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Neo-Schumpeterian views of Economic Development Today

The Theory of Economic Development of J.A. Schumpeter: Key Features

By Iurii Bazhal (Economics Department, National University of Kyiv-Mohyla Academy)

Abstract: This paper comprises translation into English of the preface of Iurii Bazhal to the first Ukrainian edition of Joseph Schumpeter’s famous fundamental book “The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle” that was translated in Ukrainian and published in 2011 in commemoration of its 100th anniversary. The paper reveals the contemporary significance of this classical book as the challenger on replacing the neoclassical approaches in capacity to become the mainstream of modern economic theory. It is shown that Schumpeter’s approach gives a new vision of driving forces for economic development where a crucial conceptual place belongs to the category of innovation. Second part of the paper reviews modern Neo-Schumpeterian approaches which have substantiated the importance of the structural innovation technological change of national economy for economic development. The government must permanently analyze a compliance of the actual production structure in the country with the current and future technological paradigms.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:69883

Distributed by NEP-HIS on: 2016-03-29

Reviewed by Stefano Tijerina (University of Maine)

In an effort to recommend economic policy solutions to the “young market economy” of Ukraine, Iurii Bazhal breaks down Joseph Schumpeter’s principles of national economic development, arguing that current global implementations of economic development policies dominated by the neoclassical economic model are not generating and have never generated “evolutionary innovative ‘jumps.’”(p. 12). Emerging economies and stagnant advanced economies would benefit immensely from the revision of the neoclassical approach, centering instead on the Neo-Schumpeterian approach that recognizes economic structures of technological systems as the base of long-term economic growth (idem). From Bazhal’s perspective, business-government partnerships should focus on national economic development strategies that center on the creation and advancement of innovative technological systems that generate revolutionary global social, cultural, economic, and political change.

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These historical transformations that have changed humanity and its relation to resources and the natural world have catapulted some nations into positions of power that have translated into national economic prosperity. Bazhal identified five “paradigms” that altered the economic development of the modern world, including the substitution of machinery for handwork in weaving (1790-1850), coal mining and the steam engine (1851-1895), iron industry (1896-1946), oil based energy and organic chemistry products (1947-1989), and microelectronics (1990-2040). Schumpeter identified these periods as “dynamic” periods of economic development (pp. 4 & 13).

Contrary to “static” development where reproduction of traditional production structures were replicated nation after nation across the world, “dynamic” economic development based on technological innovation was and continues to be the only solution for capitalist nations interested in substantially increasing their national wealth and social welfare (p. 4). Nations spearheading the different periods of global innovation promoted and justified the implementation of the revised status quo in order to legitimize its global systemic outreach, restraining other nation’s ability to create and produce new dynamic value added solutions to their own development strategy (idem). This, said Bazhal, explained the “trap” that has impeded the present economic development of nations such as Ukraine (idem).

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In order to achieve “dynamic” economic development like the one that catapulted Britain and the United States into positions of global power, it was necessary to move beyond the “model of circular flow of income and expenditure between firms and households” promoted by the neoclassical macroeconomic model (p. 6). This Schumpeterian view that “new combinations” of economic development strategies and technologies is what takes nation states into new realms of economic development patterns is what Bazhal is arguing for Ukraine. Combinations, I would argue, that are exemplified in Brazil’s reinvention into an ethanol-based economy that moved the nation away from oil dependency and thus breaking the restrains imposed by the oil based development model advanced by the United States throughout the Twentieth Century. Brazil’s case represented a “disruption of equilibrium by new combinations,” as Schumpeter would put it (p. 7). A new equilibrium based on an increase in the size of resources, the size of capital, the size of the labor force and the size of the national domestic product represent at that point Schumpeterian dynamics of economic development. Impactful and effective economic development therefore lies in business-government relations where the innovative entrepreneur has the flexibility and authority to influence the direction of policy; norms, regulations, and institutional designs that allow the entrepreneurial forces to implement and carry forward new “combinations or innovations”(idem).

A more deregulated system, argues Bazhal, would allow Ukraine’s entrepreneurial forces to move forward with the model recommended by Schumpeter. Yet the neoclassical restrains promoted by the European Union, the United States and the multilateral agents impede the clicking of new combinations (p.8). Ukraine’s economic development salvation lies in the invention or creation of a “new technological paradigm” that will catapult the nation into a more advanced economic development stage within the global economic market system (p. 11). This evolutionary dynamic, argues Bazhal, must be accompanied by “structural technological changes” that will guarantee stable economic development conditions at the design and implementation stages of the policy.

Schumpeter’s theory indicates that for this to take place, the nation’s business and political actors must also be willing and prepared to execute the “creative destruction” of the traditional systems and philosophical ideas of production. This aspect of the evolutionary process, from my perspective, is what is impeding Brazil from capitalizing fully from its transformation into an ethanol-based economy. Although not highlighted by Bazhal, the economic, political, social, cultural, domestic and international struggle against the forces of status quo are factors that require a more thorough analysis. In the case of Ukraine it is these same forces that block the nation’s self-determined transition into an evolutionary technological economic development dynamic.

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The implementation of a Neo-Schumpeterian economic development model in Ukraine or in any other nation across the world would look similar, in relative terms, to what happened in the United States during the oil or the microelectronics era. The new technological wave became the core driver of the nation’s economy, impacting at first the internal dynamics and systems of production and then replicating the same outcome nation after nation in incremental patterns. Not all nations converted to fossil fuels at once but eventually all did, accompanied by the construction of roads for the transit of vehicles together with the adoption of multiple other technologies and innovations that justified the conversion into a fossil fuels-based world. The same pattern has been developing on front of our eyes as the world adjusts to the microelectronics era.

