Author Archives: Chris Colvin

About Chris Colvin

Chris Colvin is a Lecturer (Assistant Professor) in Economics at Queen’s University Belfast, where he is also a Research Associate at Queen’s University Centre for Economic History.

Do banks facilitate economic growth? If so, what type?

Banks, free banks, and U.S. economic growth

Matthew Jaremski (Colgate University)
Peter Rousseau (Vanderbilt University)

Abstract

The “Federalist financial revolution” may have jump-started the U.S. economy into modern growth, but the Free Banking System (1837-1862) did not play a direct role in sustaining it. Despite lowering entry barriers and extending banking into developing regions, we find in county-level data that free banks had little or no effect on growth. The result is not just a symptom of the era, as state-chartered banks seem to have strong and positive effects on manufacturing and urbanization.

URL: http://econpapers.repec.org/paper/vanwpaper/vuecon-12-00012.htm
Review by Chris Colvin

Do banks facilitate economic growth, and if so, what type of banks do so best? Matthew Jaremski and Peter Rousseau attempt to answer this question by looking at the economic impact of the entry of “free banks” to the US market for banking services in the mid-nineteenth century.

Free banks, so called because they required no charter, were an early form of financial liberalisation which in the long-run proved to be unsuccessful; by 1863, one third of all the free banks ever created had closed.

The advent of free banking laws lowered entry barriers because any group of individuals could establish a bank, as long as they fulfilled certain requirements set down by the state in which they operated. The incumbent charter banks, by contrast, required significant political lobbying before they were permitted to open.

Jaremski and Rousseau look at a period of US history in which both types of bank operated side-by-side. Using county-level social, financial and economic data, they are able to track the impact, if any, of a bank opening on its locality.

Jaremski and Roussasu find that free banking had little effect on growth

Jaremski and Roussasu find that free banking had little effect on growth

Overall, they find that banks of any kind had a strong effect on local growth, especially in manufacturing. But when differentiating the impact by bank type (charter versus free), charter banks had a positive effect while free banks had little or no effect on growth.

So in conclusion, banks appear to facilitate economic growth, but free banks not so much. Why? The authors reckon it has something to do with: (1) what they were investing in (agriculture rather than manufacture); (2) what backed their note issues (some states required very little stable collateral); and (3) new banking legislation in the 1860s (which saw the advent of national banking).

The Open Access Debate and Economic History

This paper, which was distributed by NEP-HIS 2013-02-03, is an example of an alternative use of working paper series: the distribution of soon-to-be-published journal articles that have already gone through peer review. Jaremski and Rousseau are about to have this article published in Economic Inquiry; it is already available there on Early View.

Why do authors use working paper series for this purpose? Well, probably to improve the access to their work.

Improving access to academic work is a very live political issue here in the UK. There is much talk about ways to make academic research available to the general public. The UK government seems to be in favour of something called Gold Access, where researchers pay to have their work published in journals (see here). This strikes me as a way to prop up the status quo, to support publishers’ existing business models, which in my opinion have come under incredible pressure from digital paper archiving and distribution services like RePEc.

An alternative mooted by others has been dubbed Green Access, and is very much the spirit of what Jaremski and Rousseau do here: in addition to publishing work in the standard way, through an established journal with peer review, academics make a version of their article available free-of-charge through their own website or their institution’s online archive, perhaps after some time delay. Many publishers seem dead against this route, perhaps because it threatens their business model more than Gold Access would. But I think putting pressure on their business is a good idea; I reckon that the likes of Elsevier need this pressure in order to curb their market power.

The Economic History Society has recently sent at letter to the UK government committee tasked with looking into the issue of Open Access (see here). It is written from the perspective of not-for-profit academic publisher, and has a different assessment of the situation than me. I urge economic historians to read it and debate its implications, also those located outside of the UK.

