Economics

Minimum wages: The economist as a psychologist

Nicolas Cachanosky Economics, Liberty , , , ,

Both Ludwig von Mises and F.A. Hayek are known for arguing that there is no such thing as a good economist who is only an economist. For these two thinkers, a good economist-as-scientist also needs to know history, philosophy of science, ethics, and physics. Mises and Hayek are thinking of what an economist-as-scientist should be familiar with and have some minimum knowledge beyond his discipline.

I would add that the economist as public educator, that is, when the economist talks as an economist to non-economists, also needs some awareness of psychology. I may not be using the term “psychology” in the most proper way, but I mean the awareness to understand what the interlocutor feels and needs and then figure out how to communicate economic insights in a way that will not be automatically (emotionally or psychologically) rejected; how to make someone accept an economics outcome they do not want to be true. How to break the bad news with empathy? This is a challenge I try to get my students to understand as one day they, too, will be economists out of the classroom in the real world.

A few days ago I found myself unexpectedly in the “psychologist” position. Only seconds after meeting for the first time two persons dropped the question: “So, what do you think about increasing the minimum wages, should we do it?” I knew nothing about these two individuals, and the only thing they knew about me was that I’m an economics professor. The answer to such a question is an Econ 101 problem: if you increase the minimum wage (above the equilibrium price) some lucky workers will get a wage increase at the expense of other ones loosing their jobs.

The first question I asked myself was “what do these two nice ladies actually want, the analytical/scientific answer, or do they want instead the ‘professor’ to confirm their bias?” This might be a delicate discussion since they may well have a loved one in the minimum wage market.

The first thing to get out of the way is that my answer as an economist is not ideologically driven or does not respond to secret political agendas. How can that be made clear? One way is to show the economics profession’s consensus on the subject from an impersonal position. I explained to them that any economics textbook from any author from any country in the world used in any university would say the same thing: “If you put the price of labor above its equilibrium (a minimum wage), it will produce a disequilibrium (unemployment). You cannot fix the price outside equilibrium and at the same time remain in equilibrium.” Yes, as Ben Powell reminds us, even Paul Krugman agrees on this. By mentioning a worldwide consensus there is no room for ideological or political agendas. It is important to mention that economics is not always about politics. The economic analysis of minimum wages has nothing to do with being a Democrat or a Republican; the political position of each party may differ, but those are not economic analyses, those are political strategies.

The next step was to deal with the issue that if such a consensus exists, why are there mentions of studies showing no harmful effects of increases in minimum wages. This is no mystery either. A well known reason of why an increase in minimum wages does not increase unemployment is because in fact there is no such increase. The politician may say he is increasing the minimum wage, but he does not say that the minimum wage is being located just above the equilibrium level and therefore he is not doing much. Another reason is to look at the effect of a minimum wage increase in a small location where low skilled workers can get another job in the next town without the need to move and therefore they will not show up as unemployed. This is another case of an ineffective increase in minimum wages. Or maybe the minimum wage increases but a benefit goes down. The total compensation to the employee does not change, its composition does.

But can the economist show his claim? Is there more clear evidence that the effects of increasing minimum wages does do harm than the complicated cases where there are no harmful effects? Again, I went geographically large. First, I compared the U.S. with Europe, which has higher minimum wages with respect to the U.S. In Europe you find higher unemployment rates, higher unemployment in the youth population, and also higher long-term unemployment. Second, I brought the case of the U.S. Fair Labor Standard Act of 1938, which fixed the minimum wage at 25 cents per hour. This law included Puerto Rico where the many workers were earning between 3 to 4 cents. Bankruptcies and unemployment skyrocketed. It was in fact unions who asked Congress to make an exception for Puerto Rico, which took two years to consider. For two years people in Puerto Rico were forced to work in the black market or fail to make a minimum income. Want more cases? See here. “See,” the psychologist says, “minimum wages are very dangerous; you can seriously harm yourself. Is that a bet you really want to make?”

Two issues remain to be explained after dealing with these three problems, (1) objection to minimum wage increases is not (necessary) an ideological or political position, (2) studies that deny the effect are doubtful for easy reasons to understand, and (3) if you look at a sample broad enough the economist’s prediction is right there.

First, when an economist objects to an increase in minimum wages it does not mean we do not want wages to go up. We are just saying that a minimum wage increase is not the right way to do it. I wish it were so easy, but the laws of demand and supply inform otherwise. I guess most economists would advocate for minimum wages if their negative effects were not real. Second, explain Milton Friedman’s lesson that a policy is valued by its results, not by its intentions. The economist objects because of the unintended effects of fixing the price of labor outside equilibrium, not because we wouldn’t like to see real wages increasing.

On Evonomics, Spelling and Basic Economic Concepts

Vincent Geloso Economics, Liberty , , , ,

I am a big fan of exploring economic ideas into greater depth rather than remaining on the surface of knowledge that I accumulated through my studies. As such, I am always happy when I see people trying to promote “alternatives” within the field of economics (e.g. neuroeconomics, behavioral economics, economic history, evolutionary economics, feminist economics etc.). I do not always agree, but it is enjoyable to think about some of the core tenets of the field through the work of places like the Institute for New Economic Thinking. However, things like Evonomics do not qualify for this.

And this is in spite of the fact that the core motivation of the webzine is correct: there are problems with the way we do economics today (on average). However, discomfort towards the existing state of affairs is no excuse for shoddy work and holding up strawmen that can be burned at the stake followed by a vindictive celebratory dance. The most common feature of those who write for Evonomics is to hold such a strawman with regards to rationality. It presents a caricature where humans calculate everything with precision and argue that if, post-facto, all turns out well then it was a rational process. No one, I mean no one, believes that. The most succinct summary  of rationality according to economists is presented by Vernon Smith in his Rationality in Economics: Constructivist and Ecological Forms. 

Such practices have led me to discount much of what is said on Evonomics and it is close to the threshold where the time costs of sorting the wheat from the chaff outweighs the intellectual benefits.

This recent article on “Dierdre” McCloskey may have pushed it over that threshold. I say “Dierdre” because the author of the article could not even be bothered to write correctly the name of the person he is criticizing. Indeed, it is “Deirdre” McCloskey and not “Dierdre”. While, ethymologically, Dierdre is a variant of Deirdre from the Celtic legend that shares similarities to Tristan and Isolde, the latter form is more frequent. More importantly, Dierdre is name more familiar to players of Guild Wars. 

