Category Archives: Student contribution

Immigration and the Economy: An Interdisciplinary Subject

Immigrant Diversity and Economic Development in Cities: A Critical Review

By Thomas Kemeny (London School of Economics)

Abstract: This paper reviews a growing literature investigating how ‘immigrant’ diversity relates to urban economic performance. As distinct from the labor-supply focus of much of the economics of immigration, this paper reviews work that examines how growing heterogeneity in the composition of the workforce may beneficially or harmfully affect the production of goods, services and ideas, especially in regional economies. Taking stock of the existing literature, the paper argues that the low-hanging fruit in this field has now been picked, and lays out a set of open issues that need to be taken up in future research in order to fulfil the promise of this work.

URL: http://econpapers.repec.org/paper/cepsercdp/0149.htm

Revised by: Anthony C. Evans (final year graduate Business Studies & Marketing, Bangor University – Wales)

Summary

Kemeny’s paper was circulated by NEP-HIS on 2013-12-06 and it seeks to understand the relationship between immigrant diversity and economic performance, primarily by considering the effects of “interactions among a diverse populace” (p.1).

The review is motivated by the theory that “immigrant-diverse individuals could simultaneously improve economic outcomes by bringing together different perspectives and heuristics, and reduce performance by making co-operation more costly.” (p.2) This additional cost of co-operation is associated with Tajfel’s (1974) Social Identity theory, and is supported by the quoted findings of Richard et al. (2002), Bandiera et al. (2005) and O’Reilly et al. (1989); that teams who share few commonalities find it hard to integrate and suffer from reduced co-operation and higher staff turnover. Empirical studies by Hoffman and Maier (1961) and Joshi and Roh (2009) are cited, and display a modest positive economic impact of workplace diversity.

TomKemeny-238x239

Kemeny quotes Ottaviano and Peri’s (2006) findings that a 0.1 increase in the Fractionalization index increased native wages by 13% and rents more so within the US. Kemeny (2012) and Spaber (2010) find similar results, as does Bellini et al.’s (2013) European work. Alesina et al.’s (2013) global study finds birthplace diversity is positively related to GDP per capita and total factor productivity, with the strongest association in rich countries for high-skill workers.

However, Kemeny notes that many studies, including Suedekum et al.’s (2009) study of Germany and Nathan’s (2011) study of the UK, have demonstrated a negative economic effect of immigrant diversity, especially upon those in lower skilled jobs.

Citing empirical studies by Stephan and Levin (2001), Bosetti et al. (2012) and Hunt and Gauthier-Loiselle (2010), immigrant diversity is found to be positively linked to the number of research papers published and to the number of patent applications for highly skilled industries.

Kemeny finds that there is inconsistent evidence as to the link between immigration and entrepreneurship in Mariano et al. (2012), Audretsch et al. (2010) and Cheng and Li’s (2011) extant work.

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Through his review Kemeny identifies a number of stylised facts across the relevant literature. Some of these follow.

The paper refers to a growing body of work supporting Bakens et al.’s (2013) findings that the individual’s characteristics emerge as the primary determinants of variation in wages and rents. Kemeny proposes individual heterogeneity may overstate diversity’s positive impact upon productivity, as immigrants may self-select areas based upon higher wages, personal interests and their skill level. The validity of the shift share instruments used to address reverse causality rely upon initial waves of immigrants having chosen locations based upon extra-economic concerns, which likely may not be the case.

Kemeny’s (2012) previous work finds that wages in areas with high levels of social capital, often promoted by regional institutions, are typically 7% higher than those living in equally diverse areas with lower levels of social capital, a consideration not accounted for by other authors.

Overall the paper finds little consensus as to the impact of team diversity within the organizational literature.

Several issues with the measurements currently used are highlighted. Productivity gains for lower-skilled labour may not necessarily result in wage increases, and process innovation within this segment may not be patented. Kemeny cites Alesina et al.’s (2013) findings that skin colour or language spoken at home are less likely to result in production complementarities than social values are. Their research finds ethnic fractionalization and birthplace diversity are largely unrelated, whilst birthplace also fails to capture the importance of second-generation immigrants. Under Roback’s (1982) Spatial Equilibrium, higher wages may either reflect greater productivity brought about by diversity, or compensate workers for the disutility of living in a diverse area. Because of this paradox one cannot determine from wages alone how productivity and diversity may be linked.

