About the Historic Gap between Rich and Poor Italians

Economic Inequality in Northwestern Italy: A Long-Term View (fourteenth to eighteenth centuries)

By Guido Alfani (Bocconi University)

URL: http://econpapers.repec.org/paper/dondonwpa/061.htm

Review by Emanuele Felice

Summary

The pioneering work by Simon Kuznets placed the evolution and determinants of economic inequality as one of the central subjects in economics and economic history. The recent success of Thomas Piketty’s latest book (see the Book Reviews section of the NEP-HIS Blog) bears witness to inequality being a topic of great interest to a wider public.

However, constructing reliable estimates of inequality for pre-industrial times is a highly-demanding task. This is the ultimate reason why, in spite of good theorizing and much speculation about the subject, we have so few “actual” figures for the Middle Ages and the Modern Era. The paper by Guido Alfani contributes to the latter, thus quenching our thirst for historical data. Indeed, other than van Zanden’s (1995) seminal work on the Low Countries, Alfani’s is the only comprehensive and thorough study of inequality for a large geography (i.e. the Piedmont region) over a long period of time (from the first half of the 14th century to the early 19th century). Moreover, Alfani provides some good interpretative hypotheses and viable explanations for the observed patterns: here there is much to think, and to learn, about the history of pre-industrial societies.

Guido Alfani

Guido Alfani

The article is well-organized and aims to expose as clearly as possible sources and methods − including some thorny, technical issues. Following an introduction where the relevance of the subject is highlighted in the context of previous systematic studies, a first section provides an overview of the progressive extension of and the fiscal reforms introduced by the House of Savoy into the Piedmont (from circa 1350 onwards). By the late 18th century the House of Savoy had become the most expansionist and successful of all the Italian states. However, it was perhaps not the most powerful one as the Bourbon’s rule in the south (i.e Naples and Sicily in the 17th and 18th centuries) was considerably larger and commanded more resources.

The Fountain of Life by  Giacomo Jaquerio ( c. 1375 – 1453) [one of the main exponents of Gothic painting in the Piedmont].

The Fountain of Life by Giacomo Jaquerio ( c. 1375 – 1453) [one of the main exponents of Gothic painting in the Piedmont].

In section 2, Alfani details the sources for his database. These included records of taxable property (estimi or catasti), which the communities of Piedmont compiled in order to distribute the fiscal burden among households. This because they had to decide how to pay the tasso, a direct tax imposed for the first time in 1562 which by the early 17th century had grown into the main fiscal instrument of the Sabaudian domains. About this source Alfini comments:

The “estimi” are particularly convenient for conducting large-scale studies, as they show an impressive stability through space and time. (p.8)

The Italian estimi can be divided in two categories: “per property” which include lands and buildings and were more common; and “per yield” which include capital, credits, and other movables.

Alfani points out that all the sources used in his estimates are based on estimi per property, which thus only track one of the components of wealth, real estates. But he also adds that there is good reason to believe that in pre-industrial societies (which were largely agricultural) wealth inequality is a good proxy of income inequality as the size of land holdings would determine income. Thus income and wealth would tend to move in the same direction − even more as they do today.

Based on the per property estimi, Alfani constructs a database made up of 16 communities and 12 times series. These include six cities and six series of rural communities (it is noted that seven rural communities are grouped in three aggregates, plus other three individual rural communities). This database is impressive indeed. The actual locations it covers are scattered throughout the Piedmont region, with benchmark years stretching from 1311 (Chieri) until 1772 (Saluzzo). A total of 55 estimi were used.

The Piedmont region is noted for its wine and cuisine

The Piedmont region is noted for its wine and cuisine

Sections 3 to 6 offer the main results of the article. In Section 3 he calculates and discusses a Gini index for each of the 55 estimi analysed. Other measures of inequality include the share of wealth owned by the top 5% and 10% of the population as well as inter-decile ratios. Section 4 delves into a discussion about the impact of disease and pandemics on inequality, from the Black Death to epidemics in the 17th century. Section 5 presents estimates of inequality at the regional level for the whole of the Piedmont: specifically estimates of Gini coefficients from the 16th to the end of the 18th centuries, which are then compared with those estimated for the Low Countries by van Zanden (1995). In this section Alfani also calculates the share of wealth owned by the top 10% and 5% at regional level from the 14th to the end of the 18th centuries.

gap4

Comment

From Alfani’s analysis, several findings stand out. Among these, the positive correlation between urban demographic growth and inequality, the fact that cities experienced greater inequality levels than rural areas, or the prominent role of the top rich in determining inequality changes. The most important result, however, is yet another one: the evidence that in Piedmont, during the Early Modern period (16th and 17th centuries), inequality was on the rise, both in cities and in rural areas, and independently from whether the economy was growing or stagnating. As the author states:

«This is a new finding that directly challenges earlier views that tended to explain inequality growth as the consequence of economic development.»(p. 43)

In this respect, it could even be argued that the well-known Kuznets curve should be relativized to a short phase of human history, the Industrial Revolution. This finding also has an impact on the debate about the Italian decline in the 17th century (e.g. Cipolla 1952), insofar as it provides empirical confirmation for an established literature (e.g. Romano 1972) holding that the Italian decline was also due to rising inequality, which reduced the opportunity for productive investments and the size of the national market, at a time of growing international competition.

2011-474--weight-gap-between-rich-and-poor-

Equally important can be the results about the consequences of epidemics for inequality. In this case, Alfani’s inquiry does not confirm earlier hypotheses based on Tuscan data (actually, on the Tuscan city of Pistoia), according to which after the Black Death there was a rise in inequality (Herlihy 1967). The case study of Piedmont tells us quite the contrary, and appears to be consistent with a vast literature stressing the decline of inequality due to higher wages, after the Black Death. The opposite, however, occurred after the plague of the 17th century: now, the rise in inequality (or at least the fact that in the medium term the plague did not prevent inequality from rising) was probably due to «the institutional adaptation that occurred in-between» (p. 44); namely, to the creation of institutions that prevented the fragmentation of inheritance, and thus of real estates, such as the fideicommissa. Quite correctly, in my view, the author reminds us that after the Black Death adaptation to a new environment, where epidemics had become endemic, occurred:

«and for the human species, adaptation also means institutional adaptation» (p. 23).

Alfani_Calamities and the Economy_Palgrave, London, 2013

References

Cipolla, C.M. (1952) ‘The Decline of Italy: The Case of a Fully Matured Economy’, The Economic History Review, 5(2): 178-187.

Herlihy, D. (1967) Medieval and Renaissance Pistoia: The Social History of an Italian Town, 1200-1430. New Haven, CO: Yale University Press.

Romano, R. (1972) ‘Una tipologia economica’, in R. Romano and C. Vivanti (eds.), Storia d’Italia. I caratteri originali. Turin: Einaudi, pp. 254-304.