A minor irritant which, unfortunately, compounds my poor view of the webzine. But then, the author of the article in question goes into full strawman mode. He singles out a passage from McCloskey regarding the effects of redistributing income from the top to the bottom. In that passage, McCloskey merely points out that the effects of equalizing incomes would be minimal.  The author’s reply? Focus on wealth and accuse McCloskey of shoddy mathematics.

Now, this is just poor understanding of basic economic concepts and it matters to the author’s whole point. Income is a flux variable and wealth is a stock variable. The two things are thus dramatically different. True, the flux can help build up the stock, but the people with the top incomes (flux) are not necessarily those with the top wealths (stock). For example, most students have negative net worth (negative stock) when they graduate. However, thanks to their human capital (Bryan Caplan would say signal here), they have higher earnings. Thus, they’re closer to the top of the income distribution and closer to the very bottom of the wealth distribution.  My grandpa is the actual reverse. Before he passed away, my grandpa was probably at the top of the wealth distribution, but since he passed most of his time doing  no paid work whatsoever, he was at the bottom of the income distribution.

Nevermind that the author of the Evonomics article misses the basic point of McCloskey (which is that we should care more about the actual welfare of people rather than the egalitarian distribution), this basic flaw in understanding why the difference between a stock and flux leads him astray.

To be fair, I can see why some people disagree with McCloskey. However, if you can’t pass the basic ideological Turing test, you should not write in rebuttal.

Geopolitics and Asia’s Little Divergence: State Building in China and Japan After 1850

Image Mark Koyama Economics, History, Politics , , , , , , , , ,

Crossposted at the Medium

Why did Japan successfully modernize in the 19th century while China failed to do so? Both China and Japan came under increasing threat from the Western powers after 1850. In response, Japan successfully undertook a program of state building and modernization; in China, however, attempts to modernize proved unsuccessful and the power of the central state was fatally weakened. The failure to build a modern state led to China’s so-called lost century while Japan’s success enabled it to become the first non-western country to industrialize. In a paper with Chiaki Moriguchi (Hitotsubashi University) and Tuan-Hwee Sng (NUS), we explore this question using a combination of historical evidence and formal modeling.

On the surface this East Asian “little divergence” is extremely puzzling. Qing China, as late as the end of the eighteenth century, was a powerful centralized empire. An impersonal bureaucracy selected by exams, and routinely rotated, governed the empire. In contrast, the institutions of Tokugawa Japan are usually described as feudal. The shogun directly ruled only 15% of the country. The remainder was divided into 260 domains ruled by lords known as daimyo who collected their own taxes, possessed their own armies, and issued their own currencies. To the outside observer China would have seemed much more likely to have been able to establish the institutions or a centralized state than Japan.

Figure 1: Qing China and Tokugawa Japan

For much of the early modern period (1500–1700) China and Japan possessed military capabilities that made them more than a match for any western power. This changed dramatically after the Industrial Revolution and their vulnerability exposed by the Opium War (1839–1840) and the Black Ships Incident of 1853, respectively. During the First Opium a small number of British ships overpowered the entire Chinese navy, while Commodore Perry’s show of force in landing in Japan in 1853 convinced the Japanese of western naval superiority. Within a few years, political elites in both countries recognized the need to modernize if only to develop the military capacity required to fend off this new danger.

* * *

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Figure 2: Commodore Perry in Japanese eyes

In China, after the suppression of the Taiping Rebellion, there were attempts at modernizing — notably the Self-Strengthening movement associated with Li Hongzhang and others. Recent scholarship has reevaluated this movement positively. At the purely military-technological level it was in fact quite successful. The Jiangnan Arsenal and the Fuzhou Shipyard saw the successful importation of western military technology into China and the Chinese were soon producing modern ships and weaponry. However, these developments were associated with a process of political decentralization as local governors took on more and more autonomy. The importation of military technology was not associated with more far-reaching societal or political reforms. There was no serious attempt to modernize the Qing state.

In contrast, Japan, following the Meiji Restoration, embarked on whole scale-societal transformation. The daimyo lost all power. Feudalism was abolished. Compulsory education was introduced as was a nationwide railway system. A new fiscal system was imposed in the teeth of opposition from farmers. The samurai were disarmed and transformed from a military caste into bureaucrats and businessmen.

Qing China and the newly modernized Meiji Japan would collide in the first Sino-Japanese war (1894–1895). Before the war, western observers believed China would win in part because of their superior equipment. But the Chinese lacked a single national army. It was the Beiyang army and the Beiyang fleet that fought the entire Japanese military force. The fact that Japan had undergone a wholesale transformation of society enabled them to marshal the resources to win a rapid victory.

 

koyamabaiyanfleet
Figure 3: The Jingyuan, one of the ships in the Baiyang fleet

* * *

Why did the Japanese succeed in modernizing while Qing China failed to do so? Historians have proposed numerous explanations. In our paper, however, rather than focusing on cultural differences between Japan and China, we focus on how different geopolitical incentives shaped their decisions to invest in state capacity and state centralization.

Before the mid-19th century China only faced a threat from inner Asia from where historically nomadic invasions had routinely invaded and threatened the sedentary population of the Chinese plain. Due to this threat, historically China tended to be a centralized empire with its capital and the bulk of its professional army stationed close to the northern frontier (see Ko, Koyama, and Sng (2018)). In contrast, Japan faced no major geopolitical threats prior to 1850. This meant that it could retain a loose and decentralized political system.

After 1850 both countries faced major threats from several directions. China was threatened on its landward borders by Russian expansionism and from the coast by Britain and France (and later Germany and the United States). Japan was threatened from all directions by western encroachment.

We build a simple model which allows for multidirectional geopolitical threats. We represent each state as a line of variable length. States have to invest in state capacity to defend against external geopolitical threats. Each state can use centralized fiscal institutions or decentralized fiscal institutions.

If there is strong threat from one direction, as China faced prior to 1850, the dominant strategy is political centralization. In the absence of major geopolitical threats decentralization may be preferable as was the case in Tokugawa Japan.

The emergence of a multidirectional threat, however, changes things. A large country facing a multidirectional threat may have to decentralize in order to meet the different challenges it now faces. This is what happened in China after 1850. In contrast, for a small state with limited resources, an increase in the threat level makes centralization and resource pooling more attractive. For a small territory like Japan, the emergence of non-trivial foreign threats renders political decentralization untenable.

We then consider the incentives to modernize. Modernization is costly. It entails social dislocation and creates losers as well as winners, the losers will attempt to block any changes that hurt their interests. We show that for geographically compact polities, it is always a dominant strategy to modernize in the face of a multidirectional threat as the state is able to manage local opposition to reform. This helps to explain why all members of the Japanese political elite came around to favoring rapid modernization by the late 1860s.

