makes correct predictions, Rodrik adds nuance to this by stating that while unrealistic assumptions are in general necessary and useful, some assumptions are so important that they must be amended to be more in line with reality. Rodrik calls these ‘critical assumptions’, stating that “an assumption is critical if its modification in an arguably more realistic direction would produce a substantive difference in the conclusion produced by the model.” By doing so he distinguishes his argument from the seeming ‘anything goes’ implications of Friedman’s essay.”

What struck me about the passage was that the author seemed unaware of Robert Solow’s work. I have not read Rodrik’s book yet, but I searched the book on line and was a little surprised that it did not appear to mention Solow either.

This is the introduction of Solow’s 1956 “A Contribution to the Theory of Economic Growth.”

In other words, you have to make simplifying assumptions, but that does not mean that you can assume anything you want. The first footnote is important as well.

 

What is or is not a crucial (or critical) assumption depends on what question you are trying to answer.

More Economic History

The program for the annual Meeting of the Economic History Association is available and has links to many of the papers that will be presented. This morning I read an interesting paper by Geoffrey Fain Williams on the role of the British Joint Stock Banking Acts in the Panic of 1837. 

David Beckworth continues to provide historical perspective on macroeconomic issues at his Macro Musings Podcast. This week he talks to Hugh Rockoff about U.S. monetary history. Previously he has talked to Doug Irwin about trade, Jason Taylor about the Great depression and World War II, and Brad DeLong about Hamiltonian political economy.