As in the case of Brazil, a new technological innovation emanating from Ukraine would result in new structures of enterprise, new dynamics and interrelations between multiple economic indicators and sectors, new secondary and service productions sectors, in addition to value added systems, new forms and sectors for investment, new capital flows, new consumption patterns, and new domestic and international patters of trade flows.

Theoretically Bazhal’s advancement of the New-Schumpeterian model as the adequate paradigm shift for the Ukrainian economy is convincing and proven to be effective, as I pointed out in the case of Brazil, but the challenge remains in the implementation stage. Although Bazhal is aware that the technological revolution results in drastic changes on the state’s economic system and that it threatens the interests of those currently benefitting from the production status quo, he never provides his or Schumpeter’s solutions to these challenges. The success stories of Britain and the United States in altering the technological status quo indicate that domestically engineered social and political control systems must become an integral part of the sophisticated nation building process of post-modern nation states in order to secure flexibility for Schumpeter’s entrepreneur and the effective and efficient maneuverability of the government-business partnerships that advance the Neo-Schumpeterian model domestically and internationally.

The USA’s First ‘Belle Époque’ (1841-1856)

America’s First Great Moderation

By Joseph Davis (NBER) and Marc Weidenmier (Claremont – McKenna University, marc.weidenmier@cmc.edu)

Abstract 

We identify America’s First Great Moderation, a recession-free 16-year period from 1841 until 1856, that represents the longest economic expansion in U.S. history. Occurring in the wake of the debt-deleveraging cycle of the late 1830s, this “take-off” period’s high rates of economic growth and relatively-low volatility enabled the U.S. economy to escape downturns despite the absence of a central bank. Using new high frequency data on industrial production, we show that America’s First Great Moderation was primarily driven by a boom in transportation-goods investment, attributable to both the wider adoption of steam railroads and river boats and the high expected returns for massive wooden clipper ships following the discovery of gold in California. We do not find evidence that agriculture (i.e., cotton), domestic textile production, or British economic conditions played any significant role in this moderation. The First Great Moderation ended with a sharp decline in transportation investment and bank credit during the downturn of 1857-8 and the coming American Civil War. Our empirical analyses indicate that the low-volatility states derived for both annual industrial production and monthly stock prices during the First Great Moderation are similar to those estimated for the Second Great Moderation (1984-2007).

URL: https://ideas.repec.org/p/nbr/nberwo/21856.html

Distributed by NEP-HIS on 2016-03-23

Review by Natacha Postel-Vinay (University of Warwick)

Those who like to study the causes of business fluctuations are often primarily interested in severe downturns, or sometimes wild upswings. They may be tempted to gloss over periods of relative calm where not much seems to be happening. Yet there is a good case for studying such phenomena: surely a long period of low volatility in output, prices and unemployment combined with relatively high sustained growth would make many policy makers happy. As such they deserve our attention.

The Great Moderation is usually thought of as one such period when, from the 1980s up to 2007, US economic growth became both more sustained and much less volatile. The causes of the Great Moderation are still being debated, and range from better monetary policy to major structural changes such as the development of information technologies to sheer luck (for example, an absence of oil shocks). Less well-known is the fact that the US economy experienced a similar phenomenon more than a century earlier, from the 1840s to the mid-1850s. In their paper, Davis and Weidenmier draw our attention to this period as it was, in their view, America’s First Great Moderation.  While much of the paper is spent demonstrating just that, they also look for its causes, and argue that important structural changes in the transportation industry were probably at the origin of this happy experience.

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Despite being sometimes pointed out as America’s “take-off” period (Rostow, 1971), the idea that this was the US’s First Great Moderation is far from straightforward. This is partly because the period has been commonly known for its relative financial instability, with for instance financial panics in the late 1930s, 1940s and 1950s. In addition, the National Bureau of Economic Research (NBER)’s official business cycle data do not go further back than 1854, which itself results from the fact that most of the extant data on pre-1854 output is qualitative. Thorp’s Business Annals (1926), for example, are primarily based on anecdotal newspaper reports. Thorp identifies a recession in almost every other year, which Davis and Weidenmier think is a gross overestimation.

Instead, the authors use Davis’s (2004) index of industrial production (IP) and defend their choice by pointing out a number of things. First, this is a newer, high-frequency series which despite its industrial focus is much more precise than, for example, Gallman’s trend GDP data. It is based on 43 annual components in the manufacturing and mining industries which were consistently derived from 1790 to World War I. The series does not contain any explicit information on the agricultural sector, which produced more than half of US output in the antebellum era. However, Davis and Weidenmier argue that any large business fluctuations apparent in this sector would also be reflected in the IP index as the demand for industrial goods was very much tied to farm output. Conversely, the demand for say, lumber, could be intimately related to business conditions in the construction and railroad industries.

Simply looking at standard deviations makes clear that the 1841-1856 period was indeed one of especially low volatility and sustained growth in industrial production, with no absolute normal declines in output. From this data it is thus apparent that even the well-known 1837 financial panic was not followed by any protracted recession, thereby confirming Temin’s (1969) earlier suspicion. Testing more rigorously for breaks in the series, their Markov regime-switching model suggests that the probability of a low-volatility state indeed rises the most during this period as compared to the early and late 19th-century periods. Applying the same model up to the recent era, it even appears that the two Great Moderations were similar in magnitude – a remarkable result.

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But what could explain this apparently unique phenomenon? To answer this question, Davis and Weidenmier first decompose industrial production into several sectors such as metal products, transportation machinery, lumber, food, textiles, printing, chemicals and leather. They then find that the probability of faster growth and lower volatility during the First Great Moderation is significantly higher for the transportation-goods industry. This corresponds to the general idea that the “transportation revolution” (especially in railroads and ships) was an important aspect of America’s take-off. However, increased production in transportation goods could be a result of increased demand in the economy as a whole. The authors then refute this possibility by showing that transportation production preceded all other industrial sector increases in this period, which would tend to confirm the importance of transportation investment spillover effects into other sectors.

