Category Archives: Economic History

The Limitations of Correcting Data with more Data

Brazilian Export Growth and Divergence in the Tropics during the Nineteenth Century

By Christopher D. Absell and Antonio Tena Junguito (both at Carlos III, Madrid).

Abstract: The objective of this article is to reappraise both the accuracy of the official export statistics and the narrative of Brazilian export growth during the period immediately following independence. We undertake an accuracy test of the official values of Brazilian export statistics and find evidence of considerable under-valuation. Once corrected, during the post-independence decades (1821-50) Brazil’s current exports represented a larger share of its economy and its constant growth is found to be more dynamic than any other period of the nineteenth century. We posit that this dynamism was related to an exogenous institutional shock in the form of British West Indies slave emancipation that afforded Brazil a competitive advantage.

url: http://econpapers.repec.org/paper/ctewhrepe/wp15-03.htm

Distributed by NEP-HIS on: 2015-05-22 and published under the same title in Journal of Latin American Studies (Online, April 2016)

Reviewed by Thales A. Zamberlan Pereira (University of São Paulo)

The best place to find the (rather scarce)  macroeconomic data for 19th century Brazil are the official statistics compiled by the Brazilian Statistics Institute (IBGE). The IBGE data is the main source in Brian Mitchell’s international historical statistics and both are commonly used in the literature exploring Brazilian economic history. The paper by Absell and Tena is an attempt to test the accuracy of these sources by looking at official export statistics between 1821 and 1913. If nothing else this  already makes this an interesting paper.

Paraguay-Guiana-Brazil

The focus in export data relies on the argument that the Brazilian economy remained stagnant during the decades that followed Brazil’s independence until 1850 when there was renewed economic growth. While the more recent literature suggests the development of a domestic economy before 1850, the more “classic” literature focuses on the foreign sector to calculate Brazil’s economic growth in the 19th century.

Absell and Tena confirm previous findings that official export statistics were undervaluing exports after 1850. But their study extends to the earlier period and suggests that official statistics  also had a significant bias for the first half of the 19th century. In particular their analysis suggests that Brazilian export growth before 1850 was much higher than previously assumed and that a change in international demand, especially for coffee, was the principal determinant for this growth. The last section of the paper tries to explain the sources of Brazil’s “dynamic export growth” during the post-independence decades and shows that an increase in foreign demand was much more important than changes in domestic productivity. The high rate of growth in exports between 1821 and 1850, a very interesting result, is calculated by deflating prices using an index from a new series of commodities prices.

Coffee_8

 

Comment

All of Absell and Tena’s results are grounded in the price correction of the official export data and, therefore, the most interesting part of the paper is the reconstruction of Brazil’s export statistics. To correct the official data, they used international prices for the different commodities (mainly cotton, sugar, and coffee) and subtract freight rates, insurance costs, and export taxes. That is, they convert c.i.f. (cost, insurance and freight) values to f.o.b. (free on board) creating new series for these variables. For insurance and freight rates they used trade data between Rio de Janeiro and Antwerp. It should be noted, however, that a large part of cotton exports before 1850 went to Britain, and freight rates between Brazil and Liverpool were half of what they were for freight travelling to Portugal or France.

Absell and Tena argue that official data for exports was sourced in a weekly table organized “by a government committee in consultation with local commodity brokers and commercial associations.” This information was then verified by the Ministry of Finance,  who sent the tables to provincial customs houses (which calculated the tax revenue) and also to major news periodicals. If the official values were organized like this for the whole period under study, as the authors argue, it would be easier to doubt the accuracy of exports statistics. But, it is difficult to understand how a system of weekly information could work in a country the size of Brazil during the 19th century. Before 1850, northern provinces like Maranhão had stronger business relationships with Lisboa and Liverpool than with Rio de Janeiro. Some northern provinces did not support independence in 1822 because of close economic ties with Portugal.

Unknown

An additional issue is that many important provinces, even after 1850, did not use the weekly table to calculate their taxes. Evidence suggests that in Minas Gerais and São Paulo, two major coffee exporters, the government used a fixed price system to calculate taxes. See, for example, debates at the provincial assembly of Rio de Janeiro, November 1862, 1879; available online. This information, of course, does not invalidate the argument about the inaccuracy of official values, but it provides some clues that the authors’ correction could have a significant bias as well.