To patent or not to patent, that is the question

Inventors, Patents and Inventive Activities in the English Brewing Industry, 1634-1850

Alessandro Nuvolari (alessandro.nuvolari@sssup.it) and James Sumner (james.sumner@manchester.ac.uk)

URL: http://ideas.repec.org/p/ssa/lemwps/2012-18.html

Abstract

This paper examines the relationship between patents, appropriability strategies and market for technologies in the English brewing industry before 1850. Previous research has pointed to the apparent oddity that large-scale brewing in this period was characterized both by a self-aware culture of rapid technological innovation, and by a remarkably low propensity to patent. Our study records how brewery innovators pursued a wide variety of highly distinct appropriability strategies, including secrecy, selective revealing, patenting, and open innovation and knowledge-sharing for reputational reasons. All these strategies could co-exist, although some brewery insiders maintained a suspicion of the promoters of patent technologies which faded only in the nineteenth century. Furthermore, we find evidence that sophisticated strategies of selective revealing could support trade in inventions even without the use of the patent system.

Review by Chris Colvin

Much about the recent legal dispute between Apple and Samsung suggests that our patent system is broken. The conventional economic argument for patent protection is that it is socially beneficial because it: (1) incentivises invention in areas where there would otherwise be few rewards for inventors; and (2) aids in the dissemination of ideas and combats secrecy (for a good explanation of the conventional view, see Suzanne Scotchmer’s excellent textbook). But in their 2008 polemic, and again in a recent working paper, Michele Boldrin and David K Levine argue that patents create only ‘an “intellectual monopoly” that hinders rather than helps the competitive free market regime that has delivered wealth and innovation to our doorsteps’. The authors argue instead that: (1) patents neither increase invention, nor adequately reward inventors; and (2) patents simply create a market in patents and in associated legal services.

Nuvolari and Sumner try to understand the remarkably low propensity to patent in brewing before 1850.

It is against this on-going debate on the value and efficacy of patent protection that Alessandro Nuvolari and James Sumner’s new working paper should be read. Distributed on NEP-HIS-2012-11-03, the paper offers an excellent industry case study from history with which to understand the role of patents within a single sector. Nuvolari (Scuola Superiore Sant’Anna, Pisa) and Sumner (University of Manchester) track their use in the brewing industry before, during and after the Industrial Revolution. Not only do they compile a new dataset of patents and patentees in brewing across the period, but they also catalogue alternative appropriability strategies used by innovators at the time: trade secrecy, complete openness, and everything between. Of particular interest to economists and historians studying innovation and incentives are the authors’ findings that the strategies of “insiders” and “outsiders” to the brewing industry differed substantially, and that there was a large trade in inventions, even for those that were not protected by patents.

Today, and with few exceptions, we have a one-size-fits-all patent system that offers the same levels of protection to inventors in all sectors of the economy. One mooted solution to our current patent mess is that these government-granted monopoly rights should be redesigned to be sector-specific; they are perhaps more appropriate to some industries than others and should have different protection lengths, breadths and costs to reflect this. For example, patents that relate to tablet computers should be weakened, whilst those relating to pharmaceuticals strengthened. Nuvolari and Sumner give us a warning shot from history for policymakers considering such an approach: a great deal of different appropriability strategies can be present even within the same industrial sector, let alone between sectors. Redesigning today’s patent system to be sector-specific would fail to reflect the different ways in which inventors compete; it may force rivals to use the same strategies, and may hamper rather than help progress.

Why were the Cathars killed but the Huguenots not?

Legal Centralization and the Birth of the Secular State

By Noel D. Johnson (njohnsoL@gmu.edu) and Mark Koyama (mkoyama2@gmu.edu), George Mason University

URL: http://econpapers.repec.org/paper/pramprapa/40887.htm

Abstract

This paper investigates the relationship between the historical process of legal centralization and increased religious toleration by the state. We develop a model in which legal centralization leads to the criminalization of the religious beliefs of a large proportion of the population. This process initially leads to increased persecution, but, because these persecutions are costly, it eventually causes the state to broaden the standards of orthodox belief and move toward religious toleration. We compare the results of the model with historical evidence drawn from two important cases in which religious diversity and state centralization collided in France: the Albigensian crusades of the thirteenth century and the rise of Protestant belief in the sixteenth century. Both instances sup- port our central claim that the secularization of western European state institutions during the early-modern period was driven by the costs of imposing a common set of legal standards on religiously diverse populations.

