Inequality in Economic History

I found the initial reactions to Piketty’s Capital interesting because assessments of the empirical analysis seemed to line up immediately on ideological grounds before anyone had a serious opportunity to evaluate so much evidence. People on the right were certain it was wrong; people on the left were sure that it was right. Both were clearly basing their conclusions on what they wanted to be true. This was particularly clear in the uncritical use of his work by the New Historians of Capitalism. See this video (41 minutes in) where Jefferson Cowie says how bad Piketty is as a historian and follows that with how he still uses his numbers blindly. What ever happened to critical evaluation of the evidence? In NHC it has been replaced by the ability to repeat clever phrases like “tyranny of the market” and “cash nexus.”  

Enough of my rant against NHC. Capital was a big book; it takes time to really evaluate the empirical work in such a book. Well, time has passed, and some of that work has now been done. In general, it does not seem to support Piketty.

Richard Sutch challenges the reliability of many of the estimates for the U.S.

Carlos Goes fails to find empirical support for the central hypothesis about inequality and capitalist development.;

Does this mean that Capital was a bad book? I don’t know. Some big idea books are serious efforts to make sense of the available information. Sometimes they turn out to been wrong in fundamental ways. I think examples of this might be Doug North’s Economic Growth of the United States (overemphasis on trade, especially, interregional trade), Fogel and Engerman’s Time on the Cross (underestimated use of coercion and overestimated nutrition), and Pomeranz’s Great Divergence (divergence appears to have started earlier than Pomeranz thought). All of these were reasonable attempts to make sense of the available information, but they prompted a lot of research which ultimately contradicted at least some of their conclusions. All of these authors, while not necessarily accepting all the critiques of their work, acknowledged when subsequent evidence persuasively contradicted their earlier interpretations. The ultimate test for Piketty will be how he responds to the critiques of his work that have provided more evidence on inequality over time.

In any case, if Piketty’s analysis of inequality is flawed, what should you read. I would suggest Lindert and Williamson’s  Unequal Gains: American Growth an Inequality. The book is very dense with descriptions of how the estimates were developed. If you are short on time you can get a preview at VOX or read Vincent Geloso’s review at Essays in Economic and Business History.

Open Access in History and Economics

The Exchange had a post the other day about a special issue of the Journal of the Gilded Age and Progressive Era focusing on the history of capitalism. Several of the papers looked interesting. Unfortunately, I discovered that I only have access to JGAPE with a one year delay. My wife teaches at American University, and their access also has a one year delay. I then took the next step of searching for open access versions of the papers: working papers or papers presented at seminars. I put the title and author of each paper into Google Scholar. I did not find an open access version of a single one of the papers. I then tried the same thing with the first seven papers in the August issue of American Economic Review. Granted, this is a small and unscientific sample. Nevertheless, the result is consistent with the impression that I have had for a while that economics is more open access than history. What I am not sure about is why. I think economists believe that there is no cost to providing open access to working papers, and, as best I can tell, there is not. Do historians believe there is a cost? Is there? I know there are concerns about open access to dissertations reducing the demand for a book derived from that dissertation. Are these concerns well founded? And what about journal articles? 

Women and Econ Blogs

Claudia Sahm blogged about the lack of women among econ bloggers

I looked at intelligenteconomist.com’s list of top economic blogs an only found four (out of one hundred)

Carola Binder

Jodi Beggs at Economists Do It With Models

Lynne Kiesling (with Michael Giberson) at Knowledge Problem

Muriel Niederle at Experimental and Behavioral Economics

Economic History from the Last ASSA

Historical Perspectives on Financial Crisis, Banks and Regulation 
Presiding: Gary Richardson 
Crisis and Collapse in the Long Run: Some Microeconomic Evidence Raghuram Rajan and Rodney Ramcharan
What Ends Banking Panics? Gary Gorton and Ellis Tallman
Interbank Markets and Banking Crises: New Evidence on the Establishment and Impact of the Federal Reserve Mark Carlson and David Wheelock 
Commercial Bank Leverage and Regulatory Regimes: Comparative Evidence from the Great Depression and Great Recession Christoffer Koch, Gary Richardson and Patrick Van Horn 
View Webcast

Critiquing Robert J. Gordon's Rise and Fall of American Growth (Panel Discussion)
Presiding: Robert Shiller
Gregory Clark
Nicholas Crafts
Benjamin Friedman
James T. Robinson
View Webcast

Evononsense and Homo Paleas

I was just looking at Evonomics.com, an important new source of misinformation about economics. Numerous essays there talk about how economic analysis is based on the study of homo economicus, a creature that is only concerned about its own selfish material interest.  

More specifically:

“homo economicus… is the character that inhabits the economics texts, and the computer models that are the silent dictators of analysis and policy. Econ, as I will call him, is a myopic integer of self-seeking, who goes through life with a relentless and unfailing calculus of personal loss and gain. He has no social affinities, is oblivious of social context, and has no capacity or inclination to think of anyone besides him or her self.” (Jonathan Rowe at Evonomics)

It is easy to see how foolish those economists are and what a waste of time economics is. There is only one small problem. The imaginary being is not homo economicus, it is homo paleas. Homo paleas is an imaginary economist created by people who want to criticize economics without having to go to the trouble of studying what economists actually do.

