Monthly Archives: July 2013

It’s the Timing, Stupid

Cross-Sections Are History

Richard Easterlin (University of Southern California)

Abstract

Although cross section relationships are often taken to indicate causation, and especially the important impact of economic growth on many social phenomena, they may, in fact, merely reflect historical experience, that is, similar leader-follower country patterns for variables that are causally unrelated. Consider a number of major advances (“revolutions”) in the human condition over the past four centuries – material living levels, life expectancy, universal schooling, political democracy, empowerment of women, and the like. Suppose that each has its own unique set of causes, and, as a result, a unique starting date and a unique rate of diffusion throughout the world. Suppose too that initially all countries are fairly closely bunched together on each variable in fairly similar circumstances. Suppose, finally, that the geographic pattern of diffusion is the same for each aspect of improvement in the human condition, that is, the same group of countries have a head start, and the follower countries in the various parts of the world fall in line in a similar geographic order. The result will be statistically significant international cross section relationships among the various phenomena, despite their being causally independent. The oft-reported significant cross-country relationships of many variables to economic growth may merely demonstrate that one set of countries got an early start in virtually every “revolution”, and another set, a late start.

URL: http://econpapers.repec.org/paper/izaizadps/dp7341.htm

Review by Chris Colvin

The “correlation equals causation” fallacy says that one thing preceding another does not imply causation. Be that as it may, inferring causality from time series data is significantly more plausible, under certain conditions, than from cross sections. A cross-sectional regression only shows the co-occurrence of different factors; to prove causality we also need to know about history. This is the argument made in an IZA Discussion Paper by USC’s Richard Easterlin distributed as part of NEP-HIS 2013-04-27 (since published in the journal Population and Development Review).

Easterlin’s particular beef is with purveyors of cross-country growth regressions. He notes that studies of actual historical experience of individual countries frequently disprove expectations about causation based on cross-sectional relationships. The fact that a certain group of countries enjoys high levels of per-capita GDP and high life expectancies does not mean the former causes the latter. Indeed, the fact even that these countries were the first to enjoy both high GDP and high life expectancies still does not prove causality.

Richard Easterlin argues that history matters

Richard Easterlin argues that history matters

Easterlin, famous for his Easterlin Hypothesis, instead argues that there could be unrelated factors causing GDP and life expectancy that cannot be picked up in a cross-sectional regression. The reason: cross sections register the results of history, not insights into likely experience. Co-occurrence at any one point in time does not imply causation. Per-capita GDP and life expectancy may be independent of one another and governed by advances in separate underlying technologies. The Industrial Revolution and the Mortality Revolution may be totally unrelated; each phenomenon must be analysed in its own right.

This is a short paper which I think offers an important contribution. It is especially useful as a teaching aid. Easterlin presents his argument in a clear and concise fashion that undergraduate students should easily grasp. His paper reiterates the importance of economic history in the teaching of economics, something which is noted to be lacking in many university syllabi by many of the authors of a great volume on the future of economics teaching edited by Diane Coyle. And when read in conjunction with e.g. Morten Jerven’s recent book on the unreliable nature of the statistics pertaining to growth and income in the Global South, the lessons of this paper can be used by students to themselves explore the problems of much of the empirical development literature of recent history.

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Internal Migration and Trade Unions Strength: an Alternative Look on Pre-Civil War Spain

Structural change, collective action, and social unrest in 1930s Spain

by

Jordi DOMÈNECH FELIU (jdomenec@clio.uc3m.es)  Universidad Carlos III

Thomas Jeffrey MILEY (thomas.j.miley@gmail.com) University of Cambridge

ABSTRACT

The Spanish 2nd Republic (1931-1936) witnessed one of the fastest and deepest processes of popular mobilization in interwar Europe, generating a decisive reactionary wave that brought the country to the Civil War (1936-1939). We show in the paper that both contemporary comment and part of the historiography makes generalizations about the behaviour of the working classes in the period that stress idealistic, re-distributive and even religious motives to join movements of protest. In some other cases, state repression, poverty, and deteriorating living standards have been singled out as the main determinants of participation. This paper uses collective action theory to argue that key institutional changes and structural changes in labour markets were crucial to understand a significant part of the explosive popular mobilization of the period. We argue first that, before the second Republic, temporary migrants had been the main structural limitation against the stabilization of unions and collective bargaining in agricultural labour markets and in several service and industrial sectors. We then show how several industries underwent important structural changes since the late 1910s which stabilized part of the labour force and allowed for union growth and collective bargaining. In agricultural labour markets or in markets in which unskilled temporary workers could not be excluded, unions benefitted from republican legislation restricting temporary migrations and, as a consequence, rural unions saw large gains membership and participation. Historical narratives that focus on state repression or on changes in living standards to explain collective action and social conflict in Spain before the Civil War are incomplete without a consideration of the role of structural changes in labour markets from 1914 to 1931.