Van Zanden, J.L. (1995) ‘Tracing the beginning of the Kuznets curve: Western Europe during the early modern period’, The Economic History Review, 48(4): 643-664.

Immigration and the Economy: An Interdisciplinary Subject

Immigrant Diversity and Economic Development in Cities: A Critical Review

By Thomas Kemeny (London School of Economics)

Abstract: This paper reviews a growing literature investigating how ‘immigrant’ diversity relates to urban economic performance. As distinct from the labor-supply focus of much of the economics of immigration, this paper reviews work that examines how growing heterogeneity in the composition of the workforce may beneficially or harmfully affect the production of goods, services and ideas, especially in regional economies. Taking stock of the existing literature, the paper argues that the low-hanging fruit in this field has now been picked, and lays out a set of open issues that need to be taken up in future research in order to fulfil the promise of this work.

URL: http://econpapers.repec.org/paper/cepsercdp/0149.htm

Revised by: Anthony C. Evans (final year graduate Business Studies & Marketing, Bangor University – Wales)

Summary

Kemeny’s paper was circulated by NEP-HIS on 2013-12-06 and it seeks to understand the relationship between immigrant diversity and economic performance, primarily by considering the effects of “interactions among a diverse populace” (p.1).

The review is motivated by the theory that “immigrant-diverse individuals could simultaneously improve economic outcomes by bringing together different perspectives and heuristics, and reduce performance by making co-operation more costly.” (p.2) This additional cost of co-operation is associated with Tajfel’s (1974) Social Identity theory, and is supported by the quoted findings of Richard et al. (2002), Bandiera et al. (2005) and O’Reilly et al. (1989); that teams who share few commonalities find it hard to integrate and suffer from reduced co-operation and higher staff turnover. Empirical studies by Hoffman and Maier (1961) and Joshi and Roh (2009) are cited, and display a modest positive economic impact of workplace diversity.

TomKemeny-238x239

Kemeny quotes Ottaviano and Peri’s (2006) findings that a 0.1 increase in the Fractionalization index increased native wages by 13% and rents more so within the US. Kemeny (2012) and Spaber (2010) find similar results, as does Bellini et al.’s (2013) European work. Alesina et al.’s (2013) global study finds birthplace diversity is positively related to GDP per capita and total factor productivity, with the strongest association in rich countries for high-skill workers.

However, Kemeny notes that many studies, including Suedekum et al.’s (2009) study of Germany and Nathan’s (2011) study of the UK, have demonstrated a negative economic effect of immigrant diversity, especially upon those in lower skilled jobs.

Citing empirical studies by Stephan and Levin (2001), Bosetti et al. (2012) and Hunt and Gauthier-Loiselle (2010), immigrant diversity is found to be positively linked to the number of research papers published and to the number of patent applications for highly skilled industries.

Kemeny finds that there is inconsistent evidence as to the link between immigration and entrepreneurship in Mariano et al. (2012), Audretsch et al. (2010) and Cheng and Li’s (2011) extant work.

imgres

Through his review Kemeny identifies a number of stylised facts across the relevant literature. Some of these follow.

The paper refers to a growing body of work supporting Bakens et al.’s (2013) findings that the individual’s characteristics emerge as the primary determinants of variation in wages and rents. Kemeny proposes individual heterogeneity may overstate diversity’s positive impact upon productivity, as immigrants may self-select areas based upon higher wages, personal interests and their skill level. The validity of the shift share instruments used to address reverse causality rely upon initial waves of immigrants having chosen locations based upon extra-economic concerns, which likely may not be the case.

Kemeny’s (2012) previous work finds that wages in areas with high levels of social capital, often promoted by regional institutions, are typically 7% higher than those living in equally diverse areas with lower levels of social capital, a consideration not accounted for by other authors.

Overall the paper finds little consensus as to the impact of team diversity within the organizational literature.

Several issues with the measurements currently used are highlighted. Productivity gains for lower-skilled labour may not necessarily result in wage increases, and process innovation within this segment may not be patented. Kemeny cites Alesina et al.’s (2013) findings that skin colour or language spoken at home are less likely to result in production complementarities than social values are. Their research finds ethnic fractionalization and birthplace diversity are largely unrelated, whilst birthplace also fails to capture the importance of second-generation immigrants. Under Roback’s (1982) Spatial Equilibrium, higher wages may either reflect greater productivity brought about by diversity, or compensate workers for the disutility of living in a diverse area. Because of this paradox one cannot determine from wages alone how productivity and diversity may be linked.

Kemeny condemns an inherent assumption of urban studies; that “bio-diversity reflects intellectual diversity” (p.35) and contends “the idea that national culture shapes heuristics and perspectives ought to be subject to empirical validation.” (p.37)

Kemeny argues, that based upon the literature reviewed, diversity is generally positively related to wages, and either rents, productivity or cultural amenities, with least square analysis’ demonstrating the direction of causality is from diversity to economic gain. It is reasoned that this indicates the productivity augmenting effects of immigrant diversity outweigh the cost of transacting across cultures.

Kemeny proposes that further work into the role of institutions, the relative importance of city specific manifestations of diversity and the differing impact of diversity between skill levels and industries would advance this modern field.

imgres

Critique

Value and Implications of the Research

Kemeny provides a useful viewpoint by combining the findings of both economic geography and organizational theory. In identifying limitations in the methodologies of both fields, future work can seek to address these issues and generate a better understanding of the relationship between immigrant diversity and economic development. This understanding may help inform frequently inaccurate (Economist, 2013) popular debates on immigration, which argue that immigration results in fewer jobs for natives (Kemeny, 2013) and a drain on state welfare (Economist, 2013). Furthermore greater understanding of how immigration affects the economy should result in better-informed immigration policy. The finding that institutions can augment economic gains may be beneficial to both immigrants and natives, and represent a pragmatic way to enhance the quality of life for both parties.

Limitations and Future Research

By omitting the level at which quoted results were found to be statistically significant, the paper makes it difficult to interpret the frequently contradicting results of the various research cited.

One issue Kemeny fails to address is whether mild racial or cultural preferences can produce extreme segregation in urban areas, as is illustrated by Schelling’s (1978) famous checkerboard model. Becker (1971) observed that the economic penalty to employers who display taste-based discrimination increased as the size of the group being discriminated against increased, therefore larger populations of immigrants should experience less discrimination and thus higher wages than smaller populations. Further discussion of the link between immigration and discrimination, and the economic impact of the latter may provide valuable insight to public policy debate and formulation.

