Is Dominic Cummings a hypocrite, or does the EU’s Common Agricultural Policy just suck?

Tedandralph

On Saturday, The Observer revealed that Prime Minister Boris Johnson’s recently appointed chief of staff received around £235,000 of EU farm subsidies over the course of two decades in relation that his family owns. Dominic Cummings is often portrayed as the mastermind behind the successful referendum campaign to Leave the European Union. So he is currently enemy no.1 among remain-supporters.

I am unconvinced this latest line of attack plays in Remainers’ favor (I was a marginal Remain voter in the referendum and still hold out some hope for an eventual EEA/EFTA arrangement). Instead, this story serves as a reminder of probably the worst feature of the current EU: the Common Agricultural Policy.

The CAP spends more than a third of the total EU budget (for a population of half a billion people) on agricultural policies that support around 22 million people, most of them neither poor nor disadvantaged as Cummings himself illustrates. Food is chiefly a private good and both the interests of consumers, producers and the environment (at least in the long-term, as suggested by the example of New Zealand) are best served through an unsubsidized market. But the CAP, developed on faulty dirigiste economic doctrines, has artificially raised food prices throughout the European Union, led to massive over-production of some food commodities, and denied farmers in the developing world access to European markets (the US, of course, has its equivalent system of agricultural protectionism).

These economic distortions make an appearance in my new paper with Charles Delmotte, ‘Cost and Choice in the Commons: Ostrom and the Case of British Flood Management’. In the final section, we discuss the role that farming subsidies have historically played in encouraging inappropriately aggressive floodplain drainage strategies and uneconomic use of marginal farming land that might well be better left to nature:

British farmers currently receive substantial subsidies through the European Union’s Common Agricultural Policy. This means that both land-use decisions and farm incomes are de-coupled from underlying farm productivity. Without the ordinarily presumed interest in maintaining intrinsic profitability, farmers may fail to contribute effectively to flood prevention or other environmental goals that impacts their output unless specifically incentivized by subsidy rules. If the farms were operating unsubsidized, the costs of flooding would figure more plainly in economic calculations when deciding where it is efficient to farm in a floodplain and what contributions to make to common flood defense. Indeed, European governments are currently in the perverse position of subsidizing relatively unproductive agriculture with one policy, while attempting to curb the resulting harm to the natural environment with another. These various schemes of regulation and subsidy plausibly combine to attenuate the capacity of the market process to furnish both private individuals and local communities with the appropriate knowledge and incentives to engage in common flood prevention without state support.

Our overall argument is that it is not just the direct costs of subsidies we should worry about, but the dynamics of intervention. In this case, they have led not only farmers but homeowners and entire towns to become reliant on public flood defenses with significant costs to the natural environment. There is limited scope for the government to withdraw provision (at least in a politically palatable way).

Turning back to The Observer’s gotcha story, it isn’t clear to me that Cummings is a hypocrite. I think the best theoretical work on hypocrisy in one’s personal politics comes from Adam Swift’s How Not To be Hypocrite: School Choice for the Morally Perplexed. In it Swift argues that the scope to complain about supposed hypocritical behavior, especially taking advantage of policies that you personally disagree with, can be narrower than intuitively imagined, mainly because of the nature of collective action problems. Swift’s conclusion is that, in some circumstances, leftwing critics of private schools are entitled to send their own children to private schools so long as others continue to do so and burden of doing otherwise is too strong. Presumably, this also means that strident libertarians are not hypocritical to use public roads so long as a reasonable private alternative is unavailable.

In an environment where every farmer receives an EU subsidy, it might be asking too much of EU-skeptic farmers to deny it to themselves. Instead, it seems legitimate and plausible to take the subsidy while campaigning sincerely to abolish it.

Introducing: the Federation of Free States, an ongoing thought experiment

The most popular article I have ever written, in terms of views, has been, by far, “10 Places that Should Join the U.S.,” a short piece at RealClearHistory pining for an enlarged geographic area under the American constitution.