Economists generally do analyze models in which people are assumed to maximize utility, but these people can get utility from anything they like. No real economist says that you can’t get utility from someone else’s pleasure, or, for that matter, someone else’s pain.

What have economists actually said?

Adam Smith wrote in his Theory of Moral Sentiments that

“How selfish soever a man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though h derives nothing from it except the pleasure of seeing it.”

Well, Smith was special. It must have been after him that economists starting studying homo economicus. What did Alfred Marshall say?

Alfred Marshall wrote in his Principles of Economics that

“Thus though it is true that "money" or "general purchasing power" or "command over material wealth," is the centre around which economic science clusters; this is so, not because money or material wealth is regarded as the main aim of human effort, nor even as affording the main subject-matter for the study of the economist, but because in this world of ours it is the one convenient means of measuring human motive on a large scale. If the older economists had made this clear, they would have escaped many grievous misrepresentations; and the splendid teachings of Carlyle and Ruskin as to the right aims of human endeavour and the right uses of wealth, would not then have been marred by bitter attacks on economics, based on the mistaken belief that that science had no concern with any motive except the selfish desire for wealth, or even that it inculcated a policy of sordid selfishness.” (Book I Ch. II).

Okay, it wasn’t Marshall. Maybe economists now think that people can’t care about others.

In 2011, Andersen, Ertac, Gneezy, Hoffman and List explained that

“where economics provides its most basic predictions revolves around how people should respond to changes in incentives—pecuniary or nonpecuniary (Gneezy and Aldo Rustichini 2000)—not whether subjects have fairness, spite, or altruistic proclivities.” (Stakes Matter in Ultimatum Games)

Because they analyze the actions of the imaginary homo paleas rather than actual economists, these critics of economics think they have shown the weakness of economics when they point out that people vote, or give to charity, or are willing to incur a cost to punish economic experiments are concerned with fairness. The trouble is that there is actually nothing in economics that suggests a person cannot care about other people.

Economics theory does not suggest that people should not give to charity. It suggests that people will do it more if you lower the cost by, for instance giving a charitable deduction.

Some New Stuff

Here is the program for the Development of the American Economy section of the NBER summer Institute. There are links to many of the papers.

Here is the program for a conference on the history of capitalism. Although I have been critical of much of what has been labeled the new history of capitalism, there are some interesting looking papers here. I don't plan to go to the conference, but I look forward to seeing Sharon Murphy's work on bank financing and slavery at some time in the future.

Here is Jeffrey Beall blogging about a new paper on open access publishing (particularly the fraudulent form of it) by my colleague Margaret Ray. He provides a link to the paper.

Based upon this tweet, it appears that someone at Cornell's History of Capitalism Camp was talking about Mary Eschelbach Hansen's work on bankruptcy. She is, by the way, my favorite economic historian.

Stanley Fish on Historians Against Trump

The New York Times published a remarkably dishonest essay by Stanley Fish. Fish attacks a group of historians for publishing a statement opposing Donald Trump.

Fish begins by making clear that, while he is specifically attacking these historians, his remarks really apply to all professors. Ironically, the historians make clear in their letter that they are not all professors. Even casual examination of the list of historians reveals that many are not professors. But Fish won’t let details like that get in his way. (quotes from Fish are in bold)

“PROFESSORS are at it again, demonstrating in public how little they understand the responsibilities and limits of their profession.”

Fish claims that

“They suggest that they are uniquely qualified to issue this warning because they “have a professional obligation as historians to share an understanding of the past upon which a better future may be built.”

This is a really nice touch. Fish has taken a quote from the letter, but introduced it with a lie. Nowhere in the letter is it explicitly or implicitly suggested that historians are uniquely qualified. To the contrary, the letter refers to other groups that have already issued similar letters.

This is followed by some more cutting, pasting and inserting by Professor Fish. He is, after all, Professor Fish, which is the reason is being published in the New York Times.

Or in other words: We’re historians and you’re not, and “historians understand the impact these phenomena have upon society’s most vulnerable.” Therefore we can’t keep silent, for “the lessons of history compel us to speak out against Trump.”

I’ll just include this statement about extraordinary hubris for the enjoyment of anyone that knows who Stanley Fish. I wouldn’t be surprised if Fish himself didn’t get a good laugh out of it.

I would say that the hubris of these statements was extraordinary were it not so commonplace for professors (not all but many) to regularly equate the possession of an advanced degree with virtue.

He then returns to his assertion that the historian’s claim to be uniquely qualified.

The claim is not simply that disciplinary expertise confers moral and political superiority, but that historians, because of their training, are uniquely objective observers: “As historians, we consider diverse viewpoints while acknowledging our own limitations and subjectivity.”

In fact, no such claim of uniqueness is made in the letter. They don’t say that all historians oppose Trump and they don’t say that only historians are in a position to evaluate Trump. They simply state that they are historians and that their position as historians has led them to believe that they should oppose Trump.

