Introduction to Economic History for Graduate Students

Econ 210a: March 16, 2011: Walter Bagehot's Lombard Street in Contemporary Perspective?

20110316 Econ 210a.pdf

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Globalizations...

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?

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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.

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

20110119_210a.pdf

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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

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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.