Another problem with the transformation to f.o.b. prices regards export duties. In the working paper version of this article, they assume this “additional trade cost” represented between 1 to 7 per cent of export values. There is extensive evidence, however, that export taxes were a much higher burden throughout the 19th century. Debates at the Chamber of Deputies, the Senate, and in newspapers show that before the fiscal reform in the 1830s, export duties for sugar and cotton could reach more than 20 per cent. The export duties also varied across provinces. After 1850, they continued to be at least 10 per cent.  The export duties presented by Absell and Tena are undervalued because their source from 1821 to 1869 only show the total revenue collected by the central government, not revenue collected by provincial custom-houses. Making assumptions in such calculations is valid, but information regarding data sources should have been more clearly explained in the published version.

Unknown-1

Because the objective of the authors is to correct export values using more accurate price data, it should be clear that they do not use only price for Brazilian commodities to adjust the official statistics. To correct the value of Brazilian cotton exports, for example, they use price information of Guyana Raw (Berbice or Demerara) and Middling Uplands (United States) to the United Kingdom. The figure below shows the price of an arroba of cotton in pennies (d) from four different sources, including two prices series for Brazil not used in Absell and Tena paper. The first is the price from the official statistics (IBGE), the second is the price of cotton at the port of Maranhão, the third is the price of cotton from Maranhão in Liverpool, and the last one in the average price of West Indies in Liverpool. As can be seen,  using prices for Brazilian cotton would change some of the magnitudes that the paper proposes.

this_is_an_excel_graph

In summary the paper by Absell and Tena makes a worthy contribution and it proposes a revisionist approach to an important source. An important problem in the paper, however, is not discussing how its own sources could limit their conclusions, a crucial aspect in any revisionist study.

Medieval History and its Relevance to Modern Business

Joint publication review with The Long Run Blog

 

Title: The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions

The Medieval Origins of a Culture of Cooperation and Inclusive Political Institutions

 

By: Carmine Guerriero (ACLE, University of Amsterdam)

Abstract: This paper evaluates the relative importance of a “culture of cooperation,” understood as the implicit reward from cooperating in prisoner’s dilemma and investment types of activities, and “inclusive political institutions,” which enable the citizenry to check the executive authority. I divide Europe into 120 km X 120 km grid cells, and I exploit exogenous variation in both institutions driven by persistent medieval history. To elaborate, I document strong first-stage relationships between present-day norms of trust and respect and the severity of consumption risk-i.e., climate volatility-over the 1000-1600 period and between present-day regional political autonomy and the factors that raised the returns on elite-citizenry investments in the Middle Ages, i.e., the terrain ruggedness and the direct access to the coast. Using this instrumental variables approach, I show that only culture has a first order effect on development, even after controlling for country fixed effects, medieval innovations, the present-day role of medieval geography, and the factors modulating the impact of institutions. Crucially, the excluded instruments have no direct impact on development, and the effect of culture holds within pairs of adjacent grid cells with different medieval climate volatility. An explanation for these results is that culture, but not a more inclusive political process, is necessary to produce public-spirited politicians and push voters to punish political malfeasance. Micro-evidence from Italian Parliament data supports this idea.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:70879

Circulated by NEP-SOC on 2016-05-14

Reviewed by Catherine Casson (University of Manchester) and Mark Casson (University of Reading)

This paper takes a long-run approach to an investigation of the importance of a ‘culture of cooperation’ and ‘inclusive political institutions’. The author defines a ‘culture of cooperation’ as the behavioural characteristics of ‘trust, respect, control and obedience’, while the term ‘inclusive political institutions’ is defined as institutions which ‘enable the citizenry to check the executive authority’.

Analysis is focused on Europe and on the agrarian economy. The author suggests that cooperation in the middle ages was particularly associated with the monastic orders of the Cistercians and Franciscans. Their houses were generally located, the author argues, in areas with unpredictable climates. The ability of the monks to farm the land in a way that put such unproductive land to productive use attracted the support and cooperation of the local community. In addition these monastic orders also introduced new financial practices, including improvements in access to credit, which also fostered local community cooperation. Inclusive political institutions, the author suggests, were especially associated with the success of long-distance trade. This created a shared goal between the elite and citizens.

