Tag Archives: Growth

Money and Modernization in Early Modern England (forthcoming at the Financial History Review)

In early modern England, coin supply increased a lot without prices responding proportionally:

QTM.png

This contradicts the Quantity Theory of Money, according to which the changes should move together. If the money supply doubles, prices should double too, because the quantity theory assumes income and velocity to be constant (at least in the long run).

Here I show just coin supply, so a very narrow measure of the money supply. Broader money supply must have increased even more, as forms of paper money and credit developed at this time. This makes things look even worse for the quantity theory.

While the Quantity Theory looks bad, there is no contradiction with the equation of exchange, which simply states that nominal GDP equals velocity times money. Nor could there be, as the equation of exchange just an accounting identity.

In my forthcoming Financial History Review paper, “Money and Modernization in Early Modern England”, I explain what was going on. I argue that monetization helped support economic growth and structural change. If real growth happens, money can increase without a response of prices.

If you are interested, you can read the paper here.

Advertisements

Roessner on culture and growth (Highlight III)

This post continues the “Highlight” series, which has previously included posts by Ridolfi and Malinowski. It has been written by my colleague Philipp Roessner, who is a faculty member at the History faculty of the University of Manchester.

Image result for Philipp Roessner Manchester

Thinking about growth?

For ages people have pondered about the origins and nature of the wealth of nations. Adam Smith was neither the first nor the most original thinker in this department (see [Hörnigk 1684] Rössner 2018, introduction pp. 1-120). Noble prizes have been awarded (e.g. Paul Romer in 2018) for developing sophisticated theoretical approaches to growth. Economists and historians have highlighted various possible reasons for why some countries grew rich whilst others didn’t, or did so only late (the famous divergence and convergence debates). The most common origins of prosperity suggested today are geography (e.g. Landes 1998, Jones 2003), education, market size and market integration, resource endowment, institutions (e.g. Acemoglu & Robinson 2012), or the role of the state (Reinert 2008; Vries 2015, Parthasarathi 2011).

The “hockey stick” metaphor for the abrupt shift in trend growth of per capita GDP in the West from pre-modern agrarian to industrial growth around 1750 has stuck. It continues to bemuse economists and historians alike. Between 1800 and 1970 growth in the west exploded. Previous centuries had seen modest expansion, if at all. Entire rainforests have been cleared for the paper used in the publications attempting to solve the puzzle.

No one however, has tackled the obvious solution. And that is economic mentality (Rössner 2016). In recent years, historians and economists have turned to it, but indirectly. Most of them chose to focus on (sometimes ill-defined) aspects of “culture.” Mokyr has, in two fascinating books, evoked the Enlightenment (2011) and a more long-lived European “culture of growth” (2017) as ultimate causes for the European “miracle” (Mokyr 2011; Mokyr 2017). Another challenging hypothesis explaining the Hockey Stick has been advanced by McCloskey and the evocation of bourgeois value, culture and dignity (McCloskey 2006, 2010, 2017). But history has shown us that bourgeois entrepreneurs most of the time did exactly the opposite of what such lofty moral claims about their “dignity” commanded. The commercial revolution of the Atlantic and Asian economy (1650s-1750s) brought us tobacco, sugar and other exotic products creating a European culture of consumers (Trentmann 2017). It set the scene for the industrial revolution. But it was built on the suffering, enslavement and exclusion of others. Who asked the Indian textile manufacturer for their consent to the process (who was expelled from the world market by means of the British protectionist mercantilist customs and tariff system, see Parthasarathi 2011), or the Afro-American slave working on the Caribbean sugar plantation, or the Black US-American slave working in the cotton fields that fed Manchester’s burgeoning cotton mills in the 1800s? Not so much dignity to be found in the “bourgeois” process of capital formation on the eve of the industrial revolution, right?