Kemeny condemns an inherent assumption of urban studies; that “bio-diversity reflects intellectual diversity” (p.35) and contends “the idea that national culture shapes heuristics and perspectives ought to be subject to empirical validation.” (p.37)

Kemeny argues, that based upon the literature reviewed, diversity is generally positively related to wages, and either rents, productivity or cultural amenities, with least square analysis’ demonstrating the direction of causality is from diversity to economic gain. It is reasoned that this indicates the productivity augmenting effects of immigrant diversity outweigh the cost of transacting across cultures.

Kemeny proposes that further work into the role of institutions, the relative importance of city specific manifestations of diversity and the differing impact of diversity between skill levels and industries would advance this modern field.

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Critique

Value and Implications of the Research

Kemeny provides a useful viewpoint by combining the findings of both economic geography and organizational theory. In identifying limitations in the methodologies of both fields, future work can seek to address these issues and generate a better understanding of the relationship between immigrant diversity and economic development. This understanding may help inform frequently inaccurate (Economist, 2013) popular debates on immigration, which argue that immigration results in fewer jobs for natives (Kemeny, 2013) and a drain on state welfare (Economist, 2013). Furthermore greater understanding of how immigration affects the economy should result in better-informed immigration policy. The finding that institutions can augment economic gains may be beneficial to both immigrants and natives, and represent a pragmatic way to enhance the quality of life for both parties.

Limitations and Future Research

By omitting the level at which quoted results were found to be statistically significant, the paper makes it difficult to interpret the frequently contradicting results of the various research cited.

One issue Kemeny fails to address is whether mild racial or cultural preferences can produce extreme segregation in urban areas, as is illustrated by Schelling’s (1978) famous checkerboard model. Becker (1971) observed that the economic penalty to employers who display taste-based discrimination increased as the size of the group being discriminated against increased, therefore larger populations of immigrants should experience less discrimination and thus higher wages than smaller populations. Further discussion of the link between immigration and discrimination, and the economic impact of the latter may provide valuable insight to public policy debate and formulation.

Whilst Kemeny addresses the fact that many studies fail to acknowledge that individual competencies play a significant role, an issue the research does not expand upon is difference between immigrants of different cultural backgrounds. Immigrants from nations with similar language and cultural values will experience lower transactional costs (Rokeach, 1979), which correspond with Hofstede’s (2001) organizational research findings. Goodhart (2013) finds significant differences in economic prosperity between immigrants of different national origin in Britain during the 20th Century.

Whilst a controversial topic it must be noted that the recent consensus in psychology research is that there is a strong heritability of “intelligence” (Bouchard, 2004). As measures of “intelligence” have been shown to be linked to wage differentials (Benjamin et al. 2012), then it should be considered that the economic prosperity brought by immigrants may be related to their genetic makeup and enhancing genetic diversity (Ashraf and Galor, 2013; Ager and Bruckner, 2013). There is a growing body of work in this field of genoeconomics, broadly covered in Benjamin et al. (2012) and Navarro’s (2009) reviews of the existing literature, which could further enhance Kemeny’s spatial economics paper.

An additional source of heterogeneity is the individuals’ decision to emigrate. Ruiz and Vargas-Silva’s (2013) work finds that forced migration produces different economic effects to that of voluntary migration. An improved understanding of the reason for immigration may help explain the differences between skilled and unskilled labour, as one could hypothesise that those in skilled segments may be moving due to prearranged employment. The effect of capital stock brought by immigrants is also not considered, which would increase the steady state under the Solow (1956) model.

With the growing economic importance of Asia and Latin America (Mpoyi, 2012) future research considering immigration from the West to these nations would be of value to this field.