Davis and Weidenmier therefore make a convincing case that the Great Moderation should in fact be called the Second Great Moderation, since a first one is clearly apparent from the 1840s to the mid-1850s. Interestingly, they emphasize that in both cases deep structural changes in the economy seem to have been at work, especially in the realm of general purpose technologies, with significant spillovers (transportation in one case, IT in the other).

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An important question left to answer is the extent to which an era of the “Great Moderation” type is to be desired, and on what grounds. Although aiming at a quiet yet prosperous era seems legitimate, it is important to remind ourselves that the 1850s ended with a severe financial and economic crisis which some argue had its roots in financial speculation and overindebtedness in preceding years. Likewise, we all know how the 2000s sadly ended. The “Second” Great Moderation also saw significant increases in inequality. Davis and Weidenmier acknowledge not being able to account for financial and banking developments during this era; perhaps this needs to be investigated further (or at least pondered upon). One may ask, indeed, whether such periods of prosperity may not bear in themselves the seeds of their own demise.

 

References

Davis, Joseph. (2004). “An Annual Index of US Industrial Production, 1790-1915.” The Quarterly Journal of Economics 119:4, pp. 1177-1215.

Gallman, Robert. (1966). “Gross National Product in the United States, 1834-1909” in Dorothy S. Brady (ed.) Output, Employment, and Productivity in the United States after 1800. New York, Columbia University Press.

Rostow, W. (1990). The Stages of Economic Growth: A Non-Communist Manifesto. 3rd Edition. Cambridge: Cambridge University Press.

Temin, Peter. (1969). The Jacksonian Economy. New York: W. W. Norton & Company, Inc.

Thorp, William. (1926). Business Annals. NBER.

 

Don’t Panic!! War, Money and Stability, 1914-45

Confidence, Fear and a Propensity to Gamble: The Puzzle of War and Economics in an Age of Catastrophe 1914-45

by Roger L. Ransom (roger.ransom@ucr.edu) (University of California at Riverside)

This paper uses the notion of animal spirits introduced by John Maynard Keynes in the General Theory and more recently employed by George Akerloff and Robert Shiller in their book Animal Spirits, to explain the speculative bubbles and decisions for war from 1914 to 1945. Animal spirits are “a spontaneous urge to action rather than inaction” that produces decisions which are not bounded by “rational” calculations. My analysis shows how confidence, fear, and a propensity to gamble can encourage aggressive behavior that leads to speculative “bubbles” in financial markets and military or political crises. Elements of prospect theory are added to demonstrate how the presence of risk in crises tend to produce a very strong bias towards taking gambles to avoid economic or military loses. A basic premise of the paper is that war and economics were inexorably joined together by 1914 to a point where economic strength was as important as military might in determining the outcome of a war. The final section of the paper deals with the problem of measuring military and economic strength by using the composite index of national capability [CINC] created by the Correlates of War Project to evaluate the riskiness of the Schlieffen Plan in 1914 and the changes in military capability of major powers between 1914-1919

URL http://econpapers.repec.org/paper/ucrwpaper/201603.htm

Distributed by NEP-HIS on: 2016-03-17

Reviewed by Mark J Crowley

This paper surveys the impact of war on economic stability, and the role that confidence and fear plays in the nature of the economy and economic development.   It provides an interesting addition to the historiography, especially since numerous similar studies have concentrated on the social ramifications of war, most notably the correlation between armed conflict and social change first identified by Arthur Marwick in the 1970s.

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John Maynard Keynes is still regarded by many as the architect of modern economics in war and peace

Using the framework of ‘animal spirits’, first advanced by John Maynard Keynes in his classical General Theory study of 1936, Ransom shows how emotion and rationality have governed many of the economic cycles that ensued as a result of war and peace. He shows that decisions based on instinct were often the driver of many deep-rooted changes that would impact on long-term economic stability.  With the perception among policymakers that interwar years (i.e. the period after the First World War) would lead to a period of significant economic instability, he shows how major world leaders often took gambles – some of which paid off, but some of which had deep consequences that not only changed the course of war, but also affected long-term economic performance.

In identifying the limitations of economic history analyses in this area, Ransom argues that the uncertainties caused by war and the transition to a peacetime economy leads to several difficulties. For economists, no real models exist for the predictions of uncertainty or volatility, whereas outcomes can, to a certain degree of accuracy, be predicted. Furthermore, he claims that in countries where the economy was growing and the war effort was achieving positive aims, leaders were thus operating in a ‘confidence bubble.’ Yet while this progress could be regarded as positive for the nation, the implications for the economy were not always fruitful, especially since the impact of emotion on leaders’ psyche meant that despite these developments, leaders and planners did not always act rationally. In explaining this phenomenon, Ransom draws on Daniel Kahneman and Amos Tverskey’s 1979 ‘Prospect theory’ in which they argue that many leaders have focused on the results they think are really possible while also seeking to avoid large losses. This, in turn, has served to cloud judgement with regard to the possibilities open to make significant gains.

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Hoovervilles in the USA became a common sight of the Great Depression of the 1920s

In the final part of the paper, Ransom shows how historians have used the Composite Index of National Capability in order to assess a nation’s capability to wage a war.  The test, comprising six areas includes: military personnel; military expenditure; total population; urban population; primary energy consumption; and iron and steel consumption.  This approach looks at these aspects and divides each nation by the overall global variable.   While not totally reliable, it can offer possibilities to explain why leaders, in preparation for, and in prosecution of, war have changed strategies according to national needs.  Using the Battle of the Marne during the First World War as an example, Ransom shows how this acted as a ‘tipping point’ in the German prosecution of the war effort – the failure of which saw confidence turn into fear and the widely-regarded failure of General Schlieffen to discharge Germany’s military capability in the most effective way. Thus the idea that economics formed the foundation a nation’s military capability after the First World War has now received greater attention.

