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).

 

What Chance Change? Driving Development through Transport Infrastructure

Locomotives of Local Growth: Short- and Long-Term Impact of Railroads in Sweden

By Thor Berger (Lund University) and Kerstin Enflo (Lund University)

Abstract: This paper uses city-level data to examine the impact of a first wave of railroad construction in Sweden, between 1855 and 1870, from the 19th century until today. We estimate that railroads accounted for 50% of urban growth, 1855-1870. In cities with access to the railroad network, property values were higher, manufacturing employment increased, establishments were larger, and more information was distributed through local post offices. Today, cities with early access to the network are 62% larger and to be found 11 steps higher in the urban hierarchy, compared to initially similar cities. We hypothesize that railroads set in motion a path dependent process that shapes the economic geography of Sweden today.

URL: http://ideas.repec.org/p/hes/wpaper/0042.html

Review by Alexander Horkan (final-year PPE student, Queen’s University Belfast)

What impact did the introduction of railroads to Sweden have on town-level growth? This is the question being explored by Thor Berger and Kerstin Enflo, both of Lund University, in their EHES working paper circulated as part of NEP-HIS-2013-08-05. The paper focusses on the early development of the Swedish railroad network, between 1855 and 1870, and examines whether towns with early access to the network[1] experienced higher levels of expansion of economic activity, using population growth as a proxy measure for this. They expand the possibility of their have been effects beyond merely the initial shock and scrutinise whether there was a long-run impact on economic development over the 20th Century.

Berger and Enflo contribute to the discourse on the value of transport infrastructure to lowering trade costs, which frequently hypothesises that large infrastructure projects foster economic development ‘ahead of demand’. Although an intuitive suggestion serving as a core belief of policymakers regarding the localisation of growth and planning possibilities, it is historically troublesome to provide evidentiary credence that such growth is independent from endogenous, observable and unobservable preconditions. Modern transport infrastructure is rarely assigned randomly to locations, instead being focussed around connecting ‘hubs’ that inevitably possess advantageous biases towards growth. This builds on various works detailing how such biases plague neutral analysis of development, as infrastructure projects are seemingly inextricably linked with political interference at either end of the spectrum, whether promoting growth in areas of economic sterility, or those already growing through endogenous factors.

Berger and Enflo show how railroads affect the location, not the level, of growth

Does railroad access increase the overall level of growth, or just the location of growth?

This paper seems to be of extreme relevance to current debates surrounding the future of a high-speed rail network connecting Birmingham to London in the UK. Contemporary debates have been hazy, lacking clear focus on precise and demonstrable economic incentives, leading to many questioning the value brought to northern cities. This research can increase the scope of such debates, providing clear evidential support that early adoption of technological advancements in transport infrastructure ignites and fosters long-term economic growth, yet simultaneously causes large negative ‘spillover’ effects on nearby, unconnected towns. Such research seems valuable and relevant to both sides of the question and must only serve to enrich any subsequent discussion.[2]

Proof of their hypothesis is offered through the calculation of comparative populations of cities both connected and unconnected to the railroad network between 1855 and 1870. Through using a difference-in-difference framework, they show that those who gained early exposure to the rail network grew larger, with additional population growth of 26% on average. Such increases imply that levels of urbanisation in 1870, and the aggregate rate of growth by the same point, would have ‘decrease[d] by 15% and 50% respectively’ (p. 3) independent from rail infrastructure. These calculations prove correlation between the exposure to railways and subsequent growth, echoing work by Fishlow (1965).

imgres

Where Bergen and Enflo really contribute to expanding existing literature, however, is by providing robust justification to draw direct causal relationships between railroad placement and subsequent ‘ignition’ of economic development. This is achieved through a tripartite construct, initially matching observationally similar towns and their growth patterns before the railway introduction. These measures ensure that observable differences are not key to explaining growth of specific towns, i.e. they were not already growing faster than surrounding cities.

Secondly, they calculate a strong instrumental variable; this relies on proposed routes drawn up by Adolf van Rosen in 1845 and subsequently by Nils Ericson in 1856. As such routes were constructed in relative isolation of political and economic pressures; favouring conditions of topographical simplicity and military strategic importance (avoiding coastal areas traditionally predisposed to growth) such an instrument is robust in corroborating the evidence of the first measure. By estimating the pre-rail differences in population growth for towns included in these original plans, and calculating their relative differences as close to zero, further corroboration is given to assertions that there were no pre-existing conditions conducive to growth in these towns.

The final measure is the imagined construction of these proposed lines, and further ‘low cost routes’. By creating this strong counterfactual, the authors presuppose that these lines that were not built, due to political obstinacy and lassitude, and those proposed later, to link profitable hubs of commerce would show large increases in populations if the driving factor behind growth was some unobservable, predetermining factor. Conversely however, if growth failed to materialise, it would be clear that the most significant force at work was early exposure to railways.

test

What can policymakers today learn from the Swedish case?