References

Ager, P.; Bruckner, M.; (2013) Immigrants’ Genes: Genetic Diversity and Economic Development in the US. Munich Personal RePEc Archive. Paper No. 51906

Ashraf, Q. and Galor, O. (2013) The ‘Out of Africa’ Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review. Vol. 103(1) pp.1-46

Becker, G. (1971) The Economics of Discrimination. 2nd Edition. University Of Chicago Press. Chicago.

Benjamin, D.; Cesarini, D.; Chabris, C.; Glaeser, E.; Laibson, D.; Guðnason, V.; Harris, T. et al. (2012) The promises and pitfalls of genoeconomics. Annual Review of Economics. Vol. 4 pp.627-662.

Bouchard, T. (2004) Genetic Influence on Human Psychological Traits: A Survey. Current Directions in Psychological Science. Vol. 13(4) pp.148-151

Goodhart, D. (2013) The British Dream: Successes and Failures of Post-war Immigration. Atlantic Books. London.

Hofstede, G. (2001) Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd Edition. Sage Publications. Thousand Oaks, CA.

Kemeny, T. (2013) Immigrant Diversity and Economic Development in Cities: A Critical Review. Spatial Economics Research Centre. London School of Economics. Discussion Paper 149

Mpoyi, R. (2012) The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business & Economics. Vol. 13(3) pp.36-47

Navarro, A. (2009) Genoeconomics: Promises and Caveats for a New Field. Annals of the New York Academy of Sciences. Vol. 1167 pp. 57–65

Rokeach, M. (1979) Understanding Human Values. The Free Press. New York. NY.

Schelling, T. (1978) Micromotives and Macrobehavior. Norton. New York, NY.

Solow, R. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics. Vol. 70(1) pp. 65-94

The Economist (Dec 21st 2013) British immigration. You’re Welcome.

The Economist (Nov 9th 2013) Little England or Great Britain.

Zhang, J. (2009) Tipping and residential segregation: a unified Schelling model. IZA Discussion Papers. No. 4413

Singing for Hitler – Choirs, Clubs and the Third Reich

Bowling for Fascism: Social Capital and the rise of the Nazi Party in Weimar Germany, 1919-33

Shanker Satyanath (NYU), Nico Voigtlander (UCLA) and Hans-Joachim Voth (Zurich)

URL: econpapers.repec.org/paper/zureconwp/147.htm

Abstract:

Social capital typically leads to positive political and economic outcomes. A growing literature also emphasizes the potentially “dark side” of social capital. This paper examines the role of social capital in the downfall of democracy in interwar Germany. We analyse Nazi Party entry in a cross-section of cities. Dense networks of civic associations such as bowling clubs, choirs, and animal breeders facilitated the Nazi Party’s rise. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital depended on the institutional context – in Prussia, where democratic institutions were stronger, the link between party entry and association density was markedly weaker.

Reviewed by Ronan McGarry (final-year BSc Economics student, Queen’s University Belfast)

This NBER working paper was distributed by NEP-HIS-2013-07-15. The authors seek to clarify and quantify the role that social capital played in the rise of the Nazi Party and the ensuing downfall of the democratic Weimar Republic. In order to do so, econometric analysis of the link between local clubs/societies and Nazi party membership is conducted. The authors also seek to add to the current literature on the ‘dark side’ of social capital (Putnam 1995).

The literature on positive and negative outcomes as a result of high levels of social capital is conflicting. In his 1995 essay ‘Bowling Alone’, Robert Putnam wrote that communities with high levels of social capital ‘promote participatory democracy’. However, Riley (2005) would refute this and point to society-rich Northern Italy – which turned fascist in the 1930s. Furthermore, Chambers & Kopstein (2001) point out that after the collapse of the USSR, Serbs began ethnically cleansing their Balkan neighbours, even though Serbia had fairly intense levels of social capital. This paper turns its attention to Weimar Germany in an effort to shed more light on the topic.

It must be noted that the authors were not the first to tackle Weimar Germany’s fall in terms of social capital. However, they are the first to have done so econometrically. Berman (1997) showed that ‘a robust civil society helped scuttle the twentieth century’s most critical democratic experiment, Weimar Germany’ explaining that the ‘high levels of association served to fragment rather than unite German society.’ This paper builds on Berman’s conclusion by comparing numerically the rates of civic association intensity in German towns and cities against the rate of Nazi Party membership uptake; whilst controlling for various other political and socio-economic variables.