Consistent with our model, modernization was more difficult and controversial in China. The Qing government and particularly the Empress Dowager famously opposed the building of railroads. The most well-known example of this was the Wusong Road in Shanghai. Built using foreign investment it was dismantled in 1877 after locals complained about it. The Qing state remained reactive and prepared to kowtow to local powerholders and vested interests rather than confront them. Despite local initiatives, no effort was made at wholesale reforms until after China’s defeat at the hands of Japan in 1895.

koyamaindustrialization
Figure 4: The Wusong Railroad in 1876

* * *

By 1895 it was too late, however. The attempts of the Qing state to reform and modernize led to its collapse. Needless to state, East Asian’s little divergence would have lasting consequences.

Japan’s modernization program astonished foreign observers. Victory over Russia in 1904 propelled Japan to Great Power status but also set Japan on the path to disaster in the World War Two. Nevertheless, the institutional legacy of Japan’s successful late 19th century modernization played a crucial role in Japan’s post-1945 economic miracle.

Following the collapse of the Qing dynasty China fragmented further entering the so-called warlord era (1916–1926). Though the Nationalist regime reunified the country and began a program of modernization, the Japanese invasion and the Second Sino-Japanese War (1937–1945) devastated the country. The end result was that China came to be reunified by the Communist party and to experience more conflict and trauma until it began to embrace market reforms after 1979.

Ricardo and Ringo for a free-trade Brexit

Nick Cowen Books, Economics, Liberty , , , , ,

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My colleague, Shruti Rajagopalan, points out that today is the 200th Anniversary of the publication of David Ricardo’s  On the Principles of Political Economy and Taxation. It was here that the notion of comparative advantage began confounding protectionists and nativists. Shruti offers this famous example of it in practice:

Apparently, when asked if Ringo Starr is the best drummer in the world, John Lennon quipped, “Ringo isn’t the best drummer in the world. He isn’t even the best drummer in the Beatles.” And while Lennon may have fancied himself a better singer, guitarist, songwriter, and drummer, than Ringo, the Beatles are still better off with Ringo at the drums.

The essence of comparative advantage is that you don’t need to possess a great talent to benefit from trade within a group, whether we are talking about individual people or nations. So long as there exists some variation in relative talents, people will be able to benefit from specialization and trade.

This message is as relevant as ever. The British Parliament has just voted to hold fresh elections. This is supposedly to strengthen the Prime Minister’s hand when negotiating new terms of trade when Britain leaves the European Union. Politicians act as if trade is dangerous, always a threat to the national interest unless carefully constrained. They negotiate complex deals and regulation on market access, essentially holding their own consumers hostage, preventing them from buying foreign goods unless other countries agree to open their own markets. They fear that their domestic producers will be out-competed by superior, or cut-priced, businesses from abroad.

What comparative advantage shows is that even if that happened to be true for every single industry, domestic businesses could still specialize so as to be competitive on the world market, and improve domestic living standards at the same time. Britain could open its ports and wallets to foreign goods and services with no tariffs, even without any reciprocal deal from the EU, and yet still benefit from trade.

Why? Because it doesn’t matter if you have to be the drummer, just so long as you are in the band.

Would regulation stop the mistakes of rating agencies that contributed to the 2008 crisis?

Kevin Kallmes Economics, Law, Liberty, Politics , , , , ,

I remember watching The Big Short and feeling great indignation at the S&P employee who told Steve Carell that rating agencies were pressured into issuing unreasonably high ratings because they were beholden to their customers. If true, this represented an unbelievable moral hazard, which is often cited as the reason for the failures of the ratings agencies–and as a reason for regulating these agencies.

However, more in-depth research and consideration reveals that this answer is incomplete and, in many ways, incorrect. Claire Hill, a law professor at the University of Minnesota Law School and director of the Institute for Law and Rationality, clearly and convincingly critiques this simplistic explanation by recognizing market influences and proposing alternate causes, which also means that if we are looking to avoid a future crisis, we need to look to alternative solutions to the regulatory measures that we currently employ. I don’t think it could be said better than she does in her abstract:

Why did rating agencies do such a bad job rating subprime securities? The conventional answer draws heavily on the fact that ratings are paid for by the issuers: Issuers could, and do, “buy” high ratings from willing sellers, the rating agencies.

The conventional answer cannot be wholly correct or even nearly so. Issuers also pay rating agencies to rate their corporate bond issues, yet very few corporate bond issues are rated AAA. If the rating agencies were selling high ratings, why weren’t high ratings sold for corporate bonds? Moreover, for some types of subprime securities, a particular rating agency’s rating was considered necessary. Where a Standard & Poor’s rating was deemed necessary by the market, why would Standard & Poor’s risk its reputation by giving a rating higher (indeed, much higher) than it knew was warranted?

Finally, and perhaps most importantly, giving AAA ratings to securities of much lower quality is something that can’t be done for long. A rating agency that becomes known for selling its high ratings will soon find that nobody will be paying anything for its ratings, high or low.

In my view, that issuers pay for ratings may have been necessary for the rating agencies to have done as bad a job as they did rating subprime securities, but it was not sufficient. Many other factors contributed, including, importantly, that rating agencies “drank the Kool-Aid.” They convinced themselves that the transaction structures could do what they were touted as being able to do: with only a thin cushion of support, produce a great quantity of high-quality securities. Rating agencies could take comfort, too, or so they thought, in the past – the successful, albeit short, recent history of subprime securitizations, and the longer history of successful mortgage securitizations.

“Issuer pays” did not so much make the rating agencies give higher ratings than they thought were warranted as it gave the agencies a “can do” mindset regarding the task at hand – to achieve the rating the issuers desired, working with them to modify the deal structures as needed. That the issuers were paying motivated the agencies to drink the Kool-Aid; having drunk the Kool-Aid, the agencies gave the ratings they did. My account casts doubt on the efficacy of many of the solutions presently being proposed and suggests some features that more efficacious solutions should have.

I very much recommend reading the full article, which gives more nuance and information about the weaknesses of proposed solutions for rating agency mistakes or malfeasance. This should also be food for thought concerning the general perspective we should have in examining “market failures,” as there are often market feedback systems that mitigate problems, and turning to regulation by reflex can cause unintended harm or even miss the mark entirely.

Reference: Hill, Claire. “Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities?” University of Pittsburgh Law Review (2010): 10-18. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582539.