In his 1964 paper Robert Fogel identified the aggregate contribution of railroads to the US economy through social savings, deeming it of very little significance to social savings against a comparable counterfactual canal system. The measures used by Berger and Enflo are inversely interested in the relative impact of the railroad on cities. The negative ‘spillovers’ to nearby, unconnected towns examined in this paper further confirm Fogel’s argument that, whilst railroads had little impact on aggregate economic activity, they had large effects on relative growth patterns.

The final key significance Berger and Enflo draw out is the persistency of the impact of early exposure to rail networks. There are a myriad of reasons for this: high value sunk investments provide large barriers to both entry to and exit from the market, prompting concentration of economic activity in specific places. Additionally emerging towns become identifiable with growth and development, thus almost gaining critical mass and organically attracting further growth by this virtue. This emergent path dependency mirrors that cited by Bleakley and Lin (2012) regarding US cities being focussed around portage sights, despite the increasing irrelevance of such a factor. The implications of this paper however shadow those of Redding, Sturm and Wolf (2011) and Jebwad and Moadi (2011), examining man-made advantages over natural ones, contributing more greatly to discourse on policy implications and growth strategy.

imgres-2

Throughout the paper, however, despite great lengths to isolate geographical preconditions for local growth, there was an absence of discussion regarding elasticity of demand for rail services across the country. It seems remiss to address reduction of trade costs, whilst ignoring the possibility for elasticity of demand for such services, for example during winter months where winter roads open new avenues of trade, significantly reducing goods transportation costs via substitutions. Such questions could raise insightful analysis of unexplored geographical factors in northerly cities not experiencing the same degree of negative ‘spillovers’ suffered by more central ones.

The scope of this rigorous analysis could be expanded beyond current high-speed rail debates explored above to varying fields. Pertinent could be investigation of whether such findings have significance surpassing large-scale travel infrastructure and technological advancements, to the increasingly relevant information and communication sector for example; examining whether early adoption of communications advancements and infrastructure lead growth in specific locations.

Notes

[1] Less than a third of towns were connected by the end of this period, and only around a tenth of the peak network size had been realised.

[2] For a wider discussion of the minutia of this debate please refer to:

http://www.ft.com/cms/s/0/63ff3bfe-8dbd-11e3-bbe7-00144feab7de.html#axzz2xvZqcMe0

and

http://www.economist.com/news/leaders/21588862-britains-plans-high-speed-railway-are-deeply-flawed-spend-money-boring-stuff

 

References

Bleakley, H. and Lin, J. (2012). Portage and Path Dependence. The Quarterly Journal of Economics 127, 2, 587{644.

Fishlow, A. (1965). American Railroads and the Transformation of the Ante-bellum Economy. Vol. 127. Cambridge: Harvard University Press.

Fogel, R. (1964). Railroads and American Economic Growth. Baltimore: John Hopkins Press.

Jedwab, R. and Moradi, A. (2011). Transportation Infrastructure and Development in Ghana. Mimeo.

Redding, S. J., Sturm, D. M., and Wolf, N. (2011). History and Industry Location: Evidence from German Airports. Review of Economics and Statistics 93, 3, 814{831.

 

Does Bank Competition Lead to Higher Growth?

Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience

By Philipp Ager (University of Southern Denmark) and Fabrizio Spargoli (Erasmus University Rotterdam)

Abstract

We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic
growth. As governments were not concerned about systemic stability in this period, we are
able to isolate the effects of bank competition from those of state implicit guarantees. We find
that the introduction of free banking laws stimulated the creation of new banks and led to
more bank failures. Our empirical evidence indicates that states adopting free banking laws
experienced an increase in output per capita compared to the states that retained state bank
chartering policies. We argue that the fiercer bank competition following the introduction of
free banking laws might have spurred economic growth by (1) increasing the money stock
and the availability of credit; (2) leading to efficiency gains in the banking market. Our
findings suggest that the more frequent bank failures occurring in a competitive banking
market do not harm long-run economic growth in a system without public safety nets.

URL: http://d.repec.org/n?u=RePEc:hes:wpaper:0050&r=his

Circulated by NEP-HIS on: 2013-12-29

Review by Natacha Postel-Vinay

In this paper, Philipp Ager (University of Southern Denmark) and Fabrizio Spargoli (Erasmus University Rotterdam) ask two very topical questions. Does increased bank competition lead to higher economic growth? And, if so, how? Following the recent crisis, many have wondered whether the alternative to “too-big-to-fail” — having many smaller banks competing with each other — would necessarily be a better one. Clouding the debate has been the difficulty of finding appropriate historical settings in which to test the hypothesis that more competition leads to greater growth. In their paper, Ager and Spargoli focus on what they consider the best instance of intense bank competition without any implicit government bail-out guarantee: the American free banking era.