The authors collected data on 111 German towns and cities in modern-day Germany. One problem here is that Weimar Germany’s eastern border was much further to the east than modern-day Germany’s. This means that missing from this dataset are cities like Breslau (now Wroclaw, Poland) and Konigsberg (now Kaliningrad, Russia). Both of these cities were very Nazi-friendly – the Nazis received 44% of Breslau’s vote in 1932 (Davies & Moorhouse, 2011) and 54% of Konigsberg’s in 1933 (Jasinski, 1994) and so their exclusion from the dataset is disappointing in terms of accuracy.

Missing from the authors' dataset are cities like Breslau, Koningberg and Danzig.

Missing from the authors’ dataset are cities like Breslau, Koningberg and Danzig.

Following this, the authors begin the presentation of their findings with an interesting comparison of two similar towns – Kleve and Coburg. Both were similar in size, but with large differences in the presence of associations. Coburg was far denser in terms of civic society – with a rate of 2.99 associations per 1000 inhabitants, compared to Kleve’s 0.89 per 1000. Then, as their hypothesis predicts, Coburg saw an ‘80% greater uptake’ (p. 15) in Nazi Party membership than Kleve between 1919 and 1933.

However, whilst this serves to broadly illustrate the authors’ point, I find this comparison disingenuous in that in picking Coburg, they happen to select one of the most Nazi-friendly cities in Germany to make their point. Indeed, Coburg’s city hall was the first in Germany to fly the Nazi flag. My point is that by picking a town in Bavaria (the home province of the Nazis) and comparing it to a town in the far north, they are ignoring potential geographical concerns. Indeed, if the authors had of compared Kleve with Hamburg (another Northern city with a similar Association Density to Coburg’s), then they would have found their results running the wrong way, as Hamburg has a higher Association Density but a lower Nazi Party entry rate!

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

The authors then present their numerical findings. They announce that ‘association density strongly and significantly predicts higher entry rates into the NSDAP’, with ‘the per capita entry rate increasing by 0.4 standard deviations for every standard deviation increase in association density’ (p.16), results which support Chambers & Kopstein (2001) and Riley’s (2005).

Following this, the authors make an effort to quantify the differences between Putnam’s (1995) ‘bonding’ (exclusive groups such as Gentleman’s Clubs) and ‘bridging’ (inclusive groups such as choirs or bowling clubs) social capital in terms of their effects on Nazi membership uptake. Putnam believed bonding social capital to have adverse effects, with bridging social capital fulfilling the opposite role. However, the authors find bridging capital to have ‘positive, significant and quantitatively meaningful coefficients, which are similar in magnitude to those for bonding capital’ (p.21) – suggesting that both types of associations were ‘important pathways’ in terms of Nazi party membership.

German youth choir, and example of bridging capital. The sign translates to 'We sing for Adolf Hitler'.

German youth choir, and example of bridging capital. The sign translates to ‘We sing for Adolf Hitler’.

One final important contribution this paper makes is in terms of investigating the evidence that social capital can develop a ‘dark side’ (Putnam, 1995) and actually undermine a functioning democracy – which the authors claim is ‘missing’ from current literature. To do so, they examine the state of Prussia, which was more ‘pro-democracy’ and was ‘governed more competently’ (p.22). What they find is that before the gradual weakening of Prussian democracy in 1930, the relationship between party entry and association entry in Prussia was ‘systematically weaker’ (p.23) than the rest of Germany. What this shows is that a ‘functional, strong, democratic government’ (p.24) can help prevent social capital showing its ‘dark side.’

To conclude, this paper offers an interesting insight into an area of social capital literature which had not been studied econometrically before. Whilst it is indeed disappointing that the authors could not include important eastern European cities that are no longer a part of Germany, they do make a fair point that massive war damage in these cities led to the loss of many public records and as such, makes it impossible to gather data. On a positive note, the presentation of Prussia as a case in which social capital can suddenly change from a democracy-supporting vehicle to one which undermines democracy completely is welcomed, and suggests that the manner in which social capital operates is heavily dependent on the ‘wider institutional context’. In terms of future study into the ‘dark side’ of social capital, it might be interesting to apply these econometric methods to the rise of other fascist parties, such as the Golden Dawn in Greece, or further study on fascist – building on Riley’s 2005 work.

