Research Paper
Your research paper is due on Friday May 9th. In addition to sending an electronic copy to both instructors, be sure to put a copy in Professor Eichengreen’s mail box in Economics Department reception on the 5th floor of Evans Hall. The office is open 9:00-4:00. The paper should not exceed 25 pages. This deadline will not be changed; plan in advance.
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Brad DeLong and Barry Eichengreen Spring 2014 :: University of California, Berkeley :: Wednesday 1:00-3:00 p.m. :: 597 Evans Hall
Introduction
Economics 210a is required of Ph.D. students in the first year of the graduate program. The course is designed to introduce a selection of themes from the contemporary economic history literature ( not to present a narrative account of world economic history). Emphasis is on the insights that history can provide to the practicing economist.
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Brad DeLong and Barry Eichengreen Spring 2014 :: University of California, Berkeley :: Wednesday 1:00-3:00 p.m. :: 597 Evans Hall
Readings:
Readings are available either on the web or, where there exists no web-based copy, at Graduate Services (http://www.lib.berkeley.edu/doemoff/grad/index.html) at 208 Doe Library. Access to readings available through JSTOR and other proprietary sources may require you to log on through a university-recognized computer and enter your Calnet ID. There can be high demand for the readings on reserve at peak times, and the library can make available only limited numbers of copies. In past years some students have found it useful to purchase some of the books from which material is assigned through their favorite online book seller and to assemble the materials for reproduction at a local copy shop.
Week 1: January 22. The Malthusian Economy (Feudalism and Manorialism; Guilds and Trade)
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Extra Reading for April 20, 2011:
Previously Assigned Readings for April 20, 2011:
Paul Krugman (2006), "Introduction" to John Maynard Keynes, The General Theory of Employment, Interest and Money. http://tinyurl.com/dl20090112z
John Maynard Keynes (1926), "The End of Laissez Faire." http://tinyurl.com/dl20090112ad
Mancur Olson (1996), "The Varieties of Eurosclerosis: The Rise and Decline of Nations Since 1982," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945, (Cambridge, Cambridge University Press), pp.73-94. http://tinyurl.com/dl20090112x
Barry Eichengreen (1996), "Institutions and Economic Growth: Europe Since 1945," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945 (Cambridge University Press), pp. 38-72. On reserve at Graduate Services, 208 Doe Library. http://tinyurl.com/dl20090112x
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Econ 210a: Extra Reading for April 20, 2011: Richard Ericson (1991), "The Classical Soviet-Type Economy" http://www7.esc.edu/vvernon/ericson91.pdf
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Econ 210a Memo Questions for April 20 and April 27, 2011:
April 20: A couple of weeks ago Martin Wolf asked Lawrence Summers a question:
Wolf: "Wouldn’t a reasonable non-economist conclude... here we have this fantastically dangerous [macroeconomic-financial] engine, which you don’t fully understand, therefore... you just cannot risk deregulating it. It has to be under government control, very tightly, all the time. How would you tell a layperson that that’s not a reasonable response?"
And Summers answered: "Well, in some ways it probably is a reasonable response. The last time [we had such a crisis, the Great Depression] – this is an overstatement – but this was why Harry Dexter White was a communist.... [A] very large number of thoughtful people who were communists in the 1930s, because they looked and they saw that just letting the market rip had ended in disaster.... [T]hey convinced themselves that having not just the financial system but the processes of production be controlled and planned as they were in the Soviet Union that had not suffered a similar unemployment problem, would produce a better outcome. And that did not prove to be conspicuously successful."
Were the social-democratic "mixed economies" that developed after World War II a different species of animal than either market classical liberalism or state socialist planning, or are the "mixed economies" just an incoherent mix of organizing principles?
April 27: A couple of weeks ago Lawrence Summers said, of the period between 1968 and 1984:
Summers: "[It was] a Keynesian disaster... the crude application of totally demand-oriented policies that... produced an inflationary disaster..."
To what degree was he right and to what degree was he wrong about the episode of inflation that triggered the election of Reagan and Thatcher and the rightward political shift of the North Atlantic?
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"How important were federal aid to the states and federal initiatives to resolve the housing crisis for the recovery of the U.S. economy post- 1933? Does this historical experience contain any lessons relevant to post-2007 policy (what if anything does it suggest that the federal government should have done differently)?
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Econ 210a: Memo Question for March 30:
What were the "rules of the gold standard game?" To what extent were they obeyed or, to the contrary, violated? If they were violated, how then did the gold-standard system survive?
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Econ 210a: Memo Question for March 16: Read Walter Bagehot's Lombard Street. Think about the recent financial crisis and economic downturn. To what extent did policymakers in the recent financial crisis follow the model of crisis management set out by Bagehot, and to what extent did they deviate from it?
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Sanford Jacoby, Susan Carter-Elizabeth Savoca and John James provide three different pictures of labor markets in the United States toward the end of the 19th century. How and why do they differ? Can their views be reconciled?
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Ken Snowden's article on the late-19th century mortage market in the United States suggests parallels with the Subprime Crisis. What are the important parallels? How far should one push them?"
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Readings:
W. Arthur Lewis, Evolution of the International Economic Order (Princeton, Princeton Univ. Press, 1978) http://j-bradford-delong.net/2008_pdf/Lewis_Evolution_A.pdf http://j-bradford-delong.net/2008_pdf/Lewis_Evolution_B.pdf
Jeffry G. Williamson, "Globalization, Convergence, and History" Journal of Economic History 56 (1996):227-306 http://links.jstor.org/sici?sici=0022-0507%28199606%2956%3A2%3C277%3AGCAH%3E2.0.CO%3B2-T
Douglas Irwin (1998), "Did Late Nineteen Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry," NBER Working paper no. 6835 (December) http://www.nber.org/papers/w6835
Writing Assignment:
The economies settled from northwestern Europe--the United States, Canada, Australia, New Zealand--were all resource rich. So why did they industrialize early? Why didn't they simply become gigantic Denmarks, shipping agricultural and other resource-based products to the European industraIl powers in return for manufactures?
DeLong: Comment on Irwin:
Douglas Irwin examines the late-nineteenth century U.S. tinplate industry as a case study of the effects of protection. Were there dynamic economies of scale or of learning--"infant industry effects"--that were large enough to make the imposition by the McKinley tariff of high duties on imported tinplate a socially efficient policy for the late nineteenth century United States?
This is an interesting and useful paper, and Doug Irwin does a good job of wrestling with this particular--single case study--problem. But it is worth pointing out that the process by which Irwin arrives at this particular case carries a lot of information, a lot of information to the effect that this case is unusual--that any conclusions to be reached from this case cannot be generalized to the late nineteenth-century economy, and that even if Irwin had found the tinplate tariff to be economically efficient, such a finding would have done little or nothing to alter our standard--free trade--assessment of the consequences of America's late nineteenth century tariffs for economic development.
As Irwin rightly points out, the tinplate industry is one of the few places to examine the infant industry argument as applied to the late nineteenth century economy because the tinplate industry is one of the few industries that was genuinely an infant, and thus one of the few industries where you can apply the infant-industry presumption of extraordinarily valuable social learning as an economy learns to handle the technologies needed to produce a new product. Other American industries were already established by the late nineteenth century. You can argue that they were still subject to dynamic external learning-by-doing effects, but be careful! To the extent that the industry you are examining produces goods that are then used by other industries--produces capital goods or intermediate inputs--you must face the argument that the customer industries would have benefited from higher scale, and thus what you gain in dynamic external learning-by-doing upstream in the production process you lose in foregone dynamic external learning-by-doing downstream.
Outside of the very narrow, very young, truly infant-industry context, any argument for the positive effects of protection working through learning-by-doing has to explain why the particular industry protected exhibits stronger such effects than do its customers. And such an argument is rarely made. Thus in the modern literature we find such examples as, say, sociologist Peter Evans, who in his Embedded Autonomy praises Brazil's policy of excluding computer imports as a magnificent success because it enables Brazilian producers to acquire the capability to produce a VAX-level minicomputer for four times the world price at the end of the VAX's life as a viable commercial product. He simply does not see the negative impact on all of those industries--from programming to retail sales--that would have benefited from access to foreign computers and would have undergone similar processes of learning how to handle post-industrial technologies had they not been sacrificed to the development of the Brazilian hardware industry.
It is for this reason that most discussion of optimal tariffs in the study of U.S. economic history has focused on the pre-Civil War period--on the antebellum textile spinning and weaving industries and on the cotton tariff. For these industries are (or are close to) consumer-goods industries, hence there are no downstream producers whose external learning-by-doing effects can be disrupted, and these industries were truly infant.