Between 1837 and 1863 new laws were passed in a number of states allowing just about anyone to set up a bank, with very few requirements to fulfill. Until then, banks wanting to open needed a charter from their state, for which they had to meet relatively stringent criteria. As the authors show using a new quantitative analytical framework, the new laws greatly increased the creation of new banks in the states which passed them. As competition increased, however, a higher proportion of banks ended up failing. Could it still be the case that the introduction of free banking laws led to greater growth in those states?

A satire on Andrew Jackson's campaign to destroy the Bank of the United States and its support among state banks, 1836. It was partly to fill this gap that states allowed free banking.

A satire on Andrew Jackson’s campaign to destroy the Bank of the United States and its support among state banks, 1836. It was partly to fill this gap that some states allowed free banking.

The paper’s most important finding is that increasing competition among banks did lead to higher economic growth. Jaremski and Rousseau’s 2012 paper (previously reviewed in NEP-HIS here) found that a new “free” bank, as opposed to a charter bank, did not have a positive effect on the local economy. While this is an important finding in itself, it is also important to look at the effect of the introduction of free banking laws on aggregate bank behaviour, if only because the new entry of free banks may alter the willingness of charter banks to enter the market and their behaviour once in the market. Charter banks’ behaviour may in turn alter free banks’ behaviour, and so on. Interestingly, Ager and Spargoli’s study finds that in the aggregate, the acceleration in bank entry and resulting greater competition among all types of banks had a positive effect on economic growth.

To arrive at this conclusion, the authors are careful to include a number of controls. First, there is the possibility that growth opportunities led some states to adopt free banking laws, in which case the authors would face a reverse-causality problem. Hence they conduct a county-level analysis in which they include time-invariant county characteristics and state-specific linear output trends (although perhaps it would be nice to see these output trends going further back in time than 1830). Second, they also control for other laws that states might have introduced at the same time as the free banking ones, which could potentially bias the results. Finally, they control for unobserved heterogeneity between states by examining contiguous counties lying on the border of states that introduced free banking. Their results are robust to these different specifications.

Private Bank Note, Drover’s Bank, Salt Lake City, Utah, $3, 1856

Private Bank Note, Drover’s Bank, Salt Lake City, Utah, $3, 1856

Ager and Spargoli are of course also interested in where this growth came from. They find a positive relationship between the introduction of free banking laws and lending, and conclude that one of the main channels through which this increase in growth occurred was the increase in the availability of credit that greater competition fostered. This story is consistent with the finance-growth nexus literature, which argues that greater (and safer) access to credit is conducive to economic development.

Although this seems perfectly reasonable, it would perhaps have been interesting to see when most of the failures occurred. If, for instance, they mainly occurred towards the end of the period under study, say around the 1857 panic, then it is possible that the negative effects of such failures on subsequent growth would not have been picked up by this study, since it ends in 1860. This leaves open the possibility that the positive relationship between free banking and increased access to credit was not a beneficial one for the economy in the long run. Loan growth (and asset growth more generally) is not always a good thing, as the recent crisis has tended to show.

Private Bank Note, Mechanics Bank, Tennessee, $10, 1854

Private Bank Note, Mechanics Bank, Tennessee, $10, 1854

Overall however, Ager and Spargoli’s paper asks a very important question and offers a solid analysis. A natural next step would be to include output data on the periods preceding and following the free banking era, although the occurrence of the Civil War is an obvious obstacle to this study.

 

References

Jaremski, M., and P. L. Rousseau (2012): “Banks, Free Banks, and U.S. Economic Growth,” Economic Inquiry, 51(2), 1603–21.

When did Globalization Actually Start?

West versus East: Early Globalization and the Great Divergence’

By Rafael Dobado-González (Complutense), Alfredo Garcia-Hiernaux (Complutense), and David E. Guerrero-Burbano (CUNEF)

Abstract: This paper extends our previous work on grain market integration across Europe and the Americas in the eighteenth and nineteenth centuries (Dobado, García-Hiernaux and Guerrero, 2012). By using the same econometric methodology, we now present: 1) a search for statistical evidence in the East of an “Early Globalization” comparable to the one ongoing in the West by mid eighteenth century; 2) a study on the integration of grain markets in China and Japan and its functioning in comparison to Western countries; 3) a discussion of the relevance of our findings for the debate on the Great Divergence. Our main conclusions are: 1) substantial differences in the degree of integration and the functioning of grain markets are observed between East and West; 2) a certain degree of integration may be reached through different combinations of factors (agents, policies, etc.) and with dissimilar effects on long-run economic growth; 3) the absence of an “Early Globalization” in the East reveals the existence of some economic and institutional limitations in this part of the world and contributed to its “Great Divergence” with the West from at least the eighteenth century.

