Emancipation and Aggregate Economic Gains

 

 I recently listened to Rick Hornbeck on the Chicago Booth Review Podcast in the episode

An Economist Debunks Gone With the Wind

Its kind of  a silly name for the episode, but Hornbeck does a great job of describing important research by himself and and Trevon Logan. The paper calls for a significant reconceptualization of the economics of slavery. Hornbeck and Logan present slavery as a giant externality in which the labor of enslaved people was dramatically misallocated because slave holders did not have to take into consideration the full cost of their decisions. Consequently, although studies of emancipation have traditionally focused on the negative effect on production in the South, Hornbeck and Logan portray it as the biggest increase in productivity in American economic history.

You can access the working paper One Giant Leap: Emancipation and Aggregate Economic Gains  through the Becker Friedman Institute for Economics

Word on Fire/ Pants on Fire

 

I got an email notification last week for a new episode of Bishop Barron’s Word on Fire podcast  asking  Is There a Catholic Antidote to the Crisis in Higher Education

“According to Fortune magazine, overall undergraduate enrollment experienced the steepest rate of decline on record from 2019 to 2022, and it has only worsened since then.

There are several explanations, but one cause is entirely self-imposed: most universities and colleges have now replaced education with ideology, subverting the search for truth with political indoctrination.

In this episode of The Word on Fire Show, Bishop Barron and Matthew Petrusek, Senior Director of the Word on Fire Institute, discuss the ideological takeover of higher education and how the Catholic conception of the university can help provide an antidote.”

I’m afraid that before providing an antidote they should put some more work into their diagnosis. The episode does not provide any evidence that “most universities and colleges have now replaced education with ideology, subverting the truth with political indoctrination.” 

What it does provide are some references to the recent congressional testimony of some Ivy League presidents and some vague allusions to wokeness. Given the argument that students are not attending college because faculty are pressing a certain ideology and the Bishop’s example of the prevalence of this ideolog at Ivy League schools they must be at the forefront of the decline in enrollment. Anyone who knows anything about higher education knows that nothing is further from the truth. Ivy League schools are seeing record numbers of applications, leading to record low acceptance rates. They are doing just fine.

The schools that are seeing declining enrollments are less prestigious schools, especially smaller regional schools. The students who aren’t going don't express concerns about ideology; they are concerned about stress and mental health, the rate of return on their investment (which evidence still indicates is high), and their ability to pay. See, for instance, Exploring the Exodus from Higher Education

People will always be able to find anecdotes about some college course that they don’t like or some statement by an administrator that sounds preposterous, but as someone who has taught in colleges for more than 30 years, I just don’t see the world that Bishop Barron and other purveyors of the wokeness boogeyman want people to believe in. The most popular major in the United States is business, accounting for around 1 in 5 undergrads. Some of the other top majors are engineering, computer science, and nursing.  Are we seriously to believe that these schools are not in fact preparing people to be managers, accountants, engineers, computer programmers, data scientists, nurses, teachers, etc. but are instead just indoctrinating them in a political ideology?

 

If Bishop Barron really wants to play a positive role in higher education he should try to do better than this.

Planet Money on the political economy of rum in the U.S.

 

Planet Money has a nice story about rum production (The billion dollar war behind U.S. rum) in Puerto Rico and the Virgin Islands, particularly the consequences of Virgin Islands deal to lure Captain Morgan away from Puerto Rico.

It should be of interest to anyone paying attention to Youngkin’s attempts to lure the Capitals and Wizards away from D.C.

It is also a nice example of a real world prisoners dilemma type game.

What is Capital? Part 1: Bank Capital

 

This is from The New York Times article Why Big Banks (and Some Odd Allies) Oppose a Plan to Protect Banks:

“Regulators are calling for an increase in the amount of capital — cash-like assets — that banks have to hold to tide them over in an emergency to avoid needing a taxpayer-funded bailout like the one in the 2008 financial crisis.”

 

No! No! No! No! No!

Bank capital is not “cash like assets.” Those are reserves. Reserves are money that banks keep either as cash or as deposits with other banks. They are cash like assets. And there are reserve requirements regarding the percentage of deposits that have to be kept as cash like assets, but those are not capital requirements.