URL: http://e-archivo.uc3m.es/bitstream/10016/17160/1/wh1305.pdf

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2013-06-30. The authors, Jordi Domenech from Carlos III and Thomas Miley from Cambridge, aim to explain why and how workers’ protests rose in Spain during the Second Republic (1931-1936). This question is very interesting from a historiographical point of view, as this period of popular mobilization is considered to be one of the causes of the subsequent Civil War (1936-1939). Standard explanations include state repression, poor economic conditions, economic inequality and possibly the flourishing of socialist ideologies in Spain. The authors detach from these standard explanations and follow an institutional approach. They claim that a significant part of this social process can be attributed to changes in the labour markets. In particular, that increasing mobilization was due to a decrease of temporal migrations in labour markets.

Republique-allegorie-2

Spanish Republic Allegory displaying Republican paraphernalia and symbols of modernity

The conceptual argument underpinning their effort is roughly as follows: collective action theory contends that the greater the diversity of workers’ preferences (for example over their type of contract or their work conditions), the lesser the workers will be able to organize effectively. These preferences also include decisions to enter labour contracts. For instance, temporary workers accept to be paid pro-rata (i.e. by unit of output) while permanent workers accept (or prefer) to be paid by hour of in-the-job labour.

Domenech and Miley remind us that at in the first third of the 20th century, Spain characterized by substantial internal migrations that enabled the rise of temporary workers within manufacturing and agriculture. However, in the early 1930s Spain experienced changes in both the markets for its products and the demand for labour. These changes led to the introduction of legal limitations over temporary migrations. The result of regulatory innovations was the strengthening of unions by increasing their membership and also as union leaders increasingly faced more homogeneous requests by they represented workers and all this, therefore, led to greater social mobilization.

Wall painting during the Spanish Civil War

To prove their point, Domenech and Miley make a remarkable use of qualitative evidence which, let me emphasize, is not always easy to find. They collected oral testimonies, reports and newspaper articles to show the increasing tension between permanent and temporary workers. The work on original qualitative sources is vast and necessary to fill the gap left by quantitative estimates. In fact, to my surprise, this paper does not propose any formal model or empirical test on quantitative data. The reason is well explained on page 29, where the authors point out that census data would not cover this period: the relevant laws that imposed restrictions were passed just after the 1930 census and abrogated before the next census of 1940. The fact that census data are not of any use for this work is surely a severe limitation to any attempt to study the causality between migrations, union power and social unrest. However, looking at the extensive sources used for the qualitative analysis, the impression is that a further step to at least quantify the changing role of unions could be taken. Possibly,  a measure of union power (for example by number of strikes, number of members, etc) could be proposed. At the same time, conceptual framework is not all together clear, particularly when dealing with specific relationships leading to the increase of union power. For instance, poor economic conditions and greater income inequality have been proposed as causing of popular unrest and social mobilization. It is not clear why greater union power rather than the changes in labour regulation could have also been a contributing force.

Comisiones Obreras (one of the main Spanish unions – circa 1970s)

To conclude, this paper proposes an innovative explanation to social unrest in Spain in the 1930s based on labour markets and provides comprehensive qualitative evidence. This is a very important topic in light of the subsequent events: popular mobilization has been followed by four years of civil war and the beginning of Franco’s dictatorship. In spite of the severe restrictions on the data, some further quantification (even just descriptive) would improve a paper which casts light on such an fundamental period of Spanish history.

Are Cartels Pragmatic Responses to Market Failures?

The International Mercury Cartel, 1928 – 1949

By Miguel López-Morell (mlmorell@um.es), Universidad de Murcia and Luciano Segreto (segreto@unifi.it), Università degli Studi di Firenze.