URL: http://econpapers.repec.org/paper/pramprapa/48773.htm

Circulated by NEP-HIS on: 2013-08-10

Guest Entry by Elizabeth Meagher (Bangor University)

NB: In January 2014, Chris Colvin and I started an experiment involving the use of Web 2.0 tools and third year undergraduate students. The aim was to incentivise active participation in academic exchange by reviewing recent additions to the broad literatures of business and economic history whilst following the same format as the NEP-HIS blog and limited to 1,000 words or less. The best entries are then published in the blog with minimal editing. This is the first of such entries.

We appreciate comments and inspiration from John Turner (Queen’s Belfast), Mar Rubio (Publica de Navarra) and Marcel Salles (ITESO). (BBL – Ed)

Summary

This paper examines the causes of early Globalization and the rise of the Industrial Revolution, analysing the divide between the East and West known as the ‘Great Divergence’. The literature suggests that globalization began steadily in the first half of the eighteenth century, taking off rapidly after the French Revolution and Napoleonic Wars and their aftermath. Once globalization ‘regained momentum’ it was supported by the rise in the Industrial Revolution across Europe and the US (Dobado-Gonzalez et al, 2013).

Source: The Economist "What was the Great Divergence"

Source: The Economist “What was the Great Divergence”

De Vries (2010) separates Globalization into two categories, ‘soft’ and ‘hard’. Flynn and Giraldez (2004) claim that ‘soft globalization’ began when the ‘old world’ merged with the US back in 1571. O’Rourke and Williamson (1999) defined ‘hard globalization’ as the integration of markets across a geographical location. An earlier study by Dobado and Guerrero (2009) claims that literature has often ignored earlier influences of globalisation on economic growth and focuses more on the results after the Industrial Revolution from 1700s onwards. It cannot be disregarded that integration between countries across Europe was evident between 1500 and 1800 before the first Industrial Revolution began. It is from these early stages of market and trade integration across Europe that industry and globalisation developed. The paper also suggests that in the first half of the eighteenth century, the rise in the West was due to the fact that China and the East had little to compete with, leaving the gates wide open for the West to expand its operations.

A panoramic view of London, c.1670 by Wenceslaus Hollar. Photograph: Heritage Image Partnership Ltd/Alamy Source:http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

A panoramic view of London, c.1670 by Wenceslaus Hollar. Photograph: Heritage Image Partnership Ltd/Alamy Source:http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

Additionally Dobado and colleagues focus on the impact of the dramatic expansion of foreign trade on economic growth within the West which has continued through to today. The paper also compares the differences and separation between the West and East during the first major economic growth in Europe between 1500 and 1800, known as the ‘First Great Divergence’. The authors suggest that the openness of the West resulted in dynamic trading across the Atlantic between the US with Britain and the Netherlands in particular (Dobado et al, 2013). The East however was not so far behind with the Opium Wars and the Silk Road increasing trade across Eastern countries moving towards the West which had never been done before. Nevertheless, before this point, the paper suggests that Eastern governments made one of the greatest economic mistakes in closing their economies, giving way to the ‘Great Divergence’ and ‘exceptionalism’ within the West (Dobado et al, 2013; Dobado and Guerrero, 2009). The restrictive trade policy practiced by the East is claimed to have prevented that part of the world from taking advantage of both direct and indirect benefits resulting from the expansion of trade during the Early Modern Era (Dobado et al, 2013). The paper recognises the absence of international grain market integration within the debate on the ‘Great Divergence’ and therefore seeks to examine the different markets within both the East and West.

St Paul's Cathedral viewed from Southwark, across the River Thames, in 1859. Photograph: William England/Getty Images Source: http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

St Paul’s Cathedral viewed from Southwark, across the River Thames, in 1859. Photograph: William England/Getty Images Source: http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

The paper found that despite geographical proximity and the easiness of transportation between China and Japan in the East, no statistical evidence of grain market integration is found between the two countries. This finding contrasts with the increasing expansion of trade in the West both before 1792 and after the 1840s (Dobado et al, 2013). As a result the East and West were dissimilar in terms of market integration both before and after the Industrial Revolution. Therefore this supports the concept of the ‘Great Divergence’ between the East and West and early Globalization presented direct and indirect benefits for the West which left the East to fall behind. In closing their economies in the Early Modern Era, governments within the East had committed what might be considered one of the biggest economic policy mistakes ever made, losing out on the greater benefits of early Globalization (Dobado et al, 2013).