Differences in life expectancy within Canada, 1921 to 2011

Vincent Geloso Economics, History ,

I’ve been playing around with some data for a paper I have been trying to write about the economic history of Canada in the 20th century. In the process, I assembled the data from the Base de données sur la longévité canadienne regarding life expectancy at birth. Then, I thought that it would be interesting to see how large were the differences between the provinces and how fast did they close. They closed pretty dramatically during the 20th century – see for yourself.

LifeExpectancyCanada

Pride and Subsidies

Rick Weber Culture, Economics, Politics , , , , , ,

Freakonomics had an episode on the dramatic impact of subsidies on the visual effects (VFX) industry. Long story short: 1) VFX companies operate on razor thin margins, 2) the industry chases subsidies from competing local governments–Canada and London are  currently important locations, 3) Californian politicians want to bring these jobs back to LA, but doing so would probably be a net burden.

(Let’s put aside the issue of the state of California trying to play central planner by effectively creating different tax rates for different industries. That’s a bad idea for reasons we can explore later.)

Putting yourself in the head of a Californian, something about the policy feels right (maybe not for the typical NOL reader, but probably for the median voter). I’m sure you could convince the median voter that these subsidies are a bad idea, economically. But even so, I’d be willing to bet that you’d still get significant support.

I’m confident that if you were to talk this issue over with a representative sample of California voters–or X industry in Y region for similar industry upheavals–you could convince them of the probable negative impact of such policy and still see many voters at least weakly supporting the policy. Why? Because being able to point to a movie and say “that awesome explosion was made in my backyard,” is worth some degree of sacrifice for these people.

Perhaps people want our government to give us something to be proud of (God knows they give us enough things to be ashamed of!). Perhaps people have some latent willingness to pay to be able to say that some high status industry is in their community/city/state/country.

We like pride, but it costs us. This puts us squarely in the domain of economics. How do we figure out how to make the trade off between pride, and the price we must pay for it? Some cases seem easy, at least in hindsight–the sacrifice of the civil rights movement was a small price to pay for the pride generated–but cases like the VFX industry, aren’t so obvious, but still high stakes.

I don’t think we’re likely to be able to figure out the bill. We can be proud of NASA, movies, the post office, and whatever else. But how much of the cost can we attribute to engaging in activities that make us proud? We get the same issue in markets. I have more than brand loyalty for Honda (the maker of my motorcycle); I’m also proud to associate with Honda as an innovative company with a history of liberating the world’s poor.

A clever statistician or economist could estimate some important facts about how people tend to make these trade offs. Doing so could help us make better decisions, but can’t ultimately replace our own judgment.

Given the uncertainty we face we really have to make a decision about whether to err on the side of over- or under-provision of pride goods–and this is true in a variety of settings.

I suspect that the “let 1000 flowers bloom” approach is the appropriate one here. We don’t want to have one Secretary of Pride deciding to err on the side of over-provision and the result is that a bunch of children die from preventable causes so that we can all feel proud about how cool the latest domestically produced Fast and Furious movie is going to be. On the other hand, it would be a tragedy of slavery was never ended because it would interrupt business as usual.

Markets, civil society, and government face different sorts of pros and cons with respect to how they might make these trade offs. Arguing about them could create a new academic discipline at the intersection of ethics, economics, and sociology.

In all three spheres, there will be many very bad decisions made. But if you aren’t free to be wrong, you aren’t free. The question to ask is what sort of pride goods will tend to survive, and in which spheres?

What we can say for sure is that private, voluntary exchange and cooperation (free markets and civil society) at least allow us to choose our associations. And they require us to choose, and choose again on a regular basis. Our nation is mostly based on luck. Where we live tends not to change much. Voting with your feet is costly, so we should expect it to be that much harder to dismantle big mistakes. The political process routinely results in outcomes we’re ashamed of (about half of voters are ashamed of the results every presidential election!).

There aren’t markets in pride so it’s hard to know how the benefits compare to the costs. But we can (and do) exhibit pride in markets. We should probably do more of it. And perhaps we should also be more skeptical of government, even though we normally think of them as providing pride goods. On the margin, anyways, I think this is a good direction for most people to move. Be proud of your community because the people have whatever unique traits they do. Be proud of the brands you buy from for their contributions to the state of the art. Be proud of your local sports team.

The GDP, real wages and working hours of France since the 13th century

Vincent Geloso Economics, History , , ,

Every few years, an economic historian in training spends thousands of hours in archives assembling a long quantitative essay. It’s the work of monks (in fact, when you go far back in history, you also end up working with monks and nuns – which was my case on Canadian economic history). It’s the kind of work that requires patience, attention to details and (did I say it already?) patience.

I did that for my own work on Canadian economic history. For two years, I locked myself in the archives of two religious congregations to collect and transcribe close to a million price and wages information. For these two years, I did not write one single paper. I just collected the data and constituted a list of the papers I could write. However, once its finished, you may party like a sailor fresh off the boat because you end up with a wealth of data to answer hundreds of questions. When I finished my own thing on Canada, I was thrilled as I thought it constituted a great advance in quantitative knowledge (which I could use to assess tougher historical questions).

However, compared to the work of Leonardo Ridolfi, my own work looks like a dwarf (I confess envy here).  Ridolfi spent hundreds of hours assembling a quantitative essay on France’s economy since 1250. This is monumental!  France has generally been a statistical abyss (except for demography and some price series) especially when compared to England. Yet, the country is highly relevant to western economic history. After all, the question of why did the Industrial Revolution take place in Britain is the mirror of asking why it did not happen in France. As a result, Ridolfi’s work fills one of the largest voids in the field of economic history and will end up being one of the most cited dissertations for the next ten years I expect.

He constructed estimates of real wages, prices, incomes and working hours. As such, he provided the widest possible statistical portrait possible which (I wont get into details here) circumvents tons of empirical complications that may limit the quality of each variable taken separately (see for example the manner in which GDP is calculated and the role that estimating working hours plays).

I invite anyone interested in economic history to read his work. But, I will give you the main conclusion I gathered: France was not as poor as many believed. I recently pointed this out in an article which I am trying to get published, but Ridolfi’s work proves my point beyond my wildest expectations. I assembled the most relevant figures below.

Ridolfi.png

On the reversal of fortune, urbanization and Canada

Vincent Geloso Economics, History , , , , , , , , , ,

One of the more famous articles of economist Daron Acemoglu is his 2002 article on the reversal of fortunes where he points out that countries colonized by Europeans in 1500 that were relatively rich then are relatively poor now. In the paper, they use urban density as a proxy for economic development at that point in time.