Whilst Kemeny addresses the fact that many studies fail to acknowledge that individual competencies play a significant role, an issue the research does not expand upon is difference between immigrants of different cultural backgrounds. Immigrants from nations with similar language and cultural values will experience lower transactional costs (Rokeach, 1979), which correspond with Hofstede’s (2001) organizational research findings. Goodhart (2013) finds significant differences in economic prosperity between immigrants of different national origin in Britain during the 20th Century.

Whilst a controversial topic it must be noted that the recent consensus in psychology research is that there is a strong heritability of “intelligence” (Bouchard, 2004). As measures of “intelligence” have been shown to be linked to wage differentials (Benjamin et al. 2012), then it should be considered that the economic prosperity brought by immigrants may be related to their genetic makeup and enhancing genetic diversity (Ashraf and Galor, 2013; Ager and Bruckner, 2013). There is a growing body of work in this field of genoeconomics, broadly covered in Benjamin et al. (2012) and Navarro’s (2009) reviews of the existing literature, which could further enhance Kemeny’s spatial economics paper.

An additional source of heterogeneity is the individuals’ decision to emigrate. Ruiz and Vargas-Silva’s (2013) work finds that forced migration produces different economic effects to that of voluntary migration. An improved understanding of the reason for immigration may help explain the differences between skilled and unskilled labour, as one could hypothesise that those in skilled segments may be moving due to prearranged employment. The effect of capital stock brought by immigrants is also not considered, which would increase the steady state under the Solow (1956) model.

With the growing economic importance of Asia and Latin America (Mpoyi, 2012) future research considering immigration from the West to these nations would be of value to this field.

References

Ager, P.; Bruckner, M.; (2013) Immigrants’ Genes: Genetic Diversity and Economic Development in the US. Munich Personal RePEc Archive. Paper No. 51906

Ashraf, Q. and Galor, O. (2013) The ‘Out of Africa’ Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review. Vol. 103(1) pp.1-46

Becker, G. (1971) The Economics of Discrimination. 2nd Edition. University Of Chicago Press. Chicago.

Benjamin, D.; Cesarini, D.; Chabris, C.; Glaeser, E.; Laibson, D.; Guðnason, V.; Harris, T. et al. (2012) The promises and pitfalls of genoeconomics. Annual Review of Economics. Vol. 4 pp.627-662.

Bouchard, T. (2004) Genetic Influence on Human Psychological Traits: A Survey. Current Directions in Psychological Science. Vol. 13(4) pp.148-151

Goodhart, D. (2013) The British Dream: Successes and Failures of Post-war Immigration. Atlantic Books. London.

Hofstede, G. (2001) Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd Edition. Sage Publications. Thousand Oaks, CA.

Kemeny, T. (2013) Immigrant Diversity and Economic Development in Cities: A Critical Review. Spatial Economics Research Centre. London School of Economics. Discussion Paper 149

Mpoyi, R. (2012) The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business & Economics. Vol. 13(3) pp.36-47

Navarro, A. (2009) Genoeconomics: Promises and Caveats for a New Field. Annals of the New York Academy of Sciences. Vol. 1167 pp. 57–65

Rokeach, M. (1979) Understanding Human Values. The Free Press. New York. NY.

Schelling, T. (1978) Micromotives and Macrobehavior. Norton. New York, NY.

Solow, R. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics. Vol. 70(1) pp. 65-94

The Economist (Dec 21st 2013) British immigration. You’re Welcome.

The Economist (Nov 9th 2013) Little England or Great Britain.

Zhang, J. (2009) Tipping and residential segregation: a unified Schelling model. IZA Discussion Papers. No. 4413

Singing for Hitler – Choirs, Clubs and the Third Reich

Bowling for Fascism: Social Capital and the rise of the Nazi Party in Weimar Germany, 1919-33

Shanker Satyanath (NYU), Nico Voigtlander (UCLA) and Hans-Joachim Voth (Zurich)

URL: econpapers.repec.org/paper/zureconwp/147.htm

Abstract:

Social capital typically leads to positive political and economic outcomes. A growing literature also emphasizes the potentially “dark side” of social capital. This paper examines the role of social capital in the downfall of democracy in interwar Germany. We analyse Nazi Party entry in a cross-section of cities. Dense networks of civic associations such as bowling clubs, choirs, and animal breeders facilitated the Nazi Party’s rise. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital depended on the institutional context – in Prussia, where democratic institutions were stronger, the link between party entry and association density was markedly weaker.

Reviewed by Ronan McGarry (final-year BSc Economics student, Queen’s University Belfast)

This NBER working paper was distributed by NEP-HIS-2013-07-15. The authors seek to clarify and quantify the role that social capital played in the rise of the Nazi Party and the ensuing downfall of the democratic Weimar Republic. In order to do so, econometric analysis of the link between local clubs/societies and Nazi party membership is conducted. The authors also seek to add to the current literature on the ‘dark side’ of social capital (Putnam 1995).

The literature on positive and negative outcomes as a result of high levels of social capital is conflicting. In his 1995 essay ‘Bowling Alone’, Robert Putnam wrote that communities with high levels of social capital ‘promote participatory democracy’. However, Riley (2005) would refute this and point to society-rich Northern Italy – which turned fascist in the 1930s. Furthermore, Chambers & Kopstein (2001) point out that after the collapse of the USSR, Serbs began ethnically cleansing their Balkan neighbours, even though Serbia had fairly intense levels of social capital. This paper turns its attention to Weimar Germany in an effort to shed more light on the topic.

It must be noted that the authors were not the first to tackle Weimar Germany’s fall in terms of social capital. However, they are the first to have done so econometrically. Berman (1997) showed that ‘a robust civil society helped scuttle the twentieth century’s most critical democratic experiment, Weimar Germany’ explaining that the ‘high levels of association served to fragment rather than unite German society.’ This paper builds on Berman’s conclusion by comparing numerically the rates of civic association intensity in German towns and cities against the rate of Nazi Party membership uptake; whilst controlling for various other political and socio-economic variables.

The authors collected data on 111 German towns and cities in modern-day Germany. One problem here is that Weimar Germany’s eastern border was much further to the east than modern-day Germany’s. This means that missing from this dataset are cities like Breslau (now Wroclaw, Poland) and Konigsberg (now Kaliningrad, Russia). Both of these cities were very Nazi-friendly – the Nazis received 44% of Breslau’s vote in 1932 (Davies & Moorhouse, 2011) and 54% of Konigsberg’s in 1933 (Jasinski, 1994) and so their exclusion from the dataset is disappointing in terms of accuracy.

Missing from the authors' dataset are cities like Breslau, Koningberg and Danzig.

Missing from the authors’ dataset are cities like Breslau, Koningberg and Danzig.