This is not a strange concept for longtime NOL readers. I’ve been pleading for stronger political ties between the U.S. and its allies for quite some time. There has been lots of push back to this argument, from everywhere. So I’m going to spend some more time explaining why I think it’d be a great idea for the American constitutional regime to expand geographically and incorporate more political units into its realm. Here is what an initial “federation of free states” would look like in, say, 2025:

NOL map United States in 2020 with 79 states

I’ve incorporated two of the strongest voices against such a federation, NOL‘s very own Michelangelo and Edwin. Michelangelo’s Pacific and Caribbean bias is somewhat acknowledged, and Edwin’s pessimistic socio-linguistic argument against adding continental European states to the federation has also been incorporated.

I’ve also tweaked the “10 places” that I originally saw fit to join the US.

In the map above I’ve got parts of Canada (the 3 “prairie provinces”) and Mexico (3 “ranching states”) joining the American federation. The prairie provinces of Canada – Alberta, Saskatchewan, and Manitoba – would be admitted as separate “states,” and would thus get to send 2 senators each to Washington. According to my napkin calculations, Alberta would only be sending 3 representatives to DC while Saskatchewan and Manitoba would only get 1 representative each in the House. The ranching states of Mexico – Coahuila, Tamaulipas, and Nuevo León – wold likewise be admitted as separate “states,” and would also get to send 2 senators each to Washington. These three states, which have plenty of experience with federalism already, are a bit more populated than the prairie provinces, but not by much. Nuevo León would send 4 representatives to DC, while Tamaulipas would send 3 and Coahuila, 2. Why be so generous to these polities? Why not lump them together into one unit each – a Mexican one and a Canadian one? Mostly because these new states would be giving up a lot to leave their respective polities. Military protection and the rule of law wouldn’t be enough, on their own, to persuade these states into joining the Federation of Free States. They’d need disproportionate representation in Washington, via their Senate seats, in order to leave Canada and Mexico and join the republic.

Antilles (Cuba, Dominican Republic, US Virgin islands, and Puerto Rico). This is a random collection of polities, I admit, and lumping them together into one “state” is even more random. But lump them together I would. On their own I don’t think these polities would do well in a federated system, even with their own Senate seats. There’s just not enough historical parliamentary experience in these Caribbean states. If they were lumped together, though, they’d be a formidable presence in Washington. While Antilles would only get 2 Senators, its combined population would be enough to send 19 representatives to the House, more than Florida, New York, and a gang of other influential states in the current union. At the heart of Antilles joining the US as a “state” in its union is a great trade off: sovereignty in exchange for the rule of law and democratic self-governance.

IsPaJo. Israel, Palestine, and Jordan would also be incorporated into 1 voting state, though I don’t have a good name for this state yet. This isn’t nearly as crazy as it sounds. The populations of these 3 polities would benefit immensely from living under the US constitution. Questions of property would be handled fairly and vigorously by the US court system, which is still widely recognized as one of the best in the world when it comes to property rights. Concerns about ethnic cleansing or another genocide would be wiped away by the fact that this new state is now part of the most powerful military in world history. Sure, this state would only get to send 2 Senators to Washington, but its representation in the House would be sizable: 18 representatives.

England and Wales (but not Scotland or Northern Ireland). England would be the crown jewel of the federation free states. The United Kingdom is dying. Scotland wants out. Northern Ireland wants to rejoin Ireland. In England, London is thriving but the rest of the country is suffering from the effects of de-industrialization. The kingdom’s once-vaunted military depends on the United States for nearly everything. Adam Smith put forth a proposal in his 1776 treatise on the wealth of nations that’s worth re-discussing here. Smith argued that the best way to avoid a costly war with the 13 American colonies was to give them representation to go along with taxation. He proposed that the U.K.’s parliament should add some seats and give them to North American representatives. This way both sides could avoid the whole “no taxation without representation” dispute. Smith further opined that, were this federation to happen, the center of the British empire would inexorably move in the direction of the North American colonies. England and Wales would both get to send 2 Senators to Washington, giving the Isle of Liberty 4 Senators in the upper house. Wales wouldn’t get much in the way of the lower house (only 2 representatives according to my napkin calculations), but England, in exchange for its sovereignty, would become the republic’s most populated “state” and would therefore get to dictate the terms of discourse within the republic in much the same way that California and Texas have been doing for the past 3 or 4 decades. That’s not a bad trade-off, especially if you consider how awful life has become in once-proud England.

