On Tax Resistance, Censuses and the Cliometrician’s Craft

In the process of finalizing another research article (under revise and resubmit for Agricultural History), I found a small case of tax resistance in Canada East (modern day Quebec) in 1851  that is interesting.

The district of Grenville, northwest of Montreal, was an ethnically mixed district (25% French, the rest were English-Canadians) operating under the British freehold tenure system (as opposed to most of the rest of the province that operated under French seigneurial tenure). During the 1851 census, the enumerator complained that the population of roughly 2,000 inhabitants refused to report statistical information.

Basically, the enumerator pointed out that the majority supposed the information they were giving was “the precursor of a general tax for schools which they are strongly opposed to”.

tax-resistance-in-the-censuses

I find this to be interesting because it is a nice little case of how hard to master the craft of an economic historian. As a cliometrician, my task is to find the best data possible to answer historical questions with strong economic theory (while enriching theory with historical evidence). The data for that area would be biased downwards as peasants would understate their incomes to avoid being heavily taxed. Any statistical test to assert the applicability of a theory to historical questions of Canada (or Quebec) would be altered by this reaction on the part of peasants.

True, for some broad questions (like measuring GDP), this would not be too dramatic an issue. However, for more specific questions like “what was the role of tenure systems in explaining Quebec’s relative poverty”, the issue would be more problematic.

How much do the little things matter, right?

Ten best papers/books in economic history of the last decades (part 2)

Yesterday, I published part 1 of what I deemed were the best papers and books in the field of economic history of the last few decades. I posted only the first five and I am now posting the next five.

  • Carlos, Ann M., and Frank D. Lewis. Commerce by a frozen sea: Native Americans and the European fur trade. University of Pennsylvania Press, 2011.

This book is not frequently cited (only 30 cites according to Google Scholar), but it has numerous gems for scholars to include in their future work. The reason for this is that Carlos and Lewis have pushed the frontier of economic history into the history of Natives in the New World. This issue of Natives in North America is one of those topics that irritates me to no end as an economic historian. A large share of the debates on economic growth in the New World have been centered on the idea that there was either some modest growth (less than 0.5% per year in per capita income) or no growth at all (which is still a strong testimonial given that the population exploded). But all that attention centres on comparing “whites” (and slaves) in the New World with everyone in the Old World. In the first decades of the colonies of Canada and the United States, aboriginals clearly outnumbered the new settlers (in Canada, the native population around 1736 was estimated at roughly 20,000 which was slightly less than the population of Quebec – the largest colony). Excluding aboriginals, who comprised such a large share of the population, at the starting point will indubitably affect the path of growth measured thereafter. My “gut feeling” is that anyone who includes natives in GDP accounting will lower the starting point dramatically. That will increase the rate of long-term growth. Additionally, the output that aboriginals provided was non-negligible and probably grew more rapidly than their population (the rising volume of furs exported was much greater than their population growth). This is why Carlos and Lewis’s work is so interesting: because it is essentially the first to assemble economic continuous time series regarding trade between trappers and traders, the beaver population, property rights and living standards of natives. From their work, all that is needed is a few key defensible assumptions in order to include natives inside estimates of living standards. From there, I would not be surprised that most estimates of growth in the North American colonies would be significantly altered and the income levels relative to Europe would also be altered.

  • Floud, Roderick, Robert W. Fogel, Bernard Harris, and Sok Chul Hong. The changing body: Health, nutrition, and human development in the western world since 1700. Cambridge University Press, 2011.

This book is in the list because it is a broad overview of the anthropometric history that has arisen since the 1980s as a result of the work of Robert Fogel. I put this book in the list because the use of anthropometric data allows us to study the multiple facets of living standards. For long, I have been annoyed at the idea of this unidimensional concept of “living standards” often portrayed in the general public (which I am willing to forgive) and the economics profession (which is unforgivable). In life, everything is a trade-off.  A peasant who left the countryside in the 19th century to get higher wages in a city manufacture estimated that the disamenities of the cities were not sufficient to offset wage gains (see notably Jeffrey Williamson’s Coping with City Growth during the British Industrial Revolution on this). For example, cities tended to have higher food prices than rural areas (the advantage of cities was that there were services no one in the countryside could obtain).  Cities were also more prone to epidemics and pollution implied health costs. Taken together, these factors could show up in the biological standard of living, notably on heights. This is known as the “Antebellum puzzle” where the mean heights of individuals in America (and other countries like Canada) fell while there was real income and wage growth. The “Antebellum puzzle” that was unveiled by the work of Fogel and those who followed in his wake represents the image that living standards are not unidimensional. Human development is about more than incomes. Human development is about agency and the ability to choose a path for a better and more satisfying life. However, with agency comes opportunity costs. A choice implies that another path was renounced. In the measurement of living standards, we should never forget the path that was abandoned. Peasants abandoned lower rates of infant mortality, lower overall rates of mortality, the lower levels of crowding and pollution, the lower food prices and the lower crime rates of the countryside in favor of the greater diversity of goods and services, the higher wages, the thicker job market, the less physically demanding jobs and the more secure source of income (although precarious, this was better than the volatile outcomes in farming). This was their trade-off and this is what the anthropometric literature has allowed us to glean. For this alone, this is probably the greatest contribution in the field of economic history of the last decades.