So, if neither bourgeois values nor hard data really explain the origins and causes of growth (they are good at describing, in metrics, what happened, an important yet often overlooked difference), then what does? We need to get intellectual history into the picture, that is our economic cosmology. We know how important “Big Stories” and myths are in structuring human reality (Midgley 2011). For instance, since David Ricardo we to believe in the virtues of free trade, albeit we have tantamount empirical evidence to the opposite. Yet the “free trade makes a free world and vice versa” myth is an important part of our daily routine and reality. Because if we give up on this important cultural value the world will fall to the Lord of The Rings, Sauron, Mordor, or – more concrete in our time – the Trumps of our time. In a similar way what I would like to call “economic cosmologies” are important markers structuring reality. We use them to navigate the unknown waters of the future. They may be the most powerful forces moving the economy and economic development.

But why has economic cosmology not been taken up in models of economic growth and development? This is, of course, impossible to answer. But just consider the possibilities of adding it into the picture. Call it the history of economic analysis (as Joseph Schumpeter, the famous Austrian-US economist did), the history of economic reasoning (Karl Pribram, another influential Austrian economist and historian of economic thought), or, as it is most commonly known today, the “history of economic thought”. There’s a handful of prime journals in the field, most notably History of Political Economy (known, quite aptly, by its acronym HOPE), or the History of Economic Thought. It is all there. But the intellectual history of modern economic growth happens in the backyard still. Neither historians nor economists really bother about it, even though some of the most influential economists of the twentieth century either studied history or happened to be historians – Robert Lucas and Joseph Schumpeter, to name but two.

To cut a long story short: Economic mentality, the way we think about economy, can manifestly change the way we do economy and economic growth. As soon as people believed in the possibility of economic growth, economic growth became a possibility. It began to happen. It really is that simple. The Ancient Greeks and medieval economists and theologians known as “Scholastics” did not bother about growth. Instead they developed increasingly sophisticated models of market exchange, business and price formation (in fact, they were comparatively relaxed about business, the taking of interest and the making of profit; no wonder, since many churchmen in the middle ages came from successful merchant families). Until the 1650s the dominant economic literature of the day, first the Scholastic treatises on money and markets, then the somewhat weird economics genre known as “household management” (Hausväterliteratur) never paid much attention to modelling growth. This is because people did not associate growth, or economic expansion more generally, with positive qualities. Other economic goals were held more important – being a successful estate manager, keeping your money together, saving your soul from Purgatory, or just being a decent businessman with decent profit, but not over the top. Growth – of your business, of your nation – was simply off the radar.

Then, around 1600 something changed. The reasons of it are still ill-understood. But the present author is working on it currently. Just consider two examples. After the disastrous Thirty Years War (1618-1648) the Holy Roman Empire (“Germany”) lay in shackles. Capital had been destroyed, as had human souls by the awful woes of the big war. In the wake of this war a handful of economists known as “Cameralists” began to develop comprehensive models of restructuring economy (Reinert & Rössner 2016). Their models built on improving productivity and efficiency, promoting domestic industry and value-added activities (most likely to be found in manufacturing: Brexiteers, listen up!). It was all about generating useful knowledge and added value. They also started modelling the open human-economic future. This was an important departure from a world where the only “real” future had been Armageddon, that is the pretext to the Second Coming of Christ. Cameralists such as Veit Seckendorff (who produced his main work Teutsche Fürsten-Stat in 1655, “The German Princely State”), or Johann Heinrich Justi (1717-1771), Germany’s most prolific economic writer in the Enlightenment, wrote extremely successful textbooks on economics and state administration which went through ten or more editions. Their books continued to be read long after their authors had died and would be translated into Russian, French and Italian, sometimes even English (Reinert et al. 2017). They did not always use the word “growth”, mainly because the contemporary German word for growth (“Wachsthum”) referred to plant growth. But they knew what economic growth was – per capita GDP growth as we would say today –, and how it could be achieved. And they developed increasingly sophisticated methods of achieving it.