Liberia. In 1821-22, the American Colonization Society founded a colony on the Pepper Coast of West Africa and called it Liberia. The aim of the colony was to provide freed slaves in the Americas a place to enjoy their freedom, since racism was still rampant in the Americas. The freedman quickly came into conflict with the locals (a clash of cultures that has continued into the present day). Liberia, governed by its New World migrants, declared its independence in 1847 but it wasn’t until 1862, in the early stages of the American Civil War, that the US recognized Liberia’s declaration. The African continent’s first and oldest republic, predating Ghana by over one hundred years, survived, as an independent entity, the Scramble for Africa in the late 19th century and has been at the forefront of regional coalition-building in Africa since the end of World War II (when the British and French empires collapsed). Liberia, like almost all republics, has decayed politically and socially, especially over the last few decades. Federating with the United States would do wonders for Liberians, and give the federation of free states a legitimate stamp on the African continent (and breath new life into America’s own republican decay). The West Africans would send 2 Senators to Washington, and about as many representatives as Louisiana or Kentucky.

Japan (8 “states”). With nearly 127 million people, Japan’s presence in the American federation would alter the latter’s composition fundamentally. Federating the United States with Japan also presents some logistical problems. As it stands today, Japan has 47+ prefectures, which are roughly the equivalent of US states. If we added them all as they are, the Japanese would get over 100 senate seats, which is far too many for a country with so few people. So, instead, I would bring Japan on board via its cultural regions, of which there are 8: Kantō, Kansai, Chūbu, Kyushu, Tōhoku, Chūgoku, Hokkaidō, and Shikoku. The country formerly known as Japan would get 16 Senate seats (which would be roughly divided between left and right) and the new “states” would be able to send a plethora of representatives, ranging from 32 for Kantō to 3 for Shikoku. In exchange for its sovereignty Japan would get the military protection from China it wants. The US would no longer have to worry about a free-rider problem with Japan, as its inhabitants would be citizens under the Madisonian constitution. It is true that a federation would lead to more non-Japanese people being able to migrate and take root in Japan, but this is a feature of federation, not a bug. (A federation of free states would devastate ethno-conservatism in several societies around the world.)

Micronesia.” Made up of 8 current countries and territories in the Pacific Ocean, Micronesia is also a cultural territory that encompasses a huge swath of the Pacific. While it doesn’t have a whole lot of people, Micronesia has been important to US military efforts in the Pacific for centuries. Federating with the area is the least we could do for the inhabitants of the Northern Marianas, Guam, the Federated States of Micronesia, the Marshall Islands, Palau, Nauru, Kiribati, and Wake Island. Micronesia would only get 1 seat in the lower house, but with 2 sitting Senators in DC the area would finally get a say in how the United States conducts its business in the region.

Visayas, Mindinao, and Luzon. These 3 regions in the Philippines would do much to enrich the federation of free states. Like Japan above (and South Korea below), the Philippines has a complicated representative system that would need to be simplified in order to better fit the Madisionian constitutional system. Through this cultural-geographic compromise, the Philippines would be able to send 6 senators to Washington, but these three “states” would also get to send more representatives to Washington than New York, Pennsylvania, and a bunch of other current heavyweights. There is already a long history between Filipinos and Americans, and while the first half century was a rough one for both peoples, today Filipinos hold some of the most pro-American views in the world. Of course, Americans who live near Filipino communities in the United States know just how awesome Filipinos are.

Taiwan. Even though Washington doesn’t officially recognize Taiwan as a country (a deal Washington made with post-Mao reformers on the Chinese mainland, in exchange for peace and trade), the two polities are deeply intertwined. Taiwan spends billions of dollars on American military equipment, and the U.S. spends significant political capital protecting Taiwan from China’s bellicosity. Taiwanese statehood would not only bring two close societies even closer together, it would force China to either fight the United States or reveal itself to be a paper tiger. That’s a gamble I’m willing to take, since China is a paper tiger.