Following this, the authors begin the presentation of their findings with an interesting comparison of two similar towns – Kleve and Coburg. Both were similar in size, but with large differences in the presence of associations. Coburg was far denser in terms of civic society – with a rate of 2.99 associations per 1000 inhabitants, compared to Kleve’s 0.89 per 1000. Then, as their hypothesis predicts, Coburg saw an ‘80% greater uptake’ (p. 15) in Nazi Party membership than Kleve between 1919 and 1933.

However, whilst this serves to broadly illustrate the authors’ point, I find this comparison disingenuous in that in picking Coburg, they happen to select one of the most Nazi-friendly cities in Germany to make their point. Indeed, Coburg’s city hall was the first in Germany to fly the Nazi flag. My point is that by picking a town in Bavaria (the home province of the Nazis) and comparing it to a town in the far north, they are ignoring potential geographical concerns. Indeed, if the authors had of compared Kleve with Hamburg (another Northern city with a similar Association Density to Coburg’s), then they would have found their results running the wrong way, as Hamburg has a higher Association Density but a lower Nazi Party entry rate!

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

The authors then present their numerical findings. They announce that ‘association density strongly and significantly predicts higher entry rates into the NSDAP’, with ‘the per capita entry rate increasing by 0.4 standard deviations for every standard deviation increase in association density’ (p.16), results which support Chambers & Kopstein (2001) and Riley’s (2005).

Following this, the authors make an effort to quantify the differences between Putnam’s (1995) ‘bonding’ (exclusive groups such as Gentleman’s Clubs) and ‘bridging’ (inclusive groups such as choirs or bowling clubs) social capital in terms of their effects on Nazi membership uptake. Putnam believed bonding social capital to have adverse effects, with bridging social capital fulfilling the opposite role. However, the authors find bridging capital to have ‘positive, significant and quantitatively meaningful coefficients, which are similar in magnitude to those for bonding capital’ (p.21) – suggesting that both types of associations were ‘important pathways’ in terms of Nazi party membership.

German youth choir, and example of bridging capital. The sign translates to 'We sing for Adolf Hitler'.

German youth choir, and example of bridging capital. The sign translates to ‘We sing for Adolf Hitler’.

One final important contribution this paper makes is in terms of investigating the evidence that social capital can develop a ‘dark side’ (Putnam, 1995) and actually undermine a functioning democracy – which the authors claim is ‘missing’ from current literature. To do so, they examine the state of Prussia, which was more ‘pro-democracy’ and was ‘governed more competently’ (p.22). What they find is that before the gradual weakening of Prussian democracy in 1930, the relationship between party entry and association entry in Prussia was ‘systematically weaker’ (p.23) than the rest of Germany. What this shows is that a ‘functional, strong, democratic government’ (p.24) can help prevent social capital showing its ‘dark side.’

To conclude, this paper offers an interesting insight into an area of social capital literature which had not been studied econometrically before. Whilst it is indeed disappointing that the authors could not include important eastern European cities that are no longer a part of Germany, they do make a fair point that massive war damage in these cities led to the loss of many public records and as such, makes it impossible to gather data. On a positive note, the presentation of Prussia as a case in which social capital can suddenly change from a democracy-supporting vehicle to one which undermines democracy completely is welcomed, and suggests that the manner in which social capital operates is heavily dependent on the ‘wider institutional context’. In terms of future study into the ‘dark side’ of social capital, it might be interesting to apply these econometric methods to the rise of other fascist parties, such as the Golden Dawn in Greece, or further study on fascist – building on Riley’s 2005 work.

Bibliography

Berman, S. (1997). Civil society and the collapse of the Weimar Republic.World politics49, 401-429.

Chambers, S., & Kopstein, J. (2001). Bad civil society. Political Theory, 837-865.

Davies, N., & Moorhouse, R. (2011). Microcosm: a portrait of a central European city. Random House.

Jasiński, J. (1994). A history of Konigsberg: sketches of the thirteenth to twentieth centuries. (Historia Królewca: szkice z XIII-XX stulecia) Książnica, Poland.

Putnam, R. D. (1995). Bowling alone: America’s declining social capital. Journal of democracy6(1), 65-78.

Riley, D. (2005). Civic associations and authoritarian regimes in interwar Europe: Italy and Spain in comparative perspective. American Sociological Review70(2), 288-310.

Satyanath, S., Voigtländer, N., & Voth, H. J. (2013). Bowling for fascism: Social capital and the rise of the Nazi Party in Weimar Germany, 1919-33 (No. w19201). National Bureau of Economic Research.

 

(Spoiler Alert) Game of Science: Higher life expectancy does not cause Economic Growth

Disease and Development: A Reply to Bloom, Canning, and Fink

By Daron Acemoglu and Simon Johnson (both MIT)

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:20064&r=his

Abstract

Bloom, Canning, and Fink (2014) argue that the results in Acemoglu and Johnson (2006, 2007) are not robust because initial level of life expectancy (in 1940) should be included in our regressions of changes in GDP per capita on changes in life expectancy. We assess their claims controlling for potential lagged effects of initial life expectancy using data from 1900, employing a nonlinear estimator suggested by their framework, and using information from microeconomic estimates on the effects of improving health. There is no evidence for a positive effect of life expectancy on GDP per capita in this important historical episode.

Reviewed by Sebastian Fleitas

 “The game of science is, in principle, without end.   He who decides one day that scientific statements do not call for any further test, and that they can be regarded as finally verified, retires from the game.” 

The Logic of Scientific Discovery, Karl Popper, 1934.

Bill Gates' Infographics

Bill Gates’s Infographic.

Not a long time ago, on April 25, Bill Gates posted an infographic on his blog revealing which is the world’s deadliest animal. Sharks, bugs, snakes and many very scary animals are not even close. The mosquito has the first place by far. They carry terrible diseases, including malaria, which kills more than 600,000 people every year. This infographic is just a reminder of how important it is to improve health around the world. Better health conditions could make millions of people live longer and better lives. But will these better health conditions (and a longer life expectancy) actually cause economic growth? Cross-country regression studies show a strong correlation between measures of health and both the level of economic development and recent economic growth. But, as we know, correlation does not imply causation.

What Acemoglu and Johnson (AJ hereafter) do in their 2014 paper (NEP-HIS 2014-05-17) is just to play the Game of Science. AJ (2007) argue that life expectancy does not cause economic growth and that previous studies had not established a causal effect of health and disease environments on economic growth. Since countries suffering from short life expectancy are also disadvantaged in other ways that are correlated with their poor health outcomes, previous macro studies may be capturing the negative effects of these other unobservable disadvantages. To address this identification problem, AJ (2007) used an instrument for the life expectancy: medical advances that occur at the health frontier, interacted with variation in the prevalence of diseases across the world, used together to construct a predicted mortality variable. The adoption of new medical practices is clearly endogenous, but the authors argue that the technology at the frontier is potentially exogenous. Since there was variation across countries in the prevalence of different diseases, the timing of new medicine advances has a different effect on the predicted mortality for different countries. In other words, the predicted mortality variable satisfies the requirements of a good instrument: it is correlated with the life expectancy in the country, but it is arguably not correlated with other unobservables that determine growth that may be changing at the same time in a country.