  • De Vries, Jan. The industrious revolution: consumer behavior and the household economy, 1650 to the present. Cambridge University Press, 2008.

Was there an industrious revolution before the industrial revolution? More precisely, did people increase their labour supply during the 17th and 18th centuries which lead to output growth? In proposing this question, de Vries provided a theoretical bridge of major significance between the observations of wage behavior and incomes in Europe during the modern era. For example, while wages seemed to be stagnating, incomes seemed to be increasing (in the case of England as Broadberry et al. indicated). The only explanation is that workers increased their labor supply? Why would they do that? What happened that caused them to increase the amount of labor they were willing to supply? The arrival of new goods (sugar, tobacco etc.) caused them to change their willingness to work. This is a strong illustration of how preferences can change more or less rapidly (when new opportunities are unveiled). In fact, Mark Koyama (who blogs here) managed to insert this narrative inside a very simple restatement of Gary Becker’s model of time use. Either you have leisure that is cheap but time-consuming (think of leisure in the late middle ages) or leisure that is more expensive but does not consume too much time (think the consumption of tea, sugar and tobacco). Imagine you only have the time-expensive leisure which you value at level X. Now, imagine that the sugar and tea arrive and, although you pay a higher price, it provides more utility than the level and it takes less time. In such a context, you will likely change your preferences between leisure and work. I am grossly oversimplifying Mark’s point here, but the idea is that the industrious revolution argument advanced by de Vries can easily fit inside a simple neoclassical outlook. On top of solving many puzzles, it also shows that one does not need to engage in some fanciful flight of Marxian theory (I prefer Marxian to Marxist because it is one typo away from being Martian which would adequately summarize my view of Marxism as a social theory). If it fits inside the simpler model, then you don’t need the rest.  De Vries does just that.

  • Anderson, Terry Lee, and Peter Jensen Hill. The not so wild, wild west: Property rights on the frontier. Stanford University Press, 2004.

Governance is not the same as government (in fact, they can be mutually exclusive). In recent years, I have been heavily influenced by Elinor Ostrom’s work on how communities govern the commons in very subtle (but elaborate) ways without the use of coercion. These institutional arrangements are hard to simplify into one variable for a regression, but they are theoretically simple to explain: people respond to incentives. Ostrom’s entire work shows that people on the front line of problems generally have the best incentives to get the right solution because they have skin in the game. What her work shows is that individuals govern themselves (see also Mike Munger’s Choosing in Groups) by generating micro-institutions that allow exchanges to continue. Terry Anderson and Peter Hill provide the best illustration in economic history in that regard by studying the frontier of the American west. Settlers moved to the American West faster than the reach of government and the frontier was thus an area more or less void of government action. So, how did people police themselves? Was it the wild west? No, it was not. Private security firms provided most of the policing, mining clubs established property rights without the need for government, farmers established constitutions in voluntary associations that they formed and many “public goods” were provided privately. The point of Anderson and Hill is that governance did exist on the frontier in a way that demonstrates the ability of voluntary actions (as opposed to coercive government actions) to generate sustainable and efficient solutions. The book has a rich theoretical framework on top of a substantial body of evidence regarding the emergence of institutions. Any good economic historian should own and read this book.

  • Vedder, Richard K., and Lowell E. Gallaway. Out of work: unemployment and government in twentieth-century America. NYU Press, 1997.