And it is for this reason that the opening of Irwin's paper, in which he details the difficulty of finding an industry sufficiently infant for the optimal tariff infant industry argument to apply in late nineteenth century America, goes a long way to deconstructing any possible attempt to then use pro-protection or ambivalent conclusions from the tinplate industry to draw conclusions about the McKinley and other tariffs as a whole.
In fact, even the tinplate industry is not ideal from Irwin's perspective. Consider that leading member of the Tinplate Consumer's Association of the United States: the Standard Oil Company. If ever there was an organization dedicated to the ruthless exploitation of all possible economies of scale and of scope, it was Microsoft--sorry, it was the Standard Oil Company. You ship oil in metal barrels, after all, and sell it in tin cans. Irwin doesn't consider the drag imposed on dynamic learning-by-doing downstream as a result of the high tariff-driven spike in U.S. tinplate prices in the early 1890s.
Once Irwin turns to the detailed workings of the tariff, I have little to say in comment on the paper besides "I agree." The methodology is interesting, and the conclusions appear solid and robust. The McKinley tariff raised foreign producers' costs, but by no more than the growth of U.S. metallurgy was lowering U.S. producers' relative costs in the course of a single decade. All the McKinley tariff did was advance the trend of foreign relative to domestic costs by a decade. Moreover, the McKinley tariff's longevity was uncertain--much more uncertain than were the cost savings produced by the ongoing course of industrial development.
Hence the conclusion: the McKinley tariff at most shaved a decade off of the time needed for the U.S. to develop a tinplate industry. And--at least as Irwin calculates the welfare economics--the McKinley tariff was higher than would have been desirable to compensate for the higher-than-market tariff-driven costs of the metal inputs needed to produce domestic tinplate.
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The temperate economies settled from northwestern Europe--the United States, Canada, Australia, New Zealand--were all resource rich. So why did they industrialize early? Why didn't they simply become gigantic Denmarks, shipping agricultural and other resource-based products to the European industrial powers in return for manufactures?
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Memo question for 210a for next week (to be posted on THURSDAY morning) is:
The scarcity of labor in the United States in the first half of the 19th century is said in the literature to have been responsible for the country's distinctive technological development. Does this argument make sense logically? Does the evidence support it?
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Econ 210a: Memo Question for February 9:
What, if anything, remains "revolutionary" about the British Industrial Revolution? Can it still be viewed as a decisive turning point in economic history?
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Econ 210a: Memo Question for February 2, 2011:
Adam Smith confidently predicted that slavery was on its way out for economic reasons. In commercial society, manumission would be the rule because the carrot of working for yourself is much more efficient than the stick of being whipped by others. Was Smith right? If you conclude he was wrong, why was he wrong?
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"The treasure captured outside Europe by undisguised looting, enslavement and murder, floated back to the mother-country and were there turned into capital."
-- Marx, Capital, Vol. 1 Ch. 32.
Do the other assigned readings provide any basis for assessing the general truth of this passage from Marx? In what sense did colonial trade in the 1497-1800 period contribute to capital formation in Europe?
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I have been following the discussion of Karl Polanyi, and I have been worried because it seems to me that of readers are missing the point. I think that Polanyi does have an interesting argument. But it is being hidden from many because of his terminology. The underlying point is that it used to be the case--painting with a very broad brush--that what happened in economic transactions was in large part determined and guided by sociological and political relationships, but that now--again painting with a very broad brush--the principal direction of influence it is reversed: politics and sociology are more shaped by economic factors than they in turn manage to shape what happens in economic transactions.
In Polanyi's vocabulary, this is a transformation from an "embedded" to a "market" economy. And many readers do not hear Polanyi's point because their first reaction is: "We have had markets since time out of mind: what was the agora of Periclean Athens?"
I'm not sure how true Polanyi's point really is. But I do think it is worth thinking about.
What does Polanyi mean by a claim that a market is "embedded" in a society? I think of it this way: In the past two weeks my wife and I have hired three young women--a 22 year old, a 16 year old, and a 12 year old. The 22 year old is a recent graduate of Berkeley, just back in this Bayarea magalopolis from several months in China, where she was a film producer's assistant. We hired her to give our children swimming lessons (and she occasionally babysits as well). She is a superb swimming teacher and our children adore her. We pay her $40 an hour as a swimming teacher; we pay her $10 an hour as a babysitter. The 16 year old just moved to Bayarea from Mexico city for her last two years of high school. She and her parents moved up here so that she could get a U.S. education for the lats two years of high school; they are living with her sister, who works as an architect in San Francisco. We employ her as an evening babysitter. We pay her $7 an hour as an evening babysitter. The 12 year old lives in our neighborhood. She put up a sign at the local playground saying that she was a responsible house watcher, plant waterer, and pet feeder who was eager to earn money. We hired her to watch our house while we went on vacation. Her mother would not let us pay her more than $4 an hour.
We were matched--by accident--with the 22 year old last summer, when we registered for swimming lessons through Berkeley. When we employ her on our own, we pay her what we would have paid had we hired her through Berkeley. This gives her triple the hourly income she would receive were she still working as a swim teacher for Berkeley. But we are in the business of paying a fair price for her services as a swim teacher: we were impressed with and grateful to her for the job she did last summer, and so hired her because we feel we owe her for making our children happy and because she is looking for income. So we pay her a fair price--even though we could get a low-overhead private swim teacher for much less--because our relationship has a large element that is probably best seen as a gift exchange.
We found the 16 year old via reference in conversations at the playground. We pay her $7 an hour--when the market equilibrium rate, to the extent there is a market, is closer to $5.50 an hour--because we want her to value her employment relationship with us and contribute more than just her raw labor power to the job of babysitting our children. You might say that we are in an "efficiency wage" equilibrium. Or you might say that we want to be the kind of parents who pay their babysitters a generous wage.
The 12 year old is trying to earn money on her own for the first time. The principal determinants of her wage are what her parents will let her accept--they don't want her to believe too soon that getting money from work is incredibly easy. Yet from our perspective the amount we pay her is a very small fraction of the cost to us in hassle and in dollars of finding an alternative person to look in on the house.
In none of these cases were the terms and conditions of employment determined by anything like supply-and-demand equilibrium in a competitive auction market. In all of these cases what we pay is determined much more by what we feel is an appropriate level of earnings for someone of her age and skill in that employment--hence the 4:1 gap between wages as a swim teacher and wages as a babysitter; hence the 3:2 gap between what we pay a 22 year old and what we pay a 16 year old babysitter. If you increased the supply of those who wanted to work as swim teachers or babysitters, I don't think it would affect the wages we pay.
Thus when my household enters the babysitter market as an employer of labor, the terms and conditions on which we hire those who we find in the matching process are determined not by the market's equilibrium condition but by sociology: what wage is appropriate for someone of the age that we are hiring? Economic conditions enter at one remove: where do beliefs about appropriate wages come from, after all? But they enter only at one remove: we pay different people different wages for the same work. In a market in which people like us dominate, changes in relative supplies of those wishing to babysit would probably produce changes in the average number of hours worked per babysitter, but probably not in changes in tems and conditions of employment.
By contrast, when my household enters the grocery-buying market, we choose which supermarket to go to by an economic--not a sociological--process. Different supermarkets offer different price-quality bundles, from Lucky the Low Price Leader to Safeway, Apple Market, and Diablo Foods. Not to mention Costco, with very low prices but a small selection of types of goods fully thirty minutes away. Week by week--as they change prices and specials, and as our inventory of groceries and appetites change--we switch from one to the other and back again. Our participation in the grocery market is characteristic of what Polanyi would call amarket economy: it is not "embedded" in society, and the sociology of our relationships and expectations has little to do with the prices we pay or with where we shop.
Polanyi's claim, as best as I can figure it out, is that over the past five centuries northwestern Europe and its offshoots have shifted from a situation in which the bulk of economic life is kind of like my household hiring babysitters to a situation in which the bulk of economic life is kind of like my household hiring groceries. Five hundred years ago a youth became a blacksmith because the old blacksmith owed his uncle Fred a favor, and to repay it the blacksmith took him on as his apprentice and successor. Five hundred years ago when flour was scarce, the town baker made the loaves smaller and then limited quantities sold to customers. The baker did not quadruple the price--and if the baker did, the townsmen were likely to riot. Today flour is never scarce, but coffee sometimes is: but none of the supermarkets limit quantities of anything save their loss-leaders. Today people choose occupations in large part on the basis of the wages those occupations pay: uncle Fred and the opening of a spot as the Blacksmith's apprentice have less to do with it.