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General Schlieffen’s economic decisions during the First World War have now been seen as a possible reason for German’s failures.

Critique

This paper is fascinating for the way that it shows the impact of emotion and human rationality on economics.  In terms of economic policymaking, little attention has been dedicated to the role of emotion and human behaviour on the economic decisions taken that, in turn, had a fundamental impact on the trajectory of war.

The interesting aspect of this paper lies in the way that Ransom uses case studies to show how wars, and the pressures placed on leaders, could have influenced their state of mind concerning their economic decisions.  The approach is geo-political.  This is particularly useful, since the importance of international relations would have impacted severely on a nation’s economic capability.  However, what could also be of interest is a consideration of the response on the home front to the challenges brought about by war and peace, and how the opinions of ordinary citizens may or may not have influenced those in positions of power.  For example, in the British case, the Ministry of Information during the Second World War commissioned surveys of the home front to ascertain people’s opinions on a wide range of topics, of which the condition of the economy featured heavily.  The social research organisation, Mass Observation, also conducted similar surveys so as to inform the government of the home front’s condition, and how it could be maintained to ensure solidarity for the war effort.  At the core of many citizens’ grievances was the nature of the economy, especially rising food prices.  While ascertaining this information in a transnational study such as this may not be easy, perhaps a little more focus on citizens’ opinions of economy and the prosecution of the war effort would provide a wider framework in which to understand the influences on world leaders when making decisions controlling the trajectory of their nation’s economies in war and peace.

 

References

Jefferys, Kevin (ed.), War and Reform: British Politics during the Second World War (Manchester: Manchester University Press, 1994).

Marwick, Arthur, War and social change in the twentieth century: a comparative study of Britain, France, Germany, Russia and the United States (London: Macmillan, 1974).

Milward, Alan S., War, Economy and Society, 1939-45 (Harmondsworth: Penguin, 1987).

Minns, Raynes, Bombers and Mash: The Domestic Front, 1939-45 (London: Virago, 1980).

Take the Money and Don’t Run?

Benefits of empire? Capital market integration north and south of the Alps, 1350-1800

by

David Chilosi (London School of Economics d.chilosi@lse.ac.uk)

Max-Stephan Schulze (London School of Economics m.s.schulze@lse.ac.uk)

Oliver Volckart  (London School of Economics o.j.volckart@lse.ac.uk)

ABSTRACT: This paper addresses two questions. First, when and to what extent did capital markets integrate north and south of the Alps? Second, how mobile was capital? Analysing a unique new dataset on pre-modern urban annuities, we find that northern markets were consistently better integrated than Italian markets. Long-term integration was driven by initially peripheral places in the Netherlands and Upper Germany integrating with the rest of the Holy Roman Empire where the distance and volume of inter-urban investments grew primarily in the sixteenth century. The institutions of the Empire contributed to stronger market integration north of the Alps.

URL: http://econpapers.repec.org/paper/ehlwpaper/65346.htm

Distributed by NEP-HIS on  2016‒02‒29

Review by Anna Missiaia

The work by Chilosi, Schulze and Volckart deals with a fundamental issue in European economic history, namely ascertaining the level of capital market integration in different parts of the continent at a specific moment in time. The areas of interest in this case are Italy and the territories of the Holy Roman Empire. The aim is to test whether the Italian cities, that are often considered the front runners of modern finance in the medieval times, where enjoying a greater level of financial market integration compared to the cities that were part of the Holy Roman Empire.

The paper uses an impressive collection of some 30,000 interest rate records from 103 cities located both north and south of the Alps. The time span is 1350-1800, providing a very long run picture of the starting levels and evolution of the capital markets in pre-industrial times. The authors use nominal interest rate spreads across cities to assess the level of market integration. This is a standard procedure often used with price series and goes back to the concept of the law of one price: if two markets are well integrated, price (interest rates) differentials will merely reflect transport and other trade costs such as tariffs between the two markets, leaving no space for arbitrage.

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The main result of the paper is that although Italy and the Holy Roman Empire started from similar levels of interest rate spread at the beginning of the period, they had very different dynamics. Capital markets in the Holy Roman Empire experienced an accumulated reduction in spreads during the period considered while the ones in Italy experienced an increase (-6 vs. +2.55 when perpetuities are compared).

The authors make an interesting case that the divergence observed is led by long-distance integration within the Empire. They do so by separating all the possible pairs that originate the spreads into two groups: those under 200 km of distance and those above. They find that the integration in the second group increased twice as fast compared to the first. The authors place this convergence of long-distance  and short distance integration between 1500 and 1630.

The next step in the analysis is to study whether the integration was occurring between or within regions of the Empire. Using cluster analysis, the authors show that the Empire appeared as a “polycentic network” with several interconnected financial centers (such as Frankfurt, Leipzig, Nurmberg and Hamburg). These were developing in parallel in spite of the large distances between them. The evidence points to increased integration between rather than within clusters, opening the way to a fascinating discussion on the causes of this divergence between the Empire and Italy.