Review by Chris Colvin

The cause of the transition from religious to secular government in Europe remains a heavily debated topic among historians of all flavours. This working paper, by George Mason University economic historians Noel Johnson and Mark Koyama, provides a novel explanation by marrying a formal model with secondary literature to construct an analytic narrative. Distributed by NEP-HIS on 2012-09-03, the paper contrasts the history of the Cathars and the Huguenots to argue that secularisation was a way for the French Crown to limit the costs of legal centralisation.

Johnson and Koyama argue that traditional accounts of European secularisation don’t quite match the history; the process commenced much earlier than existing explanations give credit to. Secularisation cannot be a product of the 18th century Enlightenment movement as it is observed at least two centuries earlier. And secularisation cannot be associated with the advent of religious toleration, a thesis advocated by the likes of Montesquieu, as it occurred at a time of religious strife. The solution offered in this paper is that a path towards secular government was taken because enforcing an intolerant orthodoxy was deemed no longer “cost effective” by Europe’s rulers.

Johnson and Koyama apply their theoretical model to French history. In so doing they are able to explain why the Cathars were the subject of a Crusade in thirteenth century, whilst the Huguenots were (eventually) permitted to co-exist with the official religion of the French state in the sixteenth century. In line with recent historical research, they note that the Cathars only consciously became a separate heretical religion when the French defined it as such in their effort to incorporate Languedoc into the French state; in reality their beliefs were very similar to the French orthodoxy. By contrast, the Huguenots were a self-defined separate religious and political grouping. The very process of state formation led to the Cathars being seen as a legitimate target for elimination, but permitted the Huguenots to co-exist with Catholics (following a short initial spike in persecution). The Reformation led to an increase in the bounds of tolerance because eliminating a highly cohesive and highly deviant new religion simply became too expensive.

The Cathars only became heretics when the French wanted rid of them in a very 13th century approach to state-building

I would like to see this model applied to the Low Countries, an analytical narrative I will now briefly attempt to start myself. Taken together, the people of the Seventeen Provinces (what are now the Netherlands and Belgium) can be said to have formed three separate groups: the linguistically and culturally homogenous Protestant Netherlands north of the Rhine delta (Holland and its hinterland), the Dutch-speaking Catholic Netherlanders (Brabant and Flanders), and the French-speaking Walloons in the far south. The fact that the Protestant north colonised and incorporated half of the Catholic south in its effort to break away from Habsburg Netherlands means that the new Dutch state had to either tolerate or eradicate the highly cohesive and highly deviant Roman religion it now found within its borders. In the end, it chose the former. Perhaps the cost of purging the Generality Lands of their separate religious identity was found to be too costly in the face of the protracted war between the Seven United Provinces and Habsburg Spain.

The construction of analytical narratives is an approach to economic history that has been popularised, above all, by Avner Greif in his work on the Maghribi traders. As a consequence of Greif’s choice of theoretical framework, it has become viewed by many in the profession as the application of game theory to history. Johnson and Koyama – the latter of whom teaches a graduate course on analytic narratives at GMU – form part of a new group of “analytic narrators” who use other rational choice frameworks in their research. This second wave may allow the analytic narratives project to grow from being merely applied game theory into a genuine independent methodology. I would like to see analytic narratives used elsewhere in business, economic and financial history; its use in business history in particular could prove fruitful, perhaps in the context of the “New Business History” project initiated by Abe de Jong and David Higgins.