A bank's capital is just the difference between the value of the bank’s assets and its liabilities. In other words, it is the equity the owners (shareholders) have in the bank. Capital requirements regulate the size of the capital. The most basic capital requirement is a leverage ratio, requiring that capital be equal to a certain percentage of assets.

Capital requirements are intended to deal with the threat of insolvency. A bank becomes insolvent when the value of its assets falls below the value of its liabilities, primarily the money it owes to depositors.

Why would the value of assets fall? The investments banks make are risky. The prices of securities that they buy, stocks or bonds, can go up, but they can also go down. If the bank owns stocks and bonds and the prices of those securities fall, the value of the bank’s assets falls. Part of the problem faced by Silicon Valley Bank was that it purchased a lot of long term bonds before interest rates started to increase, and as interest rates rose the price of those bonds fell. The loans banks make can also decrease in value. If the bank loans money to a person or a business and they do not repay the loan, the value of that asset (the loan) falls. In U.S. history, bank runs, (people racing to the bank to withdraw their money) tended to occur during economic downturns when falling security prices and failing businesses meant that the value of bank assets were declining. Under these circumstances people had greater reason to fear that some banks might become insolvent and not be able to repay their deposits. Capital helps protect against insolvency and banking crises.

Capital helps protect against insolvency by providing a cushion when asset prices fall. Assume you have $100,000 in assets, $80,000 in deposits and $20,000 capital, if the value of your assets falls by $15,000, you still have more than enough to cover all of your deposits. On the other hand, if you had $100,000 in assets, $90,000 in deposits and $10,000 capital, a decrease in value of $15,000 would leave the bank insolvent. In addition, it can be argued that banks have less incentive to take excessive risk when they have more of their own money at stake. They have more skin in the game.

Financial institutions, including banks, generally recognize the benefits of capital. I have written a lot about the history of New York City trust companies and one of the things they were most likely to mention in advertisements was the size of their capital. They called it capital and surplus, but it meant what we mean when we talk about a bank’s capital today. They used their capital to signal their strength and stability.

            There is, however, also a cost of higher capital: a lower rate of return. A higher capital requirement means that you have to rely more on bank owner’s money and less on borrowed funds (deposits). The extent to which you rely upon borrowed funds is called leverage. To see how leverage affects return on investment consider this example. You know of an investment that will return 10%. You have $100 you can invest. You do so and end up with $110, earning that 10% rate of return. Now imagine you can borrow another $100 from someone else at 5%. You now use their $100 and your investment of $100 for a total of $200. You get back the $200 plus 10% of 200, $220. You have to give the person you borrowed from $105, leaving you with $115. Your $100 investment now earned $15 for a 15% rate of return. That is the power of leverage. Of course if that investment you made doesn’t pay off we are back to worrying about insolvency. You still owe $105.

            So what is the story in the New York Times actually about. Its really about how complicated capital requirements can get. Toward the end of the article they point out that some suggested regulations could decrease certain kinds of lending. This is because capital requirements are no longer set based upon a simple leverage ratio that applies to everyone. Modern capital requirements recognize that not all investments are equal. Some are riskier than others. So regulations assign different risk assessments to different assets and then provide a risk weighted capital requirement. More risky assets, more capital. The argument of opponents of increased capital requirements is that these risk assessments could discourage banks from making some kinds of loans that we actually want to promote. In other words, it could get harder to get a mortgage to buy a home or take out a loan to start a business.

            I’m not going to try to answer which side is right. This isn’t about whether banks should have capital requirements, its about how much capital is enough. That is a hard question. My objective here has been to clarify what people are talking about when they are discussing banks and refer to capital. The post is titled part 1 because this is not the only meaning of capital. In other contexts, the meaning of capital is very different, and I plan to discuss that in the future. Who knows, eventually I might even take on the meaning of capitalism.