 

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                                             The imperial eagle

So why did the regions north of the Alps were able to achieve greater capital market integration in spite of less favorable geographic conditions (scarce access to sea) and a lower level of financial technology? According to Chilosi, Schulze and Volckart, the key factor lays into the different institutions that the two regions developed. Local authorities in Italy restricted the participation of foreigners to the capital markets and foreign investment was more costly than local. Quite differently, within the Empire foreign investment was favoured by several means: legal systems were much more similar within the Empire and collective liability was widespread. Moreover, the local authorities competed for capital, pushing them to increase the protection of foreign investors.  The authors however are careful in stating that the Imperial institutions were the sole promoters of the integration. They are more inclined to grant them an indirect effect through the promotion of peace and the moderation of interstate rivalries. The lack of such institutions in Italy led on the other hand to much more fragmented capital markets.

This paper is very relevant for the current debate in many ways. It primarily addresses an issue that is fundamental to explain the very different economic development trajectories of two European regions that in medieval times had reversed positions, with the Italian city states forging ahead. The papers also uses a data set that is impressive both in its size and in its temporal extension, making the results very convincing from an empirical point of view. The discussion of the role of institutions in promoting exchange and therefore economic development is a classic one that goes back for instance to the work of Greif (2006) and Ogilvie (2011).

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A step that would take the debate further would be to focus more on the Italian institutions, which in this paper seem to be somehow neglected compared to the imperial ones. In particular, it would be interesting to study whether all the Italian city states had institutions that were equally detrimental for capital market integration. If, for instance, northern Italian cities, having been part of the early Empire, had institutions that were more similar to the imperial ones, this could bring some insights into the different performance of the South in the 19th century and beyond. Such analysis could be useful in the debate on regional disparities in Italy and their determinants (for recent contributions see Daniele and Malanima, 2011 and Felice, 2015).

References

Daniele V. and P. Malanima (2011). Il divario Nord-Sud in Italia 1861-2011. Rubbettino (Soveria Mannelli).

Felice, E. (2015). Ascesa e declino. Storia economica d’Italia. Il Mulino (Bologna).

Greif, A. (2006). Institutions and the Path to the Modern Economy. Lessons from Medieval Trade. Cambridge University Press (Cambridge).

Ogilvie, S. (2011). Institutions and European Trade. Cambridge University Press (Cambridge).

 

Coinucopia: Dealing with Multiple Currencies in the Medieval Low Countries

Enter the ghost: cashless payments in the Early Modern Low Countries, 1500-1800

by Oscar Gelderblom and Joost Jonker (both at Utrecht University)

Abstract: We analyze the evolution of payments in the Low Countries during the period 1500-1800 to argue for the historical importance of money of account or ghost money. Aided by the adoption of new bookkeeping practices such as ledgers with current accounts, this convention spread throughout the entire area from the 14th century onwards. Ghost money eliminated most of the problems associated with paying cash by enabling people to settle transactions in a fictional currency accepted by everyone. As a result two functions of money, standard of value and means of settlement, penetrated easily, leaving the third one, store of wealth, to whatever gold and silver coins available. When merchants used ghost money to record credit granted to counterparts, they in effect created a form of money which in modern terms might count as M1. Since this happened on a very large scale, we should reconsider our notions about the volume of money in circulation during the Early Modern Era.

URL: https://ideas.repec.org/p/ucg/wpaper/0074.html

Distributed by NEP-HIS on: 2015-11-21

Review by Bernardo Batiz-Lazo

In a recent contribution to the Payments Journal, Mira Howard noted:

It’s no secret that the payments industry has been undergoing a period of enormous growth and innovation. Payments has transformed from a steadfast, predictable industry to one with solutions so advanced they sound futuristic. Inventions such as selfie-pay, contactless payments, crypto currency, and biotechnology are just examples of the incredible solutions coming out of the payments industry. However, many payments companies are so anxious to deliver “the future” to merchants and consumers that they overlook merchants that are still stuck using outdated technologies.

The paper by Gelderblom and Jonker is timely and talks to the contemporary concerns of Mira Howard by reminding us of the long history of innovation in retail payments. Specifically, the past and (in their view) under appreciated use of ledger technology (you may want to read its current application behind Bitcoin inThe Economist Insights).

Gelderblom and Jonker set out to explain high economic growth in the Low Countries during the 17th and 18th centuries in a context of scarce media to pay by cash given low coinage, recurrent debasements and devaluations. Their argument is that scarcity of cash did not force people to use credit. Instead silver and gold coins were used as a store of value while daily transactions were recorded in ledgers while translated into a “fictional” currency (“a fictive currency, money of account or ghost money”, p. 7). This provided a common denominator in the use of different types of coin. For instance they cite a merchant house in Leiden transacting in 28 different coin types.

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Gelderblom and Jonker build their argument using different sources including a re-examination of relevant literature, probates and merchant accounts. Together they build a fascinating and thought provoking mosaic of the financial aspects everyday life in the Early Modern age. One can only praise Gelderblom and Jonker for their detail treatment of these sources, including a balanced discussion on the potential limitations and bias they could introduce to their study (notably their discussion on probate data).

Comment

The use of a unit of account in a ledger to deal with multiple currencies was by no means unique to the Low Countries nor to the Medieval period. For instance, early Medieval accounting records of the Cathedral of Seville followed the standard practice of keeping track of donations using “maravadies” while 19th century Kuwaiti merchant arithmetic of trade across the Indian Ocean and the Persian Gulf was expressed in Indian rupees [1]. Gelderblom and Jonker, however, go a step beyond using trends in probate data to explore whether there was widespread use of credit and also, extant literature to determine the scarcity of different coins and precious metals.