Now it should be obvious that Polanyi's vision is one of ideal types: abstracted generalities with features exaggerated for effect. Neither his "market economy" nor his "embedded economy" has ever existed in pure form anywhere. It is not the case that business and economic relationships today are ruthlessly and invariably governed by the cash nexus, cost minimization, and revenue maximization. (One of our supermarkets, Safeway, is spending a lot of time and money on information systems to allow their baggers to address their customers by name in real time: unfortunately, they call me "Mr. Bradford" instead of "Mr. DeLong.") It was never the case that supply-and-demand played no role, and sociological expectations of what is due someone of a particular status and caste the complete role, in setting the prices at which transactions took place.
But you can convince yourself, if you want to, that there has been a shift. To Aquinas or Aristotle, overcharging or underpaying relative to the "just price" is a kind of theft: a violation of the moral order that underlies hte universe. To us, a thing is worth what someone will pay for it.
There are still, of course, echoes of the old "embedded" conception. Consider this exchange that ex-Labor Secretary Robert Reich reports with Senator (R-Ut) Robert Bennett:
"The minimum wage should be abolished," he sys with utter assurance. "If someone isn't worth $4.25 an hour, he should be paid less."
Hallelujah! He said it! It's now public! We'e not really engaged in a debate over how much the minimum wage should be raised (in fact, its real value has continued to drop); it's about whether there should be a minimum at all. The other side believes that people should be paid no more than what they're worth on the market.
"I completely disagree," I say. "Every hard-working American is worth at least a wage that lifts a family out of dire poverty."
Note the key word: worth. He used it first. It's a moral concept as well as an economic one. Can someone's labor really be worth less than $4.25 an hour? In purely economic terms, surely it can. But in moral terms, the answer's far from clear.
And herein lies the importance of having this debate: It crystallizes a much larger debate about whether Americans are mere participants in an impersonal market or are members of a common culture and society. Raising the minimum wage is a good thing to do. But quite apart from the wisdom of raising it, having a sharp public discussion about it is worthwhile. It helps Ameicans clarify their beliefs about what we owe one another as members of the same society.
--Robert B. Reich, Locked in the Cabinet (New York: Knopf, 1997), pp. 232-3.
Robert Reich and Karl Polanyi would get along very well.
Now I am not sure how right Polanyi is: it is not clear to me that the shift has been as large as he thinks it has. And when "embeddedness" was used in the past to enforce transactions at a "just price", it usually seems to me to have been cover for thugs-with-spears (or thugs-with-idols) getting things on favorable terms from merchants, artisans, and peasants: it is far from clear that a decline in "embeddedness" is a bad thing.
But I do think it is an interesting point.
I would add that if we take a step back, and wonder "Where do ideas of just prices come from?" we find that they come from three sources:
I think that it is important to recognize that long-run social resource costs are themselves an input into the "embedding" process.
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What conclusions did Malthus draw from his "Malthusian" theory?
http://tinyurl.com/dl20090120d: It is, undoubtedly, a most disheartening reflection that the great obstacle in the way to any extraordinary improvement in society is of a nature that we can never hope to overcome. The perpetual tendency in the race of man to increase beyond the means of subsistence is one of the general laws of animated nature which we can have no reason to expect will change. Yet, discouraging as the contemplation of this difficulty must be to those whose exertions are laudably directed to the improvement of the human species, it is evident that no possible good can arise from any endeavours to slur it over or keep it in the background. On the contrary, the most baleful mischiefs may be expected from the unmanly conduct of not daring to face truth because it is unpleasing. Independently of what relates to this great obstacle, sufficient yet remains to be done for mankind to animate us to the most unremitted exertion. But if we proceed without a thorough knowledge and accurate comprehension of the nature, extent, and magnitude of the difficulties we have to encounter, or if we unwisely direct our efforts towards an object in which we cannot hope for success, we shall not only exhaust our strength in fruitless exertions and remain at as great a distance as ever from the summit of our wishes, but we shall be perpetually crushed by the recoil of this rock of Sisyphus...
It is a perfectly just observation of Mr. Godwin, that, 'There is a principle in human society, by which population is perpetually kept down to the level of the means of subsistence.' The sole question is, what is this principle? is it some obscure and occult cause? Is it some mysterious interference of heaven.... Or is it a cause, open to our researches, within our view, a cause, which has constantly been observed to operate, though with varied force, in every state in which man has been placed? Is it not a degree of misery, the necessary and inevitable result of the laws of nature, which human institutions, so far from aggravating, have tended considerably to mitigate, though they never can remove?.... It seems highly probable, therefore, that an administration of property, not very different from that which prevails in civilized states at present, would be established, as the best, though inadequate, remedy for the evils which were pressing on the society...
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January 19. Introduction, and the Malthusian Economy (DeLong)
R.G. Hawtrey (1925), "Public Expenditure and the Demand for Labour," Economica 13 (March), pp. 36-48. http://www.jstor.org/stable/2548008
John Hicks (1937), "Mr. Keynes and the 'Classics': A Suggested Interpretation," Econometrica 5:2 (April), pp. 147-159. http://www.jstor.org/stable/1907242
Eugene Fama (2009), "Bailouts and Stimulus Plans" (January 13). http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html
Jared Diamond (1987), "The Invention of Agriculture: The Worst Mistake in the History of the Human Race," Discover. http://delong.typepad.com/sdj/2005/09/the_malthusian_.html
Gregory Clark (2005) on the Malthusian Economy, draft chapters 2 and 3 of A Farewell to Alms (published version: Princeton University Press, 2007). Clark-2.pdf and Clark-3.pdf
M. I. Finley (1965), "Technical Innovation and Economic Progress in the Ancient World," Economic History Review, New Series, 18:1, pp. 29-45. http://tinyurl.com/dl20090112f
The readings for the first week of Econ 210a fall into three groups.
First come three readings on the determination of nominal spending. Among them we have, first, R.G. Hawtrey trying to tease out the implications of the quantity theory of money for the effect of government fiscal policy on total nominal spending. Hawtrey makes two mistakes. First, he implicitly assumes that the velocity of money is not a function of the nominal interest rate--that, at least as far as the effects of fiscal policy on spending are concerned, we have a rigid cash-in-advance economy. Second, he assumes that all agents in the economy have the same desired spending velocity--that even though the government is a vastly larger entity able to self-insure against fluctuations in its cash flow, it must hold the same ratio of cash to spending as the smallest household.
The second nominal spending reading is John Hicks's reconciliation of Knut Wicksell's macroeconomics (which saw the level of spending as determined by the balance of planned savings and planned investment at an interest rate set by a central bank that controlled the money supply) and Irving Fisher's macroeconomics (which saw the level of spending as determined by the money stock and money velocity at an interest rate set by the equilibration of planned savings and investment). Hicks points out that money demand is interest-elastic and that planned savings and investment are spending-elastic: thus you have two unknowns--the flow of nominal spending PY and the interest rate i--and two equations--S(i, PY) = I(i, PY) and PY = MV(i).
Starting from Hawtrey and Hicks you can begin to think about under what circumstances an expansionary fiscal policy like Christina Romer's Recovery Act might make sense--and under what circumstances it might not.
And the fascinating thing is that Eugene Fama has heard of absolutely none of this, and tries to reason out the issues over a weekend... and implicitly assumes a rigid cash-in-advance economy with a technologically-fixed velocity. The painful thing is that there is nothing special about the government in his argument: Fama appears to have proved that nominal spending can never fluctuate--for, after all, even a helicopter drop of money is offset by the higher future taxes needed to cover the future liability of withdrawing the money when the bills wear out.
This is, I think, a cautionary tale: it is very important to test your theoretical arguments against as broad a range of historical cases and past economists' thought as possible in order to keep in touch with the world as it is.
The second group is made up of Diamond and Clark on the Malthusian economies of the agrarian age. We think that there were perhaps 5 million people alive at the start of the Neolithic Age in 7500 BC--and if we want to be very brave we can assign them a living standard of $500 of today's international dollars per capita. We think that there were perhaps 500 million people alive 9000 years later in 1500--and if we want to be very brave we can assign them a living standard of $500 of today's international dollars per capita. Probably the upper class lives a lot better in 1500 than it had lived in 7500 BC. But the peasants and the craftsmen? Probably not. For one thing, you had 100 times the population density.