Cistercian_monks_at_work1

The paper suggests that contemporary cultures of cooperation and inclusive political institutions are influenced by medieval ones. The medieval data used for ‘culture’ is climate data and the modern data is the 2008 European Value Study. For inclusive political institutions the medieval data is ‘the discounted number of years Cistercian and Franciscan houses were active per square km over the 1000-1600 period’ (p. 9) while the modern data is on prosecutions of members of parliament in Italy in 1948-87.

Later in the paper some more specific hypotheses are presented as controls for change over time:

  1. That Atlantic trade impacted on modern economic development
  2. That micro-credit systems introduced by the Franciscan order strengthened contemporary credit markets
  3. That monastic orders influenced religious beliefs in general, and that this influence may have had other, less defined, influences, on economic practice
  4. That distance to Wittenberg, where Protestantism began, influenced the development of a ‘culture of cooperation’
  5. Early transition to agriculture led to ‘higher inequality in gender roles’
  6. That genetic diversity in a country had a negative impact on cooperation
  7. That the suitability of soil for potato growing contributed to the development of institutions
  8. That the Black Death raised standards of living
  9. That education influenced the development of institutions and economic growth

The paper argues that the impact of the medieval culture of cooperation originating in the Cistercian and Franciscan monastic houses can be seen today. It also argues that this culture of cooperation has had a greater influence as a check on executive authority than inclusive political institutions.

Conflict, rather than cooperation, is often the term most associated with the middle ages. One of the benefits of this paper is that it highlights the presence of, and impact of, collaboration. Monastic orders are recognised in both history and economics literature for their important economic, as well as religious, impact. Their use to assess a culture of cooperation is therefore helpful, but they are perhaps a less obvious choice for an assessment of inclusive political institutions. One potential way in which the paper could be developed would be by expanding the scope to cover both urban and rural locations. Such an extension would retain the presence of monastic orders (and indeed extend it to cover urban ones) and, more significantly, allow urban political institutions to be considered. The presence of these institutions is briefly discussed on p. 12 but the issue is not developed further. Many of these town governments had as a shared goal the long-distance trade alluded to in the paper. They also offer more equivalent data to the contemporary data used as a proxy for inclusive political institutions.

images

Continuity and change over time is a key focus on the paper and the author shows an awareness of some key developments that occurred from the medieval to the modern period. The selection of the controls shows an engagement with recent secondary literature but does introduce additional time periods (such as the Neolithic), specific events (for example the Black Death) and general trends (for example the expansion of education). The paper could be strengthened by more clearly outlining the chronology of these events, and perhaps by narrowing the list of controls used.

Connections between contemporary and historic business have been increasingly recognised and explored in academic literature. The subject of this paper is therefore related to a growing trend to examine the medieval origins of many economic processes. Monasteries have been identified as key players in the ‘multinational enterprise’ of medieval pilgrimage and as originations of sophisticated forms of financial transactions (Bell and Dale, 2011; Bell, Brooks and Dryburgh, 2007). They were also important speculators in the property market (Baker and Holt, 2004; Bouchard, 1991; Casson and Casson, 2016).

Tintern_Abbey-inside-2004

Financial crises are a further topic that can be examined through the surviving qualitative and quantitative sources from the middle ages. In the light of the financial crisis of 2008 there has been a recognition that a long-run perspective, starting as early as the middle ages, provides the opportunity to study cycles of growth and decline. Surviving medieval records from the English government, for example, provide detailed data that can be subjected to statistical analysis, as shown in the work of Bell, Brooks and Moore (Bell, Brooks and Moore, 2014; Bell, Brooks and Moore, 2013). The importance of medieval data has also been highlighted in recent work on historic GDP (Broadberry et al, 2015).