I was not particularly convinced by this because of the issue of ruralization in colonial economies. I am still not convinced in fact. As many scholars interested in American colonial history point out, the country de-urbanized (ruralized) during the colonial era as cities grew at a slower pace than the general population. As such, the share of the US population in rural areas increased. But Jeffrey Williamson and Peter Lindert documented that in 1774, the United States were the richest place in the world (beating England on top of being more egalitarian). 

This is normal. Economies on the frontier had land to labor ratios that were the exact opposite of those in Europe. The opportunity cost of congregating in one area was high given the abundance of land that could be brought under cultivation. This is why the Americas (North America at least) was the Best Poor Man’s Country. As such, areas with low population density are not necessarily poor (even if urbanization is a pretty strong predictor of wealth).

This is where Canada comes in. Today, the country easily fits in the “relatively rich” group. According to the figures 1 and 2 in the work of Acemoglu, Johnson and Robinson, it would have been in the “relatively poor” group well behind countries in Latin America. However, I recently finished compiling the Canadian GDP figures between 1688 and 1790 which I can now compare with those of Arroyo Abad and Van Zanden for Peru and Mexico. With my Canadian data (see the figure below), we can see that Canada was as poor as Latin America around 1680 (the start date of my data).

GelosoGDP.png

So, Canada was a relatively poor country back which was equally poor (or moderately richer) than Latin American countries. Why does that matter to the reversal of fortune story? Well, with the urbanization data, one shows that the non-urbanized of 1500 are the rich of the today. With the GDP data for the 1680s, we see that the more urbanized countries were also poorer than the less urbanized countries.

Now, my argument is limited by the fact that I am using 1680s GDP rather than 1500 GDP. But, one should simply extend the urbanization series to circa 1700 and the issue is resolved.  In any case, this should fuel the skepticism towards the strength of the reversal of fortune argument.

What makes robust political economy different?

Nick Cowen Books, Economics , , , , , ,

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I encountered what would later become important elements of Mark Pennington’s book Robust Political Economy in two articles that he wrote on the limits of deliberative democracy, and the relative merits of market processes, for social and ethical discovery, as well as a short book Mark wrote with John Meadowcroft, Rescuing Social Capital from Social Democracy. This research program inspired me to start my doctorate and pursue an academic career.  Why did I find robust political economy so compelling? I think it is because it chimed with my experience of encountering the limits of neo-classical formal models that I recount in my chapter, ‘Why be robust?’, of a new book, Interdisciplinary Studies of the Market Order.

While doing my master’s degree in 2009, I took a methodology course in rational choice theory at Nuffield College’s Center for Experimental Social Science. As part of our first class we were taken to a brand new, gleaming behavioural economics laboratory to play a repeated prisoners’ dilemma game. The system randomly paired anonymous members of the class to play against each other. We were told the objective of the game was to maximise our individual scores.

Thinking that there were clear gains to make from co-operation and plenty of opportunities to punish a defector over the course of repeated interactions, I attempted to co-operate on the first round. My partner defected. I defected a couple of times subsequently to show I was not a sucker. Then I tried co-operating once more. My partner defected every single time in the repeated series.

At the end of the game, we were de-anonymised and it turned out, unsurprisingly, that I had the lowest score in the class. My partner had the second lowest. I asked her why she engaged in an evidently sub-optimal strategy. She explained: ‘I didn’t think we were playing to get the most points. I was just trying to beat you!’

The lesson I took away from this was not that formal models were wrong. Game theoretic models, like the prisoners’ dilemma, are compelling and productive analytical tools in social science, clarifying the core of many challenges to collective action. The prisoners’ dilemma illustrates how given certain situations, or rules of the game, self-interested agents will be stymied from reaching optimal or mutually beneficial outcomes. But this experience suggested something more complex and embedded was going on even in relatively simple social interactions.

The laboratory situation replicated the formal prisoners’ dilemma model as closely as possible with explicit rules, quantified ‘objective’ (though admittedly, in this case, low-value) payoffs, and a situation designed to isolate players as if they were prisoners in different cells. Yet even in these carefully controlled circumstances, it turns out that the situation is subject to multiple interpretations and understandings.

Whatever the textual explanation accompanying the game, the score on the screen could mean something different to the various players. The payoffs for the representative agents in the game were not the same as the payoffs in the minds of the human players. In a sense, my partner and I were unwittingly playing different games (although I lost within either rules of the game!).

When we engage with the social world, it is not only the case that our interests may not align with other people. Social interaction is open-ended. We do not know all the possible moves in the game, and we do not know much about the preference set of everyone else who is playing. Indeed, neither they nor we know what a ‘complete’ set of preferences and payoffs would look like, even of our own. We can map out a few options and likely outcomes through reflection and experience but even then we may face outcomes we do not anticipate. As Peter Boettke explains: ‘we strive not only to pursue our ends with a judicious selection of the means, but also to discover what ends that we hope to pursue.’

In addition, the rules of the game themselves are not merely exogenous impositions on us as agents. They are constituted inter-subjectively by the practices, beliefs and values of the actors that are also participants in the social game. As agents, we do not merely participate in the social world. We also engage in its creation through personal lifestyle experimentation, cultural innovation, and establishing shared rules and structures. The social world thus presents inherent uncertainty and change that cannot be captured in a formal model that assumes fixed rules of the game and the given knowledge of the players.

It is these two ideas, both borrowed from the Austrian notion of catallaxy, that makes robust political economy distinct. First, neither our individual ends, nor means of attaining them, are given prior to participation in a collective process of trial and error. Second, the rules that structure how we interact are themselves not given but subject to a spontaneous, evolutionary process of trial and error.

I try to set out these ideas in a recent symposium in Critical Review on Mark Pennington’s book, and in ‘Why be robust?’ in Interdisciplinary Studies of the Market Order edited by Peter Boettke, Chris Coyne and Virgil Storr. The symposium article is available on open access and there is a working paper version of my chapter is available at the Classical Liberal Institute website.

The End of the Past

Mark Koyama Economics, History , , , , , , ,

On Branko Milanovic’s recommendation, I read Aldo Schiavone’s The End of the Past. Scholarly and elegantly written, it provides one of the best imaginative reconstructions of the ancient Roman economy.

Previous posts have touched on the economies of late antiquity, the modernist primitivist debate, and diagnosed problems in many recent assessments of the ancient economy (here, here, here, and here). I want to use Schiavone’s book to revisit a question raised by Peter Temin in The Roman Market Economy. How advanced was the Roman economy? Specifically, how did it compare to the economy of Europe in late medieval or early modern times? Was the Roman economy only as developed as that of Europe circa 1300 or was it as advanced as that of western Europe on the eve of the Industrial Revolution in say 1700.