The last book on the list is an underground classic for me. Richard Vedder and Lowell Gallaway are very good economic historians. Most of their output was produced from the 1960s to the 1980s. However, as the 1990s came, they moved towards the Austrian school of Economics. With them, they brought a strong econometric knowledge – a rarity among Austrian scholars. They attempted one of the first (well-regarded) econometric studies that relied on Austrian theory of the labor-market (a mixture of New Classical Theory with Austrian Theory). Their goal was to explain variations in unemployment in the United States by variations in “adjusted real wages” (i.e. unit labor costs) all else being equal. At the time of the publication, they used very advanced econometric techniques. The book was well received and even caught the attention of Brad DeLong who disagreed with it and debated Vedder and Gallaway in the pages of Critical Review. Although there are pieces that I disagree with, the book has mostly withstood the test of time. The core insights of Out of Work regarding the Great Depression (and many of its horrible policies like the National Industrial Recovery Act) have been conserved by many like Scott Sumner in his Midas Paradox and they feature prominently in the works of scholars like Lee Ohanian, Harold Cole, Albrecht Ristchl and others. In the foreword to the book, they mention that D.N. McCloskey (then the editor of the Journal of Economic History) had pushed hard for them to publish their work regarding the 1920s and 1930s. The insights regarding the “Great Depression of 1946” (a pun to ridicule the idea that the postwar reduction in government expenditures led to a massive reduction in incomes) have been generally conserved by Robert Higgs in his Journal of Economic History article I mentioned yesterday (and in this article as well) and even by Alexander Field in his Great Leap Forward However, Out of Work remains an underground classic that is filled with substantial pieces of information and data that remains unused. There are numerous unexploited insights (some of which Vedder and Gallaway have followed on) as well. The book should be mandatory reading for any economic historian.

Ten best papers/books in economic history of the last decades (part 1)

In my post on French economic history last week,  I claimed that Robert Allen’s 2001 paper in Explorations in Economic History was one of the ten most important papers of the last twenty-five years. In reaction, economic historian Benjamin Guilbert asked me “what are the other nine”?

As I started thinking about the best articles, I realized that such a list is highly subjective to my field of research (historical demography, industrial revolution, great divergence debate, colonial institutions, pre-industrial Canada, living standards measurement) or some of my personal interests (slavery and the great depression). So, I will propose a list of ten papers/works that need to be read (in my opinion) by anyone interested in economic history. I will divide this post in two parts, one will be published today, the other will come out tomorrow.

  • Higgs, Robert. “Wartime Prosperity? A Reassessment of the US Economy in the 1940s.” Journal of Economic History 52, no. 01 (1992): 41-60.

Higgs’s article (since republished and expanded in a book and in follow-ups like this Independent Review article) is not only an important reconsideration of the issue of World War II as a causal factor in ending the Great Depression, it is also an efficient primer into national accounting. In essence, Higgs argues that the war never boosted the economy. Like Vedder and Gallaway, he argues that deflators are unreliable as a result of price controls. However, he extends that argument to the issue of measuring GDP. In wartime, ressources are directed, not allocated by exchange. Since GDP is a measure of value added in exchanges, the wartime direction of resources does not tell us anything about real production. It tells us only something about the government values. As a result, Higgs follows the propositions of Simon Kuznets to measure the “peacetime concept” of GDP and finds that the prosperity is overblown. There have been a few scholars who expanded on Higgs (notably here), but the issues underlined by Higgs could very well apply to many other topics.  Every year, I read this paper at least once. Each time, I discover a pearl that allows me to expand my research on other topics.

  • Allen, Robert C. The British industrial revolution in global perspective. Cambridge: Cambridge University Press, 2009.

I know I said that Allen’s article in Explorations was one of the best, but Allen produces a lot of fascinating stuff. All of it is generally a different component of a “macro” history. That’s why I recommend going to the book (and then go to the article depending on what you need). The three things that influenced me considerably in my own work were a) the use of welfare ratios, b) the measurement of agricultural productivity and c) the HWE argument. I have spent some time on items A and C (here and here). However, B) is an important topic. Allen measured agricultural productivity in England using population levels, prices and wages to proxy consumption in a demand model and extract output from there (see his 2000 EREH paper here). As a result, Allen managed to compare agricultural productivity over time and space. This was a great innovation and it is a tool that I am looking to important for other countries – notably Canada and the US. His model gives us the long-term evolution of productivity with some frequency. In combination with a conjonctural estimate of growth and incomes or an output-based model, this would allow the reconstruction (if the series match) of a more-or-less high frequency dataset of GDP (from the perspective of an economic historian, annual GDP going back into the 17th century is high-frequency). Anyone interested in doing the “dirty work” of collecting data, this is the way to go.