Dr. Jonas Salk and Dr. Albert Sabin developed two different polio vaccines that have pretty much  almost eradicated polio from the world.

Dr. Jonas Salk and Dr. Albert Sabin developed two different polio vaccines that have pretty much almost eradicated polio from the world.

Bloom et al. (2013, hereafter BCF) disagree with AJ’s strategy and conclusions. In their paper, which earlier appeared as an NBER working paper, they argue that the problem with AJ’s instrument is that it assumes the predicted mortality to be exogenous and not affected by contemporaneous income shocks. In other words, it implies that the initial mortality rate in 1940 should be unaffected by income levels in 1940, which is difficult to believe. As BCF explain very clearly, the “natural experiment” constructed by AJ is flawed. The “treatment group” that received large health gains from technological innovations is fundamentally different from the “control group” that received low health gains, since the “treatment group” had lower life expectancy initially. Therefore, if initial conditions are important for subsequent economic growth, the results will be biased if these initial conditions in 1940 are not considered. BCF included the level of life expectancy in their econometric specifications (a “partial adjustment model”) and they concluded that exogenous improvements in health due to technical advances associated with the epidemiological transition appear to have increased income levels.

In their reply to the reply, Acemoglu and Johnson (2014) address by different means the concern raised by BCF about their original work. First, in order to capture the long-run effects of the initial life expectancy, they include the level of life expectancy in 1900 interacted with time dummies in their decadal panel data set (which runs from 1940). Second, they estimate the “partial adjustment model” of BCF via non linear GMM, since the linear estimation of BCF’s specification will lead to a great deal of multicollinearity and the standard errors become very large. Finally, they use microeconomic estimates from another paper to calculate potential macroeconomic effects of current life expectancy on future growth and examine the implications of their baseline results. AJ conclude that all these approaches confirm that their main results are robust. There is no evidence that increases in life expectancy after 1940 had a positive effect on GDP per capita growth.

There are three issues in this Game of Science that I would like to comment on. First, the intent to quantify the contribution of health to economic growth is extremely relevant for both scientific and policy-related motivations. The general conclusion of the debate, at this stage of the game, is that health conditions were not a factor that shaped the differences in GDP per capita during the second half of the 20th century. Even more generally, the evidence casts doubts on the views that health has a first-order impact on economic growth. With this in mind, it is important to recognize the limitations in the study, especially to extract conclusions for today’s effect of health on economic growth. This is recognized by AJ, who warn that international epidemiological transition was a one-time event and that the diseases that take many lives in the poorer parts of the world today are not the same as those 60 years ago. Despite these considerations, it is important to notice that no author in this debate has questioned the crucial role of improving health conditions to save and improve the lives of millions of people.

Correlation and Causation

Correlation versus Causation

Second, it is important to highlight that the main contribution of AJ is that they provide a sound way to address the problem of endogeneity in order to answer this important question. It is not the first time that Acemoglu and Johnson find a way to design a natural experiment to address some fundamental development questions by using exogenous variation in a country-level panel data setting. In another famous paper, Acemoglu, Johnson and Robinson (2001, AJR hereafter) address the problem of endogeneity that raises in the study of the linkages between income and institutions with the famous instrument of mortality rates of European settlers in different colonies. In both occasions Acemoglu and co-author(s) show us in practice the nuts and bolts of economists’ empirical work, that is, to address the endogeneity concerns by doing good research designs and by finding exogenous sources of variation.

Finally, I see this debate as a privileged example of Popper´s quote. In this short reply to BCF, AJ (2014) present further tests for their results in AJ (2007), overcoming the important point that BCF raise. This is a fair game; both articles are forthcoming in the Journal of Political Economy and the database and programs for AJ papers can be downloaded from Daron Acemoglu’s webpage at MIT. Even more, this is not the first time these authors play the game in the same way. A similar, and also very illustrative debate about AJR (2001) and David Albouy’s critiques can be found in the American Economic Review, or in the NBER working paper. In both debates, Acemoglu and co-author(s) present more evidence on their results that are robust to additional tests, but in both episodes we gain from the debate. We just need to recall that our knowledge is always limited by the evidence we have at the moment, and that this evidence will change over time. After all, in the Game of Science, just like in another famous game, you do not know how it is going to end, even if you read all the books that have been published on the topic.

The institutional co-evolution of proto-multinationals

The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623

By Oscar Gelderblom (University of Utrecht), Abe de Jong (Erasmus University Rotterdam) & Joost Jonker (Universities of Amsterdam and Utrecht)

URL: http://ideas.repec.org/p/ems/eureri/32952.html

Abstract

With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.

Reviewed by Stephanie Decker

The Dutch East India company may be among the best researched businesses of all time, but it is testament to its importance as a proto-multinational and the quality of its archive that research on this firm continues to inform contemporary research debates. The working paper by Gelderblom, De Jong & Jonker (NEP-HIS 2014-01-17), which has since been published in the Journal of Economic History, is interesting as it deals with the early years of the VOC (Vereenigde Oostindische Compagnie), and presents both a historical narrative as well as some distinctive challenges to previous assumptions. Their paper has to be seen as both an interesting contribution to other researches on the VOC, as well as some more general debates.

The continued interest in this very old company is due to a variety of reasons. Even a short sweep of recent work that relates to the VOC shows a remarkable breadth of themes. Wim van Lent has compared management policies of the VOC with its competitor, the English East India company, to understand some problems of its organizational evolution (Sgourev & Van Lent, 2011). This comparison is so intriguing not just because of the Dutch-English colonial competition during this time period, but also because the two East India companies were organized very differently, and almost provide a naturally occurring counterfactual for each other in a laboratory that tests organizational effectiveness at long distance.

As both firms date back to the seventeenth century, and were among the first well-documented examples of how organizations dealt with the challenges of managing across vast distances, their corporate histories are of great importance in and of themselves. Both provide organizational solutions to some of the perennial problems of multinationals, which struggled with poor communication and oversight of operations, especially the difficulties of enforcing control and monitoring the trustworthiness of its agents.

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Gelderblom et al. discuss the attitudes and conflicts within the Dutch Republic over the control of the VOC, the world’s first modern corporation

But despite all of these similarities to the multinationals of later stages, the East India companies were also fundamental different, and creations of their own time. The companies, especially the VOC, often took on roles that made them quasi-governmental bodies. As a result, they were involved in some of the day-to-day issues of governance of empire, which made these archives particularly rich. Thus they have been researched beyond the narrow confines of business history, and the particular insights that can be gained from those files have been discussed in great detail by Ann Laura Stoler (2009), a well-known postcolonial historian of gender and empire. The conduct of business often involved the company in political and personal issues well beyond what one would usually expect to see in a business archive, which offers rich contextual insights into the time period and its attitudes.