Richard Thaler and Behavioral Economics

 

I was listening to a recent episode of Hidden Brain the other day about anomalies, specifically things that are supposedly anomalies in economic theory. The guest was Richard Thaler, who is famous as a behavioral economist and Nobel Prize winner. The discussion reminded me of some of the problems that I have with some work that is described as behavioral economics. One of the stories he told was about Richard Rosett, a professor of his when he was in graduate school at the University of Rochester. Rosett collected wine. He wouldn’t spend more than $20 or $30 on a bottle, but sometimes a bottle he had purchased would increase in price to as much as $200. There was a wine shop in Rochester that would have purchased these valuable bottles from him, yet he would serve them rather than sell them, despite the fact that he would not spend $200 on a bottle. Thaler regards this as an anomaly that contradicts economic theory. The claim is that economic theory says that cost is the value of the foregone opportunity. It doesn’t matter whether you paid $200 for the bottle you are serving or gave up the opportunity to sell the bottle for $200. Either way the cost is $200. That’s all well and good, but it is ignoring the value of the story, which is odd because Thaler claims stories are his thing.

I assume Thaler knows this story because Rosett told it to him. Serving a $200 bottle that you paid $20 for is a very different story than the story you tell when you serve a $200 bottle that you just bought. The first is about your skill in purchasing good wines, the second is bragging about your wealth. Everyone can enjoy the first story. You shouldn’t tell the second story. The other possibility is to sell the $200 bottle and buy more $20 bottles to serve. Again, this isn’t such a great story: “I had a $200 bottle of wine, but I sold it and bought some less expensive wine to serve you.” Following Thaler’s notion of economics would have cost Rosett the pleasure he gained from telling the story to people like Thaler.  Economists assume that people try to maximize their utility not their wealth. I am inclined to believe that Rosett was in fact behaving exactly as economic theory would predict he was maximizing his utility.

I think part of the problem with the wine story comes from not appreciating the many ways in which people can get satisfaction (utility). This showed up later in their discussion of tipping. From the standpoint of economic theory there is nothing anomalous about leaving a tip. If you believe that leaving a server $20 will give you more satisfaction than alternative uses of that $20, that is what you should do. One of the silliest notions that some people try to attribute to economics is that economists think people only care about their own material gain. Yet nothing could be further from the truth. Don’t take my word for it. Here is University of Chicago economist and Nobel Prize Winner Gary Becker:

“One basic query is: What is meant by rational behavior? Consider first what is not meant. Certainly not that people are necessarily selfish, “economic men” solely concerned with their own well being. This would rule out charity and love for children, spouses, relatives or anyone else, and a model of rational behavior could not be so grossly inconsistent with actual behavior and still be useful.”

Economic theory doesn’t say what people should and should not get satisfaction from. It just says that whatever people get satisfaction from their choices will tend to respond to changes in the constraints they face.

I’m not saying there is no value in behavioral economics, but far too much attention is given to these little stories that supposedly contradict economic theory when in fact they do no such thing.

P.S. I should mention that I also knew Rosett, though I’m sure Thaler spent far more time with him than I did. Rosett was a Dean and Professor of Economics at Wash U when I started the Ph.D. program there. I only knew him because he was friends with Doug North and came to the Economic History Lunch every Friday. The man I met did seem to enjoy a good story.

History's Replication Crisis

 

Anton Howes recently asked Does History Have a Replication Crisis?  The question is one that Howes has been concerned with for some time, but the immediate impetus for the essay was the publication of Jenny Bulstrode’s Black metallurgists and the making of the industrial revolution published in the journal History & Technology. Bulstrode claims that,

“Between 1783 and 1784, British financier turned ironmaster, Henry Cort, patented a process of rendering scrap metal into valuable bar iron that has been celebrated as one of the most important innovations in the making of the modern world. Here, the concern is the 76 Black metallurgists in Jamaica, who developed the process for which Cort took credit.”

Howes describes the innovation as a process “to more easily convert scrap iron into new bar or wrought iron — a higher-quality iron that had had various impurities beaten out of it with hammers — by bundling the scrap together, heating it, and then passing it through grooved rollers, rather than the more usual flat ones, stretching and smoothing the sides and edges of the heated metal so that the resulting bars became “perfectly welded at the edges and throughout” and “completely welded at the sides, without a crack, into one mass, perfectly sound to the centre”.” Not surprisingly, the discovery that a famous inventor of an important process had in fact stolen his invention from enslaved people spread quickly.