Innovation and knowledge acquisition in the middle ages have recently been examined using both modelling approaches from economics, and historical case studies. De la Croix, Doepke and Mokyr (2016) have shown, using their combined expertise in the fields of economics and history, the important foundation that medieval guilds provided in the transmission of knowledge across Europe before the Industrial Revolution. Meanwhile Davids and de Munck’s edited collection on Innovation and Creativity in Late Medieval and Early Modern European Cities has used historical case studies to demonstrate that medieval cities saw a clear connection between the skills of their population and the overall economic performance of their city, and developed strategies that were intended to make their city economically resilient (Davids and De Munck, 2014; Casson, 2012).

Entrepreneurship can also be examined in a long-run context. Business records, letters, literary sources and government records all demonstrate that, contrary to popular belief, the origins of enterprise lie in the middle ages rather than the Industrial Revolution. Medieval entrepreneurs were involved in a range of activities, including infrastructure developments, property speculation and factory foundation (Casson and Casson, 2013a; Casson and Casson, 2013b; Landes, Mokyr and Baumol, 2012)

Overall, one of the key strengths of this paper is the contribution that it makes to this broader research agenda on the parallels between medieval and modern business.

 

References

Baker, N. and R. Holt (2004), Urban Growth and the Medieval Church: Gloucester and Worcester (Routledge, Aldershot).

Bell, A. R.Brooks, C. and Moore, T. K. (2014), ‘The credit relationship between Henry III and merchants of Douai and Ypres, 1247-70’, Economic History Review, 67 (1), 123-145. doi: 10.1111/1468-0289.12013.

Bell, A.Brooks, C. and Moore, T. (2013), ‘Medieval foreign exchange: A time series anaylsis’ in M. Casson and N. Hashimzade (eds.) Large Databases in Economic History: Research Methods and Case Studies (Routledge, Abingdon), 97-123.

Bell, A. R. and Dale, R. S. (2011), ‘The medieval pilgrimage business’, Enterprise and Society, 12 (3), 601-627. doi: 10.1093/es/khr014.

Bell, A. R., C. Brooks, C. and P. R. Dryburgh, P. R. (2007), The English Wool Market, c.1230-1327 (Cambridge University Press, Cambridge).

Broadberry, S., B. Campbell, A. Klein, M. Overton and B. van Leeuwen (2015), British Economic Growth, 1270-1870 (Cambridge: Cambridge University Press).

Bouchard, C. B. (1991), Holy Entrepreneurs: Cistercians, Knights, and Economic Exchange in Twelfth-century Burgundy (Ithaca, NY).

Casson, C. (2012), ‘Reputation and Responsibility in Medieval English Towns: Civic Concerns with the Regulation of Trade’, Urban History 39 (3), 387-408. doi:10.1017/S0963926812000193.

Casson, C. and Casson, M. (2016), ‘Location, Location, Location? Analysing Property Rents in Medieval Gloucester’ Economic History Review 69: 2 pp. 575-99 DOI:10.1111/ehr.12117.

Casson, M. and Casson C. (2013), The Entrepreneur in History: From Medieval Merchant to Modern Business Leader (Basingstoke: Palgrave Macmillan).

Casson, M. and Casson C. eds. (2013), History of Entrepreneurship: Innovation and Risk Taking, 1200-2000 (Cheltenham: Edward Elgar, 2 vols).

Davids, K. and B. de Munck, eds. (2014), Innovation and Creativity in Late Medieval and Early Modern European Cities (Ashgate: Farnham).

De la Croix, D., M. Doepke and J. Mokyr (2016), ‘Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy’ NBER Working Paper No. 22131, circulated by NEP-HIS on 2016-04-16.

Landes, D. S., J. Mokyr & W. J. Baumol (2012), The Invention of Enterprise:Entrepreneurship from Ancient Mesopotamia to Modern Times (Princeton, Princeton University Press).

Wealth and Income Inequality in the Early Modern Period

Comparing Income and Wealth Inequality in Pre-Industrial Economies: Lessons from 18th-Century Spain

By Esteban A. Nicolini (Universidad Carlos III de Madrid) and Fernando Ramos Palencia (Universidad Pablo de Olavide)

Abstract: In this new working paper on preindustrial inequality, Nicolini and Ramos Palencia build upon their earlier work on income inequality in eighteenth-century Old Castile (Nicolini and Ramos Palencia 2015) by looking into one particularly important, and difficult to assess, aspect: how to reconstruct, for a given preindustrial society, estimates of both income and wealth inequality – considering that the sources, according to the place and the period, have the tendency to inform us only about one of the two. Given the amount of new information about long-term trends in preindustrial inequality, of either income or wealth, which has been made available by recent research, the authors point at what clearly constitutes one of the next steps we should take and in doing so, they also provide a useful contribution to the methodological debates which are taking place among scholars working on preindustrial inequality.