Or in post-1648 Sweden, where thinkers around chancellor Axel Oxenstierna, Bengt Skytte, later on the famous biologist Carl Linnaeus/Linné developed models of infinite growth based on a cornucopia of knowledge expansion. As Wennerlind has shown, the Swedish Age of Greatness (1648-1721), when Sweden as the “Lion in the North” nearly turned the Baltic Sea into a Swedish inland lake, begot a wave of scientific discovery. Networks of natural and economic science flourished (Wennerlind 2016). The Swedish wave of economic discovery around 1648 rested upon the conviction that the human-economic future was plannable and manageable. If only the correct tools of natural science and natural discovery were chosen, this could be the road towards indefinite growth. Swedish thinkers, often connected related to pan-European science networks, such as the English Hartlib Circle in England or Sophopolis, an imagined European community of wisdom, unlocked the keys towards infinite growth. This programme was based on useful knowledge, natural discovery, promotion of education, scientific research and innovation, providing the foundations of the intellectual movement commonly known as Enlightenment.

This seems to me what Romer, in one of his famous articles (Romer 1998), has called increasing marginal returns on knowledge, something that is crucial for economic growth. It was there, in the heart of Europe and beyond, in the 1650s. Let me reiterate: The explanation of the “Hockey Stick” really is dead simple. After 1650, there was a switch in the European economic mind. Before that people did not think of growth as a virtue.  They thought more of balance, conservation, just prices. They simply were not interested in growth. After 1650 more and more thinkers began to see growth as something desirable and feasible. So, it seems to me we should do more work on the history of economic thought when trying to explain the history as well as mechanics of growth.

References:

Daron Acemoglu & James Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (New York: Crown 2012)

Eric L. Jones, The European Miracle: Environments, Economies and Geopolitics in the History of Europe and Asia (Cambridge: Cambridge University Press, 2003)

David S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (New York: W. W. Norton, 1999)

Deirdre McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (Chicago: Chicago University Press, 2006)

Deirdre McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago: Chicago University Press, 2010)

Deirdre McCloskey, Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (Chicago: Chicago University Press, 2017)

Mary Midgley, The Myths We Live By, new ed. (London & New York: Routledge, 2011)

Joel Mokyr, Culture of Growth: The Origins of the Modern Economy (Princeton, NJ: Princeton University Press, 2017)

Joel Mokyr, The Enlightened Economy: Britain and the Industrial Revolution 1700-1850, (London: Penguin, 2011)

Prasannan Parthasarathi, Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600–1850 (Cambridge: Cambridge University Press, 2011)

Erik S. Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (London: Constable, 2007)

Erik S. Reinert, Kenneth Carpenter, Fernanda A. Reinert, Sophus A. Reinert, “80 Economic Bestsellers before 1850: A Fresh Look at the History of Economic Thought”, Tallinn University of Technology Working Papers in Technology Governance and Economic Dynamics no. 74 (2017),  http://hum.ttu.ee/wp/paper74.pdf

Erik S. Reinert and Philipp Robinson Rössner, “Cameralism and the German Tradition of Development Economics,” in: Erik S. Reinert/Jayati Ghosh/Rainer Kattel (eds.), Elgar Handbook of Alternative Theories of Economic Development (Cheltenham/Northampton: Edward Elgar, 2016), pp. 63-86.

Paul M. Romer, “Increasing Returns and Long Run Growth”, Journal of Political Economy 94, No. 5 (1986), 1002-1037

Philipp Robinson Rössner, ‘Entangled Worlds or Cultural Bifurcation? Comments on the Intellectual Origins of the Great Divergence and Modern Economic Growth, c. 1500-2000 A.D.’, in: COMPARATIV | Zeitschrift für Globalgeschichte und vergleichende Gesellschaftsforschung 3/16 (2016)

Philipp Robinson Rössner (ed.), Philipp Wilhelm von Hörnigk’s Austria SUPREME (if It So Wishes)’. A Strategy for European Economic Supremacy (1684). transl. Keith Tribe

Frank Trentmann, Empire of Things: How We Became a World of Consumers, from the Fifteenth Century to the Twenty-First (London: Penguin, 2017)

Peer Vries, State, Economy and the Great Divergence. Great Britain and China 1650s-1850s (London: Bloomsbury, 2015).