The key to understanding why effectively all technological progress from 7500 BC to 1500 went into rising populations and next to none of it into higher living standards rests on four facts:
And this brings us to the third of our topics. Why was the rate of technological progress so slow? We don't think we have anything to teach Sophocles about writing plays or Homer about writing epics or Sappho about writing poetry. We don't have anything to teach Cicero about pulling the wool over the eyes of a jury or Julius Caesar about blitzkrieg. We might have some things to teach Pericles and Augustus about how to set up a stable and non-oppressive government, but not very much. Yet we have a huge amount to teach everybody in the past not just about technology but how to make more and better technology, not just our inventions but rather the master invention of how to make the process of invention more-or-less routine.
For it is a fact that if you do the arithmetic you see that we have about the same relative productivity growth in one year as previous pre-1500 epochs had in a century.
There are two big theories as to why. The first is what I think of as Michael Kremer's density hypothesis: two heads are better than one, and a literate head is better than an illiterate one, and so it is our greater population and greater wealth that makes our technological progress faster.
The second is the more "cultural" approach that I associate with M.I. Finley. When William Gates wants to make his mark on the world at the end of the twentieth century, he drops out of college and starts a software company to make money by selling people operating systems, games, and office programs--and rises to become the richest man in the world. When Williams Marshall wants to make his mark on the world in the middle of the twelfth century, he practices with sword, shield, lance, and horse and then heads out into the world as a combination of professional athlete, bully-boy, soldier, and then courtier-administrator--and rises to become regent of England for Henry III and Earl of Pembroke.
This is the background for Finley's discussion of why it was that (military applications aside) the literate brainpower of the pre-industrial world was not directed at things of practical utility.
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April 28: Macroeconomics—Up to 2007:
Question: In what respects, given what you know, has the police response to what we are now starting the call the "great recession" exceeded reasonable expectations for what can be accomplished in the heat of the moment?
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Apr 7: The Forward March of Social Democracy Halted?
Question:
What were the reasons behind the general belief--on the left, on the right, and in the center--in the late-1970s that North Atlantic social democracy had failed as a political-economic system?
Readings:
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Readings:
Question:
After World War II nearly everything went right for Western Europe--just as nearly everything had gone wrong for Western Europe starting in 1914. What, in your view, is the factor that was key but that is relatively unappreciated in making everything go right?
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Jan 20: Introduction: Why Are We Here?
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/01/first-class-resources.html
Jan 27: One Economics or Many?
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-january-27-2010-one-economics-or-many.html
Feb 3: The Malthusian Economy
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-february-3-2010-the-malthusian-economy.html
Readings:
Feb 10: Industrious Revolutions
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-february-210-2010-industrious-revolutions-and-divisions-of-labor.html
Feb 17: Industrial Revolutions
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-february-17-2010-industrial-revolutions.html
Feb 24: Globalizations
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/02/globalizations.html
Mar 3: Divergences
Assignments and notes at: http://delong.typepad.com/economics_210a_spring_201/2010/03/econ-210a-uc-berkeley-march-3-2010-divergences.html
Mar 17: WWI and the Great Depression
Mar 19: Paper prospectus due, 5 PM
Mar 31: WWII and the Thirty Glorious Years
Apr 7: The Forward March of Social Democracy Halted?
Apr 21: China Stands Up
April 28: Macroeconomics to 2007
May 5: The Panic of 2007-2010
May 12: Reflections
May 12: Paper due, 5 PM
Economics Learning Goals: CT2: Apply economic analysis to evaluate specific policy proposals. CT3: Compare two or more arguments that have different conclusions to a specific issue or problem. CT4: Understand the role of assumptions in arguments. QT1: Understand how to use empirical evidence to evaluate an economic argument. PS1: Solve problems that have clear solutions. PS2: Propose solutions for problems that do not have clear answers, and indicate under what conditions they may be viable solutions. CS1: Communicate effectively in written, spoken, and graphical form about specific economic issues. CS2: Formulate a well-organized written argument that states assumptions and hypotheses, which are supported by evidence. LL3: Understand and evaluate current economic events and new economic ideas.
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Readings:
Writing Assignment:
The economic history of the world over the past two centuries has been one in which the world has shrunken enormously in distance along every conceivable measurement, and yet in which income and productivity differences between societies have grown enormously. What are the big-picture theories for explaining this phenomenon that you think are worth further investigation?
Additional and Very Optional Readings:
Posted at 05:14 AM in Assignments, Readings | Permalink | Comments (28)
Readings:
Jeffrey Williamson and Kevin O'Rourke, "After Columbus: Explaining Europe's Overseas Trade Boom, 1500-1800," Journal of Economic History 62 (2002): 417-456 http://www.nber.org/papers/w8186
Jan de Vries, "The Limits to Globalization in the Early Modern World," Economic History Review (forthcoming) http://www.j-bradford-delong.net/2008_pdf/devries_limits_of_globalization.pdf
W. Arthur Lewis, Evolution of the International Economic Order (Princeton, Princeton Univ. Press, 1978) http://j-bradford-delong.net/2008_pdf/Lewis_Evolution_A.pdf http://j-bradford-delong.net/2008_pdf/Lewis_Evolution_B.pdf
Jeffry G. Williamson, "Globalization, Convergence, and History" Journal of Economic History 56 (1996):227-306 http://links.jstor.org/sici?sici=0022-0507%28199606%2956%3A2%3C277%3AGCAH%3E2.0.CO%3B2-T
Richard Baldwin and Philippe Martin (1999), “Two Waves of Globalization: Superficial Similarities, Fundamental Differences,” NBER Working Paper no.6904 (January) http://www.nber.org/papers/w6904
Writing Assignment:
The economies settled from northwestern Europe--the United States, Canada, Australia, New Zealand--were all resource rich. So why did they industrialize early? Why didn't they simply become gigantic Denmarks, shipping agricultural and other resource-based products to the European industral powers in return for manufactures?
Additional and Optional Readings:
*Barry R. Chiswick and Timothy J. Hatton, "International Migration and the Integration of Labor Markets," in Michael Bord, Alan M. Taylor, and Jeffrey G. Williamson, Globalization in Historical Perspective (NBER 2003), pp. 65-120 http://books.google.com/books?id=vDL0u3Rz7C8C&pg=PA65&lpg=PA65&dq=chiswick+and+hatton+international+migration+and+the+integration+of+
Posted at 07:26 AM in Assignments, Readings | Permalink | Comments (30)
Economics 210a is required for first-year Ph.D. students in Economics here at Berkeley. The course introduces selected themes from the economic history literature but does not claim to present a narrative account of world economic history. Emphasis is placed on the uses of economic theory, and on the insights (if any) a knowledge of history can give to the practicing economist.
Requirements are: (i) doing the reading, (ii) attending the class, (iii) talking in class, and (iv) writing the papers. When the course goes well, it is primarily discussion; when the course goes badly, it is primarily lecture. Because discussion will focus on the issues raised, resolved, and left unanswered by the assigned readings, readings should be completed before class.
Grades will be based 40 percent on one to two-page memos due before each class meeting, 20 percent on class participation, and 40 percent on the research paper. Two- page memos cannot be exhaustive, nor can they provide definitive answers. But they can explain why the question asked is important, summarize how at least some of the articles assigned for the upcoming class approach it, and provide a provisional assessment of conclusions.
Your research paper is due on Wednesday, May 12th (that is, exactly one week after the last class meeting). The paper should provide new information or evidence on a topic in economic history. It should not simply summarize an existing literature. The writing and submission process requires that you meet two benchmarks. You should discuss your paper topic during office hours during the first half of the semester, and then submit a brief paper prospectus prior to the commencement of spring break. Your prospectus should motivate the topic (explain why it is important), state your hypothesis (or question), and describe the historical materials that you will use to analyze it. The grade you receive on your paper will depend also on the quality of the prospectus and on your meeting these two benchmarks.
This paper should go beyond summarizing or synthesizing a literature: students should use the tools of economic theory and empirical analysis to pose and answer an historical question. The paper must have historical substance. The paper may cover almost any topic in economic history. You are not limited to the material covered in 210a. The only requirement is that the topic must genuinely involve the past. Comparisons of past and current events are certainly fine, but studies of developments solely after 1973 are not. Aim at a length of 5 to 10 pages or so for the prospectus, and more for the final paper. A final paper less than 15 pages tends to make your instructor suspicious, while a final paper more than 25 pages tends to make your instructor cranky.