URL: http://econpapers.repec.org/paper/heswpaper/0095.htm

Distributed by NEP-HIS on 2016-03-29

Review by Guido Alfani

Summary

In this paper Nicolini and Ramos explore the connection between income and wealth for a large sample of communities from different Spanish provinces: Palencia, Madrid, Guadalajara and Granada. They combine information from two different sources:

1. the Catastro de Ensenada (ca. 1750), which provides information about household income, and

2. probate inventories (covering the period 1753-68), a source which has often been used to estimate wealth inequality.

These two sources are combined using nominative linkage techniques in order to take advantages of one to solve the weaknesses of the other. In particular, the almost-universal scope of the survey within the Cadastre enables Nicolini and Ramos to assess with certain precision the actual coverage of the probate inventories (which tend to be biased towards the upper part of the distribution). This allows them the resampling or weighthing of the information to improve the study of wealth inequality. It should be underlined that the Catastro de Ensenada is a truly exceptional source. It was an early attempt at introducing a universal tax on income. As the new tax was proportional and should have replaced a number of indirect provincial taxes with regressive effects, this fiscal innovation clearly moved in the direction of a more equitable system of taxation. Unfortunately, the new tax was never implemented – but at the very least, the attempt to introduce it generated a vast amount of useful information.

bodon3

Nicolini and Ramos were able to reconstruct both income and wealth for 194 observations, out of the much larger sample of 6,214 households for which they only have information about income. Nicolini and Ramos then explore the connection between income and wealth, finding (as was expected) a very strong correlation. However, they go much deeper, thanks to an econometric approach in which the distortions in the sample (determined in particular by over-representation of rich households) are corrected by weighting. They obtain many interesting and potentially useful results, in particular:

  1. they estimate the average rate of return to wealth to be 2.9% p.a. – which is, generally speaking, much smaller that usually implied in the literature. For instance, the rate of return to wealth implied by Lindert in his work on the Florentine Cadastre of 1427 was 7% p.a. (see below). However, if the association between income and wealth is analyzed by considering their logarithm (which is the econometric specification preferred by Nicolini and Ramos), then the elasticity of income to wealth varies between 0.4 and 0.9 depending on the region. This means that a 10% increase in household wealth is associated to an income increase comprised in the 4-9% range. This range is consistent with empirical findings in many studies of past and present societies, all of which suggest that income inequality is lower than wealth inequality;
  2. the distribution of household income increases less steeply than the distribution of household wealth. This might be due to the fact that labour income is relatively larger in the bottom part of the distribution, or that the wealth of the bottom part of the distribution consists for a larger part of income-producing assets, while the wealth of the richest people would consist also of other assets, including (unproductive) status goods and luxuries as well as cash;
  3. the relationship between wealth and income differs depending on the sector of activity of the household head (primary vs secondary/tertiary) and on the place of residence – although somewhat surprisingly, and differently from what reported for other European regions (for example Tuscany by Alfani and Ammannati 2014), Nicolini and Ramos do not find that urban households had greater wealth than rural ones. In the study by Nicolini and Ramos urban and rural wealth were usually on par, but in the extreme case of Guadalajara urban dwellers were less wealthy than rural dwellers.

 

Sample of Catastro de Ensenada (Archivo Simancas)

Sample of Catastro de Ensenada (Archivo Simancas)

 

Comment

This paper makes many interesting and potentially important contributions to the study of inequality in the early modern period, a field which has been particularly fertile in recent years. First, it provides new information about inequality in the Iberian peninsula, integrating other recent studies (e.g. Santiago-Caballero 2011; Reis and Martins 2012). Secondly, it contributes considerably to the development of a methodology to translate in a non-arbitrary way income distributions into wealth distributions, and vice versa. This is a crucial point, which deserves some attention.