Carl Wennerlind, “The Political Economy of Sweden’s Age of Greatness: Johan Risingh and the Hartlib Circle,” in Philipp Robinson Rössner (ed.), Economic Growth and the Origins of Modern Political Economy: Economic Reasons of State, 1500- 2000 (New York, NY; Abingdon, Oxon: Routledge, 2016), pp. 156-186

Paul Romer: the view from Economic History

In this post I write about the connections between Paul Romer’s work, which is essentially applied theory, and the empirical work on long-run economic growth done by economic historians. How was Romer influenced by the work of economic historians? has he influenced economic history? and have his theories been confirmed by the recent work of economic historians? (preview: I will argue that the answers are: yes; not much; and no).

Addendum shortly after publishing: my point above is not that Romer is wrong in general; in fact some of his ideas *about ideas* are fundamental for us to think about growth in the past. (Read on if this isn’t clear yet.)

Paul Romer’s was a well-deserved and long-anticipated prize. Many predicted he would eventually win, including myself in my very first academic article, written when I was a undergradute and published in 2008. (alternatively, click here for an ungated version). I now find it mildly amusing how assertive I was when I wrote: “Paul Romer is going to win the Nobel Prize in economics”. I continue to believe that this was a good choice.

Many have written about the nature of his main contributions, all of which, as I have said, have been on applied theory; see for instance, see the posts in Dietrich Vollrath’s blog, here and here, or in Paul Romer’s own blog.

Romer’s work had some influence on economic history, but not much. There is, for instance, a 1995 article by Nick Crafts which looks at the Industrial Revolution from a New Growth perspective, but it is fair to say that economic historians were perhaps not quick to pick up the New Growth theory train. Part of this was surely because its implications seemed to apply mostly to frontier economies and did not seem to apply to much of human history, a limitation which Unified Growth Theory would later attempt to overcome.

And yet, Romer himself has often spoken about economic history and relied on the data of economic historians. He now seems to have won mostly due to his 1990 article, but his earlier work on increasing returns (ungated version here) had a graph from Maddison, for instance (he discusses how Maddison influenced him here). And the process of growth itself was documented by economic historians using graphs such as the following; as my friend Max Roser tweeted:

(as a side note: Max, the source for this is not the Bank of England; it is Broadberry, Campbell, Klein, Overton, and van Leeuwen; empirical work is very demanding, so citations need to be fair with the people who did the hard work in putting these figures together).

One of the most empirical papers Romer has written is “Why indeed in America?”,  which was the culmination of much of what he had done before. It was also one of the last papers he wrote before entering a writing hiatus. In this paper he explicitly argues for the complementarity of economic history and growth theory. He argues that the USA achieved economic supremacy after 1870 due to having the largest integrated market in the world. He writes:

“differences in saving and education do not explain why growth was so much faster in the United States than it was in Britain around the turn of this century. In 1870, per capita income in the United States was 75 percent of per capita income in Britain. By 1929, it had increased to 130 percent. In the intervening decades, years of education per worker increased by a factor of 2.2 in Britain and by a nearly identical factor of 2.3 in the United States. In 1929, this variable remained slightly lower in the United States. (Data are taken from Angus Maddison [1995].”

Notice that there are three empirical statements here. Romer’s story builds on these facts, so if the facts change, the story must too. Theory depends on facts.