Historians do have to consider diverse viewpoints and acknowledge their own limitations and subjectivity. They don’t all do it well. I spend plenty of time criticizing bad historical scholarship, but that criticism presumes that historians should consider diverse viewpoints and acknowledge their limitations and subjectivity.

In the interest of acknowledging my own subjectivity, I probably should acknowledge that I hate Trump with the white hot passion of a thousand burning suns. But the evidence that Fish is lying is clear. Simply read the letter.

The Rise and Fall of American Economic Growth

I finally got around to reading Robert Gordon’s Rise and Fall of American Economic Growth. It is an excellent book. Much of the book is essentially an expansion of Lebergott’s Pursuing Happiness. It describes the many ways in which the material conditions of life (what they consumed, how they worked, and their health) were transformed from 1870 to 1970. Gordon argues that economic growth this period essentially created modern economic life: comfortable homes with electricity and clean water, cars parked out front, and all of this purchased with less labor hours and less onerous labor. 

Much of the attention the book has received has focused on Gordon’s argument that current innovations in information and communication are not transforming life the way the earlier changes did and that the rate of growth is unlikely to return to the rapid pace experienced for most of the twentieth century. This argument actually occupies a relatively small part of the book. I also found this part of the argument to be somewhat more cautiously stated than I think it has been in the popular press and in blurbs for the book. While Gordon argues that some of these innovations were uniquely transforming and points to specific factors that he believes are likely to slow growth (e.g. demographic change, education, inequality), he also has suggestions for policy changes which might mitigate some of these headwinds (e.g. reducing excessive regulation, policies to reduce inequality). In other words, he doesn’t appear to believe that the current course is inevitable. He also acknowledges that any attempts to make predictions about future innovations are somewhat speculative.

His analysis of the causes of the “Great Leap Forward” also seems reasonable, though I think he gives too much credit to Alex Field for pointing out the technological innovations that took place during the Great Depression and not enough to Michael Bernstein, who emphasized these changes long before Field.

I do tend to disagree with Gordon and others who underplay the transformation brought about by information technology. You can say that it is only entertainment and communication but my children ages 17, 23 and 27 are never without their phones. They use social media, they watch movies and tv shows. They listen to an incredible variety of music. When I was a teenager you pretty much had to pick one kind of music: heavy metal, or punk, or disco. My kids listen to everything. They listen to podcasts on soccer, cooking, politics, etc. They can’t get lost. A map is no further than the phone. Maybe it is just entertainment and information, but it is a world of information and entertainment in their hand.

I agree with Gordon that attempts to make predictions about future innovations are speculative, but I tend to be somewhat more optimistic than he is. In part, my optimism stems from the dismal performance of dire predictions about the future. Read Jevon’s on the Coal Question, or Alvin Hansen on secular stagnation.

Part of my optimism is also related to what I think might be the chief weakness of the book. It tells the story strictly from an American standpoint. The problem with this is that the same things happened in many other countries. The United States is not the only wealthy country. One of the things that I believe I learned from John Nye (listen to John’s Econ Talk on the Great Depression, Political Economy and the Evolution of the State) is that you might want to occasionally look outside of particular area to see if the same thing is happening in other places. If it is, you might want to ask what are the broader forces at work. I think that if innovations can travel across borders and innovation is not isolated to Americans there are some good reasons to be optimistic. Increased economic freedom and access to education in Asia have the potential to dramatically increase the pool of innovators. I don’t think that economic freedom is firmly enough established to feel completely secure about this, but I think the potential is great.

Robin Hanson on Slavery

Robin Hanson and Bryan Caplan were having an argument about something called “Em.” I have no idea what Em is so I am not writing about that. But the argument had something to do with slavery, and it prompted Hanson to do a quick review of the literature and write up a summary on his blog overcoming bias. I’m afraid that Hanson’s quick review of the literature was a bit too quick. Some of the statements are simply wrong and others can reasonably be contested. I posted these responses on his blog, but it did not seem to keep the links. Consequently, I'm posting it here as well.

He states that

Historically, even when slaves were common, they were usually a minority of the population. (Beware, the term “slave” is used in different ways.) About 10% in the Roman Empire and US south.

This statement is simply incorrect. Slaves accounted for substantially more than 10 percent of the population of the South. Slaves were as much as 57 percent of the population (South Caroline) and at least 25 percent (Tennessee). See, for instance, Jenny Wahl. Or you can check at the Historical Census Browser at UVA

He states that

(The sex story is overrated, as only 1-2% of slave babies were fathered by white men.)

The first thing to note is that, unlike population, the number of children born to slave mothers and white fathers is difficult to estimate. Some estimates put it as low as 1-2 percent, but Stephen Crawford found that in ex-slave interviews, by the WPA and Fisk University, as many 10 percent of slaves reported that their father was white. The 10 percent figure was when the interviews were done by African –American interviewers. In other words we don’t know. It may be possible use genetic studies to produce a more accurate estimate, but I don’t know of such a study. There is also the question of “How large is large?” Stating that “the sex story is overrated” suggests that 1-2 percent is somehow not important. Given that the vast majority of enslaved people in the South lived on plantations of 15 or more people, even 1 or 2 percent could be consistent with a relatively large percentage of slave owners fathering an enslaved child (or a smaller percentage fathering numerous children). It is not obvious to me that 1 or 2 percent is small in this case.      