On NPR you can listen to How Henry Cort stole his iron innovation from Black metallurgists in Jamaica

In the Guardian you can read about how Industrial Revolution iron method ‘was taken from Jamaica by Briton’

At The World you can hear how Historian uncovers the Jamaican metal workers behind Industrial Revolution

At New Scientist you can read about how English industrialist stole iron technique from Black metallurgists

     Howes, however, was skeptical of the claim ( The Cort Case) suggesting that the evidence presented in the paper did not warrant the conclusion that the innovation in question had been developed by enslaved workers and then stolen by Cort. Oliver Jelf (The origin of Henry Cort’s iron-rolling process: assessing the evidence) looked at the sources cited by Bulstrode and concluded that there was a more fundamental problem. The sources simply did not say what Bulstrode claimed they did. For instance,

 

Jelf did not simply claim that the sources do not support Bulstrode’s argument, he transcribed and presented the sources in the paper, leading Howes to state that “What I simply cannot fathom, now that I’ve read her sources thanks to Jelf’s transcriptions, is how Bulstrode arrived at her narrative at all (Does History Have a Replication Crisis?).”

Ian Leslie (Stories are bad for your intelligence: How Historians (and Others) Make Themselves Stupid) has theory for how Bulstrode came to the narrative. He traces it to problems with stories and  story telling. Leslie says that,

I doubt that Bulstrode set out to deceive. My guess is that she came across a few suggestive fragments in her reading (the ‘cousin’ of Cort travelling from Jamaica to England) and wanted so badly to make them into a story which fitted her ideologically determined prior - that the British stole ideas from those they enslaved - that she got carried away, fabricating causes and effects where none existed.”

He thinks more of the blame should fall on the peer reviewers. Leslie suggests that,

It’s one thing for a young and passionate academic to make mistakes; it’s quite another for a series of experienced academics to let her make them. The paper had two anonymous peer-reviewers (Bulstrode thanks other historians in an endnote, though they may not have read the paper). Even to an ignorant reader like me, the paper just smells funny - it has the aroma of the fantastical. How on earth did these experts read it without becoming suspicious? Why didn’t they double-check its remarkable claims?

I can’t agree with Leslie’s argument. I don’t think that stories or peer-reviewers are the fundamental problem here. 

We need to tell stories. Often the answer to “Why did this happen?” is a sequence of events, a story about how it came to happen. Nor can the blame for misleadingly citing sources be pushed on to the referees. Although I am an economist, I have probably written more referee reports for books and papers written by historians than economists. I will note it in my report if I think an author incorrectly uses a source that I am familiar with.  But I can’t check every citation. I can’t even check the citations to crucial claims if it requires a trip to the archive. Experts in the field should be familiar with important secondary sources, but you can’t know every primary source. You certainly can’t run off to check on every novel primary sources that someone has discovered. You have to be able to trust the author to honestly report what is in the sources that that they cite.

Leslie’s concern about the siren song of stories makes him overly generous with Bulstrode. A professional historian should not get carried away with enthusiasm to the point that they try to support claims with references to sources that do not actually provide any support for those claims. Actually, amateur historians and undergraduate students shouldn't do that either. Historians must tell stories, but they must tell stories that are constrained by the sources. If you do not want your story telling to be constrained by the historical evidence you should be forthcoming and admit that your genre is historical fiction, not history.

I have frequently said that I think honesty is the most important trait for a historian. In economics and other quantitative social sciences I can say “Send me your data.” Many journals require making the data available. But a historian might cite documents that I would have to travel to multiple cities, states, or even countries to access. To be of any use to me I need to be able to trust that you have honestly represented the sources that you cite. Once you have lost my trust you are worthless to me as a historian. Even if I can point to things that you got right, I can’t be sure about anything that I don’t already know. I can’t learn anything from you.