As part of their arguments Gelderblom and Jonker also question the “efficiency” of the so called “stage theory of money”. This echoes calls that for some time economic anthropologist have made, as they have provided empirical support questioning notion of the barter economy prior to the emergence of money and thus pointing to the illusion of the “coincidence of and wants” (for a quick read see The Atlantic on The Myth of the Barter Economy and for an in depth discussion see Bell, 2001). The same sources agree that the Middle Ages was a second period of demonetization. Moreover, systems of weight and measures, both being per-conditions for barter, were in place by the Early Modern period in Europe then a barter or credit economy rather than the gift economy that characterized pre-monetary societies was a possible response to the scarcity of cash. Gelderblom and Jonker provide evidence to reject the idea of a credit economy while conclude that “barter was probably already monetized” (p. 18) and therefore

“we need to abandon the stage theory of monetization progressing from barter via chas to credit because it simply does not work. … we need to pus the arguments of Muldrew, Vickers, and Kuroda further and start appreciating the social dimensions of payments”.(pp. 18-19)

I could not agree more and so would, I presume, Georg Simmel, Bill Maurer, Viviana Zelizer, Yuval Millo and many others currently working around the sociology of finance and the anthropology of money.

References and Notes

Bell, Stephanie. 2001. “The Role of the State in the Hierarchy of Money.” Cambridge Journal of Economics 25 (149-163).

[1] Many thanks to Julian Borreguero (Seville) and Madihah Alfadhli (Bangor) for their comments.

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Where is the growth?

Mismeasuring Long Run Growth: The Bias from Spliced National Accounts

by Leandro Prados de la Escosura (Carlos III)

Abstract: Comparisons of economic performance over space and time largely depend on how statistical evidence from national accounts and historical estimates are spliced. To allow for changes in relative prices, GDP benchmark years in national accounts are periodically replaced with new and more recent ones. Thus, a homogeneous long-run GDP series requires linking different temporal segments of national accounts. The choice of the splicing procedure may result in substantial differences in GDP levels and growth, particularly as an economy undergoes deep structural transformation. An inadequate splicing may result in a serious bias in the measurement of GDP levels and growth rates.

Alternative splicing solutions are discussed in this paper for the particular case of Spain, a fast growing country in the second half of the twentieth century. It is concluded that the usual linking procedure, retropolation, has serious flows as it tends to bias GDP levels upwards and, consequently, to underestimate growth rates, especially for developing countries experiencing structural change. An alternative interpolation procedure is proposed.

Source: http://econpapers.repec.org/paper/cgewacage/202.htm

Distributed in NEP-HIS on 2015 – 01 – 09

Reviewed by Cristián Ducoing

Dealing with National Accounts (hereafter NA) is a hard; dealing with NA in the long run is even harder…..

Broadly speaking, a quick and ready comparison of economic performance for a period of sixty years or more, would typically source its data from the Maddison project. However and as with any other human endevour, this data is not free from error. Potential and actual errors in measuring economic growth is highly relevant economic history research, particularly if we want to improve its public policy impact. See for instance the (brief) discussion in Xavier Marquez’s blog around how the choice of measure can significantly under or overstate importance of Lee Kuan Yew as ruler of Singapore.

The paper by Leandro Prados de la Escosura, therefore, contributes to a growing debate around establishing which is the “best” GDP measure to ascertain economic performance in the long run (i.e. 60 or more years). For some time now Prados de la Escosura has been searching for new ways to measure economic development in the long run. This body of work is now made out of over 60 articles in peer reviewed journals, book chapters and academic books. In this paper, the latest addition to assessing welfare levels in the long run, Prados de la Escosura discusses the problems in using alternative benchmarks and issues of spliced NA in a country with a notorious structural change, Spain. The main hypothesis developed in this article is to ascertain differences that could appear in the long run NA according to the method used to splice NA benchmarks. So, the BIG question is retropolation or interpolation?

Leandro Prados de la Escosura. Source: www.aehe.net

Leandro Prados de la Escosura. Source: http://www.aehe.net

Retropolation: As Prados de la Escosura says, involves a method that is …, widely used by national accountants (and implicitly accepted in international comparisons). [T]he backward projection, or retropolation, approach, accepts the reference level provided by the most recent benchmark estimate…. In other words, the researcher accepts the current benchmark and splits it with the past series (using the variation rates of the past estimations). What is the issue here? Selecting the most recent benchmark results in a higher GDP estimate because, by its nature, this benchmark encompasses a greater number of economic activities. For instance, the ranking of relative income for the UK and France changes significantly when including estimates of prostitution and narcotrafic. This “weird” example shows how with a higher current level and using past variation rates, long-run estimates of GDP will be artificially improved in value. This approach thus can lead us to find historical anomalies such as a richer Spain overtaking France in the XIXth century (See Prados de la Escosura figure 3 below).

An alternative to the backward projection linkage is the interpolation procedure. This method accepts the levels computed directly for each benchmark year as the best possible estimates, on the grounds that they have been obtained with ”complete” information on quantities and prices in the earlier period. This procedure keeps the initial level unaltered, probably being lower than the level estimated by the retropolation approach.

There are two more recent methods to splice NA series derived from the methods described above: the “mixed splicing” proposed by Angel de la Fuente (2014), which uses a parameter to capture the severity of the initial error in the original benchmark. The problem with this solution is the arbitrary value assigned (parameter). Let’s see it graphically and using data for the Maddison project. As it is well known, these figures were recently updated by Jutta Bolt and Jan Luiten van Zanden while the database built thanks to the contributions of several scholars around the world and using a same currency (i.e. the international Geary-Kheamy dollar) to measure NA. Now, in figure 1 shows a plot of GDP per capita of France, UK, USA and Spain using data from the Madison project.