Bibliography

Berman, S. (1997). Civil society and the collapse of the Weimar Republic.World politics49, 401-429.

Chambers, S., & Kopstein, J. (2001). Bad civil society. Political Theory, 837-865.

Davies, N., & Moorhouse, R. (2011). Microcosm: a portrait of a central European city. Random House.

Jasiński, J. (1994). A history of Konigsberg: sketches of the thirteenth to twentieth centuries. (Historia Królewca: szkice z XIII-XX stulecia) Książnica, Poland.

Putnam, R. D. (1995). Bowling alone: America’s declining social capital. Journal of democracy6(1), 65-78.

Riley, D. (2005). Civic associations and authoritarian regimes in interwar Europe: Italy and Spain in comparative perspective. American Sociological Review70(2), 288-310.

Satyanath, S., Voigtländer, N., & Voth, H. J. (2013). Bowling for fascism: Social capital and the rise of the Nazi Party in Weimar Germany, 1919-33 (No. w19201). National Bureau of Economic Research.

 

On Macroeconomics After the Financial Crisis

Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis?

By Oliver Landmann (Albert-Ludwigs-University Freiburg)

Abstract: The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.

Persistent Link: http://EconPapers.repec.org/RePEc:fre:wpaper:27?

Reviewed by Catherine Dorman (final-year BSc Business Economics student, Bangor University, Wales)

Summary

This paper was distributed by NEP-HIS on 2014-02-08, and it addresses the impact that the recent financial crisis has had upon macroeconomic thought. Specifically in terms of how the New Neoclassical Synthesis has held up to scrutiny following the most recent economic debacle. Landmann offers an overview of the history and progression of macroeconomic thought from the “Keynesian revolution” (p.4) to New Neoclassical Synthesis economics, right up to modern day contemporary economics, and its response to current macroeconomic issues.

The purpose of Landmann’s paper is to explain how economics has evolved since the Keynesian school of thought emerged in the aftermath of the 1930s depression, and to show how the macroeconomic community has been left splintered as a result of the recent financial crisis, without a consensus in sight. It asks the questions: Why has this occurred? How did the New Neoclassical Synthesis fail to foresee or explain the worst economic downturn since the 1930s? Finally, it asks the all-important question: Is it necessarily a bad situation to be in? Or has having smashed the previous concept to pieces resulted in an environment in which macroeconomics can really explore and develop itself without the shackles of archaic and contextually inapplicable economic theory?

Prof. Dr. Oliver Landmann -Bild Schneider

Landmann introduces his paper by assessing the state of macroeconomic affairs, operating within a New Neoclassical Synthesis environment, in the run up to the financial crisis of 2008. The ‘Great Moderation’, described a period of economic constancy spanning from the 1980s to 2008, which was characterized by a continually stable business cycle (Davies and Kahn, 2008). Famously, Ben Bernanke, who coined the phrase ‘Great Moderation’, is quoted as having attributed this period of economic success to structural change, improved macroeconomic policies, and good luck (Bernanke, 2004). Ultimately, Landmann describes a period in which the great moderation had lulled the economic community into a false sense of stability, much like that described by Hymen Minsky (Minsky, 1992).

The next section of the paper is dedicated to creating a contextual understanding, and this is achieved through showing the evolution of economics thought from Keynes to the New Neoclassical Synthesis.

Consider Fig 1 for a brief overview of the changes of economic thought from the 1930s to 2008:

Fig. 1
Figure1

As is evident across each of these theories, their explanatory power tends to be relatively finite. In the case of Adam Smith and John Keynes’ theories, they were deconstructed and meshed in order to explain the economy’s operations at a specific point in time, and this came to be known as the Neoclassical Synthesis. This was largely credited to the work of Paul Samuelson during the 1950s (Samuelson, 1955). It took the underlying idea of Keynesian theory of underemployment, with the notion that monetary and fiscal policy can be employed to reduce this. It could therefore use classical equilibrium analysis to explain resource allocation and relative prices (p4). The economic policy was successfully adopted in developed countries as an effective treatment for the economy after the Second World War.