The Ensenada Cadastre is an exceptional source as it provides data on income. As a matter of fact, most other sources of the “cadastrial” kind are essentially property tax records, which always list real estate and sometimes other components of wealth – but not income. However, it has also been argued that for the preindustrial period, in most instances wealth distributions are the best proxy we have for income distributions (Lindert 2014; Alfani 2015). This being said, moving from the good-quality distributions of wealth that have recently been made available for different parts of late medieval and early modern Europe (in particular, Alfani 2015; Alfani and Ryckbosch 2015) to acceptable distributions of income is clearly a worthy pursuit.

I would differ with Nicolini and Ramos Palencia in their statement that theirs is the first attempt at studying together income and wealth distributions in the pre-industrial period. For example, Soltow and Van Zanden (1998) did so in their study of the Netherlands. However, Nicolini and Ramos do provide useful and interesting insights into how to convert wealth distributions into income distributions. Many such attempts are currently underway and there are earlier examples, like Lindert’s method to convert the distribution of wealth in the 1427 Florentine catasto into an income distribution (results used in Milanovic, Lindert and Williamson 2011).

Moreover, Nicolini and Ramos Palencia stress many potential pitfalls in procedures of this kind. This being said, there are aspects of their current reconstructions which are a bit surprising and might be the result of sampling issues, as 59% of the 194 observations relate to the province of Palencia. Is Guadalajara, where rural dwellers were wealthier than urban dwellers, an exceptional case or does this depend on the very small sample (just 12 observations) the authors have for that region? To dispel any doubts, more probate inventories should be collected, in order to improve the territorial balance within the sample and to better account, both in the estimation process and in the econometric analysis, for possible regional variations. However, this does not alter the general conclusion. The paper by Nicolini and Ramos is a very useful piece of innovative research, grounded in new archival data and packed with useful insights about how to improve our knowledge of inequality in the pre-industrial period.

 

Ferdinand VI (1713 – 1759), called the Learned, was King of Spain from 9 July 1746 until his death.

Ferdinand VI (1713 – 1759), called the Learned, was King of Spain from 9 July 1746 until his death.

 

Selected Bibliography

Alfani, G. (2015), “Economic inequality in northwestern Italy: A long-term view (fourteenth to eighteenth centuries)”, Journal of Economic History, 75 (4), 2015, pp. 1058-1096.

Alfani, G. and Ammannati, F. (2014), Economic inequality and poverty in the very long run: The case of the Florentine State (late thirteenth-early nineteenth centuries), Dondena Working Paper No. 70.

Alfani, G., Ryckbosch, W. (2015), Was there a ‘Little Convergence’ in inequality? Italy and the Low Countries compared, ca. 1500-1800, IGIER Working Paper No. 557.

Lindert, P.H. (2014), Making the most of Capital in the 21st Century, NBER Working Paper No. 20232.

Milanovic, B., Lindert, P.H. and Williamson, J.G. (2011). “Pre-Industrial Inequality”, The Economic Journal 121: 255-272.

Nicolini, E.A. and F. Ramos Palencia (2015), “Decomposing income inequality in a backward pre-industrial economy: Old Castile (Spain) in the middle of the eighteenth century”, The Economic History Review, online-first version, DOI: 10.1111/ehr.12122.

Reis, J., Martins, A. (2012), “Inequality in Early Modern Europe: The “Strange” Case of Portugal, 1550-1770”. Paper given at the conference Wellbeing and Inequality in the Long Run (Madrid, 1 June 2012).

Santiago-Caballero, C. (2011), “Income inequality in central Spain, 1690-1800”, Explorations in Economic History 48(1): 83-96.

Soltow, L. and Van Zanden, J.L. (1998), Income and Wealth Inequality in the Netherlands, 16th-20th Century. Amsterdam, Het Spinhuis.

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.

1234xNxNICNRRNewMartinsville.jpg.pagespeed.ic.7fm_WoZdB9

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.

images

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).

69workmen

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.

keynes

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.

hoovervilles

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.

schleiffen

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.

Matterhorn_from_Zermatt

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.

 

Banner_of_the_Holy_Roman_Emperor_with_haloes_(1400-1806).svg

                                             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).

6a00d8341c98c253ef01538e14b954970b-pi

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.

images

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.

images