Coming up with a promising paper topic is part of this exercise. Your entire graduate career (indeed, for most of you, your entire career) will center around identifying interesting questions to be answered. Successful papers in the past have generally come out of a comment on or an extension of an interesting paper assigned in this course (or one not assigned in this course); a comparison of some past episode with present; the finding of an interesting dataset; a new test of an old debate; or some historical natural experiment.
Readings are available on the web. Access to readings available through Jstor and other proprietary sources may require you to log on through a university-recognized computer and/or enter your Calnet ID.
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Readings:
Writing Assignment:
Write a 200-500 essay on this topic. At least 18 hours before the class--by 6 PM PST on January 26, 2010--email your paper (either in the message text or as an attachment) to [email protected] and post it as a comment on the webpage at http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-february-17-2010-industrial-revolutions.html.
Posted at 02:23 PM in Assignments, Readings | Permalink | Comments (31)
Adam Smith wrote, according to Dugald Stewart (1811), Account of the Life and Writings of Adam Smith, LL.D. (Edinburgh: George Romney): "Man is generally considered by statesmen and projectors as the materials of 'a sort of political mechanics. Projectors disturb nature in the course of her operations in human affairs; and it requires no more than to let her alone, and 'give her fail play id the. pursuit of her ends, that she may establish her own designs..." And: "Little else is requisite to carry a state to the highest glegree of opulence from the lowest barbarism, but peace, easy taxes, and a -tolerable administration. of justice; all the rest being brought about by the natural course of things. All governments.which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical..."
This is Douglass North and Barry Weingast's story. Is it sufficient to give us an understanding of the industrious--commercial--revolution? And is it sufficient to give us an understanding of the industrial revolution, and what has followed it?
Readings:
Jan de Vries (1994), "The Industrious Revolution and the Industrial Revolution," Journal of Economic History 54:2 (June), pp. 249-70 http://links.jstor.org/sici?sici=0022-0507%28199406%2954%3A2%3C249%3ATIRATI%3E2.0.CO%3B2-8 * Hans-Joachim Voth, "Time and Work in Eighteenth-Century London," *Journal of Economic History 58 (1998): 29-58 http://links.jstor.org/sici?sici=0022-0507%28199803%2958%3A1%3C29%3ATAWIEL%3E2.0.CO%3B2-Y * Douglass North and Barry Weingast (1989), "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," Journal of Economic History 49:4 (December), pp. 803-832 http://links.jstor.org/sici?sici=0022-0507%28198912%2949%3A4%3C803%3ACACTEO%3E2.0.CO%3B2-9 * J. Bradford DeLong and Andrei Shleifer (1993), "Princes and Merchants: City Growth Before the Industrial Revolution," Journal of Law and Economics 36:5 (Oct), pp. 671-702 http://www.j-bradford-delong.net/movable_type/archives/000638.html. * (Optional) Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations http://www.econlib.org/library/Smith/smWNtoc.html. Read Books I and V.
Writing Assignment:
In his article Voth cites the elegant dictum of D. N. McCloskey that "ingenuity rather than abstention governed the Industrial Revolution." By this McCloskey meant that technological change was more important than a rise in investment (and a corresponding decline in current consumption) in driving economic growth during the Industrial Revolution. Voth concludes his article as follows: "Abstention seems to have been more important than invention [in bringing about the Industrial Revolution]but it was abstention from leisure ... that was at the core of economic growth." Does Voth provide the evidence needed to persuade you that he is correct? Is his evidence convincing to Clark? What evidence would you deem necessary to make this case?
Write a 200-500 essay on this topic. At least 18 hours before the class--by 6 PM PST on February 9, 2010--email your paper (either in the message text or as an attachment) to [email protected] and post it as a comment on the webpage at http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-february-210-2010-industrious-revolutions-and-divisions-of-labor.html.
Or, alternatively, wrestle with North and Weingast (and Smith).
Thoughts and Notes:
Posted at 02:44 PM in Assignments, Readings | Permalink | Comments (31)
Between the year zero and 1500 world population and real GDP tripled; world TFP grew by 30%; and as best as we can tell median world living standards did not grow at all. Why didn't 30% growth in TFP have any impact on living standards? How did the world economy work on a very broad scale before the industrial revolution? And why wasn't growth in TFP faster?
Readings:
Writing Assignment:
Write a 200-500 essay on whether Gregory Clark was right in his claim that "the real income in Malthusian economies (all economies after 5000 B.C. and before 1800) was determined from the birth rate and death rate schedules alone." You might, as you write your essay, think about the following question: Does this mean that mankind was powerless to improve its material conditions via factors such as technology, social organization, population control, etc.?
At least 18 hours before the class--by 6 PM PST on February 2, 2010--email your paper (either in the message text or as an attachment) to [email protected] and post it as a comment on the webpage at
Alternatively, write on the following: Was it in fact the case-as UCLA's Jared Diamond maintains-that the invention of agriculture was the worst mistake in the history of the human race? Which side of this question do you come down on-yes or no-and why? Or, if you want to suspend judgment, what additional facts about the past and present would you need to know before you would come down on one side or the other?
DeLong (2008), "Economic Growth--The Ultimate Bird's Eye View":
Posted at 02:35 PM in Assignments, Readings | Permalink | Comments (31)
I have been following the discussion of Karl Polanyi, and I have been worried because it seems to me that of readers are missing the point. I think that Polanyi does have an interesting argument. But it is being hidden from many because of his terminology. The underlying point is that it used to be the case--painting with a very broad brush--that what happened in economic transactions was in large part determined and guided by sociological and political relationships, but that now--again painting with a very broad brush--the principal direction of influence it is reversed: politics and sociology are more shaped by economic factors than they in turn manage to shape what happens in economic transactions.
In Polanyi's vocabulary, this is a transformation from an "embedded" to a "market" economy. And many readers do not hear Polanyi's point because their first reaction is: "We have had markets since time out of mind: what was the agora of Periclean Athens?"
I'm not sure how true Polanyi's point really is. But I do think it is worth thinking about.
What does Polanyi mean by a claim that a market is "embedded" in a society? I think of it this way: In the past two weeks my wife and I have hired three young women--a 22 year old, a 16 year old, and a 12 year old. The 22 year old is a recent graduate of Berkeley, just back in this Bayarea magalopolis from several months in China, where she was a film producer's assistant. We hired her to give our children swimming lessons (and she occasionally babysits as well). She is a superb swimming teacher and our children adore her. We pay her $40 an hour as a swimming teacher; we pay her $10 an hour as a babysitter. The 16 year old just moved to Bayarea from Mexico city for her last two years of high school. She and her parents moved up here so that she could get a U.S. education for the lats two years of high school; they are living with her sister, who works as an architect in San Francisco. We employ her as an evening babysitter. We pay her $7 an hour as an evening babysitter. The 12 year old lives in our neighborhood. She put up a sign at the local playground saying that she was a responsible house watcher, plant waterer, and pet feeder who was eager to earn money. We hired her to watch our house while we went on vacation. Her mother would not let us pay her more than $4 an hour.
We were matched--by accident--with the 22 year old last summer, when we registered for swimming lessons through Berkeley. When we employ her on our own, we pay her what we would have paid had we hired her through Berkeley. This gives her triple the hourly income she would receive were she still working as a swim teacher for Berkeley. But we are in the business of paying a fair price for her services as a swim teacher: we were impressed with and grateful to her for the job she did last summer, and so hired her because we feel we owe her for making our children happy and because she is looking for income. So we pay her a fair price--even though we could get a low-overhead private swim teacher for much less--because our relationship has a large element that is probably best seen as a gift exchange.
We found the 16 year old via reference in conversations at the playground. We pay her $7 an hour--when the market equilibrium rate, to the extent there is a market, is closer to $5.50 an hour--because we want her to value her employment relationship with us and contribute more than just her raw labor power to the job of babysitting our children. You might say that we are in an "efficiency wage" equilibrium. Or you might say that we want to be the kind of parents who pay their babysitters a generous wage.
The 12 year old is trying to earn money on her own for the first time. The principal determinants of her wage are what her parents will let her accept--they don't want her to believe too soon that getting money from work is incredibly easy. Yet from our perspective the amount we pay her is a very small fraction of the cost to us in hassle and in dollars of finding an alternative person to look in on the house.
