Category Archives: Economic History

Martin Gurri watch

Posted on by

Noah Smith suggests that from a historical perspective, the revolt of the public is not new. He cites the period from 1789-1848 as well as the 1960s.

These were two former eras, one far in the past, one recent, in which spontaneous activism and popular rage led to widespread rejection of elites and endemic political chaos. And yet in each case, the public didn’t need Facebook or Twitter to revolt – all it needed were pamphlets, independent newspapers, books, or that ultimate information technology, word of mouth.

So the Revolt of the Public might not be such a new thing under the sun. Instead, it might be a recent manifestation of a recurring phenomenon – a periodic eruption of popular discontent. Such a cycle might be driven by improvements in information technology – the printing press, telephones, radio, blogs, and now social media. Each time information technology improves, it might lead to an explosion of chaos and rage while elites and institutions struggle to adapt. But each time in the past, the slow-moving engines of government, business, and media have eventually figured out how to put the lid back on public rage. It may turn out similarly this time.

The bank run of 1930?

Posted on by

Gary Gorton, Toomas Laarits, and Tyler Muir write,

At the start of the Great Depression there were no nationwide bank runs and banks did not avail themselves of the discount window. Yet, output dropped substantially: industrial production fell over 20%. As a consequence, 1930 is viewed as a puzzle. For example, Romer (1988) writes: ”The primary mystery surrounding the Great Depression is why output fell so drastically in late 1929 and all of 1930” (p. 5).2 And Bernanke (1983) does not include 1930 in his study of the effects of bank failures on output: ”it should be stated at the outset that my theory does not offer a complete explanation of the Great Depression (for example, nothing is said about 1929-1930)” (p. 258).

In this paper show that a large part of the output drop in 1930 can be explained by bank actions: the reduction in loans and purchase of safe assets. We argue that banks realized the severity of economic conditions and, in effect, ran on themselves.

I want to note this paper for future reference. But I’m not saying I buy it. I mean, the reason that output dropped so sharply is that the banks ran on themselves, and the reason that the banks ran on themselves is that they realized that output was dropping so sharply?

Timothy Taylor gets a story wrong

Posted on by

He writes,

There was a time, less than 20 years ago, when a major concern for the US government was how it would deal with the problems of paying off all government debt, which was projected to happen by about 2010. Alan Greenspan, then chairman of the Federal Reserve, made it a major point in his “Outlook for the federal budget and implications for fiscal policy” when he testified before the US Senate Budget Committee on January 25, 2001.

Tim tells the story as if this was a cognitive failure. Look at how hard it is to forecast! In hindsight, it looks like Greenspan’s crystal ball was cracked. Haha!

That is not the right story. It was a moral failure. I feel very strongly about this. Although I still consider Tim a great blogger, he muffed this one.

The context for Greenspan’s testimony was that newly elected President George W. Bush wanted to enact a big tax cut. One of the potential arguments against it was that it would cause the deficit to worsen. The responsible thing for Greenspan to do would have been to keep out of this issue, maintaining the political independence of the Fed. Instead, he waded in, with his ridiculous forecast, going so far as to say that it would cause dire problems for the Fed in the long run, because it would run out of government securities to buy. I hated that testimony from the moment it appeared. It was so craven (obviously, he was currying favor with the new President), so wrong on the economics, and so evil in its deception that I marked Greenspan as an irredeemable villain right then and there. I have not budged from that opinion.

Construction productivity in the 1930s

Posted on by

José Luis Ricón writes,

It also seems that buildng speed (this is all looking at the US now) was faster during the Great Depression years. Before and after it was slower.

My first thought is that you might have had some unusually productive construction workers, given the high unemployment in the economy. We think of blue-collar workers as homogeneous, but that is not the case. People who are more intelligent and more conscientious can be more productive at those jobs, at least if they are motivated. Which you would be during the Depression.

If this story is correct, then we should not long for the days when an Empire State Building could be put up quickly. Because we probably are better off with an economy in which those workers use their intelligence and conscientiousness elsewhere.