  • Broadberry, Stephen, Bruce MS Campbell, Alexander Klein, Mark Overton, and Bas Van Leeuwen. British economic growth, 1270–1870. Cambridge University Press, 2015.

On this one, I am pretty biased. This is because Broadberry (one of the authors) was my dissertation supervisor (and a pretty great one to boot). Nonetheless, Broadberry et al. work greatly influenced my Cornucopian outlook on the world. Early in my intellectual development, I was introduced to Julian Simon’s work (see the best of his work here and here and Ester Boserup whose argument is similar but more complex) on environmental trends. While Simon has generally been depicted as arguing against declining environmental indicators, his viewpoint was much broader. In essence, his argument was the counter-argument to the Malthusian worldview. Basically, Malthusian pressures caused by large populations which push us further down the curve of marginally declining returns have their countereffects. Indeed, more people means more ideas and ideas are non-rival inputs (i.e. teaching you to fish won’t make me unlearn how to fish). In essence, rising populations are no problems (under given conditions) since they can generate a Schumpeterian countereffect (more ideas) and a Smithian countereffect (size of market offsets). In their work, Broadberry et al. basically confirm a view cemented over the last few decades that England had escaped the Malthusian trap before the Industrial Revolution (see Crafts and Mills here and Nicolinni here). They did that by recreating the GDP of Britain from 1270 to 1870. They found that GDP per capita increased while population increased steadily which is a strong piece of evidence. In their book, Broadberry et al. actually discuss this implication and they formulate the Smithian countereffect as a strong force that did offset the Malthusian pressures. Broadberry and al. should stand in everyone’s library as the best guidebook in recreating long-term historical series in order to answer the “big questions” (they also contribute to the Industrious Revolution argument among many other things).

  • Chilosi, David, Tommy E. Murphy, Roman Studer, and A. Coşkun Tunçer. “Europe’s many integrations: Geography and grain markets, 1620–1913.” Explorations in Economic History 50, no. 1 (2013): 46-68.

Although it isn’t tremendously cited yet, this is one of the best article I have read (and which is also recounted in Roman Studer’s Great Divergence Reconsidered). This is because the paper is one of the first to care about market integration on a “local” scale. Most studies of market integration consider long-distance trade for grains and they generally start with the late 19th century which is known as the first wave of globalisation. However, from an economic historian perspective, this is basically studying things once the ball had already started rolling.  Market integration is particularly interesting because it is related to demographic outcomes. Isolated markets are vulnerable to supply shocks. However, with trade it is possible to minimize shocks by “pooling” resources. If village A has a crop failure, prices will rise inciting village B where there was an abundant crop to sell wheat to village A. In the end, prices in village A will drop (causing fewer deaths from starvation) and increase in village B. This means that prices move in a smoother fashion because there are no localized shocks (see the work of my friend Pierre Desrochers who argues that small local markets were associated for most of history with high mortality risks). In their work, Chilosi et al. decide to consider the integration of markets between villages A and B rather than between country A and B. Basically, what they wonder is when geographically close areas became more integrated (i.e. when did Paris and Bordeaux become part of the same national market?). They found that most of Europe tended to be a series of small regions that were more or less disconnected from one another. However, over time, these regions started to expand and integrate so that prices started moving more harmoniously. This is an important development that took place well before the late 19th century. In a way, the ball of market integration started rolling in the 17th century. Put differently, before globalization, there was regionalization. The next step to expand on that paper would be to find demographic data for one of the areas documented by Chilosi et al. and see if increased integration caused declines in mortality as markets started operating more harmoniously.

  • Olmstead, Alan L., and Paul W. Rhode. Creating Abundance. Cambridge Books (2008).

