Introduction to Economic History for Graduate Students

Econ 210a: Memo Question for February 2, 2011

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?

Econ 210a: Memo Question for January 26, 2011

"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?

January 19. Introduction, and the Malthusian Economy (DeLong)

20110119_210a.pdf

---

Open publication - Free publishing

---

Optional Reading: DeLong (1997): "On the 'Embedded Economy' Thesis"

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:

• From force--that because I am or my ancestors were better fed than you and know how to use weapons, you owe me a good share of your farm produce.
• From fraud--that because I can or my ancestors could get you into heaven or keep the space monsters from eating the sun, you owe me a good share of your farm produce.
• From long-run average market equilibrium scarcities and opportunities--that because it takes twice as much of society's resources to train and equip a blacksmith as it does to train and equip a farmer, the blacksmith's products should sell for twice as much.

I think that it is important to recognize that long-run social resource costs are themselves an input into the "embedding" process.

Economic Growth: The Ultimate Bird's-Eye View

20090121_growth_delong.pdf

Malthus on the Malthusian Economy

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...

Econ 210a Syllabus

January 19: Introduction, and the Malthusian Economy

20110107 210a_syllabus_1-7-11-1.pdf

January 19. Introduction, and the Malthusian Economy (DeLong)

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:

• That effective birth control is hard to do.
• That almost nobody wants effective birth control in a world in which surviving descendants are one of the very few ways you can save for your old age.
• That although customs and cultures can drive a large wedge between the standard of living at which population is stable and the poverty at which ovulation ceases and deficiency diseases collapse your immune system, such customs and cultures are unstable.
• That technological progress was never fast enough to get any group over the hump and into the range where female literacy and better public health begin to give people incentives to work hard to restrict their fertility.

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.