What I am re-reading

Posted on by

George Gilder’s Microcosm. The copyright date is 1989. I checked it out of the library shortly after it was published, and I have been meaning to buy a copy for a while.

When I first read it, I was struck by his emphasis on human ingenuity as more important than physical resources. That has stuck with me ever since. It influenced my decision in April of 1994 to quit my job to start an Internet-based business. It influenced my economic views, where I emphasize intangible assets.

I was also struck by his echoing Carver Mead that in the future analog computing would experience growth. It seems to me that this did did not happen, although one can argue that computing devices are increasingly linked to analog sensors.

He also did not mention the Internet. But he did stress the potential of computers as communication tools, and he understood that the cost of switches was falling relative to the cost of wires, which is the technological reason that the Internet took over the communication process. And of course, by 1994 he was writing long articles for Wired extolling the Internet.

He prophesied a decline of centralized power. On p. 361, he wrote,

The military threats of the future come not from mass mobilizations for territorial expansion but from nihilist forces of terrorism and reaction. . .all democracies will face the challenge of using new methods of electronic surveillance, security, and control, together with new non-lethal weapons, without seriously infringing on the rights of law-abiding citizens.

It all seems obvious now. It didn’t in 1989.

Would you buy this book?

Posted on by

The title is Predicting the Markets: A Professional Autobiography. It has many favorable reviews on Amazon, but they seem to pre-date the official release of the book, which makes one suspicious. Maybe you will download the Kindle sample and leave your comments here.

1. I was aware of Yardeni back in my days at the Fed, when he was a leading Wall Street forecasting guru. In fact, I was surprised to find out he is still active–I would have assumed he had aged out of the profession or died, given how well established he was by 1980, when I started at the Fed. But he had only graduated with his Yale Ph.D four years prior to that.

2. Many of the names and events that he recalls from the 1960s, 1970s, and 1980s are familiar to me. I vividly remember that he coined the term “bond market vigilantes.” It served to emphasize that the financial markets do not necessarily strictly respond to the short-term interest rate that the Fed can control. When bond market investors were really inflation-phobic, they kept long-term rates higher than the Fed wanted. More recently, between 2003 and 2006, the bond market did the opposite–keeping long-term rates low even when the Fed was tightening. This is what made the Bernank mutter about a “global savings glut.”

3. I preach, “stare at the world, not at your models,” and Yardeni adopted that in practice as soon as he left Yale. He says that around 1988 he converted from being a macroeconomist to a microeconomist. He writes, “I have become increasingly convinced that most of the more interesting and relevant influences on the outlook for the global economy have occurred at the microeconomic level.”

4. In a chapter (still part of the Kindle sample) on economic history, he credits the decision taken in June of 1938 to suspend mark-to-market accounting for banks as helping to end the Roosevelt recession that hit in 1937. My first exposure to the accounting issue was in the 1980s, when book-value accounting allowed many under-water savings and loan associations to remain in business, and that was not a good thing–it made the inevitable bailout more expensive. The problem is that not marking assets to market makes the institution less transparent to regulators. So I was long in favor of market-value accounting.

But I have since come to hold a different view of financial intermediation, in which full transparency could be a bug, not a feature. The function of banks and other financial intermediaries is to hold risky, long-term assets while issuing low-risk, short-term liabilities. This permits households and nonfinancial firms to do the opposite. This is somewhat magical, as long as it is not carried to excess. Market-value accounting takes away some of the magic, and it has the property of turning liquidity crises into solvency crises. I still think that when government is backing deposits (and going beyond that with its de facto commitment to prop up big banks) the regulators need market-value accounting. In 2008, instead of advocating getting rid of market-value accounting, the approach that I advocating for keeping banks from all dumping assets at the same time would have been to temporarily relax capital requirements.

5. I have doubts that I would enjoy the whole book. Yardeni’s life represents a “road not taken” by me, and nothing I’ve read so far gives me regrets. I regard my own experiences as more interesting than his. Tyler Cowen says he would like to see more memoirs. I wonder if he could get through this one.

Kling on Niall Ferguson’s latest

Posted on by

My review of The Square and the Tower.