It is in this regard that the paper by Gelderblom et al. is interesting, as it discusses the attitudes and conflicts within the Netherlands over the control and financing of the VOC, and the exact rights and obligations of its directors. The paper takes core historical values such as contextualization and contingency (O’Sullivan & Graham, 2010) seriously, and paints a rich picture of the time period and some of the characters that influenced the decision-making within and beyond the VOC. The importance of these issues lies in more conceptual debates about the evolution of limited liability in the West (as opposed to other commercially vibrant areas such as the Middle East). Gelderblom et al.’s analytically structured narrative (Rowlinson, Hassard & Decker, 2014) highlights that although the VOC possessed some important legal features that we commonly associate with modern corporations, others developed only during its first years of operations in response to external pressures.
Consequently, having acquired two key features of the modern corporation (the split between ownership and management and transferable shares) from the outset, the VOC obtained three more (a permanent capital, limited liability for directors and by extension legal personhood) step-by-step over a period of some twenty years. Thus the five features did not come as a package, as a coherent logical set.

Their narrative shows how most of these pressures reflected financial constraints, as the large-scale trading activities in conjunction with military expeditions were a far larger undertaking than anything that had hitherto been financed on the Amsterdam money markets. This is an important contribution, and their short discussion in the conclusion quite sensitively highlights that some assumptions about the superiority of the Western institutional frameworks, such as argued for by Kuran (2010), are perhaps too ethnocentric to fully understand not just the different evolution of institutions in other cultures, but can also blind researchers to the historically contingent development of the legal frameworks that we now take for granted.

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Gelderblom et al. hide much of their contribution in their paper’s appendix

In light of the above, it is noticeable that the actual narrative takes up the largest part of the paper, and that it is only at particularly important junctures that the historiographical literature is challenged, while the framing in the introduction and conclusion is more heavily conceptual. These insights that can only be developed from a careful, in-depth historical investigation perhaps deserve better highlighting. This extends to the title, which does not quite do justice to the large themes that inform the historical narrative. Finally, it is only in the appendix that it becomes clear for readers not familiar with the nature of the VOC archive that this early period that the paper deals with is indeed not as well-researched as the later period, especially in terms of its financial performance. All of this adds up to another interesting angle of research on the VOC, which as a company and an organizational archive is clearly a case of great importance for the history of business and its institutional developments.

References:

  • Kuran, T. 2010. The Long Divergence: How Islamic Law Held Back the Middle East. Princeton: Princeton University Press.
  • O’Sullivan, M., & Graham, M. B. W. 2010. Guest Editors’ introduction: Moving Forward by Looking Backward: Business History and Management Studies. Journal of Management Studies, forthcoming.
  • Rowlinson, M., Hassard, J., & Decker, S. 2014. Research Strategies for Organizational History: A Dialogue between Historical Theory and Organization Theory. Academy of Management Review, 39(3).
  • Sgourev, S. V., & van Lent, W. 2011. The Right Amount of Wrong? Private Trade and Public Interest at the VOC European Group of Organization Studies. Gothenburg, Sweden.
  • Stoler, A. L. 2009. Along the Archival Grain: Epistemic Anxieties and Colonial Common Sense. Princeton: Princeton University Press.

On Macroeconomics After the Financial Crisis

Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis?

By Oliver Landmann (Albert-Ludwigs-University Freiburg)

Abstract: The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.

Persistent Link: http://EconPapers.repec.org/RePEc:fre:wpaper:27?

Reviewed by Catherine Dorman (final-year BSc Business Economics student, Bangor University, Wales)

Summary

This paper was distributed by NEP-HIS on 2014-02-08, and it addresses the impact that the recent financial crisis has had upon macroeconomic thought. Specifically in terms of how the New Neoclassical Synthesis has held up to scrutiny following the most recent economic debacle. Landmann offers an overview of the history and progression of macroeconomic thought from the “Keynesian revolution” (p.4) to New Neoclassical Synthesis economics, right up to modern day contemporary economics, and its response to current macroeconomic issues.

The purpose of Landmann’s paper is to explain how economics has evolved since the Keynesian school of thought emerged in the aftermath of the 1930s depression, and to show how the macroeconomic community has been left splintered as a result of the recent financial crisis, without a consensus in sight. It asks the questions: Why has this occurred? How did the New Neoclassical Synthesis fail to foresee or explain the worst economic downturn since the 1930s? Finally, it asks the all-important question: Is it necessarily a bad situation to be in? Or has having smashed the previous concept to pieces resulted in an environment in which macroeconomics can really explore and develop itself without the shackles of archaic and contextually inapplicable economic theory?

Prof. Dr. Oliver Landmann -Bild Schneider

Landmann introduces his paper by assessing the state of macroeconomic affairs, operating within a New Neoclassical Synthesis environment, in the run up to the financial crisis of 2008. The ‘Great Moderation’, described a period of economic constancy spanning from the 1980s to 2008, which was characterized by a continually stable business cycle (Davies and Kahn, 2008). Famously, Ben Bernanke, who coined the phrase ‘Great Moderation’, is quoted as having attributed this period of economic success to structural change, improved macroeconomic policies, and good luck (Bernanke, 2004). Ultimately, Landmann describes a period in which the great moderation had lulled the economic community into a false sense of stability, much like that described by Hymen Minsky (Minsky, 1992).

The next section of the paper is dedicated to creating a contextual understanding, and this is achieved through showing the evolution of economics thought from Keynes to the New Neoclassical Synthesis.

Consider Fig 1 for a brief overview of the changes of economic thought from the 1930s to 2008:

Fig. 1
Figure1

As is evident across each of these theories, their explanatory power tends to be relatively finite. In the case of Adam Smith and John Keynes’ theories, they were deconstructed and meshed in order to explain the economy’s operations at a specific point in time, and this came to be known as the Neoclassical Synthesis. This was largely credited to the work of Paul Samuelson during the 1950s (Samuelson, 1955). It took the underlying idea of Keynesian theory of underemployment, with the notion that monetary and fiscal policy can be employed to reduce this. It could therefore use classical equilibrium analysis to explain resource allocation and relative prices (p4). The economic policy was successfully adopted in developed countries as an effective treatment for the economy after the Second World War.

It was from the stability and growth that was created through the adoption of this macroeconomic approach, which helped to develop confidence in the prescriptive capabilities of economic theory. However, as history has taught us, ceteris paribus does not hold in reality. The theory was largely nullified in the 60’s and 70’s, because it had been unable to predict stagflation, and the Philips Curve was completely undermined (Motyovszki, 2013).
Consider Fig 2 for a concise history of the economic theory covered in this paper.