It was from the stability and growth that was created through the adoption of this macroeconomic approach, which helped to develop confidence in the prescriptive capabilities of economic theory. However, as history has taught us, ceteris paribus does not hold in reality. The theory was largely nullified in the 60’s and 70’s, because it had been unable to predict stagflation, and the Philips Curve was completely undermined (Motyovszki, 2013).
Consider Fig 2 for a concise history of the economic theory covered in this paper.

Fig. 2
Figure 2
(Source: Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis? By Oliver Landmann.)

The result of this was a new hybrid economic theory: New Classical economics. From this theory came the Real Business Cycle model, which argued that cycles result from the reactions of optimizing agents to real disturbances, for example, changes in technology.
In the 1970s, the New Neoclassical Synthesis emerged, with a combination of New Keynesianism and New Classical theories, and the basis of economic practice during the Great Moderation. It was felt amongst policy makers that the short term interest rate was enough of an instrument in economic management, and that the business cycle was believed to have been overcome (Aubrey, 2013).

Landmann’s paper addresses how the economic crash of 2008 threw macroeconomics into turmoil. The New Neoclassical Synthesis had not fully appreciated the effects of the financial market within its model, and the result was that it was inadequate as a means of remedying problems in the economy (Pike, 2012). Landmann makes a good point of acknowledging that although financial economics took great consideration of the behavioural antics of the banking sector, within the actual practiced model of the New Neoclassical Synthesis, these were fundamentally disconnected.

In light of this, the once unquestioned macroeconomic doctrine was suddenly under scrutiny. One of the greatest criticisms of the New Neoclassical Synthesis is its reliance upon “elegant” (p12) mathematical equations, which are often predictively insufficient due to the sheer number of assumptions that have to be made in order to create a working model. It doesn’t fully estimate factors such as irrationality and uncertainty (BBC NEWS, 2014) and the result of this is that the results can be wildly inaccurate (Caballero, 2010). This can also create coordination problems from assumptive behavioural models, such as the Robinson Crusoe model, which become overly stylized to the detriment of economic viability (Colander, 2009).

Consequentially, macroeconomics has begun to pay more focus to realistic behaviour, given that information is rarely perfect in actuality (Caballero, 2010; Sen, 1977).

Landmann concludes that out of the financial crisis, there has been a flood of new macroeconomic theories develop, and that the New Neoclassical Synthesis still has pedagogic merit. He does, however, primarily blame the era of Great Moderation for a period of complacency amongst economic academics. The simple acceptance of one concept of economics based purely on its merit during a stable business cycle, without inquisitive forethought into how it would respond when faced with an exogenous or endogenous shock, is Landmann’s greatest criticism.

Critique

This paper is incredibly relevant, and its themes and messages are certainly ones that economists need to be considering in the aftermath of such a fresh and colossal economic recession. There is perhaps an over simplification of some of the timeline of economics: broadly defining all economists during the Great Moderation as being one school of thought is unfair and inaccurate, but for the purpose of the paper, it is perhaps forgivable.

Landmann makes little mention of the pattern by which economic thought often evolves. Gul, Chaudhry and Faridi describe economic thought as developing from “quick fixes” (Gul et al. 2014: 11), and this would help to explain why, during the Great Moderation, very little new economic thought was developed: the need wasn’t there. Through their histories of economic development, Gul et al. (2014) and Landmann,suggest that macroeconomics is reactionary as opposed to precautionary, despite its attempts to be prophetic.

This echoes the “Lucas Critique”, the understanding that economic equations developed and implemented during one policy system, are unlikely to remain relevant or explanatorily applicable during another (Lucas, 1976).