South Korea (5 “states”). Another wealthy free-riding ally of the United States, South Korea has 5 cultural regions that could easily become “states” in a trans-oceanic federation: Gangwon, Jeolla, Chungcheong, Gyeongsang, and Gyeonggi. This would give South Korea 10 senators and 50 representatives (spread out according to population size, just like all the other states in the union).

Altogether we’re looking at adding 29 states to the union. That’s a lot, but I think you’ll find that not only would we be expanding liberty but also limiting the size and scope of the federal government, and forcing it to do more of what it is supposed to do: provide a standardized legal system with plenty of checks & balances and maintain a deadly, defensive military.

Ending Empire

Check out this map of known American military bases in the world today:

NOL known US bases
h/t Dissent Magazine

Expanding liberty and the division of labor are not the only positive side-effects of an enlarged federation under the Madisonian constitutional system. Ending empire – which is expensive and coercive, and gives the United States a bad name abroad – would also be a key benefit of expanding the republic’s territory.

Most American libertarians are isolationists/non-interventionists. Most European libertarians are wishy-washy hawks. Neither position is all that libertarian, which is why I keep keep arguing that “a libertarian position in foreign affairs should emphasize cooperation, choice, and trade-offs above all else.” Non-interventionism is uncooperative, to say the least, but you could argue that it’s at least a position; the Europeans seem to take things on a case-by-case basis, which is what you’d expect from a people who haven’t had to make hard foreign policy decisions since 1945. Open borders is a cool slogan, but that’s just a hip way of arguing for labor market liberalization.

It’s time to open up our doors and start talking to polities about going all the way.

Conservative Parties and the Birth of Democracy

Understanding how political parties function is an area where recent research in political science has contributed major insights. Political parties are a fairly recent phenomenon. Prior to the 19th century, there were factions and loose groupings – the Optimates and Populares in Republican Rome, Tories and Whigs in late 17th century England, and Girondins and Jacobins in the French Revolution – but not organized parties. They were looser groupings that centered around dominant individuals – a Marius or Sulla, a Lord Shaftsbury, or a Brissot or Robespierre; but not parties with structured platforms and a deep well of local support.

I recently reviewed Daniel Ziblatt‘s recent book Conservative Parties and the Birth of Democracy for the Journal of Economic History (gated and ungated). Ziblatt provides new insights into the key role played by conservative parties in the formation and stabilization of democracy in Western Europe. Ziblatt’s thesis is that where conservative parties were able to become entrenched and organized political forces, the prospects for liberal democracy were fairly good. But where conservative parties remained weak, democracy was likely to remain poorly institutionalized. Under these circumstances, elites simply had too much to lose from acquiescing in universal suffrage.

Ziblatt contrasts the fate of England where a popular conservative party did take on solid roots in the late 19th century with that of Germany. As I write in my review:

“The central insight Ziblatt emphasizes throughout is game theoretic: the absence of a party to organize around meant that economic elites lacked the ability to strategically defend their interests and hence became willing to ally with any forces that might help them protect their property. While in Britain, the well-institutionalized Parliamentary Conservative party moderated and sidelined the more reactionary and xenophobic elements in British life, the absence of such a strong party meant that in Germany, the right tended towards antisemitism and other forms of extremism . . . “

“. .  . Stable and lasting democratization required “buy-in” from old regime elites and this buy-in can only occur if there are institutional mechanisms in place that are capable of assuaging their fears and moderating the influence of extremists. In late 19th and early 20th century Europe, strong professional conservative parties served this purpose. In the absence of such a party the transition to democracy will likely be temporary and unstable.”

Do read the full review.

Are Swedish University Tuitions Fees Really Free?

University tuition fees are always popular talking points in politics, media, and over family dinner tables: higher education is some kind of right; it’s life-changing for the individual and super-beneficial for society, thus governments ought to pay for them on economic as well as equity grounds (please read with sarcasm). In general, the arguments for entirely government-funded universities is popular way beyond the Bernie Sanders wing of American politics. It’s a heated debate in the UK and Australia, whose universities typically charge students tuition fees, and a no-brainer in most Scandinavian countries, whose universities have long had up-front tuition fees of zero.