He states that

Sometimes people sold themselves into slavery for a limited time, as with indentured servitude.

This is just kind of odd. It may be that he is using a definition of slavery that makes this make sense, but I don’t know of any historian who regards slavery and indentured servitude as equivalent.

Finally, he states that

Slaves weren’t converted into debt perhaps because of credit market failures, or more plausible because the full control approach was especially productive on plantations.

I’m not entirely clear about what this means, but it does not sound consistent with current understanding of slavery in the United States. Historians have devoted considerable attention to the well developed credit markets that facilitated slave purchases. See for instance, recent work by Bonnie Martin, John Clegg, Calvin Schemerhorn, Kathryn Boodry, and Gonzalez, Marshall, and Naidu.

Some Random Economic History

The Program of the next meeting of the Economic History Association.

The Economic History Society now has a blog: The Long Run

Pseudoerasmus attempts to describe the essence of Beckert’s argument about economic development in Empire of Cotton

Ed Baptist explains how he was able to misinform so many people.

Jane Humphries examines the role of women in English economic history and gives a lesson in the use of primary sources in economic history.

At Ben Franklin’s World Liz Covart and Zara Anashanslin also discuss the use of primary sources, particularly in reference to Anashanslin’s book  Portrait of a Woman in Silk: Hidden Histories of the British Atlantic World. 

Fugitive Slave Ads and the Runaway New History of Capitalism

The OAH recently tweeted about a new post at the Process blog.  The tweet asked if runaway slave ads can change the way we study slavery.The post is authored by Mary Niall Mitchell, Edward Baptist, and Joshua Rothman, and it describes their new project to create a database of digitized fugitive slave ads:

“Most historians of chattel slavery looking for detailed information about individual enslaved people have turned to a familiar constellation of sources: nineteenth-century slave narratives, the Ex-Slave Narratives gathered in the 1930s and 1940s by the Works Progress Administration, plantation records, and legal documents. We hope that this is about to change, by bringing new and existing digital techniques to a type of narrative that ran daily on the pages of American newspapers from the eighteenth century until the Civil War: the fugitive slave advertisement.”

“By 1865, we estimate more than 200,000 such notices appeared.”

It is possible that there are 200,000 such notices. It seems plausible to me, though I would be more willing to accept it if I was not familiar with Ed Baptist’s technique for creating quantitative estimates. He makes them up.

Although they do mention the work of Loren Schweinger and John Hope Franklin on runaway slaves the overall impression that the authors leave is that little has been done to make use of these valuable pieces of evidence. After all, “historians …. have turned to a familiar constellation of sources,” but they “ hope that this is about to change” as a result of their work. It is this implication that they are boldly going where no historians have gone before that is the problem.  There are already a number of extensive collections of digitized fugitive slave ads that, unlike their project, are already available to people. Moreover, historians have long regarded fugitive slave ads as an important source. Some economic historians have created databases including tens of thousands of ads to conduct their research. Bellow I provide a list of some of the digitization projects and historical scholarship related to runaway slave ads.

Can runaway slave ads change the way we study slavery? Yes. I know this because they already have. Why don’t the authors just acknowledge the contributions of the numerous scholars that have already worked on fugitive slave ads? They could simply state that despite all these previous efforts none has yet created a truly comprehensive database that is accessible to everyone. That would be true, and if they were able to create such a database it would be a considerable achievement. But that is not the way of the new history of capitalism. Instead, the approach is to ignore or deny the work of earlier scholars in order to claim false novelty for their own work. 

North Carolina Runaway Slave Advertisements 1751-1840

“The North Carolina Runaway Slave Advertisements project provides online access to all known runaway slave advertisements (more than 2300 items) published in North Carolina newspapers from 1751 to 1840. These brief ads provide a glimpse into the social, economic, and cultural world of the American slave system and the specific experience within North Carolina. Working from microfilmed copies of these rare publications, the project team scanned the ads to provide digital images, create full-text transcripts and descriptive metadata, and develop a searchable database. The NCRSA website includes digital scans of the ads, contextual essays to address their historical research value, full text transcripts, an annotated bibliography to aid researchers, and a searchable database.”

Texas Runaway Slave Project

“The Texas Runaway Slave Project (TRSP) is a database of runaway slave advertisements, articles and notices from newspapers published in Texas. The project has so far documented the names of over 1400 runaway slaves from Texas.”

Louisiana Runaway Slave Advertisements

“The “Louisiana Runaway Slave Advertisements, 1836-1865” collection is a comprehensive digital collection of advertisements and notices harvested from the newspapers digitized as part of the Digitizing Louisiana Newspapers Project.  In these advertisements people from Louisiana and the Lower Mississippi Valley demonstrate their agency and resistance against the institutions of slavery and indentured servitude.

The project team identified and cropped advertisements directly from the digital newspaper images, and they created full-text transcriptions and descriptive metadata.”