This book has influenced me tremendously. Olmstead and Rhode contribute to many literatures simultaneously. First of all, they show that most of the increased in cotton productivity in the United States during the antebellum era came from crop improvements. Secondly, they show that these improvements occured with very lax patents systems. Thirdly, they show how crucial biological innovations were in determining agricultural productivity in the United States (see their paper on wheat here and their paper on induced innovation). On top of being simply a fascinating way of doing agricultural history (by the way, most economic history before 1900 will generally tend to be closely related to agricultural history), it forces many other scholars to reflect on their own work. For example, the rising cotton productivity explains the rising output of slavery in the antebellum south. Thus, there is no need to rely on some on the fanciful claims that slaveowners became more efficient at whipping cotton out of slaves (*cough* Ed Baptist *cough*). They also show that Boldrine and Levine are broadly correct in stating that most types of technological innovations do not require extreme patents like those we know today (and which are designed to restrict competition rather than promote competition). In fact, their work on biological innovations have pretty much started a small revolution in that regard (see one interesting example here in French). Finally, they also invalidated (convincingly in my opinion) the induced innovation model that generally argued that technologies are developped merely to ease scarcities of factors. While theoretically plausible, this simplified model did not fit many features of American economic history. Their story of biological innovations is an efficient remplacement.

On How Poor France Was in the 18th Century?

I have recently completed a working paper which has now been submitted (thank you a great many scholars who provided comments notably Judy Stephenson and Mark Koyama). That paper basically went back modestly on one datapoint in the work of Robert Allen which was published in 2001 in Explorations in Economic History. 

Probably one of the greatest ten papers in the field of economic history for the last twenty-five years, Allen’s article has had a tremendous influence. It introduced a new method of comparing real wages at a time when very few goods were traded internationally and most prices were determined at the local level. In using what we now call “welfare ratios” (which are akin to poverty lines), Allen managed to compare many countries before the industrial revolution.

My entire research agenda has been to improve on this stupendous work and to increase the constellation of observations as part of an “uncoordinated” (many scholars are working on this separately) effort to map living standards prior to the mid 19th century. The main part of my agenda is to add Canada and devote more attention to the important issue of relative prices in comparing old world (high labor to land ratios) and new world (high land to labor ratios) economies. In the process of comparing parts of the world, I had to re-examine some data for some established countries. One of my reconsiderations was for Strasbourg in France where I found that Allen might have misclassified wages of skilled workers which included in-kind payments as unskilled workers receiving full compensation in money wages.

When I enacted corrections to the money wage rate, I found that the Alsace region where Strasbourg is located had living standards more or less in line with those observed in Paris (rather than living standards at less than half the level of Paris). If you’re interested, the note is available here.

Note: For those who are interested, I really recommend reading this short article in Cliometrica by Sharp and Weisdorf who also discuss comparisons between France and England (and how it may relate to topics like the French Revolution).

Stock markets and economic growth: from Smoot-Hawley to Donald Trump

In a recent article for the Freeman, Steve Horwitz (who has the great misfortune of being my co-author) argued that stock markets tell us very little about trends in economic growth. Stock markets tell us a lot about profits, but profits of firms on the stock market may be higher because of cronyism. Basically, that is Steve’s argument. He applies this argument in order to respond to those who say that a soaring stock market is the proof that Donald Trump is “good” for the economy.

I know Steve’s article was published roughly a month ago, so I am a little late. But I tend to believe it is never too late to talk about economic history. And basically, its worth pointing out that there are economic history examples to show Steve’s point. In fact, its the best example: Smoot-Hawley.

Bernard Beaudreau from Laval University has advanced, for some years, an underconsumptionist view of the Great Depression (I consider it a “dead theory”). While I am highly unconvinced by this theory (in both its original and current “post-keynesian” reformulation), Beaudreau tries hard to resurrect the theory (see here and here) and merits to be discussed. In the process, Beaudreau attempted to reestimated the effects of of Smoot-Hawley on the stock market with an events study. Unconvinced about the rest of his research, this is a clear instance of sorting the wheat from the chaff. In this case, the wheat is his work (see here for his article in Essays in Economic and Business History) on Smoot-Hawley.

Basically, Beaudreau found that good news regarding the probability of the adoption of the tariff bill actually pushed the stock market to appreciate. Thus, Smoot-Hawley -which had so many negative macroeconomic ramifications* – actually boosted the stock market. Firms that gained from the rising tariffs actually saw greater profits for themselves and thus the firms on the stock market would have been excited at the prospect of restricting their competitors. If that is true, could it be that Donald Trump is the modern equivalent (for the stock market) of Smoot-Hawley.

*NDLR: I believe that Allan Meltzer was right in saying that the Smoot-Hawley might have had monetary ramifications that contributed to the money supply collapse. It was a real shock that precipitated the collapse of weak banks which then caused a nominal shock and then the sh*t hit the proverbial fan.