Fig. 2
Figure 2
(Source: Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis? By Oliver Landmann.)

The result of this was a new hybrid economic theory: New Classical economics. From this theory came the Real Business Cycle model, which argued that cycles result from the reactions of optimizing agents to real disturbances, for example, changes in technology.
In the 1970s, the New Neoclassical Synthesis emerged, with a combination of New Keynesianism and New Classical theories, and the basis of economic practice during the Great Moderation. It was felt amongst policy makers that the short term interest rate was enough of an instrument in economic management, and that the business cycle was believed to have been overcome (Aubrey, 2013).

Landmann’s paper addresses how the economic crash of 2008 threw macroeconomics into turmoil. The New Neoclassical Synthesis had not fully appreciated the effects of the financial market within its model, and the result was that it was inadequate as a means of remedying problems in the economy (Pike, 2012). Landmann makes a good point of acknowledging that although financial economics took great consideration of the behavioural antics of the banking sector, within the actual practiced model of the New Neoclassical Synthesis, these were fundamentally disconnected.

In light of this, the once unquestioned macroeconomic doctrine was suddenly under scrutiny. One of the greatest criticisms of the New Neoclassical Synthesis is its reliance upon “elegant” (p12) mathematical equations, which are often predictively insufficient due to the sheer number of assumptions that have to be made in order to create a working model. It doesn’t fully estimate factors such as irrationality and uncertainty (BBC NEWS, 2014) and the result of this is that the results can be wildly inaccurate (Caballero, 2010). This can also create coordination problems from assumptive behavioural models, such as the Robinson Crusoe model, which become overly stylized to the detriment of economic viability (Colander, 2009).

Consequentially, macroeconomics has begun to pay more focus to realistic behaviour, given that information is rarely perfect in actuality (Caballero, 2010; Sen, 1977).

Landmann concludes that out of the financial crisis, there has been a flood of new macroeconomic theories develop, and that the New Neoclassical Synthesis still has pedagogic merit. He does, however, primarily blame the era of Great Moderation for a period of complacency amongst economic academics. The simple acceptance of one concept of economics based purely on its merit during a stable business cycle, without inquisitive forethought into how it would respond when faced with an exogenous or endogenous shock, is Landmann’s greatest criticism.

Critique

This paper is incredibly relevant, and its themes and messages are certainly ones that economists need to be considering in the aftermath of such a fresh and colossal economic recession. There is perhaps an over simplification of some of the timeline of economics: broadly defining all economists during the Great Moderation as being one school of thought is unfair and inaccurate, but for the purpose of the paper, it is perhaps forgivable.

Landmann makes little mention of the pattern by which economic thought often evolves. Gul, Chaudhry and Faridi describe economic thought as developing from “quick fixes” (Gul et al. 2014: 11), and this would help to explain why, during the Great Moderation, very little new economic thought was developed: the need wasn’t there. Through their histories of economic development, Gul et al. (2014) and Landmann,suggest that macroeconomics is reactionary as opposed to precautionary, despite its attempts to be prophetic.

This echoes the “Lucas Critique”, the understanding that economic equations developed and implemented during one policy system, are unlikely to remain relevant or explanatorily applicable during another (Lucas, 1976).

Finally, it does little to explore the external factors that led to the period of Great Moderation. Globalisation had really taken a hold during this time, with containerization in full flow (at 90% of all non-bulk cargo worldwide being moved by containers on transport ships (C. E. Ebeling, 2009)), and advances in computation and communication technology (Bernanke, 2004) which helped to stabilize inventory stocks – something that is acknowledged as a contributory factor in cyclical fluctuations (McConnel and Quiros, 2000).

Ultimately, the paper makes the same conclusions that most macroeconomic papers do. There is no definitive explanation for everything that occurs within the economy, and certainly no blanket approach that will procure the most lucrative outcomes on every occasion. This paper goes a step further to explain why it can be damaging to rigidly subscribe to one theory of macroeconomics: it discourages continual change and forethought, which in turn can stunt the evolution of explanatory macroeconomic thought.

References

Aubrey, T., 2013. Profiting from Monetary Policy: Investing Through the Business Cycle. 1 ed. New York: Palgrave MacMillan.

BBC NEWS, 2014. Did Hyman Minsky find the secret behind financial crashes?. Available at: http://www.bbc.co.uk/news/magazine-26680993 [Accessed 07 April 2014].

Bernanke, B. S., 2004. Remarks by Governor Ben S. Bernanke At the Meeting of the Eastern Economics Association Available at: http://www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/ [Accessed 07 April 2014]

Ebeling, C. E. 2009. Evolution of a Box. Invention and Technology 23(4): 8-9.

Caballero, R. J., 2010. Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome. Journal of Economic Perspectives 24(4): 85-102.

Colander, D. C. et al., 2009. The Financial Crisis and the Systemic Failure of Academic. Kiel: Kiel Institute for the World Economy.

Davies, S. J., and Kahn, J.A., 2008. Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels. Cambridge, MA: National Bureau of Economic Research. Available at: http://EconPapers.repec.org/RePEc:nbr:nberwo:14048 [Accessed 07 April 2014]

Gul, E., Chaudhry, I. S. and Faridi, M. Z., 2014. The Classical-Keynesian Paradigm: Policy Debate in Contemporary Era. Munich: Munich Personal RePEc Archive. Available at: http://econpapers.repec.org/paper/pramprapa/53920.htm [Accessed 07 April 2014]

Lucas, R. E., 1976. Econometric Policy Evaluation: A Critique. Carnegie‐Rochester, Carnegie‐Rochester Conference.

McCombie, J. S. L., and Pike, M., 2012. The End of the Consensus in Macroeconomic Theory? A Methodological Inquiry. Unpublished. Cambridge Centre for Economic and Public Policy WP02-12, Department of Land Economy: University of Cambridge. Available at: http://www.landecon.cam.ac.uk/research/real-estate-and-urban-analysis/ccepp/copy_of_ccepp-publications/wp02-12.pdf [Accessed 07 April 2014]

McConnell, M. M., and Perez Quiros, G., 2000. Output Fluctuations in the United States: What Has Changed Since the Early 1980s?. Federal Reserve Bank of San Francisco. Available at: http://www.frbsf.org/economic-research/events/2000/march/structural-change-monetary-policy/output.pdf [Accessed 07 April 2014]

Minsky, H. P., 1992. The Financial Instability Hypothesis. New York: The Jerome Levy Economics Institute of Bard College.

Motyovszki, G., 2013. The Evolution of the Phillips Curve Concepts and Their Implications for Economic Policy. Budapest: Central European University.