Documenting Runaway Slaves

“The Documenting Runaway Slaves (DRS) research project is a collaborative effort to document newspaper advertisements placed by masters seeking the capture and return of runaway slaves. Dr. Max Grivno and Dr. Douglas Chambers, lead researchers and faculty members in the Southern Miss Department of History, are focusing their pilot project on Mississippi, but plans are already in place to expand the research to the larger Gulf South, the rest of the southern United States, the Caribbean, and Brazil.

The Geography of Slavery

“The Geography of Slavery in Virginia is a digital collection of advertisements for runaway and captured slaves and servants in 18th- and 19th-century Virginia newspapers. Building on the rich descriptions of individual slaves and servants in the ads, the project offers a personal, geographical and documentary context for the study of slavery in Virginia, from colonial times to the Civil War.”

Hodges, Graham Russell, and Alan Edward Brown. " Pretends to be Free": Runaway Slave Advertisements from Colonial and Revolutionary New York and New Jersey. Taylor & Francis, 1994.

Smith, Billy Gordon, and Richard Wojtowicz. Blacks who Stole Themselves: Advertisments for Runaways in the Pennsylvania Gazette, 1728-1790. University of Pennsylvania Press, 1989.

Prude, Jonathan. "To Look upon the" Lower Sort": Runaway Ads and the Appearance of Unfree Laborers in America, 1750-1800." The Journal of American History 78.1 (1991): 124-159.

Dittmar, Jeremiah, and Suresh Naidu. Contested Property: Fugitive Slaves in the Antebellum US South. Working paper, Columbia University (September 2012), 2012. Dittmar and Naidu collected more than 20,000 ads.

Komlos, John. "The Height of Runaway Slaves in Colonial America, 1720-1770." Stature, Living Standards, and Economic Development: Essays in Anthropometric History, ed. John Komlos (Chicago: University of Chicago Press, 1994) (1994): 93-116. Komlos collected more than 10,000 ads.

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. 

Economic and Business History Society

I first presented a paper at EBHS in 1996 in Savannah. My first, publication was in Essays in Economic and Business History. I go to the meeting whenever I can take the train or drive in a reasonable amount of time (say 12 hours or so), and I have published a couple more papers in Essays. EBHS has changed a great deal over the last twenty years. It has become much more international. Many of the members come from Europe, and there is an increasing number from Asia. Every other year the meeting is held outside the United States. This year it was in Montreal. Next year it will be in Oklahoma City, and in 2018 it will be in Finland. The editors of Essays have made it an open access online journal, with an impressive editorial board. What hasn’t changed is that the EBHS meeting always demonstrates that historians and economists (and even some business types) can coexist, not just peacefully, but happily and productively. As long as the methodology seems appropriate for the question, people just want to hear what you have to say. The sessions are well attended, and the questions and comments are thoughtful. EBHS is particularly welcoming of people just starting their academic careers.

This year

Fan Fei won the Lynne Doti award  for the best paper by a graduate student for his work on interstate highways and the decline of general stores. Fei is graduate student in the Economics Department at Michigan. You can find his job market paper here.

Soudeh Mirgashemi won the Fred Batemen prize for the best paper for her work on dams and agricultural development in the West in the early twentieth century.  She did her Ph. D. at Arizona and just finished her first year teaching at Hofstra. Soudeh presented at the same session as Nikola Tynan and Leslie Tomory. Nikola’s paper (coauthored with Brian Beach and Werner Troesken) showed a large drop in typhoid deaths following municipalization of water works in English cities. Leslie presented work on the history of the London water supply. I found it interesting that he said he began the work after he finished a book on the gas industry. Since Werner also started with the gas industry (the Chicago gas trust) it suggests there are economies of scope involved in the study of networks of pipe.   

Brad Sturgill and Dan Giedeman won the James Soltow Award for the best paper published in Essays the previous year.  

Economics still needs better critics

I just got back from the meeting of the Economic and Business History Society in Montreal, and I was going to blog about that, but then someone tweeted about this stupid essay at Evonomics. Eric Beinhocker writes about the problems with traditional economics and the benefits of the new economics. The primary problem with his essay is that his description of traditional economics is what would generally be referred to as bullshit.  He conveniently provides a table from his book, The Origin of Wealth, which I was fortunate enough to have never heard of before.

Pick any element you want. For instance the first one declares that traditional economics assumes that everyone has perfect information. Really? Even principles textbooks cover imperfect information and uncertainty. For Dynamics, he states that traditional economics assumes that the “The Economy automatically goes to equilibrium where social welfare is maximized.” Find me a principles textbook that doesn’t cover externalities, public goods, and monopoly. I like his description of the New Economics even better. “Economy is a highly dynamic system that can go far from equilibrium and become trapped in a suboptimal state.” It can become trapped in a state that is far from equilibrium? Does this guy not know what equilibrium means? Stability is the essential characteristic of equilibrium. In the absence of some sort of shock the situation won’t change. Later he refers to market failures, but he does so at the same time that he declares traditional economics assumes a natural tendency toward efficiency. Market failure is a situation in which the market equilibrium is inefficient. Moreover, equilibrium is a property of models, not reality. Reality is never stable. Equilibrium is nevertheless useful for helping us to consider the direction of change and possible unintended consequences.  In the case of innovation, what he ascribes to new economics is a feature of traditional economics and what he ascribes to traditional economics is not. Traditional economists have long studied the factors that are likely to encourage or impede innovation.