Comments

One aspect of the research which could be criticised is that the samples used for comparing the different grain markets in both the East and West are unequal, with twelve studied within the West, and eleven in the East (Dobado et al, 2013). This could suggest the results may be biased towards the wheat market within the West. In addition to this, the study works with “[…] long yearly data series covering most of the eighteenth and the nineteenth centuries for most markets” (Dobado et al, 2013, p.6). This could also alter the results as using the same data is critical for a fair analysis. Another valuable point to consider is that the only countries which gained from ‘Early Globalization’ in Latin America were Peru and Chile who traded wheat.

It may also be beneficial to take into account cultural differences between the East and West at this time. The demand for wheat across Europe and the US would have been greater than the demand for rice from the East, causing further integration within the East.

Based on the points discussed above, it is apparent that there is a strong divide between the economic activity within both the East and West before the Industrial Revolution gained momentum. Additionally, it is evident that Globalization was present within Europe between 1500 and 1800 with the integration of markets within the West.

References

De Vries, J. (2010) ‘The Limits of Globalization in the Early Modern World’, The Economic History Review, Vol.63, pp 671-707.

Dobado-Gonzalez, R., Garcia-Hiernaux, A., and Guerrero-Burbano, D. (2013) ‘West verus East: Early Globalization and the Great Divergence’, accessed 6 March 2014.

Dobado, R. and Guerrero, D. (2009) ‘The Integration of Western Hemisphere Grain Markets in the Eighteenth Century: Early Progress and Decline of Globalization’, http://EconPapers.repec.org/RePEc:ucm:wpaper:09-09 Accessed 9 March 2014.

Flynn, D.O. and Giraldez, A. (2004) ‘Path Dependence, Time Lags and the Birth of Globalisation: A Critique of O’Rourke and Williamson”, European Review of Economic History, Vol.8 No.1, pp 81-108

O’Rourke, K.H. and Williamson, J.G. (1999) Globalization and History, Cambridge, MA: The MIT Press.

QWERTY – Kay’s analysis of a non sub-optimal standard

QWERTY and the search for optimality

By: Neil M Kay (University of Strathclyde Business School, Department of Economics)

Abstract: This paper shows how one of the developers of QWERTY continued to use the trade secret that underlay its development to seek further efficiency improvements after its introduction. It provides further evidence that this was the principle used to design QWERTY in the first place and adds further weight to arguments that QWERTY itself was a consequence of creative design and an integral part of a highly efficient system rather than an accident of history. This further serves to raise questions over QWERTY’s forced servitude as “paradigm case” of inferior standard in the path dependence literature. The paper also shows how complementarities in forms of intellectual property rights protection played integral roles in the development of QWERTY and the search for improvements on it, and also helped effectively conceal the source of the efficiency advantages that QWERTY helped deliver

URL: http://econpapers.repec.org/paper/strwpaper/1324.htm

Circulated by NEP-HIS on: 2013-11-22

Review by Anthony Gandy

Overview:

The paper reviewed here is another instalment in Neil Kay’s systematic exploration of the history of the QWERTY typewriter (see also Kay 2013a and 2013b). Through his work Kay questions the QWERTY typewriter as the primary example of how inferior design can become establish and create a path of dependency which will always be sub-optimal. The case Kay makes both in this paper and in earlier ones is that the design was in fact near-optimal for the state of knowledge at the time. In this paper he produces further knowledge that the designer made later efforts to refine the design using principles which show the designers’ advanced understanding of the concepts needed to produce an efficient design given the outcomes required (later definitions of efficiency were based on a different concepts and on different technology capabilities).

Christopher Latham Sholes (1819-1890)

Christopher Latham Sholes (1819-1890)

Kay studies the work of designer Christopher Latham Sholes and how he refined his own design of typewriter designs. In 1872 he and his associates created the familiar QWERTY layout which is so familiar in many Western and English language countries. The design was bought by Remington in 1873 in a deal arranged by Sholes’ business partner James Densmore who also retained a financial stake in the QWERTY keyboard after Remington bought it. Kay shows the deliberate design concepts which lay at the heart of the QWERTY keyboard which then refutes some earlier works (such as David 1985) which claimed the design process for QWERTY and the eventual lock-in created was generated by random events and that the design was effectively accidental and a sub-optimal standard. The path dependency concept based on network externalities (typist unwilling to face conversion to another standard even if it were more efficient) maybe fair, but the design was not at that time accidental or sub-optimal. Kay shows by inference that Sholes work was more deliberate than may have been understood, primarily because Sholes was protecting his trade secret which was his understanding of how to avoid frequent letter pairs from occurring and jamming the early typewriter technology. In this paper he explores two patents issued to Sholes after his death and finds them as evidence that Sholes continued to improve his basic understanding, but continued to protect his knowledge.