GDP per capita $G-K 1990. France, UK, USA and Spain. 1850 – 2012

The graph suggests that Spain was always poorer than France. But this could change if the chosen method to split NA is the retropolation approach. Probably we need a graph just with France to appreciate the differences. Please see figure 2:

GDP pc Ratio between Spain and France. Bolt&vanZanden (2014) with data from Prados de la Escosura (2003)

GDP pc Ratio between Spain and France. Bolt&vanZanden (2014) with data from Prados de la Escosura (2003)

Figure 2 now suggests an apparent convergence of Spain with France in the period 1957 to 2006. The average growth rate for Spain in this period was almost 3,5% p.a. and in the case of France average growth shrinks to 2,2% p.a. Anecdotal observation as well as documented evidence around Spainish levels of inequality and poverty make this result hard to believe. Prados de la Escosura goes on to help us ascertain this differences in measurement graphically by brining together estimates of retropolation and interpolation approaches in a single graph (see figure 3 below):

Figure 3. Spain’s Comparative Real Per Capita GDP with Alternative Linear Splicing (2011 EKS $) (logs).

Figure 3. Spain’s Comparative Real Per Capita GDP with Alternative Linear Splicing (2011 EKS $) (logs).

In summary, this paper by Prados de la Escosura is a great contribution to the debate on long run economic performance. It poises interesting challenges scholars researching long-term growth and dealing with NA and international comparisons. The benchmarks and split between different sources is always a source of problems to international comparative studies but also to long-term study of the same country. Moving beyond the technical implications discussed by Prados de la Escosura in this paper, economic history research could benefit from a debate to look for alternative measures or proxies for long-run growth, because GDP as the main source of international comparisons is becoming “dated” and ineffective to deal with new research in inequality, genuine savings Genuine Savings, energy consumption, complexity and gaps between development and developed countries to name but a few.

References

Bolt, J. and J. L. van Zanden (2014). The Maddison Project: collaborative research on historical national accounts. The Economic History Review, 67 (3): 627–651.

Prados de la Escosura, Leandro  (2003) El progreso económico de España (1850-2000). Madrid, Fundación BBVA, , 762 pp.

PS:

1) This paper by Prados de la Escosura has already been published in Cliometrica and with the same title

2) Prados de la Escosura’s A new historical database on economic freedom in OECD countries | VOX, CEPR’s Policy Portal.

Neoliberalism: A Cultural Social Construction

Crisis Without End: Neoliberalism in a Globalized Environment

by Richard N. Rambarran (University of Hyderabad)

Abstract: Since the 1970’s, both politically and theoretically, neoliberalism as an ideology has been on a persistent rise to the point where, in the twenty first century, it has garnered hegemonic dominance. Despite several recurring crises in countries since the ascendance of neoliberalism, we yet remain reluctant to point out the political economy philosophy as a root cause of the crises. Instead, many of the academics within Economics prefer to offer bouts of highly technical reasons for the downturn – this is especially true and almost solely applicable to those who practice within the ‘neoclassical’ conjecture of Economics. In a typical Marxian sense, one would have to look no further than the economic system to determine both economic and social outcomes of a country. What dictates that economic system however is the political philosophy of the leaders who guide the economic system – the policy makers. This paper attempts to show the neoliberal political philosophy, as the common thread for major crises within the last two decades. It also proposes a societal trinity for which change is driven through complex interactions among the political, economic and social spheres.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:67410

Circulated by nep-his on: 2015-10-25

Revised by: Stefano Tijerina

Richard Rambarran joins an emerging group of scholars that are spearheading an aggressive global criticism of modern capitalism, and particularly the impact that neoliberalism has had on its most recent methods of implementation within the international system. Thomas Picketty’s Capitalism in the Twenty-First Century has lead the way in recent times. Nevertheless Rambarran’s contribution to the discussion is welcomed because it points out that the economic political philosophy behind the social construction of neoliberal ideals is the determinant factor in preserving <status quo, even after numerous economic crises.

Richard Rambarran Research Fellow at The Social Economy Research Group (SERG)

From Rambarran’s point of view, the neoliberal principles have become an “ingrained” ideology fomented by economists, local politicians and bureaucrats, domestic and multilateral institutions, academic institutions, mass media, corporations, and the consumer.[1] He further argues that today’s mainstream professional economist has perpetuated this social construction using its mathematical and econometric technical rhetoric to distance itself not only from the public sphere but also from the critical role once played by the “Classical economists.”[2] The complacency in the professional sphere has permeated the public sphere, where the collective political and social conscience is more concerned in pursuing the possibility of “wealth and great opulence,” occasionally reacting to economic crises like the one in 2008 only to quickly return to the initial passive approach once individual financial issues are partially resolved.[3]

Rambarran centers on the 1997 East Asian crisis and the 2008 Global Financial Meltdown in order to illustrate how the economic political philosophy has come to dictate “the very mechanics of our lives” through its systemic and institutional framework. He argues that contrary to the views of many scholars that the rise of neoliberalism came with the emergence of political leaders Ronald Reagan and Margret Thatcher, the foundations of the political philosophy and its social construction emerged in the post Great Depression era.[4] The solutions to the 1997 and 2008 crises therefore represent a series of theoretical models constructed since the first modern global financial crisis in order to scientifically justify the perpetuation of neoliberalism.

'Well what a coincidence! I'm a financial regulator too!'

‘Well what a coincidence! I’m a financial regulator too!’