In none of these cases were the terms and conditions of employment determined by anything like supply-and-demand equilibrium in a competitive auction market. In all of these cases what we pay is determined much more by what we feel is an appropriate level of earnings for someone of her age and skill in that employment--hence the 4:1 gap between wages as a swim teacher and wages as a babysitter; hence the 3:2 gap between what we pay a 22 year old and what we pay a 16 year old babysitter. If you increased the supply of those who wanted to work as swim teachers or babysitters, I don't think it would affect the wages we pay.
Thus when my household enters the babysitter market as an employer of labor, the terms and conditions on which we hire those who we find in the matching process are determined not by the market's equilibrium condition but by sociology: what wage is appropriate for someone of the age that we are hiring? Economic conditions enter at one remove: where do beliefs about appropriate wages come from, after all? But they enter only at one remove: we pay different people different wages for the same work. In a market in which people like us dominate, changes in relative supplies of those wishing to babysit would probably produce changes in the average number of hours worked per babysitter, but probably not in changes in tems and conditions of employment.
By contrast, when my household enters the grocery-buying market, we choose which supermarket to go to by an economic--not a sociological--process. Different supermarkets offer different price-quality bundles, from Lucky the Low Price Leader to Safeway, Apple Market, and Diablo Foods. Not to mention Costco, with very low prices but a small selection of types of goods fully thirty minutes away. Week by week--as they change prices and specials, and as our inventory of groceries and appetites change--we switch from one to the other and back again. Our participation in the grocery market is characteristic of what Polanyi would call amarket economy: it is not "embedded" in society, and the sociology of our relationships and expectations has little to do with the prices we pay or with where we shop.
Polanyi's claim, as best as I can figure it out, is that over the past five centuries northwestern Europe and its offshoots have shifted from a situation in which the bulk of economic life is kind of like my household hiring babysitters to a situation in which the bulk of economic life is kind of like my household hiring groceries. Five hundred years ago a youth became a blacksmith because the old blacksmith owed his uncle Fred a favor, and to repay it the blacksmith took him on as his apprentice and successor. Five hundred years ago when flour was scarce, the town baker made the loaves smaller and then limited quantities sold to customers. The baker did not quadruple the price--and if the baker did, the townsmen were likely to riot. Today flour is never scarce, but coffee sometimes is: but none of the supermarkets limit quantities of anything save their loss-leaders. Today people choose occupations in large part on the basis of the wages those occupations pay: uncle Fred and the opening of a spot as the Blacksmith's apprentice have less to do with it.
Now it should be obvious that Polanyi's vision is one of ideal types: abstracted generalities with features exaggerated for effect. Neither his "market economy" nor his "embedded economy" has ever existed in pure form anywhere. It is not the case that business and economic relationships today are ruthlessly and invariably governed by the cash nexus, cost minimization, and revenue maximization. (One of our supermarkets, Safeway, is spending a lot of time and money on information systems to allow their baggers to address their customers by name in real time: unfortunately, they call me "Mr. Bradford" instead of "Mr. DeLong.") It was never the case that supply-and-demand played no role, and sociological expectations of what is due someone of a particular status and caste the complete role, in setting the prices at which transactions took place.
But you can convince yourself, if you want to, that there has been a shift. To Aquinas or Aristotle, overcharging or underpaying relative to the "just price" is a kind of theft: a violation of the moral order that underlies hte universe. To us, a thing is worth what someone will pay for it.
There are still, of course, echoes of the old "embedded" conception. Consider this exchange that ex-Labor Secretary Robert Reich reports with Senator (R-Ut) Robert Bennett:
"The minimum wage should be abolished," he sys with utter assurance. "If someone isn't worth $4.25 an hour, he should be paid less."
Hallelujah! He said it! It's now public! We'e not really engaged in a debate over how much the minimum wage should be raised (in fact, its real value has continued to drop); it's about whether there should be a minimum at all. The other side believes that people should be paid no more than what they're worth on the market.
"I completely disagree," I say. "Every hard-working American is worth at least a wage that lifts a family out of dire poverty."
Note the key word: worth. He used it first. It's a moral concept as well as an economic one. Can someone's labor really be worth less than $4.25 an hour? In purely economic terms, surely it can. But in moral terms, the answer's far from clear.
And herein lies the importance of having this debate: It crystallizes a much larger debate about whether Americans are mere participants in an impersonal market or are members of a common culture and society. Raising the minimum wage is a good thing to do. But quite apart from the wisdom of raising it, having a sharp public discussion about it is worthwhile. It helps Ameicans clarify their beliefs about what we owe one another as members of the same society.
--Robert B. Reich, Locked in the Cabinet (New York: Knopf, 1997), pp. 232-3.
Robert Reich and Karl Polanyi would get along very well.
Now I am not sure how right Polanyi is: it is not clear to me that the shift has been as large as he thinks it has. And when "embeddedness" was used in the past to enforce transactions at a "just price", it usually seems to me to have been cover for thugs-with-spears (or thugs-with-idols) getting things on favorable terms from merchants, artisans, and peasants: it is far from clear that a decline in "embeddedness" is a bad thing.
But I do think it is an interesting point.
I would add that if we take a step back, and wonder "Where do ideas of just prices come from?" we find that they come from three sources:
I think that it is important to recognize that long-run social resource costs are themselves an input into the "embedding" process.
Posted at 02:27 PM in Other Resources | Permalink | Comments (1)
ow did we get here?--that is, me teaching and you taking a course in economic history during your first year as graduate students in the econ Ph.D. program here at U.C. Berkeley. The rest of your curriculum is composed of courses in math, statistics, econometrics, constrained optimization, market equilibrium, general equilibrium, intertemporal optimization, and dynamic stochastic general equilibrium. Here we have economic history. Why?
I see five purposes:
To that end, I have asked you to read three sets of short pieces for this week--one set on development and growth, one set on comparative systems, and one set on macro--with an eye toward assessing whether and how knowledge of history and instiutions helps you or hurts you as an economist...
The year before last, Jan de Vries spent more time than I had in the past on what he called "apologetics"--outlining why we were requiring first-year Ph.D. students in economics to take an economic history course--and he gave a historian's answer to that question: a narrative, a particular individual story, a talk about the formation of the social sciences, and the rise and fall of positivism and the subsequent vicissitudes of economic history as a subdiscipline within economics.
It struck me after that class that I should have taken up a bit of time to give the economist's answer to the question of why we make first-year Ph.D. students take economic history, so I will do so now.
I think the economist's answer goes roughly as follows:
Economics is the hyper-positivist of social science disciplines: believing that everything of interest can be reduced to law-like theoretical and empirical propositions modeled after classical mechanics; that what cannot be reliably, repeatedly, quantitatively, and empirically demonstrated does not really exist as knowledge; that the only good social science is a deductive, analytical, model-based, general, experimental science.
But this misses a lot. Because we are people like those whom we study, we have psychological access to our subjects' internal decision-making processes and motivations at a level that we cannot obtain from market price-quantity data. There is lots of interest that happens once and only once. Natural experiments are rare, and so if we restrict ourselves to positivist tools alone much is underidentified. The individuals' preferences--the "tastes" part of "tastes and technologies" are not primitive but are themselves the result of long and complex historical, sociological, psychological, and--yes--economic processes. You need thickly-described case studies and anecdotes looking out from people's insides before you can tell if your statistical results mean what you assert they mean.
Most important, every piece of economic theory is ultimately a piece of crystalized history. And you have a much deeper and more sophisticated knowledge if you know the history that led people to think that elaborating these particular theories was worth doing. If you just do the crystalized stuff--well, there is a sense in which your thought processes are then on crack, unable to properly process and reflect on the systems of analysis you are using. And there is the problem that you do not know what theories you should be developing: we economists are smart enough that the set of theories we can develop is dense in the space of possible conclusions, so either we are guided by history or we say nothing at all.
Of course, there is a parallel answer to the question of why historians should be forced to take economic history courses. It has, I think, two parts. First, certainly since 1800 and perhaps since 1500, what is most extraordinary and salient about our global society is primarily economic and scientific, so you cannot do post-1500 history without knowing economics anymore than you can do early Byzantine history without knowing theology.
Second, just as every piece of theory is ultimately crystalized history, so every individual historical narrative or judgment is based on a web of implicit social science theories. And your knowledge of the past is inadequate if you do not understand your implicit social science theories critically enough to be expert users of them.[1]
Web Page:
http://delong.typepad.com/economics_210a_spring_201/2010/01/thoughts-on-week-one-january-20-2010-how-did-we-get-here.html
[1] Thus there is a corresponding set of answers—not to the question “why should economists learn economic history?” but rather to the question “why should historians learn economic history?” See Brad DeLong's Notes: Jan de Vries's Talk on the Purpose of Economic History (January 23, 2008) http://surveyofeconomichistorywikipage.wikispaces.com/DeLong%27s+Notes+of+de+Vries%27s+Talk+on+the+Purposes+of+Economic+History
Posted at 02:23 PM in Other Resources | Permalink | Comments (0)
(i) Exchange and its vicissitudes as fundamental to human psychology and society? Adam Smith: http://www.adamsmith.org/smith/won-b1-c2.htm:
Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.... When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons....