This question is not mere idle speculation. It matters for our understanding of the causes of long-run economic growth whether an industrial revolution could have happened in Song China or ancient Rome. This type of counterfactual history is crucial for pinning down the casual mechanisms responsible for sustained growth, especially as historians like Bas van Bavel are now proposing explicitly cyclical accounts of growth in societies as varied as early medieval Iraq and the Dutch Republic (see The Invisible Hand? (OUP, 2016))

Temin’s GDP estimates suggest that Roman Italy had comparable per capita income to the Dutch Republic in 1600. The Empire as a whole, he suggests, may have been comparable to Europe in 1700 (Temin 2013, 261). My gut reaction is that this is plausible as an upper-bound. Schiavone (who was writing several years before Temin), however, raises important points that I had fully not considered previously.

Schiavone opens with an account of a speech given by Aelius Aristides celebrating the wealth of the Roman empire in the mid-2nd century AD.

“Whatever each culture grows and manufactures cannot fail to be here at all times and in great profusion. Here merchant vessels arrive carrying these many commodities from every region in every season and even at every equinox, so that the city takes on the appearance of a sort of common market for the world. One can see cargoes from India and even from southern Arabia in such numbers that one must conclude that the trees in those lands have been stripped bare, and if the inhabitants of those lands need anything, they must come here to beg for a share of what they have produced….

Your farmlands are Egypt, Sicily, and all of cultivated Africa. Seaborne arrivals and departures are ceaseless, to the point that the wonder is, not so much that the harbor has insufficient space for all these merchant vessels, but that the sea has enough space (if it really does). Just as there is a common channel where all waters of the Ocean have a single source and destination, so that there is a common channel to Rome and all meet here: trade, shipping, agriculture, metallurgy— all the arts and crafts that are or ever were and all things that are produced or spring from the earth. What one does not see here does not exist” (Aristides, The Roman Oration).

This is a panegyric addressed to flatter the emperor but its emphasis on long-distance trade, commerce, manufacturing is highly suggestive. Such a speech is all but impossible to imagine in an predominantly rural and autarkic society. Aristides is painting a picture of a highly developed commercialized economy that linked together the entire Mediterranean and beyond. Even if he is grossly exaggerates, the imagine he depicts must have been plausible to his audience. In evaluating the Roman economy in the age of Aristides, Schaivone notes that:

“Until at least mid-seventeenth century Amsterdam, so expertly described by Simon Schama — the city of Rembrandt, Spinoza, and the great sea-trade companies, the product of the Dutch miracle and the first real “globalization of the economy — or at least, until the Spanish empire of Philip II, the total wealth accumulated and produced in the various regions of Europe reached levels that were not too far from those of the ancient world” (Schiavone, 2000, 94).

This is the point Temin makes. Whether measured in terms of the size of its largest cities — Rome in 100 AD was larger than any European city in 1700 — or in the volume of grain, wine, and olive oil imported into Italy, the scale of the Roman economy was vast by any premodern standard. Quantitatively, then, the Roman economy looks as large and prosperous as that the early modern European economy.

Qualitatively, however, there are important differences that Schiavone draws out and which have been obscured in recent quantitative debates about GDP estimates.

Observe that Roman history leaves no traces of great mercantile companies like the Bardi, the Peruzzi or the Medici. There are no records of commercial manuals of the sort that are abundant from Renaissance Italy; no evidence of “class-struggle” as we have from late medieval Europe; and no political economy or “economics”, that is, no attempts to systematize one’s thoughts and insights concerning the commercial world. The ancient world, in this view, only superficially resembled that of early modern Europe. Seen from this perspective, the latter contained the potential for sustained growth; the former did not. Why is this?

The most obvious institutional difference between the ancient world and the modern was slavery. Recently historians have tried to elevate slavery and labor coercion as crucial causal mechanism in explaining the industrial revolution. These attempts are unconvincing (see this post) but slavery certainly did dominate the ancient economy.

In its attempt to draw together the various strands through which slavery permeated the ancient economy, Schiavone’s chapter “Slaves, Nature, Machines” is a tour de force. At once he captures the ubiquity of slavery in the ancient economy, its unremitting brutality—for instance, private firms that specialized in branding, retrieving, and punishing runaway slaves — and, at the same time, touches the central economic questions raised by ancient slavery: to what extent was slavery crucial to the economic expansion of period between 200 BCE and 150 AD? And did the prevalence of slavery impede innovation?

It is impossible to do justice to the argument in a single post. Suffice to say that after much discussion, and many fascinating interludes, Schiavone suggests that ultimately the economic stagnation of the ancient world was due to a peculiar equilibrium that centered around slavery.

One can think of this equilibrium as resting on a two legs. The first is the observation that the apparent modernity of the ancient economy — its manufacturing, trade, and commerce rested largely on slave labor. The expansion of trade and commerce in the Mediterranean after 200 BC both rested on, and drove, the expansion of slavery. Here Schiavone note that the ancient reliance on slaves as human automatons — machines with souls — removed or at least weakened, the incentive to develop machines for productive purposes.

The existence of slavery, however, was not the only reason for the neglect of productive innovation. There was also a specific cultural attitude that formed the second leg of the equilibrium:

“None of the great engineers and architects, none of the incomparable builders of bridges, roads, and aqueducts, none of the experts in the employment of the apparatus of war, and none of their customers, either in the public administration or in the large landowning families, understood that the most advantageous arena for the use and improvement of machines — devices that were either already in use or easily created by association, or that could be designed to meet existing needs — would have been farms and workshops”

The relevance of slavery colored ancient attitudes towards almost all forms of manual work or craftsmanship. The dominant cultural meme was as follows: since such work was usually done by the unfree, it must be lowly, dirty and demeaning:

“technology, cooperative production, the various kinds of manual labor that were different from the solitary exertion of the peasants on his land — could not but end up socially and intellectually abandoned to the lowliest members of the community, in direct contact with the exploitation of the slaves, for whom the necessity and demand increased out of all proportion . . . the labor of slaves was in symmetry with and concealed behind (so to speak) the freedom of the aristocratic thought, while this in turn was in symmetry with the flight from a mechanical and quantitative vision of nature”

Thus this attitude also manifest itself in the disdain the ancients had for practical mechanics:

Similar condescension was shown to small businessmen and to most trade (only truly largely-scale trade was free from this taint). The ancient world does not seem to have produced self-reproducing mercantile elites. Plausible this was in part because of the cultural dominance of the landowning aristocracy.