Remington No 7 – an improved version of the Sholes design

Remington No 7 – an improved version of the Sholes design. Source: http://machinesoflovinggrace.com/large/remstandard703.jpg

Like Kay’s earlier work this paper is highly detailed, looking at the available evidence, and analyzing the likely approaches used. It considers how, after Sholes sold his rights to the QWERTY typewriter, he continued to use his principles to develop an improved “perfect” typewriter, and how this was evidence that he knew more about the underlying principles than others have given credit to.
The real challenge at the time was typebars jamming. Using a keyboard layout of ABCDE, it was known that too often there would be pairs of letters used which would jam the typewriter. The goal was to reduce these pairs to reduce jamming risk.
Kay shows (2013a) that when typing the book Life of the Mississippi by Mark Twain, the Sholes Qwerty typewriter would have created 146 events where letters next to each other in the “typebasket” would have occurred and jammed. Others have argued (David 1985) that later designs of typewriter such, as the 1936 design by August Dvorak, were more efficient because they were faster. However, Kay shows that in the Life of the Mississippi test, the Dvorak design would create 2358 conflicting pairs. Kay points out that the comparison needs to be in era context. While later development was based on ten figure typing and efficiency focused on speed out output, Sholes’ era was one where two fingers of each hand was seen as optimal (and the reviewer here is certainly in this camp!!!) and the real challenge was one of the mechanical jamming or letter pairs.

This paper extends Kay’s research to the period after the Remington company purchased Sholes’ design and when he then went on to try to develop the “perfect” typewrite. Frankly, these are detailed and intricate discussions. Kay studies two patents issued after Sholes’ death to show he was working further with infrequency principles for his improved QV typewriter, the ultimate version of which would have reduced the incidents of jamming pairs by 97.7% compared to the QWERTY design. It is the evidence presented by the “jigsaw” of the two patents supporting the QV typewriter which is the core the Kay paper, combining them to show Sholes had an advanced knowledge of the processes required to reduce conflict between letters. Kay believes Sholes split the patents into two separate ones so as to protect his trade secret as to how to prevent conflict through infrequency principles, a concept which in itself could not be protected under copyright.

Brief discussion:

While the paper is maybe too detailed for most, and on occasion difficult to read without prior understanding of the issues, it serves as an interesting discussion paper on both how intellectual property was protect, even when the underlying principles could not be copyrighted and a lesson not to infer the efficacy of a technological solutions in the light of later technological capability. While the case for path dependency has been well made over the years and clearly make a great deal of sense, paths which have been founded on technology that is at its origin less than optimal are rare, maybe this is the reason the QWERTY keyboard has been so popular as an example as the thesis that its development was less than deliberate suggests it may have always been less than optimal. Kay’s forensic disputes this very. Kay generates evidence of a deliberate process by Sholes and his associates and while clearly the design could be refined (as Sholes tried) or replaced (as advocates of the Dvorak would argue for), it was nevertheless close to the optimal design at the time of development.

For those interested in what has been a very long running debate about QWERTY, optimality and lock-in, a more in depth review of Kay’s work and the prior debate has been produced by Jean-Philippe Vergne (2013) in the journal Research Policy which certainly seems to have dedicated its existence to discussion the QWERTY typewriter!!!

Additional References

Kay’s other QWERTY Papers

Kay, N. M. (2013a) “Rerun the tape of history and QWERTY always wins” Research Policy, 42:1175-85.

Kay, N. M. (2013b) “Lock in, path dependence, and the internationalization of QWERTY. Strathclyde Discussion Papers in Economics, no 13-10, http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2013/13-10FINAL.pdf (accessed 14 April 2014).

Jean-Philippe Vergne’s excellent review can be found in Research Policy:

Vergne, J. P. (2013) “QWERTY Is Dead, Long Live Path Dependence!” Research Policy, 42: 1191-1194. See also http://www.academia.edu/3495369/QWERTY_Is_Dead_Long_Live_Path_Dependence_

Constructing Contemporary (Mexican Banking) History

Bank Nationalisation, Privatisation, Crisis and Financial Rescue: Using Testimonials to Write Contemporary Mexican Banking History

By Enrique Cárdenas (Centro de Estudios Espinosa Yglesias)

Abstract – The Mexican banking system has experienced a large number of transformations during the last 30 years. Although important regulatory changes were introduced in the 1970s, all but a couple of the commercial banks were nationalized in 1982, consolidated into 18 institutions and these were re-privatized in 1992. Shortly after, a balance of payments crisis in 1995 (i.e. Tequila effect) led the government to mount a financial rescue of the banking system which, in turn, resulted in foreign capital controlling all but a couple of institutions. Each and every one of these events was highly disruptive for Mexico’s productive capacity and society as a whole as their consequences have had long lasting effects on politics, regulation and supervision of the financial sector as well as polarising society. Not surprisingly the contemporary narrative accompanying these events has been highly controversial and full of conflicting accounts, with competing versions of events resulting in a long list of misconceptions and “urban legends”.