On 19th Century Tariffs & Growth

A few days ago, Pseudoerasmus published a blog piece on Bairoch’s argument that in the 19th century, the countries that had high tariffs also had fast growth.  It is a good piece that summarizes the litterature very well. However, there are some points that Pseudoerasmus eschews that are crucial to assessing the proper role of tariffs on growth. Most of these issues are related to data quality, but one may be the result of poor specification bias. For most of my comments, I will concentrate on Canada. This is because I know Canada best and that it features prominently in the literature for the 19th century as a case where protection did lead to growth. I am unconvinced for many reasons which will be seen below.

Data Quality

Here I will refrain my comments to the Canadian data which I know best. Of all the countries with available income data for the late 19th century, Canada is one of those with the richest data (alongside the UK, US and Australia). This is largely thanks to the work of M.C. Urquhart who recreated the Canadian GNP series fom 1870 to 1926 in collaborative effort with scholars like Marvin McInnis, Frank Lewis, Marion Steele and others.

However, even that data has flaws. For example, me and Michael Hinton have recomputed the GDP deflator to account for the fact that its consumption prices component did not include clothing. Since clothing prices behaved differently than the other prices from 1870 to 1885, this changes the level and trend of Canadian incomes per capita (this paper will be completed this winter, Michael is putting the finishing touch and its his baby).  However, like Morris Altman, our corrections indicate a faster rate of growth for Canada from 1870 to 1913, but in a different manner. For example, there is more growth than believed in the 1870-1879 period (before the introduction of the National Policy which increased protection) and more growth in the 1890-1913 period (the period of the wheat boom and of easing of trade restrictions).

Moreover, the work of Marrilyn Gerriets, Alex Chernoff, Kris Inwood and Jim Irwin (here, here, here, here) that we have a poor image of output in the Atlantic region – the region that would have been adversely affected by protectionism. Basically, the belief is a proper accounting of incomes in the Atlantic provinces would show lower levels and trends that would – at the national aggregated level – alter the pattern of growth.

I also believe that, for Quebec, there are metrological issues in the reporting of agricultural output. The French-Canadians tended to report volume units in manners poorly understood by enumerators but that these units were larger than the Non-French units. However, as time passed, census enumerators caught on and got the measures and corrections right. However, that means that agricultural output from French-Canadians was higher than reported in the earlier census but that it was more accurate in the later censuses. This error will lead to estimating more growth than what actually took place. (I have a paper on this issue that was given a revise and resubmit from Agricultural History). 

Take all of these measurements issue and you have enough doubt in the data underlying the methods that one should feel the need to be careful. In fact, if the sum of these (overall) minor flaws is sufficient to warrant caution, what does it say about Italian, Spanish, Portugese, French, Belgian, Irish or German GDP ( I am not saying they are bad, I am saying that I find Canada’s series to be better in relative terms).

How to measure protection?

The second issue is how to measure protection. Clemens and Williamson offered a measure of import duties revenue over imports volume. That is a shortcut that can be used when it is hard to measure effective protection. But, it may be a dangerous shortcut depending on the structure of protection.

Imagine that I set an import duty so high as to eliminate all entry of the good taxed (like Canada’s 300% import tax on butter today). At that level, there is zero revenue from butter import and zero imports of butter. Thus, the ratio of protection is … zero. But in reality, its a very restrictive regime that is not being measured.

More recent estimates for Canada produced by Ian Keay and Eugene Beaulieu (in separate papers, but Keay’s paper was a conference paper) attempted to measure more accurate indicators of protection and the burden imposed on Canadians. Beaulieu and his co-author found that using a better measure, Canada’s trade policy was 11% more restrictive than believed. Moreover, they found that the welfare loss kept increasing from 1870 to 1890 – reaching a figure equal to roughly 1.5% of GDP (a non-negligible social cost).

It ought to be noted though that alongside Lewis and Harris, Keay has found that the infant industry argument seems to apply to Canada (I am not convinced, notably for the reasons above regarding GDP measurements). However, that was in the case of Canada only and it could have been a simple outlier. Would the argument hold if better trade restriction measures were gathered for all other countries, thus making Canada into a weird exception?

James Buchanan to the rescue

My last argument is about political economy. Was the institutional arrangement of protection a way to curtail government growth? Protection is both a method for helping national industries and for raising revenues. However, the government cannot overprotect at the risk of loosing revenues. It must protect just enough to allow goods to continue entering to earn revenues from imports.  This tension is crucial especially since most 19th century countries did not have uniform general tariffs (like a flat 5% import duty) which would have very wide bases. The duties tended to concern a few goods very heavily relative to other goods. This means very narrow tax bases.