Samuelson, P., 1955. Economics. 3rd ed. New York: McGraw-Hill.

Sen, A. K., 1977. Rational Fools: A Critique of the Behavioral Foundations of Economic Theory. Philosophy and Public Affairs. 6(4): 317-344.

Cold, Calculating Political Economy’: Fixed costs, the Rate of Profit and the Length of the Working Day in the Factory Act Debates, 1832-1847

By Steve Toms (Leeds University Business School)

URL: http://econpapers.repec.org/paper/pramprapa/54408.htm

The paper re-analyses the evidence presented by pro and anti-regulation interests during the debates on factory reform. To do so it considers the interrelationship between fixed costs, the rate of profit and the length of the working day. The interrelationship casts new light on the lobbying positions on either side of the debate. It does so by comparing the evidence presented in the debates before parliament and associated pamphlets with actual figures contained in the business records of implicated firms. As a result the paper identifies the compromise position of the working day length compatible with reasonable rates of profit based on actual cost structures. It is thereby able to reinterpret the validity of the claims of contemporary political economy used to support the cases for and against factory regulation.

Reviewed by Mark J Crowley

This paper was circulated by NEP-HIS on 2014-03-22 and its a follow up to that reviewed by Masayoshi Noguchi in an earlier post on the NEP-HIS blog (click here)

This second paper by Toms draws on a range of archival materials from both government and businesses to explore in detail the implications of legislative changes on British business during the industrial revolution.  It shows how the debates concerning the implementation of stricter working hours were contentious. Outlining the difficulties faced by the government and businesses to uniformly apply these new measures, particularly since businesses were exposed to different pressures according to their contribution to society, it shows how these factors further influencing the implementation and drafting of these measures.   By citing the debates of the anti-regulation bodies in Parliament, and also Parliamentary debates, it exemplifies how the interpretations of profit influenced the debates tabled by the Ten Hours movement – the pressure group created with a view to enshrine, in legislation, a maximum 10 hour working day.   This perspective in itself is new, particularly since it moves away from the traditional approaches adopted by trade union historians such as Alistair Reid and others who have examined the influence of unions in these disputes, but have examined them from the perspective of strikes (Reid, 2005).

 

Summary

Adopting a theoretical approach, especially in its examination of different interpretations of profit in the nineteenth century, this paper scrutinizes the range of factors that determined wages in nineteenth century factories, concluding that the reasons were much more complex than originally assumed.  In claiming that accounting manipulators were used as a major force in setting these wages, Toms shows how the considerations governing the decisions about wages were based on a range of accounting methods, although these methods at this time were not well-developed.  Furthermore, he claims convincingly that accountancy was poorly practiced in the nineteenth century, primarily owing to the apparent paucity of regulations governing the profession.   In adopting this approach, Toms highlights the two sides of the debate suggested by historians so far concerning the role of accountancy, that being: that it did not have an important role at all; or that it played a role that was sufficient to encourage competition.  By doing so, he has lucidly integrated the laissez faire ideology to elucidate the role of accountants in the policymaking process.

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Pressures on workers and the arduous hours did result in greater pressure on government to develop measures to regulate working hours

Much of the debates concerning workplace rights have adopted either a policy history perspective (examining the efforts of the government to regulate the economy) or a social history perspective (examining the perceived improvement in rights for workers).  Yet a detailed analysis of the implications of company accounting on government policy decisions has not yet been undertaken.  While economic historians such as Nicholas Crafts have used econometrics as a method to try and explain the causes of the industrial revolution, (Crafts, 2012) little attention has been given to the implications of these changes in terms of workplace legislation on not only the workers themselves, but on the calculations affecting industrial output and their response to government intervention.  Through examining the role of prominent socialists such as Robert Owen, this paper highlights the complex nature of the debates concerning profits, loss and its correlation with productivity to show that while the pro-regulation movement sought to protect the rights of individual workers, the anti-regulation movement created an inextricable link between the reduction of profit and the justification for longer working days. Locating this argument within the debate concerning fixed costs, it demonstrates how the definitions and arbiters of profits, loss and value was a moveable feast.

Robert Owen's ideas to reform the system and ensure greater equality were especially influential

Robert Owen’s ideas to reform the system and ensure greater equality were especially influential

This approach to the data has led to a different account of the costs faced by businesses than has hitherto been suggested by historians, and while Toms is careful to claim that this does not resolve the conceptual disputes surrounding the practice of accounting in the nineteenth century, it does provide a platform for further debate and a re-examination of the figures.  For example, in the analysis of the Ashworth accounts, Toms claims that the adoption of a variable approach to costing of volume-based products shows an annual running cost of £2500 per year, £3800 less than Boyson concluded in his 1970 study.  In his analysis of profit, Toms concludes that there could be a 3 hour variable that would not have detrimentally affected the profitability of companies.  Claiming that profitability would be at last 10 percent with 58 hour or 55 hour working week, this challenges previous assumptions those longer working hours would yield greater profits.  However, he highlights that the only significant difference would be that if these figures were compared to the onerous 69 hour week, where the profit margins could be expected to rise by a further 5 percent, although the pro-regulation body, for the purposes of strengthening their argument, presented this variable as high as 15 percent.

The final part of the paper lucidly examines the impact of foreign competition.  Citing the increased costs of British production when compared with European counterparts, with Manchester reported to be 50 percent higher in terms of spinning production costs than Switzerland, Toms shows how superficially the justification for maintaining the British market was now becoming even more difficult.  However, a deeper analysis of the figures reveals a different story, and to illustrate the point, evidence from Mulhausen is juxtaposed with Lancashire to show how wages were on average 18 d per day higher in Lancashire, although their productivity was almost double that of their German counterpart, and concludes that in effect, the overseas threat to the British market was as substantial as originally assumed.

Critique

This paper is extremely ambitious in its scope and development, and has covered significant ground in its analysis.  Its conclusions are convincing and are based on deep theoretical and conceptual understandings of the accountancy process.  My only suggestion is that the final section of the paper examining the ideological theories of profit could be fleshed out more so as to fully contextualise the political, legislative and business developments at this time.  It may also be possible to connect these issues with the contemporary debates concerning ‘thrift’, and the development of commercial banking.  For example, the idea of thrift was widely debated with the growth of friendly societies, and the decision of the government to open a Post Office Savings Bank to enable workers to deposit their savings.  Therefore, was there any connection between contemporary ideas of profit and thrift, and if so, was there a common ideological strand that linked people together in terms of their perceptions of money and its role in the wider society?

 

References

Crafts, NFR., “British Relative Economic Decline Revisited: the Role of Competition”, Explorations in Economic History (2012), 49, 17-29

Reid, Alastair J., United We Stand: A History of Britain’s Trade Unions (London: Penguin, 2005).