I think it is very difficult to show that a particular technology favors peer relationships over hierarchical relationships.

I think that many of us made this mistake when we projected the social consequences of the Internet. Because the Internet is obviously a peer-to-peer network, we assumed that it would break down hierarchies. But the social world is its own sphere, and it does not necessarily mirror the technical world. Groups that are peer-oriented can use the Internet, but so can hierarchies. Perhaps some of the social changes that have taken place in recent decades disrupt hierarchies, including changes that were facilitated by the Internet. However, it is a fallacy to insist that just because the Internet is peer-to-peer, human groups necessarily must array themselves in that fashion in order to be successful in the current technological setting.

Gabriel Rossman on Niall Ferguson’s latest book

Posted on by

Rossman writes,

to this sociologist’s ear, conflating social networks, civic organizations, and social movements is confusing and imprecise. Some forms of human action are shaped by the structure of personal relationships. Others are shaped by affiliation with voluntary associations from which we derive identity and meaning. Both are important alternatives to hierarchy, but they work in different ways and so should be kept distinct.

The Square and the Tower probably will turn out to be an important book for its major claim that order requires hierarchy. But I am confirmed in my belief that Ferguson’s failure to commit to a precise definition of the term “network” detracts from the work.

How does one define the term “network”?

Posted on by

I ask this question because I have started to work through a review copy of Niall Ferguson’s The Square and the Tower. So far, it is an attempt to reinterpret history as a contest between networks and hierarchies. So naturally, I want to see the two terms defined. And they are not. It is amazing how often that happens. Somebody writes a book about culture and does not bother to carefully define culture. Am I the only one who finds that deeply annoying?

Ferguson defines a hierarchy as a network with particular characteristics. A hierarchy is heavy on top-down connections and light on horizontal or bottom-up connections. I am being terse. He is more explicit. But since he never defines the term network, calling a hierarchy a particular type of network still leaves hierarchy undefined.

When I type “network” into Google, it gives me the movie with the famous line “I’m mad as hell and I’m not going to take it any more.” Maybe Google knows how peeved I am when a book never defines the terms that are its main focus.

One challenge is that we use the term network very promiscuously. We speak of road networks, computer networks, social networks, and so on. Maybe a definition is elusive because the term means different things in these different contexts.

Anyway, let me try to give a definition of a network, and see how you like it:

A network is a set of channels (or conduits) through which resources can flow according to particular protocols between nodes (or endpoints).

With a network of roads, the resources that flow are vehicles and their contents. The protocols usually allow for bidirectional flow.

With the Internet, the resources that flow are digital messages. The protocols include the Internet Protocols.

With real-life social networks, the “resources” are knowledge about someone based on personal acquaintanceship. The “protocols” are customs about how much we know about friends, family, and co-workers in our immediate circle. Yes, I’m stretching here.

When we talk about a political or economic contest between a network and a hierarchy, what are the resources that flow? Maybe the resources are “instructions” and “information.” They flow vertically in a hierarchy, and more horizontally in a non-hierarchy.

I have one more quibble about Ferguson. That is, the metaphor of a tower (managed centrally) and a square (emergent) strikes me as similar to the metaphor of the Cathedral and the Bazaar, found in a famous essay by Eric Raymond. I looked in the index, and there is a citation of Raymond’s essay, but Ferguson never remarks on the similarity of the metaphor!

By the way, I am probably going to like Ferguson’s book very much by the time I finish it.

Organizing the causes of the Industrial Revolution

Posted on by

Mark Koyama writes,

Consider some prominent views about what caused the British Industrial Revolution. At the risk of grossly simplifying matters we can put them into three bins.

…Third, there are those who argue that ultimately only innovation can explain the transition to modern economic growth. This is the position of the majority of economic historians. Label them group 3. However, this third group is divided between those who seek to explain the increase in innovation in purely economic terms (3a) and those who see this as an impossible task and argue that the answer has to be sought elsewhere, perhaps in something that can be broadly defined as culture (3b).

Pointer from Tyler Cowen. The essay is about whether Rome could have had an industrial revolution. Recommended.