URL: http://d.repec.org/n?u=RePEc:pra:mprapa:46772&r=his

Abstract

Mercury has been one of the most persistent cases in contemporary history of international market regulations and this in spite of its having been affected by important technological changes and the regular discovery of new deposits. This paper offers an approach to the least known period, although perhaps the one in which the greatest rises in process and production occurred as a consequence of market manipulation. The period coincides with a series of agreements between the Spanish and the Italian producers and the outcome was a worldwide cartel known as “Mercurio Europeo” which came into being in 1928. The aims of this work will, therefore, be first to describe the features of the various stages of development of the international mercury market during the first half of the twentieth century, with emphasis on the characteristics and conditioning factors in each period. Secondly, the objective is to analyse the various market agreements that came about, the effectiveness of the clauses therein, the construction of distribution networks and the influence that the increase in production had on other mines and on certain technological developments.

Review by Beatriz Rodríguez-Satizábal

There are two sides to every argument and the different forms of competitive collaboration is no exception. On the one hand, the claim against cartels and other forms of collusion is the loss of efficiency and the dampening of incentives for technological progress. These are exacerbated by the potential to influence the political process (e.g. lobbying, regulatory capture, etc.) and the potential to augment economic inequality through biased distribution of profits. On the other hand, business historians have documented the importance of cartels for industrialisation in Germany as well as to achieve network externalities in banking (particularly around payment systems). Legally sanctioned competitive collaboration can provide an industry with a guaranteed profitability and a secure competitive path by being more stable, dividing up markets, and securing price and production.

The case of competitive collaboration around the extraction of mercury documented by López-Morell and Segreto, distributed by NEP-HIS on 2013-05-11, looks at the cartel known as Mercurio Europeo, to advance arguments which favour collaboration in industries were collusion allows producers to achieve economies of scale as well as foster technological change and reduce market prices in the long-term. The central question is whether a cartel was or not a pragmatic response to the imperfect allocation of the resources between the Spanish and Italian mercury producers from 1928 to 1949.

Based on the assumption that cartel agreements have been around for a while, López-Morell and Segreto present a thorough revision of the strategies during its early years. The agreement between Minas de Almaden y Arrayanes (Spain) and Monte Amiata (Italy) was signed in 1928 as a way to control the supply of mercury in a very stable market. In other words, the cartel was organized in order to deal with an unchanging demand. The result was a cartel with a complex internal organization that, in a very short time kept, managed to place the price of mercury close to monopoly levels but, at the same time, failed in achieve greater efficiency in production and/or increase sales volume.

López-Morell and Segreto explore in detail the reasons for the formation of the Spanish-Italian mercury cartel while arguing that there was a desire to stabilise production levels in order to increase profits without losing market share nor, as it was mainly in the Italian case, to invest in new technology. The cartel strategy proved to be effective because the demand for the product was inelastic and the collusion between the two producers increased the profit without harming the individual production targets.

Although, López-Morell and Segreto omit a discussion of the relative efficiency of collusion and competitive collaboration, from their empirical evidence it would seem that a carel was the best organisational option for the case of mercury. Mercurio Europeo was successful at least in part because during the 1928-1949 period mercury was a key input in the production of other metals and at the time there were only a handful of mines around the world. A cartel, therefore, became the answer to best manage scarcity.

Benito Mussolini (1883-1945)

However, the argument by López-Morell and Segreto is in need of a counter factual. Perhaps one that explores the option of a monopoly with private ownership (such as the Rothschild family) rather than a cartel agreement. In other words, could the absence of a cartel change ownership structures, market share, and international price levels? Further, there is a need to understand the role of both governments in the agreement. The 1928-1949 period coincides with fascist governments in both Spain and Italy, which characterised by radical nationalistic ideas, peculiar forms of corporatism, the role of the state (e.g. protectionism, interventionism), economic self-sufficiency and autarky, among others. Hence, the particular form of cooperation between Spanish and Italian mines could well be the result of institutional pressures (including, the war effort) rather than the behaviour of consumers.

Francisco Franco y Bahamonde (1892-1975)

In summary, the paper by López-Morell and Segreto is an interesting contribution to the study of collaboration because it focuses on the strategies taken by two national companies to organise a cartel. It builds upon surviving internal documents (e.g. analyses of Board meeting minutes) of each company to bring about a better understanding of changes in the market. Moreover, it shows that the strategic decision to whether co-operate or cheat within the cartel has a profound effect on the market outcome.