Standard public finance theory mandates wide tax bases with a focus on inelastic sources. However, someone with a public choice perspective (like James Buchanan) will argue that this offers the possibility for the government to grow. Basically, a public choice theorist will argue that the standard public finance viewpoint is that the sheep is tame. Self-interested politicians will exploit this tameness to be elected and this might imply growing government. However, with a narrow and elastic tax base, politicians are heavily constrained. In such a case, governments cannot grow as much.

The protection of the 19th century – identified by many as a source of growth – may thus simply be the symptom of an institutionnal arrangement that was meant to keep governments small. This may have stimulated growth by keeping other sectors of the economy more or less free of government meddling. So, maybe protection was the offspring of the least flawed institutional arrangement that could be adopted given the political economy of the time.

This last argument is the one that I find the most convincing in rebuttal to the Bairoch argument. It means that we are suffering from a poor specification bias: we have identified a symptom of something else as the cause of growth.

On getting the data right : price disparities before 1914

I am a weird bird. I get excited at weird things. I get excited at reading economics and history papers (and books). I get particularly excited when I read papers and books that “get the data right”. This is because I believe that most theoretical debates in economics stem from poor data forcing us to develop grandiose theories or very advanced models to explain simple things. One example of that is the work of Joshua Hendrickson who argued that monetary aggregates (M1, M2 etc.) are not necessarily perfect indicators of money. However, these aggregates were used in statistical tests and generated strange results inconsistent with theory. This issue has been the cause of many debates. Josh stepped in and said that we just had a variable that was not created to measure what the theory said. Using broader measures of money, he found the results consistent with theory. The debates were driven by poor data (as I think is the case in issues over fiscal multipliers, crowding-out and business cycles).

Thus, I am always excited to see data work that “get things right”. One recent example that adds to cases like that of Hendrickson is Peter Lindert’s working paper at the National Bureau of Economic Researcher. Now, before I proceed, I must state that I am very partial to Lindert as he has been a big supporter of my own research and has volunteered important quantities of his time to helping me move forward. Thus, I have a favorable bias towards Lindert (and his partner in crime, Jeffrey Williamson).  Nonetheless, his working paper requires a discussion because it “gets prices right”.

The essence of his new working paper is that our GDP per capita estimates prior to 1914 may overestimate divergence between countries over time.

Generally, when we measure GDP, we try to derive “volume indexes” that measure quantities produced at a fixed vector of prices. For example, when I measured Canadian economic growth from 1688 to 1790 (I am submitting it in a few weeks), I took the quantities of grain reported in censuses and weighed them by prices for a fixed year. This is a good approach for measuring productivity (changes in quantities). Nonetheless, there are issues when you try to move this method over a very long period in time. The prices may become unrepresentative.  So you get time-related distortions. Add to this that all the time-related distortions may be different over space. After all, should we believe the relative price of wheat to oats in 1910 was the same in Canada as it was in Russia?  Variations in relative prices over space will affect this issue. Basically, you juxtapose these two types of distortions when trying to measure GDP per capita over centuries and you may end up so far in the left field that you’re in fact in the right field.

In his working paper, Lindert tried to adjust for those problems by moving to prices that were more representative. The approach he used is basically the one used by Robert Allen in his work on the Great Divergence. You create a bundle of goods that capture the cost of living in different regions – a basic bundle of goods. This generates purchasing power parities. From there, he recomputed incomes per capita with these measures prior to 1914. The results are striking: there is much more divergence between Europe and Asia that commonly proposed and the United States are much richer than otherwise believed (and were more richer very early on – as far back as the colonial era).

Now, why does this matter?

Well, consider the debate on convergence. Many scholars have been unimpressed by the level of income convergence across countries (at least until the 1980s). However, Lindert’s estimates suggest that the starting point was well below what we think it was. In a way, what this is telling us is that many puzzles regarding the “catching-up” of poor countries may be simply related to poor data. Imagine, for a second, that we could redo what Lindert did with many more countries at a higher time frequency. What would this tell us? Imagine also that this new data would confirm Lindert’s point, what would that entail for those entangled in debates over development?

Basically, what I am saying is this: most of our debates often stem from poor data. If a simple (and theoretically sound) correction can eliminate the puzzles, maybe our task as economists should be to stop bickering over advanced theory and make sure the data is actually geared towards testing our theories!