Many people in the English-speaking world idolize Scandinavia, always selectively and always for the wrong reasons. One example is the university-aged cohort enviously drooling over Sweden’s generous support for students in higher education and, naturally, its tradition of not charging tuition fees even for top universities. These people are seldom as well informed about what it actually means – or that costs of attending university is probably lower in both England and Australia. Let me show you some vital differences between these three countries, and thereby shedding some much-needed light on the shallow debate over tution fees:

The entire idea with university education is that it pays off – not just socially, but economically – from the individual’s point of view: better jobs, higher lifetime earnings or lower risks of unemployment (there’s some dispute here, and insofar as it ever existed, the wage premium from a university degree has definitely shrunk over the last decades). The bottom line remains: if a university education increases your lifetime earnings and thus acts as an investment that yield individual benefits down the line, then individuals can appropriately and equitably finance that investment with debt. As an individual you have the financial means to pay back your loan with interest; as a lender, you have a market to earn money – neither of which is much different from, say, a small business borrowing money to invest and build-up his business. This is not controversial, and indeed naturally follows from the very common sense principle that those who enjoy the benefits ought to at least contribute towards its costs.

Another general reason for why we wouldn’t want to artificially price a service such as university education at zero is strictly economical; it bumps up demand above what is economically-warranted. University educations are scarce economic goods with all the properties we’re normally concerned about (has an opportunity cost in its use of rivalrous resources, with benefits accruing primarily to the individuals involved in the transaction), the use and distribution of which needs to be subject to the same market-test as every other good. Prices serve a socially-beneficial purpose, and that mechanism applies even in sectors people mistakenly believe to be public or social, access to which forms some kind of special “human right.”

From a political or social-justice point of view, such arguments tend to carry very little weight, which is why the funding-side matters so much. Because of debt-aversion or cultural reasons, lower socioeconomic stratas of societies tend not to go to university as much as progressives want them to – scrapping tuition fees thus seems like a benefit to those sectors of society. When the financing of those fees come out of general taxation however, they can easily turn regressive in their correct economic meaning, disproportionately benefiting those well off rather than the poor and under-privileged they intended to help:

The idea that graduates should make no contribution towards the tertiary education they will significantly benefit from it, while expecting the minimum wage hairdresser in Hull, or waiter in Wokingham to pick up the bill by paying higher taxes (or that their unborn children and grandchildren should have to pay them due to higher borrowing) is highly regressive.

Although not nearly enough people say it, university is not for everyone. The price tag confronts students, who perhaps would go to university to fulfill an expectation rather than for any wider economic or societal benefit, with a cost as well as a benefit of attending university.

Having said that, I suggest that attending university is probably more expensive in your utopian Sweden than in England or Australia. The two models these three countries have set up look very different at first: in Sweden the government pays the tuition and subsidies your studies; in England and Australia you have to take out debt in order to cover tuition fees. A cost is always bigger than no cost – how can I claim the reverse?

With the following provision: Australian and English students don’t have to pay back their debts until they earn above a certain income level (UK: £18,330; Australia: $55,874). That is, those students whose yearly earnings never reach these levels will have their university degree paid for by the government regardless. That means that the Scandinavian and Anglophone models are almost identical: no or low costs accrue for students today, in exchange for higher costs in the future provided you earn enough income. Clearly, paying additional income taxes when earning high incomes but not on low incomes (Sweden) or paying back my student debt to the government only if I earn high incomes rather than low (England, Australia) amounts to the same thing. Changing the label of a financial transfer from the individual to the government from “debt-repayment” to “tax” has very little meaning in reality.

In one way, the Aussie-English system is somewhat more efficient since it internalises costs to only those who benefited from the service rather than blanket taxing everyone above a certain income threshold: it allows high-income earners who did not reach such financial success from going to university to avoid paying the general penalty-tax on high-incomes that Swedish high-earners do.