URL (Podcast: 07 April 2014, 1 hr and 38 min)

Review by Bernardo Bátiz-Lazo

This entry departs from our usual as it fails to discuss a specific paper circulated by NEP-HIS. Instead I comment and reflect on a public lecture, that is, another common medium we use to communicate our research. The lecture build around two multi volume books and three DVD’s, and was delivered by Enrique Cárdenas (Executive Director of Centro de Estudios Espinosa Yglesias or CEEY) at Bangor Business School’s London campus on 2014-04-07. The actual publications are available, by the way, in hard copy from CEEY’s book store and in electronic version from Amazon.com.mx, as well as following the links to videos below and the link to the full podcast of the presentation above.

The chief aim of this project is to offer new evidence on the process of nationalisation (1982) and privatisation (1991-1992) of Mexican commercial banks. These two episodes of contemporary financial history had important rippling effect on Mexican society, politics and macroeconomic performance. They also had global consequences, first, as they mark the start of the so-called “International Debt Crisis” after Mexico informed of a payment moratorium of sovereign debt in August 1982. Secondly, the ratification of Robert Rubin as the 70th US Treasury Secretary (1995-1999) together with Ernesto Zedillo taking office as 54th President of Mexico (1994-2000), led to a political power vacuum and impasse in economic policy making between the Autumn of 1994 and early Winter of 1995. Known in the vernacular as the “Tequila Crisis”, in December 1994 Mexico devalued its currency and this led to instability in international foreign exchange markets and accelerated the exit of portfolio investments from a number of other countries (most notably Argentina and Brazil). By this point in time, Mexicans had fought hard during negotiations with the US and Canada to keep the banking system out of the North American Free Trade Agreement (NAFTA). But this exception was lost in the aftermath of the “Tequila Crisis” while the subsequent bailout of the newly privatised banks represented a precedent missed by US and British regulators of what would happen, on a much bigger scale, during the 2007-9 financial debacle.

José López-Portillo y Pacheco (Last presidential address to the Nation, 1982; The president broke into tears after announcing the nationalisation of the banks).  Courtesy of Centro de Estudios Espinosa Yglesias

José López-Portillo y Pacheco (1920-2004) (Last presidential address to the Nation, 1982; The president brakes into tears). Courtesy of Centro de Estudios Espinosa Yglesias

Cárdenas’ analytical framework is based on Stephen Haber’s ideas of co-dependence between political and financial spheres. Cardenas’ evidence-based approach is certainly welcomed. But more so as he tackles head on with the issue of periodicity and method. Specifically whether and how to write accurate and meaningful economic history using of oral sources in the recent past. Revisiting and unpacking method and methodology are topics not far from current debates in business history, as has been portrayed in previous posting in the NEP-HIS blog (click here); the forthcoming panel on oral histories and World War I at theEuropean Association for Banking and Financial History (EABH) meeting in Rüschlikon, Switzerland; recent and forthcoming publications in refereed journal articles by Stephanie Decker and colleagues (see full references below); and JoAnne Yates’s contribution to the edited book by Bucheli and Wadhwani (2014) (as well as their panel on the latter publication during the recent World Business History Conference in Frankfurt). Indeed, one of Cárdenas’ and CEEY trustees’ chief motivations to engage in this research was to listen to what major players had to say while they were still alive.

Cárdenas was not limited to oral sources. He endeavoured to gather surviving but uncatalogued documents as well as the construction and reconstruction of statistical data series to complement historical analysis. Actors were of the highest standing in society including former Presidents, Mexican and foreign Treasury ministers, senior staff at multinational financial bodies, past and present senior bank executives, regulators, economic academic advisors, etc. To deal with historians mistrust of recollection and potential bias, Cárdenas sent in advance a questionnaire split in two sections: one aimed at enabling a 360 degree perspective on key moments; and the second, made out of questions tailored to the participant’s office and status during the event. All participants were informed of who else would take part of the discussions but none were shown others’ responses until all were collected and ready for publication. The risk of being “outed” thus resulted in only a handful of contradictions as participants preferred to declined answering “painful” topics than stretching the “truth”. Meetings were recorded, transcribed, and compared against statistical data. The latter would either strengthen the participant’s argument or was returned to him with further queries. Several iterations resulted in each participant embracing full ownership of individual texts and thus effectively becoming an author of his entry. It’s this process of iterations and guided discussion to which Cárdenas refers to as “testimonials”.