[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love....
[I]t is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. Another excels in making the frames and covers of their little huts or movable houses. He is accustomed to be of use in this way to his neighbours, who reward him in the same manner with cattle and with venison, till at last he finds it his interest to dedicate himself entirely to this employment, and to become a sort of house-carpenter.... [T]he certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.
The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men... is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education... and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.... By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog....
Among men... the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for...
(ii) Different technologies as producers of different societies which give rise to different types of economies? Karl Marx: Preface to A Contribution to the Critique of Political Economy: http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/preface-abs.htm:
In the social production of their life, men enter into definite relations that are indispensable and independent of their will, relations of production which correspond to a definite stage of development of their material productive forces. The sum total of these relations of production constitutes the economic structure of society, the real foundation, on which rises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.
At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or — what is but a legal expression for the same thing — with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution. With the change of the economic foundation the entire immense superstructure is more or less rapidly transformed. In considering such transformations a distinction should always be made between the material transformation of the economic conditions of production, which can be determined with the precision of natural science, and the legal, political, religious, aesthetic or philosophic — in short, ideological forms in which men become conscious of this conflict and fight it out....
In broad outlines Asiatic, ancient, feudal, and modern bourgeois modes of production can be designated as progressive epochs in the economic formation of society...
(iii) Robert Solow (1985), "Economic History and Economics" http://www.jstor.org/stable/pdfplus/1805620.pdf:
Economics is a social science. It is subject to Damon Runyon's Law that nothing between human beings is more than three to one. To express the point more formally, much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity. Moreover, all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors, some of which change slowly and gradually, others erratically. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want. I think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief. Indeed, some of Fortune's favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices.
If I am anywhere near right about this, the interests of scientific economics would be better served by a more modest approach. There is enough for us to do without pretending to a degree of completeness and precision which we cannot deliver. To my way of thinking, the true functions of analytical economics are best described informally: to organize our necessarily incomplete perceptions about the economy, to see connections that the untutored eye would miss, to tell plausible-sometimes even convincing-causal stories with the help of a few central principles, and to make rough quantitative judgments about the consequences of economic policy and other exogenous events. In this scheme of things, the end product of economic analysis is likely to be a collection of models contingent on society's circumstances-on the historical context, you might say-and not a single monolithic model for all seasons....
The other direction of influence, what economic history offers to that kind of economic theory, is more interesting. If the proper choice of a model depends on the institutional context-and it should-then economic history performs the nice function of widening the range of observation available to the theorist. Economic theory can only gain from being taught something about the range of possibilities in human societies. Few things should be more interesting to a civilized economic theorist than the opportunity to observe the interplay between social institutions and economic behavior over time and place....
If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying. If it did succeed, then there would be no difference between economics and economic history other than the source of data.... There are, however, some reasons for pessimism about the project. Hard sciences dealing with complex systems-but possibly less complex than the U.S. economy-like the hydrogen atom or the optic nerve seem to succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions. Other sciences, like astronomy, succeed because they can make long series of observations under natural but essentially stationary conditions.... Neither of these roads to success is open to economists....
[T]here is a clear and productive division of labor between the economist and the economic historian. The economist is concerned with making and testing models of the economic world as it now is, or as we think it is. The economic historian can ask whether this or that story rings true when applied in earlier times or other places, and, if not, why not.... [E]conomic history can offer the economist a sense of the variety and flexibility of social arrangements and thus, in particular, a shot at understanding a little better the interaction of economic behavior and other social institutions...
Posted at 02:19 PM in Readings | Permalink | Comments (0)
How many economicses are there?
Karl Marx was sure that there were many:
Economists express the relations of bourgeois production, the division of labour, credit, money, etc., as fixed, immutable, eternal categories.... Economic categories are only the theoretical expressions, the abstractions of the social relations of production.... Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions.... When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time... eternal laws which must always govern society.... [But] during the epoch of the domination of feudalism... the knightly virtues, the beautiful harmony between rights and duties, the patriarchal life of the towns, the prosperous condition of domestic industry in the countryside, the development of industry organized into corporations, guilds and fraternities.... Thus, feudal production, to be judged properly, must be considered as a mode of production.... Is not this as good as saying that the mode of production, the relations in which productive forces are developed, are anything but eternal laws, but that they correspond to a definite development of men and of their productive forces, and that a change in men's productive forces necessarily brings about a change in their relations of production?...
Was he right? Or wrong?
Readings Around the Knotty Question of "Modes of Production":
Writing Assignment:
Write a 200-500 essay on whether we are better off presuming that there is one economics common to all societies, or alternatively that there are many--that different types of economies follow different economic laws of motion. At least 18 hours before the class--by 6 PM PST on January 26, 2010--email your paper (either in the message text or as an attachment) to [email protected] and post it as a comment on the webpage at http://delong.typepad.com/economics_210a_spring_201/2010/01/econ-210a-uc-berkeley-january-27-2010-one-economics-or-many.html.
You might, as you write your essay, think about the following question:
"Formalists" would say that all economies are pretty much alike--that people make stuff and distribute it in a social process, and that this social process is or can be fruitfully and conveniently modeled as one of reciprocal exchange of commodities at market prices. I contract with the Bay Alarm Company to provide security for my house: they install, monitor, and respond to a burglar alarm, and I pay them valuable money. Similarly, Hrothgar (Roger) the Scylding, King of the Danes "contracts" with warriors to provide security for his villages: they acquire weapons, train until they are skilled in their use, and follow him into battle against raiding bandits who want to steal the cows and rape and kidnap the women of the Danes; he in return feeds them dinner, plies them with alcohol, entertains them with skalds, and gives them places to sleep every night in his great hall of Heorot. These are, the formalists would say, fundamentally the same thing: the "purchase" of security services in exchange for value at an "equilibrium" price.
"Substantivists" would say that economies are very different: that there is next to nothing in common between the business conducted by the Bay Alarm Company on the shores of San Francisco Bay early in the twenty-first century and the business conducted by Prince Beowulf of the Geats and his companions on the shores of sixth-century Jutland. The "prices" at which the reciprocal obligations that make up social life are "exchanged" or "bought and sold" are not set by equalizing a supply and demand themselves the results of utility, scarcity, opportunity, and capabliity but are instead determined by overpowering sociological forces--fear, force, custom, command, bureaucracy, and honor--combined with a generalized human desire to return good for good and evil for evil alongside a sense of shame if the flow seems to be too one-way. The economic is thus "embedded" in the sociological and the political.
An example. Back in 1997 there was on two-week period in which my wife and I hired three babysitters: a 22 year old recent graduate of Berkeley who was also our children's swimming teacher who we paid $10 an hour as a babysitter (and $40 an hour as a swimming teacher); a 16 year old just moved to Bayarea from Mexico city for her last two years of high school whom we paid $7 an hour as a babysitter; and a 13 year old living in our neighborhood who put up a sign at the local playground whose mother would not let us pay her more than $4 an hour. In none of these cases were the terms and conditions of employment determined by anything like supply-and-demand equilibrium in a competitive auction market. In all of these cases what we pay is determined much more by what we feel is an appropriate level of earnings for someone of her age and skill. Economic conditions--scarcity and opportunity--do enter, for where do beliefs about appropriate wages come from?, but they enter only at one remove, for we pay different people different wages for the same work.
Clearly even the most "substantivist" of situations has a formal element: when Grendel shows up very few of Hrothgar's warriors stick around because the food and drink is not worth having your arms torn off. And even the most "formalist" of situations has a substantivist element: we don't have the cartoon of oatmeal tested by a biochemist before we pay for it at Safeway, but rely (most of the time) on the Safeway workers' belief that their social role is to sell food rather than garbage and (most of the time) we are right. But to say that the truth is in the middle is unsatisfactory. So: to what degree should we lean toward the "formalist" or the "substantivist" end in doing are economic analyses? To what degree should we presume that there is only one economics? And to what degree should we presume that there are many?