In Antitrust We (Do Not) Trust

British economists on competition policy (1890-1920)

By Nicola Giocoli (giocoli@mail.jus.unipi.it), University of Pisa

URL: http://econpapers.repec.org/paper/pramprapa/39245.htm

Abstract

Most late 19th-century US economists gave a rather cool welcome to the Sherman Act (1890) and, though less harshly, to the Clayton and FTC Acts (1914). A large literature has identified several explanations for this surprising attitude, calling into play the relation between big business and competition, a non-neoclassical notion of competition and a weak understanding of anti-competitive practices. Much less investigated is the reaction of British economists to the passing of antitrust statutes in the U.S. What we know is simply that none of them (including the top dog, Alfred Marshall) championed the adoption of a law-based competition policy during the three decades (1890-1920) of most intense antitrust debates in the U.S. The position of three prominent British economists will be examined in this paper: H.S. Foxwell, D.H. MacGregor, and, of course, Alfred Marshall – the latter in two moments at the extremes of our period, 1890 and 1919. It will turn out that they all shared with their American colleagues a theoretical and operational skepticism about the government and judiciary interference with the free working of markets. They also believed that British industrial structure and business habits were so different from those in the U.S. that the urge of interfering with markets in order to preserve competition was much weaker. Among the paper’s insights is that Marshall’s key concept of “defending a competitor’s right to compete” foreran the modern characterization of the goal of competition policy as “the protection of the competitive process”. Yet Marshall developed his concept without making recourse to the post-1930s neoclassical notion of competition as a static market structure which lies at the foundation of most contemporary antitrust policy: a useful lesson from the history of economic thought for those IO economists who still claim that the classical dynamic view of competition is unsuited as a foundation for an effective competition policy.

Review by Chris Colvin

I will be teaching industrial organisation (IO) to undergraduates next year. It is a brand new course, and so I have been trawling though the websites of IO teachers around the world for inspiration. Overall, I have been quite perplexed with what I have found: undergraduates seem to be fed material that is very theoretical and computational, with little or no context or application. Perhaps this prepares students well for graduate programmes in economics, but the vast majority of economics undergraduates aren’t going to be doing a PhD. And even those that do will require exposure to some empirical research.

I want my students to use their microeconomics, to get them to appreciate that real life is dirtier than in the models. And I want them to understand that economic ideas aren’t fixed in time and space, that a log-run perspective can yield interesting insights about human behaviour. I plan to do so by limiting the use of textbooks and instead delving into academic papers and antitrust cases. I feel economic history should play centre stage in an economics degree, not relegated to an obscure field study. So, when teaching sunk costs and market structure, I will look at the decline of Europe’s film industry in the early twentieth century; when covering collusion, I will set them the US sugar cartel of the 1930s; when teaching natural monopolies, I will examine Victorian railways; and when looking at the efficacy of patents, I will do nineteenth century alternatives.

I am also keen to find something accessible that students can use to appreciate the origins and evolution of competition policy – including why it differs by place, and how legal decisions based on economic arguments made long ago still have resonance today. I want to teach them some history of economic thought. One paper that I hope to discuss in this context is Nicola Giocoli‘s working paper distributed by NEP-HIS on 2012-06-13. Giocoli looks at the reaction in the UK to the advent of antitrust in the US. He finds that influential British economists like Foxwell, McGregor and Marshall were dead against US-style anti-monopoly legislation. They believed it would be difficult to implement, run counter to the ideals of a free market, and be inappropriate in the UK industrial context. The UK had to wait until the 1970s for a pukka competition policy to be introduced.

Alfred Marshall, whose ideas about antitrust policy are explored by Nicola Giocoli

What is particularly interesting about Giocoli’s paper is his description of a transformation in what economists thought competition entailed. For classical economist, competition was about firm conduct; they adopted a dynamic process-based view of competition. For the neoclassical economists that followed, competition was more about market structure, the market condition; this static view was more concerned with business size and the number of competitors. For someone teaching modern IO theory, this is fascinating. Over the last two (or three) decades, IO has seen a paradigm shift from the old structure-conduct-performance view of competition – which primarily concerned itself with measuring market structure – to the so-called New Industrial Organisation view – which, apparently much like the economists described by Giocoli, is far more concerned with figuring out firm conduct and doesn’t necessarily draw a causal link between structure and performance. In short, it appears we have come full circle.