The first fact (according to Romer) is that the US only converged to British per capita GDP levels after 1870. Second, that this was not due to matters such as education or savings. Third, the reason was market size. As economic historians, we have made much progress in measuring each of these matters since 1995. Let me consider each in turn.

Timing of convergence of the USA to Britain

The important thing to keep in mind here is that it is by no means certain that the USA had not catched up earlier. The methodological issues are complicated and in fact today’s other (and equally deserving) Nobel prize, Nordhaus, wrote a fascinating paper about the problems involved in these types of measurements. (A popular description of this work can be read here.) As far as USA vs Britain is concerned, though, Marianne Ward and John Devereux summarize the debate as follows:

“Prados De la Escosura (2000) and Ward and Devereux (2003, 2004, 2005) argue for an early US income lead using current price estimates. Broadberry (2003) and Broadberry and Irwin (2006) defend the Maddison projections while Woltjer (2015) hews to a middle ground. The literature has recently taken an unexpected turn as Peter Lindert and Jeffrey Williamson, Lindert and Williamson (2016), find a larger US lead before 1870 and one that stretches further back in time than claimed by either Prados De la Escosura (2000) or Ward and Devereux (2005).”

Comparative levels of education

Recent evidence suggests that the average years of post-primary education actually declined in Britain after about 1700. (ungated version here). This was not the case at all in the USA, where it is well-known that the state invested in high schools, so it seems unlikely that average human capital grew at similar levels in the latter part of the 19th century, as Maddison/Romer claimed.

Addendum: minutes ago when I first posted, I initially wrote “post-secondary” where I meant to write “post-primary”

Market size

I used to believe this part of Romer’s story. That was until I read this brilliant paper by Leslie Hannah: “Logistics, Market Size, and Giant Plants in the Early Twentieth Century: A Global View”. (Ungated version here). Notice that Hannah does not refer to Romer’s argument or even cite him. What he does instead is he destroys the commonly held idea that USA’s market size was larger that Europe’s already before the Great War (aka World War I). It is true that the USA had more railroads, but it also had much longer distances. In Northwestern Europe, transportation by a mix of ships, trains and horses was cheaper, especially once we consider the much denser (and highly urbanized) population. It is important to remember that prior to WWI, Europe was living the “first age of globalization”, with high levels of integration and relatively low tariffs.

So, this part of Romer’s story cannot be right.

Conclusion

In conclusion, what does this all mean? will these new facts affect where growth theory will go? only time will tell, and growth theory itself is by no means moving much these days, as Paul Romer himself has addmited in recent interviews. What these facts suggest, though, is that other things must have mattered.

As I said in the beginning, I believe that Paul Romer’s applied theory work is important (as it is that of others that might have won, such as Aghion and Howitt). The natural complementaries between the work of economic historians and applied theorists suggest that we need to listen to each other in order for science to move forward. Hopefully, new generations of economists will do a bit of both, as have some people who now work on Unified Growth.

But in the future, it is fair that the Nobel committee gives more prizes to empirical work as well. Because theory can’t live without facts, but economics Nobels have been highly biased towards theorists (whether pure or applied).

Final addendum, about one hour later than the original post: Max Roser read this post and has now corrected the citation. This is not the first time I give him a slap on the wrist about this sort of thing, but I know that Max, who is a friend and a promoter extraordinaire of this sort of work, is well-intentioned. Yet it is crucial that we insist on this being done fairly everytime, because if even Max occasionally does this wrong, that shows that this is the sort of thing that easily happens. The root cause is indirect citations, i.e. citation of someone who cited the data instead of citing the original work. Doing this takes credit away from those who did the basic empirical work, even when that is unintentional. So we all need to be careful to cite those who produced the original data.

 

 

 

 

How important was colonial trade for the rise of Europe?

I recently gave an interview to Garret M. Petersen of the Economics Detective Radio where we discuss some of my work. You can listen to it in this link: Money, Trade and Economic Growth in the Early Modern Period (interview).