He describes one of the implications of new economic thinking for policy as follows:

Regulators take an action to address a perceived problem, that changes the perceptions and actions of market participants, which in turn creates a new set of problems triggering further regulator actions, and so on. Over time this infinite chase between fallible regulators and equally fallible market participants leaves a trail of rules, structures, and institutions that has a major effect on shaping the evolution of the economy.

Ironically, this is pretty much a description of my paper "LearningTo Tax: The Political Economy of the Opium Trade in Iran, 1921-1941," Journal of Economic History 61(March 2001):95-113. It is ironic because I regard myself as a pretty traditional economist. I see this paper, and most of my work on history and institutions, as building on traditional economics not refuting it.

I have taught pretty traditional principles of microeconomics for more than a quarter century, and I still believe that those simple models provide a great deal of value to students. 

I'll try to write about EBHS and Montreal later today.

Science Fiction and Economics

My friend John McAdams said that he was going to internet stalk me this week. This post is for him.

The Relationship Between Science Fiction and Economics

A List of the 50 Essential Science Fiction Books

Random Economic History Stuff

1. I will be in Montreal this week at the meeting of the Economic and Business History Society. Here is the program. I’ll be presenting a paper on “Trust Company Failures in New York State, 1875-1925.”

Abstract

Despite what appeared to be lax regulation and rapid growth, trust companies rarely failed. These few failures, however, provide a path to understanding the overall success of trust companies in New York in the late nineteenth and early twentieth centuries. Failures played a disproportionate role in shaping the rules and regulations that governed trust companies, and the resolution of each failure provided additional information about how the laws and regulations would be implemented. These failures shed light on issues of corporate governance and financial stability that are still relevant today.

2. This blog made the Intelligent Economist’s list of The Top 100 Economics Blogs of 2016.

Anton Howe’s Capitalism’s Cradle is another economic history focused blog on the list.

3. Pseudoerasmus' blog, which should also be on the list, has some new posts: Did Inequality Cause the First World War?; Inequality and the First Globalization, and Economic History Readings

4. By the way, for those of you who do not know, Pseudoerasmus is the name of a person who blogs and tweets, mostly about economic history and development. Most people seem to assume that that Pseudoerasmus is a pseudonym. Consequently, some people refer to him as an anonymous blogger.

He recently contributed to discussion about the history of capitalism at the Junto and published a long blogpost about the Lenin-Hobson theory of World War I as it appears in Branko Milanovic’s recent book.

Richard Drayton argued with Pseudoerasmus in the comments section over at the Junto. Drayton concluded his part of the exchange with the following:

I’m rather intrigued by a chap, and there’s too much chap coming out of your prose for me to go for gender neutral pronoun, who spends so much of his time writing aggressive anonymous critiques of — and these are only the ones I’ve noticed — David Armitage, Steve Pincus, Ed Baptist, Sven Beckert. These are, or have become, high profile figures, who have produced substantial original work which has been widely received and even often forcefully and critically responded to. Why not publish these pieces with your name behind it? It begins to look rather mean spirited, even envious, and as if you are afraid to defend your position in public, or afraid that somehow whoever you are would diminish the respect with which your opinions are received?

Reply

I, on the other hand, am intrigued by a chap who seems so much more concerned with who people are than with what they have to say. The last line is the most intriguing.  Are you “afraid that somehow whoever you are would diminish the respect with which your opinions are received?” What does that mean? Are we absolved from considering the logic and evidence that someone presents if they are not a high profile figure? Or, perhaps he just takes the same approach to argument  that people like Baptist and Cowie do. All you have to do is note that someone is an economist (or a sociologist in the case of John Clegg) before dismissing their argument.

Milanovic’s response to the blogpost by Pseudoerasmus challenging his interpretation of the cause of World War I was to retweet it.

New Institutional Economics and Economic History

The University of Wisconsin La Crosse has posted several videos of talks given at a conference there on New Institutional Economics and Economic History

JOHN NYE (GEORGE MASON UNIVERSITY) “HUMAN CAPITAL, BIOLOGY, AND INSTITUTIONS” COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

PHIL KEEFER (INTER-AMERICAN DEVELOPMENT BANK) “COME TOGETHER? ECONOMIC DEVELOPMENT AND THE CHALLENGE OF COLLECTIVE ACTION” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

GARY LIBECAP (UNIVERSITY OF CALIFORNIA-SANTA BARBARA) “THE ROLE OF INSTITUTIONS AND HISTORICAL ANALYSIS IN ADDRESSING CONTEMPORARY PROBLEMS” COMMENT: F. ANDREW HANSSEN (CLEMSON UNIVERSITY)

KEYNOTE ADDRESS: LEE ALSTON (UNIVERSITY OF INDIANA) “WHERE THE PATHS INTERSECT? ECONOMIC HISTORY AND THE NEW INSTITUTIONAL ECONOMICS" COMMENT: JOHN WALLIS (UNIVERSITY OF MARYLAND)