I like Giocoli’s paper because he tries to marry his history of economic thought with up-to-date research in economic history. Instead of seeing the US as a success and Britain as a failure – a view that business historian Alfred Chandler made a living out of – Giocoli argues instead that competition law was unnecessary because Britain was largely still a success, still ahead of everyone else terms of total factor productivity – it didn’t require government intervention. I would encourage Giocoli to further develop this argument by looking at some of the work of Leslie Hannah, whose career has been devoted to debunking Chandler. His work (including in the JEH) shows that the Chandlerian corporation was actually far more a thing of Europe than America. A monopolist like Standard Oil – the company whose breakup is central to any history of antitrust – was the exception rather than the rule. US capitalism is a story of small family-run enterprise, not big business. How does this revision of the business history affect Giocoli’s argument?

How did the antipope affect the distance to school?

Medieval Universities, Legal Institutions, and the Commercial Revolution

By Davide Cantoni (cantoni@lmu.de) and Noam Yuchtman (yuchtman@haas.berkeley.edu)

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:17979&r=his

Abstract:

We present new data documenting medieval Europe’s “Commercial Revolution” using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany’s first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.

Review by Chris Colvin

The “distance to” literature, as I like to call it, has just had an exciting new addition, from Davide Cantoni (University of Munich) and Noam Yuchtman (Haas School of Business, UC Berkeley). As UK readers will know all too well, our tabloid press is quite obsessed with stories about the distance to school (sometimes even more than house prices). In their new working paper (circulated by NEP-HIS on 2012-04-17), Cantoni and Yuchtman apply this English obsession to explain something altogether different; they use the distance to new post-Schism universities as an indicator of human capital in what may well be a 14th-century natural experiment.

Recent contributions to the “distance to” literature include Sascha Becker and Ludger Woessmann’s 2009 QJE article, which uses distance to Wittenberg as an instrument for Protestantism, Jeremiah Dittmar’s 2011 QJE article, which uses distance to Mainz as an instrument for the adoption of the printing press, and, in an interesting combination of the two, Jared Rubin’s working paper, which uses distance from Mainz as an instrument for the spread of Protestantism through the printing press.

Whilst these all focussed on questions involving the 16th-century Reformation, Cantoni and Yuchtman look at a much earlier Christian division: the 14th-century Papal, or Western, Schism that led to the Avignon-based Antipopes. Europe’s German areas had no universities before this schism. German states largely chose to follow the Roman pope, as a result of which German academics and students could no longer get to school; German academics found themselves in the antipope’s realms and were exiled. Returning home, they establish their own schools in places like Erfust, Heidelberg and Cologne.

Antipope Clement VII: Cantoni and Yuchtman think he may have helped cause the Rise of the West

Cantoni and Yuchtman argue that this influx-of-the-educated led to a proliferation of legal education, which in turn facilitated economic exchange and helped lead to the Commercial Revolution and the Rise of the West. Their core “distance to” instrument for education is defined as the change in distance between a market and its closest university following the establishment of a new German university. Markets in the west of the German parts of the Holy Roman Empire saw a larger reduction in this distance-to-school measure than in the east, and the interaction of the timing of universities’ arrival and this change in distance correlates nicely with the founding of organised markets.

As with all papers involving natural experiments of history, the authors devote considerable time convincing readers that the arrival of new universities was truly an exogenous event, that these universities would not have been established were it not for the Papal Schism. One of the ways they do this is with “placebo regressions” involving parts of Europe affected by the Schism, but which saw no change in the trend in university establishment, such as England. However, by their own admission, the most important part of English legal education at the time took place in London, at the Inns of Court, rather than at Oxbridge, which were basically glorified seminaries for the rich; perhaps they could consider the Inns as a de facto university in their next version of the paper. Another placebo regression I would like to see would involve ancient universities (like Northampton, Lucca and Würzburg) that were short-lived: do their results still hold if these failed universities are included?

Unfortunately, Cantoni and Yuchtman decided to distribute their working paper using the NBER, which means it is behind the Great Academic Firewall; only individuals clicking on the paper from within a university network can download it for free. Fortunately, Yuchtman has also uploaded a copy on his personal webpage. I think it is high time for the NBER to stop charging punters to access its papers; members should vote with their feet and distribute their work-in-progress in alternative ways!