The ingrained idea that “human well-being and social welfare” are best advanced by the deregulation of the institutions, programs, and norms that once regulated the capitalist machine, seems to be an unquestionable thought. [5] To get to this social reality, argues Rambarran, classic liberal ideas of John Locke, Adam Smith, David Ricardo and the like had to be dismantled in order to neoliberalism to surge. According to Rambarran, neoliberalism is “not simply a minutely revised version of classic liberalism,” it is a new version of capitalism that reduces the role of the state to its minimal.[6] The business-government alliance that pushed neoliberalism forward after the 1930s slowly twisted the idea that “liberating individual and entrepreneurial freedoms and skills” through institutions, programs, and a normative systems “characterized by strong private property rights, free markets, and free trade” were actually responsible for the debacle of the market system in 1997 and 2008, and that greater privatization of services and deregulation for the business sector was the only solution moving forward.[7] These are the principles of nation state building under globalization, the basic political economic structures of nations that welcome open market and free trade, the minimal parameters for participating in the global market system; ideas that, as indicted by Rambarran, are part of the subconscious decision making dynamic between politicians, the private sector, and consumers.[8]

The current realities of this “macroscopic trinity” indicate that the business class, defined by Rambarran as the “intellectual class,” heavily influences political, economic, and social perceptions of nation building under a globalized system.[9] An intellectual class responsible for the cultural social construction of neoliberal principles that originated in the industrial world during the first half of the twentieth century and that began to spread across the developing world after the Second World War.

Macroscopic TrinityNeoliberal economists obsessed with breaking the chains of state regulatory systems and interested in returning to the deregulated conditions of the pre Great Depression era used theoretical models to debunk Keynesian economics.[10] During the 1970s and 1980s neoliberal principles became the formula for stagflation in the highly developed countries, and the remedy for the increasing external debt crisis across the developing world. The effective release of the forces of the market justified the dismantling of the social welfare state and the institutional and programmatic bodies that awarded citizens levels of accountability within the triangular dynamic of government-business-constituent relationships across the world. Nationalist development models based on Import Substitution Industrialization were dismantled and replaced by the principles of deregulation, privatization, and the strengthening of private property rights.

According to Rambarran, the implementation of the neoliberal experiment across the world produced mixed results, but the ability of the intellectual class to market success stories through its propaganda machine in order to justify the long-term preservation and expansion of neoliberal principles across the world gave birth to the Asian miracle.[11] Foreign direct investment and the “inflow of speculative money” would be the driving force behind the miracle, as capitalists in the industrial world shifted their production and manufacturing operations to newly unregulated regions of the world while at the same time taking advantage of the liberalization of capital accounts, escaping the already fragile regulatory systems in their own nation states, and setting the tone for the initial stages of accelerated “neoliberal globalization.”[12] Once the “speculative bubble…popped” foreign investors quickly pulled their money from the region, decreasing confidence in the East Asian region.[13] The neoliberal experiment had revealed the need for regulatory systems in order to impede the emergence of new unregulated speculative markets across the world under a more interdependent global market system, but the reshuffling of capital back into the industrial economies allowed the neoliberal propaganda system to quickly market the success of Free Trade zones.

Crisis 1997 Rambarran misses the opportunity to explain the historical developments that took place between the Asian crisis of 1997 and the 2008 Global Financial Crisis that pushed neoliberalism further into the collective subconscious. Discussions about the emergence of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement, and the consolidation of the European Union would have allowed the author an opportunity to illustrate how neoliberal intellectuals engineered and marketed to their constituents the illusion of a globalized economy for the sake of the consumer and the domestic worker.

The author’s lack of historical evidence makes his argument less convincing. The 1997 and 2008 crises help illustrate how neoliberal forces are able to perpetuate their principles even after severe global economic, political, and social damage, but he is not able to explain how the intellectual forces within his “macroscopic trinity” were able to create the social cultural construction that turned neoliberalism into an unquestionable economic political philosophy.

For example how neoliberal economists such as Milton Friedman and Lauchlin Currie together with multilateral organizations engineered the expansion of neoliberalism to markets across the world. How marketing and public relations intellectuals such as Philip Kotler and Daniel Edelman perfected the use of mass media in order translate the principles of neoliberalism to consumers, distancing them from their role as constituents and shifting their agency toward the world of consumption. How the roles of politicians and bureaucrats was redefined by Thatcher and Reagan in order to reinvent the democratic relationship between representative and constituent, and how the educational system at all levels was reengineered in order to replicate and export neoliberal ideals across the world.

A more detailed explanation of the concepts behind his “social trinity” would have clarified the dynamics between the intellectual class, and political, economic, and social actors. Why is there a one-way communication dynamic between economic actors and society? Why is the communication between political and economic actors a one-way dynamic? And why is the intellectual class not present within the political, economic, and social realms but separate from them? I would argue that the success of the expansion of neoliberal thought is that they now represent government, economic policy, and the collective social conscience. It is why it is more prevalent then ever before to see private sector representatives running for office, managing government institutions, and redefining the nature of once sacred social institutions such as universities. It is not a phenomenon of the industrial world but a common trend across the global system.

References

Duménil, G. & Levy, D. “Neoliberal (Counter) Revolution.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 9-19.

Harvey, D. A Brief History of Neoliberalism. London, United Kingdom: Oxford University Press, 2007.

Rambarran,R. “Crisis without End: Neoliberalism in a Globalized Environment Modeling the Historic Rise of Neoliberalism and its Systematic Role in Recent Economic Downturns,” Munich Personal RePEc Archive, October 22, 2015.

Palley, T. I. “From Keynesianism to Neoliberalism: Shifting Paradigms in Economics.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 20-29.

Picketty, T. Capitalism in the Twenty-First Century. Cambridge MA: Harvard University Press, 2014.

[1] Rambarran, “Crisis without End”, p. 1.

[2] Ibid.

[3] Ibid.

[4] For more information see Harvey 2007, Palley 2004 and Dumeril & Levy 2004.

[5] Rambarran, 2.

[6] Ibid.

[7] Ibid., 3.

[8] Ibid.

[9] Ibid.

[10] Ibid., 4.

[11] Ibid., 10.

[12] Ibid., 11.

[13] Ibid., 13.