The Ironic Origins of Libertarianism

From I Chose Liberty: Autobiographies of Contemporary Libertarians

“some liberty-loving soul had donated a copy of John Hospers’s Libertarianism: A Political Philosophy for Tomorrow (1971) to my local public library. While I doubt I would find Hospers’s book impressive today, at the time it was a thrilling read. I had never heard the “standard libertarian arguments” before. (Bryan Caplan)

 “When I was about thirteen, I decided I wanted to read all of the good books in the public library. …. At the public library I found Ayn Rand; my grandmother also recommended her to me. Capitalism: The Unknown Ideal had a big influence on me, as did Atlas Shrugged. Hayek and Rothbard followed shortly thereafter.” (Tyler Cowen)

“I had some unusual early influences. In the eighth grade I borrowed an H.L. Mencken book from the city library. I couldn’t understand why everybody didn’t think and write like he did. Also, I became enamored of the Barry Goldwater legend.” (Karen De Coster) 

“That experience led me to the public library and a host of books on economics, one of which was a book whose table of contents I could not understand and which had never before even been checked out: Mises’s Human Action.” (Robert Formaini) 

capitalism, institutions, and history

Related to yesterday’s post, here are a couple of reviews of Geoff Hodgson’s Conceptualizing Capitalism by Christian Barrere and Mehmet Kerem Coban.

Speaking of Geoff Hodgson (editor of the Journal of Institutional Economics), I just got an email from Cambridge University Press letting me know that BRADLEY A. HANSEN and MARY ESCHELBACH HANSEN (2016). The historian's craft and economics. Journal of Institutional Economics, 12, pp 349-370 was just published.

Is capitalism a useful concept?

Thanks to Tom Cutterham at the Junto for blogging about the Capitalism and Slavery session at the meeting of the Organization of American Historians.

I have been very critical of the “New History of Capitalism” NHC, which is the label that has been applied to much of the recent work in this area. Mostly, I have criticized it because it is bad history. The worst problems are that they tend to provide misleading historiography and simply make things up. The description of Beckert’s talk doesn’t do anything to alleviate these concerns.

It is particularly ironic that Beckert should point to “an active act of forgetting” since that is largely what he has been promoting. Rather than developing a truly novel argument, Beckert has simply tried to wipe out the work of earlier historians. The role of force has been prominent in the work of numerous scholars from Carlo Cippola’s Guns, Sails and Empire, to O’Rourke and Findlay’s Power and Plenty, and even Jared Diamond’s Guns, Germs and Steel. The use of force to maximize profits is the essence of Fogel’s analysis of slavery, which he repeatedly referred to as a dynamic capitalist system.  It is not just traditional economic historians that actively forgotten, John Clegg and  Peter James Hudson show how Beckert and Baptist also disregard the work of radical scholars.

The work of Edward Baptist is built on an even more misleading myth, the myth that he is telling the half that has never been told. Rather than responding to criticisms of his argument and evidence claims that people who disagree with him refuse to accept the legitimacy of slave testimony. Ed Baptist speaks for the enslaved, like the Lorax speaks for the trees. If you disagree with him you are denying the voice of enslaved people. The fundamental problem with Baptist’s claim is that the story has been told. Unlike the trees, enslaved people spoke for themselves. Charles Ball and Solomon Northrup don’t need to be filtered through Baptist. The half has been told. If you haven’t heard it, it’s because you chose not to listen until a professor at a prestigious university said it. Moreover, the economic historians that disagree with Baptist have not at any point rejected the statements of former slaves about the brutality of slaveholders. Their arguments are premised on the belief that enslaved people were brutally beaten to force them to work at maximum effort. Instead they argue that these accounts by former slaves to not provide evidence that increases in productivity were the result of improvements in torture that led to improvements in picking techniques over time.     

Even if the most prominent authors in this field were not doing really bad history, one can question the extent to which capitalism is a useful construct for analysis. In this regard, Caitlin Rosenthal’s attempt to define capitalism is an interesting development among new historians of capitalism and I am curious to see how it plays out. It is new development because to the extent that other historians follow her, I think it will force people to confront the more fundamental question: Is capitalism a useful concept for the analysis of societies?

Up to this point NHC have acted as if it is, but it is not clear to me that the work supports this conclusion. Beckert provides a good illustration of the problem. Beckert asserts that capitalism is not necessarily characterized by the things people normally associate with it:  wage labor, markets and contracts, property rights, and the rule of law. Sometimes it is associated with these things, but sometimes it is not. There are different capitalisms with different characteristics. But what makes a system capitalist as opposed to something else?  When discussing the expansion of cotton production in the Soviet Union, he explains that “Such recourse to the state in postcolonial and postcapitalist societies was not a return to the war capitalism of the eighteenth and early nineteenth centuries, but a sharpening of the tools and an enhancing of the methods of industrial capitalism.” (page 436) If the Soviet Union provides an illustration of industrial capitalism I’m left wondering if there is anything that is not capitalism. And if everything is capitalism what does the concept add to our understanding? Rather than using it as a tool, Beckert seems to toss the word capitalism in every once and a while, occasionally changing the adjective in front of it, to add a little flavor to the dish.  I think it is this sort of use of capitalism that prompted Lou Galambos to suggest that the NHC was primarily a clever marketing ploy.