DeLong (2008), "Economic Growth--The Ultimate Bird's Eye View":
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Posted at 02:04 PM in Assignments, Readings | Permalink | Comments (29)
How did we get here--me teaching and you taking a class in economic history during your first year in graduate school, a year otherwise filled with economic and statistical theory?
This is the odd course out in a first-year curriculum that consists of math, optimization, statistics, constrained optimization, market equilibrium, econometrics, general equilibrium, intertemporal optimization, and dynamic stochastic general equilibrium. What is economic history doing here? I want to point you to an interview that the Atlantic Monthly's Conor Clarke conducted with the late Paul Samuelson[1]: Clarke: "What would you say to someone starting graduate study in economics?..." Samuelson: "Well, I'd say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn't have been. But history doesn't tell its own story..."
Let's see if we can develop and deepen what our Uncle Paul said...
For the first class:
(1) Read the following before the first class, and come to Evans 608-7 at 1 PM on Wednesday January 20, 2010 prepared to discuss them:
I. Growth and Development
II. Macroeconomics:
III. Comparative Systems:
(2) Write a 200-500 word essay on any of the three sets of readings, discussing whether in your view a knowledge or lack of knowledge of economic history is helping or hindering the economists who write and whose ideas are discussed in the readings. At least 18 hours before the first class--by 6 PM PST on January 19, 2010--email your paper (either in the message text or as an attachment) to [email protected] and post it as a comment on the webpage at http://tinyurl.com/dl20100105j.
You might, as you write your essay, think about one or more of the following questions:
Paul Krugman is certain that his "thin" model-based set of techniques would have been better than Albert Hirschman's techniques for trying to deal with the now-two generation ago "crisis in development economics." Is Paul correct?
Why is Daron Acemoglu so certain that Mexican growth would skyrocket if only somebody could, in Woodrow Wilson's words, "teach the Mexicans to elect good men"?
Why is Tyler Cowen so suspicious of Daron Acemoglu's certainty that Mexican growth would skyrocket if only somebody could, in Woodrow Wilson's words, "teach the Mexicans to elect good men"?
It is clear what Narayana Kocherlakota does not think modern macroeconomic theory is good for. As he writes: "Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions..." What does he think modern macroeconomic theory is good for?
In June 2007 the S&P Composite U.S. stock index closed at an index value of 1503 and a ten-year 5% coupon $1000 U.S. Treasury bond sold for $990. In March 2009 the S&P Composite U.S. stock index closed at an index value of 798 and a ten-year 5% coupon $1000 U.S. Treasury bond would have sold for $1170. Over that 21 month period investors in long Treasuries gained 23% (in real terms) while investors in diversified equities lost 45% (in real terms). Richard Thaler (and I) would say that this extraordinary divergence in the values of these asset collapses is the result of market irrationality: the unwinding of an "irrational exuberance" in which the risk tolerance of the market was artificially elevated into an irrational pessimism in which the risk tolerance of the market was artificially depressed. John Cassidy quotes Eugene Fama as seeing no evidence for any form of market "irrationality" whatsoever: "Stock prices typically declne prior to a recession.... This was a particularly severe recession.... This was exactly what you would expect if markets are efficient.... I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning." What are Fama's arguments that the enormous wheeling of asset prices between June 2007 and March 2009 is "exactly what you would expect if markets are efficient"? Why don't Thaler and I find Fama's arguments convincing? Why doesn't he find our arguments convincing?
In August 2009 Richard Posner attacked our own Christina Romer for saying that she believed for reasons that fiscal stimulus had already been effective in reducing the size of the recession: "her claim is that the stimulus had a dramatic effect on output and employment during that quarter. I do not think her analysis is responsible, and I am concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples..." In January 2010 John Cassidy quotes Richard Posner as saying that while he had never before "bothered to investigate [John Maynard Keynes's] The General Theory..." he now believes that it has "more of a grasp of what is going on in the economy" and believes that modern theoretical economics is a menace: "very mathematical... credulous about the self-regulating power of markets. That combination is dangerous." Reflect on Posner in the context of Saul of Tarsus on the road to Damascus, or perhaps of Martin Luther in the lightning storm--"St. Anne save me! I shall become a monk!"
For the brave who want to undertake extra reading. In 1983 Ben Bernanke published his still most-cited paper: Ben Bernanke (1983), "Nonmonetary Effects of Financial Crisis in the Propagation of the Great Depression," American Economic Review 73:3 (June), pp. 257-76 http://tinyurl.com/dl20100105k. In this paper, Bernanke argued that the money stock is not a sufficient statistic for the determinants of nominal spending but instead that the capitalization and soundness of the banking system affects its ability to perform financial intermediation and has at times a powerful independent effect on nominal spending. In March 2009 Robert Lucas said that he did not understand this worry about an independent influence of the "credit channel" on nominal spending: "I avoided this bank bailout issue.... I don't really get it. Some of the problems you're talking about about deciding who gets paid and who doesn't, that's the whole function of bankruptcy law is to deal with that in an effective way. Now, it may be that the kind of neighborhood effects of the bankrupt banks are sufficiently different from the neighborhood effects of a bankrupt auto company -- that they need some kind of special treatment. But then it seems like the right public policy is something that -- maybe some kind of accelerated bankruptcy proceedings. Just to say make them well on all the money they've lost over this thing, I just -- I do not get it and I know of -- I don't know whether we're headed that way or not. I hope not.... Friedman and Schwartz have got a lot to tell us about the current situation..." Why do you think that Friedman and Schwartz's 1963 ascription in their Monetary History of the United States of the depth of the Great Depression exclusively to the collapse of the nominal money stock has had intellectual traction in a way that Bernanke (1983) apparently has not?
Why did so many economists retain their confidence that the USSR would in less than a generation catch up to the US in total GDP for so long?
Posted at 11:03 AM in Assignments, Readings | Permalink | Comments (28)
The first class of the course will be a very big-picture overview: How are economies different across time and space? How are they organized? Can all economies be fruitfully analyzed with the tools that we use to analyze modern market economies? Or must economies elsewhere and elsewhen from the modern North Atlantic (which somehow includes Hawaii, Japan, Australia, and New Zealand) be analyzed with different tools because they follow different laws of motion and behavior? This first week will lead us into the first part of the course which will cover the long era between 8000 BC and 1800 or so during which people were very poor, populations were very slowly-growing, the pace of technological and organizational innovation was very very low by our standards, and life was typically nasty and brutish and short.
I. Pre-Industrial Economies
The second part of the course will cover modern industrial economies: from the British Industrial Revolution up to the present day, focusing mostly on the North Atlantic but with side glances elsewhere in the world.
II. The Industrial Economic World
The third part of the course will take a historical look at the current financial crisis, and also at how economists have thought about financial crises for the past roughly two hundred years since the start of the industrial business cycle.
The first week of three will examine financial crises, their impact on the real economy, and economists' thoughts about financial crises and the industrial business cycle over the century between 1825 and 1914. It will thus trace both the birth of the industrial business cycle and also the birth and development of economists' thought about the industrial business cycle--that is, the birth of macroeconomics as we have known it.
The second week of three will consider the period from 1914 up through 1970 or so that spans World War I, post-WWI inflations, the Great Depression, WWII, and then the boom and inflation of the post-WWII period that catalyzed the development of the useful macroeconomics that we can use today to understand the current financial crisis, and what economic policies governments should try to cure it. The last of the three weeks on financial crises will start by looking at the history of macroeconomic thought from 1970 to 2008--a history that I think all have to admit is a somewhat sorry history, as it has left us with a discipline that is, as Narayana Kocherlakota says, of little use in helping us to understand either the cause or the development or the cure of our current macroeconomic distress. The bulk of this third class, however, will cover the cause, development, and potential cures for our current financial crisis and macroeconomic distress. I will thus break a treaty between macroeconomic theorists on the one hand and economic historians on the other by which we economic historians are supposed to keep our noses on the far side of 2000.
III. Macroeconomics in Historical Perspective
The last class of the semester will be a separate part for the course, a reflection and a kind of preachy summing-up.
IV. Conclusion
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Office Hours:
Spring 2010: Th9-10, 11-1, Qualcomm Cafe, Sutarja Dai Hall, or by appointment. Sign up for times at We Join in: http://www.wejoinin.com/[email protected]
Files:
Syllabus http://delong.typepad.com/economics_210a_spring_201/2009/11/syllabus-econ-210a-spring-2010.html
Jan 20: How Did We Get Here? http://delong.typepad.com/economics_210a_spring_201/2010/01/first-class-resources.html
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