Let me show the more technical aspect: In England, earning above £18,330 places you at a position in the 54th percentile, higher than the majority of income-earners. Similarly, in Australia, $55,874 places you above 52% of Aussie income-earners. For Sweden, with the highest marginal income taxes in the world, a similar statistics is trickier to estimate since there is no official cut-off point above which you need to repay it. Instead, I have to estimate the line at which you “start paying” the relevant tax. What line is then the correct one? Sweden has something like 14 different steps in its effective marginal tax schedule, ranging from 0% for monthly incomes below 18,900 SEK (~$2,070) to 69.8% for incomes above 660,000 SEK (~$72,350) or even 75% in estimations that include sales taxes of top-marginal taxes:


If we would place the income levels at which Australian and English students start paying back the cost of their university education, they’d both find themselves in the middle range facing a 45.8% effective marginal tax – suggesting that they would have greatly exceeded the income level at which Swedish students pay back their tuition fees. Moreover, the Australian threshold would exchange into 367,092 SEK as of today, for a position in the 81st percentile – that is higher than 81% of Swedish income-earners. The U.K., having a somewhat lower threshold, converts to 217,577 SEK and would place them in the 48th percentile, earning more than 48% of Swedish income-earners – we’re clearly not talking about very poor people here.

The fact that income-earners in Sweden face a much-elevated marginal tax schedule as well as the simplified calculations above do indicate that despite its level of tuition fees at zero, it is more expensive to attend university in Sweden than it is in England or Australia. Since Australia’s pay-back threshold is so high relative to the income distribution of Sweden (81%), it’s conceivably much cheaper for Australian students to attend university than for it is for Swedish students, even though the tuition list prices may differ (the American debate is much exaggerated precisely because so few people pay the universities’ official list prices).

Letting governments via general taxation completely fund universities is a regressive measure that probably hurts the poor more than it helps the rich. The solution to this is not some quota-scholarships-encourage-certain-groups-version but rather to a) increase and reinstate tuition fees where applicable or b) cut government funding to universities, or ideally get government out of the sector entirely.

That’s a progressive policy in respect to universities. Accepting that, however, would be anathema for most people in politics, left and right.

Nightcap

  1. Khalistan’s Deadly Shadow Terry Milewski, Quillette
  2. Yes to Europe: The 1975 Referendum and Seventies Britain Daniel Hannan, Spectator
  3. Will there always be an England? Andrew Sullivan, Daily Intelligencer
  4. Translating the classics is harder than it sounds Colin Burrow, London Review of Books

Testing the High-Wage Economy (HWE) Hypothesis

Over the last week or so, I have been heavily involved in a twitterminar (yes, I am coining that portemanteau term to designate academic discussions on twitter – proof that some good can come out of social media) between myself, Judy Stephenson , Ben Schneider , Benjamin Guilbert, Mark Koyama, Pseudoerasmus,  Anton Howes (whose main flaw is that he is from King’s College London while I am from the LSE – nothing rational here), Alan Fernihough and  Lyman Stone. The topic? How suitable is the “high-wage economy” (HWE) explanation of the British industrial revolution (BIR).

Twitter debates are hard to follow and there is a need for summaries given the format of twitter. As a result, I am attempting such a summary here which is laced with my own comments regarding my skepticism and possible resolution venues.

An honest account of HWE

First of all, it is necessary to offer a proper enunciation of HWE’s role in explaining the industrial revolution as advanced by its main proponent, Robert Allen.  This is a necessary step because there is a literature attempting to use high-wages as an efficiency wage argument. A good example is Morris Altman’s Economic Growth and the High-Wage Economy  (see here too) Altman summarizes his “key message” as the idea that “improving the material well-being of workers, even prior to immediate increases in productivity can be expected to have positive effects on productivity through its impact on economic efficiency and technological change”. He also made the same argument with my native home province of Quebec relative to Ontario during the late 19th century. This is basically a multiple equilibria story. And its not exactly what Allen advances. Allen’s argument is that wages were high in England relative to energy. This factors price ratio stimulated the development of technologies and industries that spearheaded the BIR. This is basically a context-specific argument and not a “conventional” efficiency wage approach as that of Allen. There are similarities, but they are also considerable differences. Secondly, the HWE hypothesis is basically a meta-argument about the Industrial Revolution. It would be unfair to caricature it as an “overarching” explanation. Rather, the version of HWE advanced by Robert Allen (see his book here) is one where there are many factors at play but there is one – HWE – which had the strongest effects. Moreover, while it does not explain all, it was dependent on other factors that contributed independently.  The most common view is that this is mixed with Joel Mokyr’s supply of inventions story (which is what Nick Crafts has done). In the graph below, the “realistically multi-causal” explanation is how I see HWE. In Allen’s explanation, it holds the place that cause #1 does. According to other economists, HWE holds spot #2 or spot #3 and Mokyr’s explanations holds spot #1.