Finally, it does little to explore the external factors that led to the period of Great Moderation. Globalisation had really taken a hold during this time, with containerization in full flow (at 90% of all non-bulk cargo worldwide being moved by containers on transport ships (C. E. Ebeling, 2009)), and advances in computation and communication technology (Bernanke, 2004) which helped to stabilize inventory stocks – something that is acknowledged as a contributory factor in cyclical fluctuations (McConnel and Quiros, 2000).

Ultimately, the paper makes the same conclusions that most macroeconomic papers do. There is no definitive explanation for everything that occurs within the economy, and certainly no blanket approach that will procure the most lucrative outcomes on every occasion. This paper goes a step further to explain why it can be damaging to rigidly subscribe to one theory of macroeconomics: it discourages continual change and forethought, which in turn can stunt the evolution of explanatory macroeconomic thought.

References

Aubrey, T., 2013. Profiting from Monetary Policy: Investing Through the Business Cycle. 1 ed. New York: Palgrave MacMillan.

BBC NEWS, 2014. Did Hyman Minsky find the secret behind financial crashes?. Available at: http://www.bbc.co.uk/news/magazine-26680993 [Accessed 07 April 2014].

Bernanke, B. S., 2004. Remarks by Governor Ben S. Bernanke At the Meeting of the Eastern Economics Association Available at: http://www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/ [Accessed 07 April 2014]

Ebeling, C. E. 2009. Evolution of a Box. Invention and Technology 23(4): 8-9.

Caballero, R. J., 2010. Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome. Journal of Economic Perspectives 24(4): 85-102.

Colander, D. C. et al., 2009. The Financial Crisis and the Systemic Failure of Academic. Kiel: Kiel Institute for the World Economy.

Davies, S. J., and Kahn, J.A., 2008. Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels. Cambridge, MA: National Bureau of Economic Research. Available at: http://EconPapers.repec.org/RePEc:nbr:nberwo:14048 [Accessed 07 April 2014]

Gul, E., Chaudhry, I. S. and Faridi, M. Z., 2014. The Classical-Keynesian Paradigm: Policy Debate in Contemporary Era. Munich: Munich Personal RePEc Archive. Available at: http://econpapers.repec.org/paper/pramprapa/53920.htm [Accessed 07 April 2014]

Lucas, R. E., 1976. Econometric Policy Evaluation: A Critique. Carnegie‐Rochester, Carnegie‐Rochester Conference.

McCombie, J. S. L., and Pike, M., 2012. The End of the Consensus in Macroeconomic Theory? A Methodological Inquiry. Unpublished. Cambridge Centre for Economic and Public Policy WP02-12, Department of Land Economy: University of Cambridge. Available at: http://www.landecon.cam.ac.uk/research/real-estate-and-urban-analysis/ccepp/copy_of_ccepp-publications/wp02-12.pdf [Accessed 07 April 2014]

McConnell, M. M., and Perez Quiros, G., 2000. Output Fluctuations in the United States: What Has Changed Since the Early 1980s?. Federal Reserve Bank of San Francisco. Available at: http://www.frbsf.org/economic-research/events/2000/march/structural-change-monetary-policy/output.pdf [Accessed 07 April 2014]

Minsky, H. P., 1992. The Financial Instability Hypothesis. New York: The Jerome Levy Economics Institute of Bard College.

Motyovszki, G., 2013. The Evolution of the Phillips Curve Concepts and Their Implications for Economic Policy. Budapest: Central European University.

Samuelson, P., 1955. Economics. 3rd ed. New York: McGraw-Hill.

Sen, A. K., 1977. Rational Fools: A Critique of the Behavioral Foundations of Economic Theory. Philosophy and Public Affairs. 6(4): 317-344.

What Chance Change? Driving Development through Transport Infrastructure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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What can policymakers today learn from the Swedish case?

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

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

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

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

Notes

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

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

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

and

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

 

References

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

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

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

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

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

 

When did Globalization Actually Start?

West versus East: Early Globalization and the Great Divergence’

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

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

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

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

Guest Entry by Elizabeth Meagher (Bangor University)

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

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

Summary

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

Source: The Economist "What was the Great Divergence"

Source: The Economist “What was the Great Divergence”

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

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

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

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

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

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

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

Comments

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

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

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

References

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

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

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

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

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