In the interview, we discuss at one point the matter of how important was colonial (and otherwise intercontinental) trade for macroeconomic outcomes such as growth and urbanization in Europe. As I notice in the interview, my position on this (see my Cliometrica article for details) stands between two extremes:

  1. that of Eric Hobsbawm or Immanuel Wallerstein, who argue Europeans profited a huge deal from the colonies. This view is very prevalent in some political circles today, if not the person on the street, who often believes that “imperialism” or “colonialism” is what what made the West Rich, through exploitation of the rest of the world. It is related to “dependency theory”.
  2. by contrast, that of many if not most economic historians, who believe that such trade (and the violence that came with it) didn’t matter very much for outcomes back in Europe.

The latter view became the orthodoxy among economists and economic historians after Patrick O’Brien’s 1982 paper, which in one of many of Patrick’s celebrated phrases, claims that “”the periphery vs peripheral” for Europe. He concludes the paper by writing:

“[G]rowth, stagnation, and decay everywhere in Western Europe can be explained mainly by reference to endogenous forces. … for the economic growth of the core, the periphery was peripheral.”

This is the view that remarkable scholars such as N. Crafts, Deirdre McCloskey, or Joel Mokyr repeat today (though Crafts would argue cotton imports would have mattered in a late stage, and my reading of Mokyr is that he has softened his earlier view from the 1980s a little, specifically in the book The Enlightened Economy.) Even recently, Brad deLong has classifyied O’Brien’s 1982 position as “air tight”.

Among economists and economic historians more on the economics side, I would say that O’Brien’s paper was only one of two strong hits against the “Worlds-System” and related schools of thoughts of the 1970s, the other hit being Solow’s earlier conclusion that TFP growth (usually interpreted as technology, though there’s more to it than that) has accounted for economic growth a great deal more than capital accumulation, which is what Hobsbawm and Wallerstein, in their neo-Marxist framework, emphasize.

Let me be clear from the outset that the idea that it was European exploitation of foreign peoples that made it rich is, by itself, highly simplistic, and, in short, nonsense. The view held by many historians and members of the public, that colonialism essentially equals why the west is rich is evidently false. This view is seductive in part because of the nasty violent means and institutions (such as slavery), clearly immoral from the normative standpoint of our times, which was often associated with it. Even if partially true it fails to ask why was Europe the part of the world capable of doing this, which in turn raises the obvious suspicion that the deep causal factor lies elsewhere.

To a degree in the interview I react more against the opposite version, the point (2) above, the idea that it did not matter at all. But this is because I hold the fact that (1) is false as more evident.

One irony with all of this is that for more than a decade now, Patrick O’Brien has changed his mind. He has, indeed refereed to this in writing (as far back as 2006), and several people have witnessed seminars where the speaker mentions “as Patrick O’Brien has concluded, colonies didn’t matter for European development…” only to have Patrick raise and kindly but firmly inform the speaker of his change of heart.

Last year at the American Economic Association meeting in S. Francisco, my good friend Deirdre McCloskey even told me in disappointment how me she feels Patrick should go back to his old view! But I feel there’s good reason for his change of mind. Patrick certainly hasn’t adopted a Hobsbawm-Wallerstein type of position. He is now simply of the view that, at the margin, trade with other parts of the world did matter for European development. It’s does not explain everything, but it mattered a bit. This is what I find empirical support for in my own work.

My discussion has focused on the impact of trade for the European economy.  As Brad deLong notices, a different matter is that of whether such trade had an impact on other parts of the world (positive or negative). Patrick O’Brien sometimes refers to himself as a “mercantilist”. So I conclude by noting that some ideas related to the benefits of protectionism (once an idea almost banished from the realms of “serious” economics), especially as it applies to countries that are not at the frontier, has been taking hold among some young and very competent economic historians, such as Réka Juhász or Luigi Pascali. Perhaps I’ll write more about this in a future post.

 

 

nbm