The phenomenon coined by Fernand Braudel, the “Betrayal of the Bourgeois,” was particularly powerful in ancient Rome. Great merchants flourished, but “in order to be truly valued, they eventually had to become rentiers, as Cicero affirmed without hesitation: ‘Nay, it even seems to deserve the highest respect, if those who are engaged in it [trade], satiated, or rather , I should say, satisfied with the fortunes they have made, make their way from port to a country estate, as they have often made it from the sea into port. But of all the occupations by which gain is secured, none is better than agriculture, none more delightful, none more becoming to a freeman’” (Schiavone, 2000, 103).

Such a cultural argument fits perfectly with Deirdre McCloskey’s claim in her recent trilogy that it was the adoption of bourgeois cultural norms and specifically bourgeois rhetoric that distinguished and caused the rise of north-western Europe after 1650 (here, here, and here).

Having taken note of the existence of such a powerful equilibrium — one resting on both material and cultural foundations, we can now return to Schiavone’s argument for why a modern capitalist economy did not develop in antiquity. He argues that given the prominence of slavery and the prestige of the landowning elite, economic expansion and growth of the kind that took place between c. 200 BCE to 150 CE was not self-reinforcing. It generated a growth efflorescence that lasted several centuries, but it ultimately undermined itself because it was based on an intensification of the slave economy that, in turn, reinforced the cultural supremacy of the landowning aristocracy and this cultural supremacy in turn eroded the incentives responsible for driving growth.

Compare and contrast with early modern Europe. The most advanced economies of early modern Europe, say England in 1700, were on the surface not too dissimilar to that of ancient Rome. But beneath the surface they contained the “coiled spring”, or at least the possibility, of sustained economic growth — growth driven by the emergence of innovation (a culture of improvement) and a commercial or even capitalist culture. According to Schiavone’s assessment, the Roman economy at least by 100 CE contained no such coiled spring.

We are not yet at the point when we can decisively assess this argument. But the importance of culture and the manner in which cultural and material factors interacted is clearly crucial. The argument that the slave economy and the easy assumptions of aristocratic superiority reinforced one another is a powerful one. For whatever historical reasons these cultural elements in the Roman economy were relatively undisturbed by the rise of merchants, traders and money grubbing equites. Likewise slavery did not undermine itself and give rise to wage labor.

Why this was the case can be left to future analysis. The full answer to the question why this was the case and a more careful consideration of the counterfactual “could it have been otherwise” are topics deserving their own blog post.

Did Inequality Fall During the Great Depression ?

Vincent Geloso Economics, History , , , , ,

Inequality

The graph above is taken from Piketty and Saez in their seminal 2003 article in the Quarterly Journal of Economics. It shows that inequality fell during the Great Depression. This is a contention that I have always been very skeptical of for many reasons and which has been – since 2012 – the reason why I view the IRS-data derived measure of inequality through a very skeptical lens (disclaimer: I think that it gives us an idea of inequality but I am not sure how accurate it is).

Here is why.

During the Great Depression, unemployment was never below 15% (see Romer here for a comparison prior to 1930 and this image derived from Timothy Hatton’s work). In some years, it was close to 25%. When such a large share of the population is earning near zero in terms of income, it is hard to imagine that inequality did not increase. Secondly, real wages were up during the Depression. Workers who still had a job were not worse off, they were better off. This means that you had a large share of the population who saw income reductions close to 100% and the remaining share saw actual increases in real wages. This would push up inequality no questions asked. This could be offset by a fall in the incomes from profits of the top income shares, but you would need a pretty big drop (which is what Piketty and Saez argue for).

There is some research that have tried to focus only on the Great Depression. The first was one rarely cited NBER paper by Horst Mendershausen from 1946 who found modest increases in inequality from 1929 to 1933. The data was largely centered on urban data, but this flaw works in favor of my skepticism as farm incomes (i.e. rural incomes) fell more during the depression than average incomes. There is also evidence, more recent, regarding other countries during the Great Depression. For example, Hungary saw an increase in inequality during the era from 1928 to 1941 with most of the increase in the early 1930s. A similar development was observed in Canada as well (slight increase based on the Veall dataset).

Had Piketty and Saez showed an increase in inequality during the Depression, I would have been more willing to accept their series with fewer questions and doubts. However, they do not discuss these points in great details and as such, we should be skeptical.

The Antebellum Puzzle, Anthropometric History and Quebec

Vincent Geloso Economics, History, Links , , , , , , ,

I recently gave an interview on Economics Detective Radio with Garrett Petersen to talk about my forthcoming article in Economics & Human Biology (with Vadim Kufenko and Alex Arsenault Morin). In the interview, I explain why anthropometric history is important to our understanding of living standards, their evolution and short-term trade-offs in economic history. The interview is below, but you should subscribe to Garrett’s podcast as he is well on his way to becoming a serious competitor to EconTalk with the bonus that he does lots of economic history.

Podcast link (download).

Can Median Voter Theorem explain political polarization?

Kevin Kallmes Economics, Liberty, Politics , , , , ,

When I began dipping my toes into game theory and rational choice theory, like many others, I learned about the Median Voter Theorem (MVT). This theory is essentially the Hotelling’s Law of voting, in which two competing politicians, on any given issue, will adopt views similar to the median on a spectrum of views of that issue, in order to maximize the number of votes they receive. Any movement toward either extreme, so the theory goes, would allow the opponent to gain the votes of centrists by moving in the same direction, but not as far, effectively gaining all voters on the other extreme AND the centrists. According to MVT, the most successful politicians should, if rational choice theory can be said to apply to elections, represent (if not hold) the views closest to those of the median voter, who should be relatively “centrist” even if extremist voters outnumber centrists.

This is, rather dramatically, not the case. History and current events offer a plethora of examples: a brief look at the makeup of the US government implies that centrist voices (and especially centrist voters) are outnumbered and drowned out. If MVT has any effect at all, why is increasing political polarization such a hot topic?