hwe

In pure theoretical terms (as an axiomatic statement), the Allen model is defensible. It is a logically consistent construct. It has some questionnable assumptions, but it has no self-contradictions. Basically, any criticism of HWE must question the validity of the theory based on empirical evidence (see my argument with Graham Brownlow here) regarding the necessary conditions. This is the hallmark of Allen’s work: logical consistency. His work cannot be simply brushed aside – it is well argued and there is supportive evidence. The logical construction of his argument requires a deep discussion and any criticism that will convince must encompass many factors.

Why not France? Or How to Test HWE

As a doubter of Allen’s theory (I am willing to be convinced, hence my categorization as doubter), the best way to phrase my criticism is to ask the mirror of his question. Rather than asking “Why was the Industrial Revolution British”, I ask “Why Wasn’t it French”. This is what Allen does in his work when he asks explicitly “Why not France?” (p.203 of his book). The answer proposed is that English wages were high enough to justify the adoption of labor-saving technologies. In France, they were not. This led to differing rates of technological adoptions, an example of which is the spinning jenny.

This argument hinges on some key conditions :

  1. Wages were higher in England than in France
  2. Unit labor costs were higher in England than in France (productivity-adjusted wages) (a point made by Kelly, Mokyr and Ó Gráda)
  3. Market size factors are not sufficiently important to overshadow the effects of lower wages in France (R&D costs over market size mean a low fixed cost relative to potential market size)
  4. The work year is equal in France as in England
  5. The cost of energy in France relative to labor is higher than in England
  6. Output remained constant while hours fell – a contention at odds with the Industrious Revolution which the same as saying that marginal productivity moves inversely with working hours

If most of these empirical statements hold, then the argument of Allen holds. I am pretty convinced by the evidence advanced by Allen (and E.A. Wrigley also) regarding the low relative of energy in England. Thus, I am pretty convinced that condition #5 holds. Moreover, given the increases in transport productivity within England (here and here), the limited barriers to internal trade (here), I would not be surprised that it was relatively easy to supply energy on the British market prior to 1800 (at least relative to France).

Condition #3 is harder to assess in terms of important. Market size, in a Smithian world, is not only about population (see scale effects literature). Market size is a function of transaction costs between individuals, a large share of which are determined by institutional arrangements. France has a much larger population than England so there could have been scale effects, but France also had more barriers to internal trade that could have limited market size. I will return to this below.

Condition #1,2,4 are basically empirical statements. They are also the main points of tactical assault on Allen’s theory.  I think condition #1 is the easiest to tackle. I am currently writing a piece derived from my dissertation showing that – at least with regards to Strasbourg – wages in France presented in Allen (his 2001 article) are heavily underestimated (by somewhere between 12% and 40% using winter workers in agriculture and as much as 70% using the average for laborers in agriculture). The work of Judy Stephenson, Jane Humphries and Jacob Weisdorf has also thrown the level and trend of British wages into doubts. Bringing French wages upwards and British wages downwards could damage the Allen story. However, this would not be a sufficient theory. Industrialization was generally concentrated geographically. If labor markets in one country are not sufficiently integrated and the industrializing area (lets say the “textile” area of Lancashire or the French Manchester of Mulhouse or the Caën region in Normandy) has uniquely different wages, then Allen’s theory can hold since what matters is the local wage rate relative to energy. Pseudoerasmus has made this point but I can’t find any mention of that very plausible defense in Allen’s work.

Condition #2 is the weakest point and given Robert Fogel’s work on net nutrition in France and England, I have no problem in assuming that French workers were less productive. However, the best evidence would be to extract piece rates in textile-producing regions of France and England. This would eliminate any issue with wages and measuring national productivity differences. Piece rates would perfectly capture productivity and thus the argument could be measured in a very straightforward manner.