Personally, I am skeptical of the extent to which capitalism can be a useful analytical concept. Economists, economic historians, and business historians do not seem to me to have had much success with it as a tool for analysis. Economics departments used to frequently have courses on Comparative Economic Systems, which were largely about comparing capitalism and socialism. Even before the fall of the Soviet Union and China’s turn toward markets these courses seemed to be running into a dead end. The differences among the capitalist and socialist countries often seemed more relevant the similarities. Economists generally turned to the analysis of specific institutions, rather than trying to classify entire systems.  It seems to me that much of the recent work in economic history has tended to undermine simple notions about capitalism. Things like individualism and private property seem to predate what had been thought of as the emergence of capitalism in England, and a lot of work since Pomeranz Great Divergence has challenged conventional notions about the significant differences between the West and the Rest.

I am not suggesting that historians abandon the study of capitalism. Historians can’t really avoid studying capitalism. “Capitalism” is a term that people have used for a long time to express their beliefs about certain kinds of economic systems since the early 19^th century (according to my very old copy of Raymond Williams Keywords). To the extent that ideas about “capitalism” have played an important role in shaping people’s thoughts and actions historians must study “capitalism.” But, at least for the most part, this hasn’t been what the “new historians of capitalism” have been doing. The NHC treat capitalism as an analytic concept. They write as if there is an objective thing called capitalism that by means of historical analysis they can make concrete statements about. 

Behavioral Whatever

I’m going to start a new discipline called behavioral physics. Unlike traditional physics, which assumes that objects just fly apart from each other, behavioral physicists recognize that a phenomenon they call “gravity,” prevents this from happening.  Or maybe I will create behavioral evolutionary biology based upon the concept of natural selection, rather than the assumption that everything just stays the same, which traditional evolutionary biologists rely on. The way a physicist or biologist would feel reading those sentences is the way that I feel most of the times I read about behavioral economics.

The latest irritation is an article from the New York Times about getting doctors to stop over-prescribing antibiotics. Getting doctors to stop over-prescribing antibiotics is a good thing. Personally, I worry more about the negative consequences of overuse of antibiotics than I do about the negative consequences of the overuse of painkillers. On the other hand, their suggestion that they are able to solve this problem because behavioral economics has remedied the flaws of traditional economics is nonsense.

They describe how various attempts to get doctors to stop prescribing unnecessary antibiotics have failed because they “are all based on the assumption that physicians are rational agents who will do the right thing if provided proper information and incentives. But,” they ask, “what if doctors are a little irrational, like the rest of us? They may over-prescribe antibiotics out of an unrealistic fear that the patient could eventually develop complications and need them, or because it is easier than arguing with a patient who insists on getting them.” The situation they just described is practically a definition of a rational choice. Prescribing the antibiotic has a benefit for the doctor (the patient is happy) and no cost to the doctor. 

Nevertheless, they go on to explain that “Over the last few years, our research team has developed several new approaches to reducing unnecessary antibiotic prescribing, drawing on insights from behavioral economics and social psychology. These disciplines acknowledge that people do not always behave rationally and are strongly motivated by social incentives to seek approval from others and compare favorably to their peers.” I have no idea what they mean by rational.  There is nothing irrational about being motivated by social incentives or wanting to compare favorably with peers. One of the characteristics of traditional economics is that economists don’t care what your preferences are, or where they came from.The only thing that is really required for rational behavior is that you respond in predictable ways to changes in the costs and benefits of a choice, which brings us to the interventions they introduced.

In one of their interventions “whenever doctors prescribed an antibiotic that was not clearly called for by the diagnosis, the electronic health record system asked them to provide a short “antibiotic justification note.”” Wait a minute, did they just say that they increased the cost to the doctor of prescribing an unnecessary antibiotic, and doctors chose to write less unnecessary prescriptions. Let me see if I’ve got this straight. As the cost of doing something increases, other things equal, people will do it less. Thank God for behavioral economics. If only someone had thought of this before, they could have given it a name like “the law of demand” and taught it in every principles of economics course.

Next week, I think I’ll invent behavioral history, which, unlike traditional history, relies on critical analysis of primary sources. You can play along too. It’s easy. Take any discipline, x. Identify one of the primary features of that discipline, y. Assert, contrary to all evidence, that x does not do y. Claim that the new discipline “behavioral x” does y. Repackage some standard results from x as startling new results of “behavioral x.”

Stories about economic historians

Here is an article in the Chronicle of Higher Education about Deirdre McCloskey. I have to say that I feel the same way about Deirdre’s recent work that Jim Holt does: "She has read the library, and won’t let you forget it." I am afraid many people no longer enjoy listening to her, even when she might be right. The problem is less the move away from cliometrics and toward culture than it is the voice that she chooses to use. Here, for instance is Noah Smith’s reaction to McCloskey’s review of Piketty.

This is a long but fascinating story about the economic historian Nathaniel Leff.