What are the possible explanations for this? Is MVT fundamentally wrong in its core idea, and is voting in fact not possible to model in rational choice theory? I do not think so, so here are several ideas, some old and one novel, about why the application of MVT does not lead to centrist politicians winning most elections in practice:

  • Voter preferences are polarized. If voter opinions are not only not normally distributed, but are in fact gathered at two poles with no centrist voters, MVT may actually function, but it would predict that centrists would lose a lot (because the median voter would be at one pole or the other). The idea that voters resemble a barbell graph more than a normal distribution may be very salient, because many issues are dominated by extreme views. However, the voting population is demonstrably more centrist on some issues, so this cannot fully explain the difference between reality and MVT.
  • Third parties spoil things. This hearkens back not only to Arrow’s Impossibility Theorem, but also to the influence of Ross Perot and Ralph Nader on presidential elections. Third party participation does not spoil MVT, because it still fundamentally follows the idea of rational choice theory about elections, but it complicates two-candidate models.
    • Further note: multi-party systems are vulnerable to extremists. The possibility of invasion by extreme views is higher in multi-party systems, because if multiple centrist parties compete for median voters, extreme groups gain power disproportionate to their constituency.
  • Primaries spoil things. This is an old idea in US politics: in primaries, you have to run to the extremes, and then in the general election, run to the center. The very logic behind this idea, and any empirical evidence of it, proves the viability of MVT, but it does introduce complications to any model of it that fails to account for the two different elections many politicians must win. Also, we must remember to factor in the fact that politicians have a negative utility in abandoning past positions (especially recent decisions) of seeming inauthentic or losing their base.
  • The Electoral College spoils things. Outside of US presidential elections, “swing states” may not have the same power, but in the US, candidates would be “rational” to pursue votes in swing states much more assiduously than they do in states that are nearly sure bets. This is only narrowly applicable, but the campaign focus on swing states indicates that candidates do at least campaign rationally (see academic studies or news reports), in that they seek votes strategically and not indiscriminately.
  • Voter turnout skews MVT. In elections without mandatory voting, those who are less committed to the issues at stake—who are more likely to be centrists—tend to vote less than those who care greatly one way or another. Therefore, voting may be more about mobilizing one’s base than appealing to centrists. (Note: this is not an endorsement of mandatory voting, which can allow more zero-sum games in politics and the enforcement of which seems worse than the problem).
  • People do not vote based on rational weighing of stances. This would be a troubling conclusion, and suggests that people may align with parties and candidates based on motives other than matching candidate views to their own. While this is certainly true to some extent, MVT can still predict the overall “centrism” of politicians. Also, just because many people have an irrational method of weighing stances does not mean that the aggregate result does not mean that the utility of favoring centrist positions would not be positive.
  • Voting is multidimensional. Since single candidates represent dozens if not hundreds of salient issues in a single election, voters are forced to compromise on some issues in order to win others. This multidimensionality is not a counterargument to MVT, but an extreme complication, because “median” politicians could lose based on voter preference not within an issue, but between issues. That is, a politician can gain voters by recognizing weighting each voter’s stance by how likely that issue is to change their vote. This can be observed in the fact that referenda tend to follow MVT in a more straightforward fashion than elections. It is also a possible explanation for the rise of certain coalitions: no matter if constituents have deep disagreements on many issues, they end up aligned behind the same candidate based on inter-issue preferences. This may have been a major motivation for federalization and separation of power: different decisions are constrained to certain elections, allowing voters to communicate on each individual issue more clearly because of the reduced multidimensionality. The game theory on multidimensional voting is well developed, but still has some complications that have not been specifically argued:
    • Complication: Special interest compared to general interest. Multidimensional voting allows politicians to promise concentrated special interest to voters on certain issues in order to gain votes rather than appeal to general interest across many issues. The implications of this have been shown in game form, especially in special interest influence on enforcement. In this, public choice theory proves the idea that governments tend to favor dispersed costs and concentrated gains.
    • Complication: Singe issue voters. This is a subset of the above, or at least related to it. In multidimensional elections, voters obviously have to weigh issue preferencing. However, if a voter decides that they would choose a candidate so long as he agrees with the voter on a single issue, then on that issue, the single-issue voter has a hugely disproportionate influence on the candidate’s opinion on that issue. The reason: if the candidate runs to the center on that single issue, he risks his opponent capturing the vote of all single-issue voters on that side by running slightly more to the extreme. The Nash Equilibrium of such a situation would depend on how many single-issue voters there are at either extreme (I assume here that single-issue voters are not centrists, based on examples shown below, but I am open to argument) and how much of the non-single-issue constituency is ceded by focusing on single-issue voters, but it is distinctly possible that issue preferencing, especially the power of the ultimatum implied in single-issue voting, makes it rational for politicians to run to the extremes. Interesting examples of this phenomenon include background checks for guns, defense spending, and possibly marijuana legalization. (Please note that this does not constitute an endorsement of these ideas—whether the majority is correct is a different question from whether the majority idea is enacted by politicians).
      • The single-issue voter idea continues to fascinate me. Most of all, it fascinates me how little (apart from some basic preferencing models in the literature) I can find that either theorizes or empirically examines the specific influence of single-issue voters and voter preferencing. I hope it is out there, and I just can’t find it (so send it to me if you have found one!). But if not, is anyone out there a public choice theorist who wants to help me figure this out?

Thanks for sticking with a long read, and please give me feedback if you have any examples of this phenomenon or another angle on MVT!

Aggregate measures of well-being, England 1781-1850

Vincent Geloso Economics , , , , , , , ,

I went in the field of economic history after I discovered how much it was to properly measure living standards. The issue that always interested me was how to “capture” the multidimensional nature of living standards. After all, what weight should we give to an extra year of life relative to the quality of that extra year (see all my stuff on Cuba)?

However, I never tried to create “a composite” measure of living standards. I thought that it was necessary, first, to get the measurements right. However, I had been aware of the work of Leandro Prados de la Escosura who has been doing considerable work on this in order to create composite measures (Leandro also influenced me on my Cuba reasoning – see this article).

A year ago, I discovered the work of Daniel Gallardo Albarrán from the University of Groningen at the meeting of the Economic History Society (EHS). Daniel’s work is particularly interesting because he is trying to generate a composite measure of well-being at one of the most important moment in history: the start of the British industrial revolution.

Because of its importance and some pieces of contradicting evidence (inequality, stature, amplitude of real wage increases, amplitude of income increases, urban pollution leading to increased mortality risks etc), the period has been begging for some form of composite measure to come along (at least a serious attempt at generating it). Drawing on some pretty straightforward microeconomic theory (the Beckerian in me likes this), Daniel generates this rich graph (see the paper here).

Daniel

The idea is very neat and I hope it will inspire some economic historians to attempt an expansion upon Daniel’s work. I have already drawn outlines for my own stuff on Canada since I study an era when (from the early 1800s to the mid-1850s) real wages and incomes seem to be going up but stature and mortality are either deteriorating or remaining stable while inequality is clearly increasing.