Anton Howes suggests making history more like quantitative social sciences. Try to make copies of relevant sources available. Now that so many people have digital images of the primary sources they use this is at least imaginable. Still, it is not a panacea, as demonstrated by recent revelations on honesty research (see datacolada.org.) Nevertheless, to the extent that it can be done, it would be great, both for the credibility of current research as well as a resource for future research.

But there should also be repercussions. Sadly, I doubt that there will be. Anton Howes notes other historical myths that seem immune to revision in response to evidence. I and others have written a great deal about one historian who in an influential book did not honestly represent what was in primary or secondary sources, going well beyond honest mistakes driven by youthful enthusiasm. As best I can tell there were absolutely no repercussions for him. Other historians still cite the book and praise the author. 

I hope that I am wrong; I hope that many historians read Howes' Does History Have a Replication Crisis? and take the question seriously.

Economic and Business History Seminars

Some have not yet been updated for the current academic year. Let me know of any that should be added.

Yale Economic History Workshop

Harvard Seminar in Economic History

Hagley Research Seminars

Northwestern Seminar in Economic History

Newberry History of Capitalism Seminars

Harvard Business School Business History Seminar

Princeton Economic History Workshop

Washington Area Economic History Seminar

NYU Stern Economic History Seminar

Queen’s University Centre for Economic History

LSE Economic History Seminars

Economic and Social History at Cambridge

Some thoughts on a liberal arts education

 

I recently listened to an episode of the Podcast Word on Fire in which Bishop Robert Barron and Brandon Vogt discussed Why Liberal Arts Matter. Although I agreed with their conclusions regarding the need to support the humanities, I disagreed with their overall interpretation of a liberal arts education.

Bishop Barron defines liberal arts by going back to the root of the word liberal in the Latin word liber, which means free. He argues that in the context of  liberal arts, free refers to disciplines that are free from utility. He provides as examples of liberal arts English and Philosophy, which he claims do not have practical utility, but are higher sciences because they are simply good in themselves. Vogt notes that the liberal arts are “sometimes called the humanities.” I think the notion that the liberal arts and the humanities are synonymous is actually fairly common. Leaving aside the claim that the humanities do not have utility, I don’t think that making liberal arts and humanities synonymous is supported by the traditional use of the term liberal arts, and I do not think it is a useful definition for the present.

The traditional understanding of the liberal arts was that it referred to the education appropriate to a free person, a person who was fully eligible to participate in society.  One traditional view held that there were seven liberal arts: grammar, logic, rhetoric, astronomy, arithmetic, geometry, and music.  These clearly do not coincide with what we now regard as the humanities. They suggest, instead, that a free person needed a broad set of skills and knowledge, including critical thinking, clarity of expression, and an understanding of the world they lived in.

Barron’s view suggests that there are disciplines that are liberal arts and disciplines that are not. You could, for instance, obtain a liberal arts education by studying only English, or only Philosophy, or somewhat more broadly, only the Humanities. If on the other hand, if you think of a liberal arts education as an education that prepares someone to fully participate in society, studying only the Humanities would not qualify as a liberal arts education. A liberal arts education in terms of the original definition, the education appropriate to a free person, refers to the totality of the education rather than specific disciplines. It requires an education that promotes critical thinking, clarity of expression and breadth of knowledge associated with the original conception of a liberal arts education. An education only in the humanities will not achieve this goal.

Things have changed since the Classical World in which the idea of a liberal education was developed. In general, we no longer think of free people as a subcategory of the population. But it is still reasonable to ask what sort of education will prepare people to fully participate in society. Students do need to study the humanities, but they also need to study the social and natural sciences, and mathematics. The sort of disciplines that Barron would contrast with the liberal arts, such as engineering, computer science, and business are subjects that people increasingly need some knowledge of to be informed citizens. One could even argue that education that leads directly to an income is now an essential part of a liberal arts education. Unlike the past a free person is less likely to able to depend upon their inherited wealth and status for their livelihood.

In other words, I don’t think it is particularly productive to divide disciplines into those that are liberal arts and those that are not. Instead, we should think of a liberal arts education as one that includes numerous disciplines, giving students a wide array of skills and the breadth of knowledge to live successful and fulfilling lives and make valuable contributions to society.