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As mentioned, the result of the CEEY’s sponsored research by Cárdenas was two multi book volumes and three documentary videos all of which, as illustrated by the links below to trailers and video documentaries below, have been edited but have no narrators. All views are expressed by the main actors “so that viewers can draw their own conclusions” said Cárdenas during his lecture. By publishing a large number inconclusive outputs based on “testimonials” the CEEY, and Cádernas as his Executive Director, aim to offer a new empirical source for others to include in their own analytical work and come to their own conclusions. Indeed, CEEY’s publications also include a number single author monographs and the commissioning of edited collections by academic authors who have used the testimonials as part of their evidentiary repertoire.

But does Cárdenas have any conclusions of his own? For one, he believes the effort to generate and document events through testimonials and new statistical material results in a much more balanced approach to assess the limited options President López-Portillo had at the end of his term in office. For starters in 1981 he was to nominate on his successor ahead of elections (“el dedazo”). The events that followed were to become the beginning of the end for the one party rule that characterised Mexico during most of the 20th century. At this point in time, Mexico had experienced four record years of strong economic growth. Never seen before and never to be seen since. Its oil production was doubling each year but its international debt was skyrocketing (particularly that of short-term maturity in 1981-2).

But as international oil prices begin to drop, Mexico followed an erratic behaviour (reducing and then raising its oil price) while oil revenues generated 35% of fiscal income and 75% of exports. Moreover, prices for other Mexican exports also fell while a practically fixed-rate parity with the US dollar meant a strongly overvalued peso. A devaluation was followed by a massive increase in salaries. And in the midst of political jockeying and an accelerating worsening of public finance, the President (a lawyer by training) was, according to Cárdenas, to receive conflicting and contradicting information (Cárdenas calls it “deceiving”) on the actual size of the public deficit (which was to double from 7% of GDP in 1981 to 14% of GDP in 1982) as well as the merits of defending the Mexican peso vs US dollar exchange rate (which he publicly claim to “defend like a dog [would defend his master]“.

2014-04-07 13.42.25

This conclusion sheds a significant amount of light on the decisions of late former President López-Portillo. As much as also help to better understand the end of some otherwise promising political careers. The narrative of actors bring fresh light to understand the break up between Mexican political and business elites, which eventually results in the end of the one party rule in the presidential election of 2000. It also helps to explain the break up of the rule of law during the next 15 to 20 years in Mexico as well as the loss of the moral authority of its government.

Cárdenas and CEEY have certainly produced a piece that will resist the test of time. They offer a unique effort in creating contemporary financial history while building from oral sources, privileged access to main actors and in this process, developing an interesting method to deal with concerns around potential bias. Given the passion that the topics of nationalisation and privatisation still generate amongst Mexicans and scholars of modern day Mexico, it is understandable that the analysis has emphasised idiosyncratic elements of these events. But somehow links with wider issues have been lost. For one, nationalisation or sequestration of assets (whether of local or foreign ownership) characterised the “short” 20th century. Nationalisation is one side of the coin. The other is public deficit reduction through the sale of government assets. Indeed, the privatisation of Mexican banks between 1991 and 1992 enabled to finance about half of the reduction of Mexican sovereign debt (though the massive rescue that followed practically annulled that reduction). Mexicans were not inmune to Thatcherism to the same extent that a reduction of the state in economic activity (whether real or not) was and is part and parcel of the “second” globalisation.

In summary and in Enrique Cárdenas own words: “Writing current (economic) history is not only possible, but highly desirable!”. We welcome his contributions to enhance empirical evidence around such important events as well as offering a way to systematically deal with oral sources.

Videos

The President’s Decision (1982) – Trailer (with English subtitles)

The President’s Decision (1982) – Full length (in Spanish)

From Nationalisation to Privatisation of Mexican Banks (1982-1991) – Trailer (with English subtitles)

Privatization of Mexican Banks (The President’s Decision Ex Post: Bank Privatization [Tequila effect - 1991-1995] – Trailer (with English subtitles)

References

Yates, J. (2014) “Understanding Historical Methods in Organizational Studies” in M. Bucheli and R. D. Wadhwani (eds.) Organizations in Time : History, Theory, Methods Oxford: Oxford University Press, pp. 265-283.

Decker, S. (forthcoming) “Solid Intentions: An Archival Ethnography of Corporate Architecture and Organizational Remembering”, Organization.

Decker (2013) “The Silence of the Archives: Postcolonialism and Business History”, Management and Organisational History 8(2): 155-173.

Rowlinson, M. Hassard, J. and Decker, S. (forthcoming) “Research Strategies for Organizational History: A Dialogue between Organization Theory and Historical Theory”, Academy of Management Review.

Note: with special thanks for helpful comments to Sergio Negrete (ITESO) and Gustavo del Angel (CIDE).