Condition #4 is harder to assess and more research would be needed. However, it is the most crucial piece of evidence required to settle the issue once and for all. Pre-industrial labor markets are not exactly like those of modern days. Search costs were high which works in a manner described (with reservations) by Alan Manning in his work on monopsony but with much more frictions. In such a market, workers may be willing to trade in lower wage rates for longer work years. In fact, its like a job security argument. Would you prefer 313 days of work guaranteed at 1 shilling per day or a 10% chance of working 313 days for 1.5 shillings a day (I’ve skewed the hypothetical numbers to make my point)? Now, if there are differences in the structure of labor markets in France and England during the 18th and 19th centuries, there might be differences in the extent of that trade-off in both countries. Different average discount on wages would affect production methods. If French workers were prone to sacrifice more on wages for steady employment, it may render one production method more profitable than in England. Assessing the extent of the discount of annual to daily wages on both markets would identify this issue.

The remaining condition (condition #6) is, in my opinion, dead on arrival. Allen’s model, in the case of the spinning jenny, assumed that labor hours moved in an opposite direction as marginal productivity. This is in direct opposition to the well-established industrious revolution. This point has been made convincingly by Gragnolati, Moschella and Pugliese in the Journal of Economic History. 

In terms of research strategy, getting piece rates, proper wage estimates and proper labor supplied estimates for England and France would resolve most of the issue. Condition #3 could then be assessed as a plausibility residual.  Once we know about working hours, actual productivity and real wages differences, we can test how big the difference in market size has to be to deter adoption in France. If the difference seems implausible (given the empirical limitations of measuring effective market size in the 18th century in both markets), then we can assess the presence of this condition.

My counter-argument : social networks and diffusion

For the sake of argument, let’s imagine that all of the evidence favors the skeptics, then what? It is all well and good to tear down the edifice but we are left with a gaping hole and everything starts again. It would be great to propose a new edifice as the old one is being questioned. This is where I am very much enclined towards the rarely discussed work of Leonard Dudley (Mothers of Innovation). Simply put, Dudley’s argument is that social networks allowed the diffusion of technologies within England that fostered economic growth. He has an analogy from physics which gets the point across nicely. Matter has three states : solid, gas, liquid. Solids are stable but resist to change. Gas, matter are much more random and change frequently by interacting with other gas, but any relation is ephemeral. Liquids permit change through interaction, but they are stable enough to allow interactions to persist for some time. Technological innovation is like a liquid. It can “mix” things together in a somewhat stable form.

This is where one of my argument takes life. In a small article for Economic Affairs, I argued (expanding on Dudley) that social networks allowed this mixing (I am also expanding that argument in a working paper with Adam Martin of Texas Tech University). However, I added a twist to that argument which I imported from the work of Israel Kirzner (one of the most cited books in economics, but not by cliometricians – more than 7000 citations on google scholar). Economic growth, in Kirzner’s mind,  is the result of entrepreneurs discovering errors and arbitrage possibilities. In a way, growth is a process of discovering correcting errors. An analogy to make this point is that entrepreneurs look for profits where the light is while also trying to move the light to see where it is dark. What Kirzner dubs as “alertness” is in fact nothing else than repeated and frequent interactions. The more your interact with others, the easier it becomes for ideas to have sex. Thus, what matters is how easy it is for social networks to appear and generate cheap information and interactions for members without the problem of free riders. This is where the work of Anton Howes becomes very valuable. Howes, in his PhD thesis supervised by Adam Martin who is my co-author on the aforementioned project (summary here), showed that most innovators went in frequent with one another and they inspired themselves from each other. This is alertness ignited!

If properly harnessed, the combination of the works of Howes and Dudley (and also James Dowey who was a PhD student at the LSE with me and whose work is *Trump voice* Amazing) can stand as a substitute to Allen’s HWE if invalidated.

Conclusion

If I came across as bashing on Allen in this post, then you have misread me. I admire Allen for the clarity of his reasoning and his expositions (given that I am working on a funded project to recalculate tax-based measures in the US used by Piketty to account for tax avoidance, I can appreciate the clarity in which Allen expresses himself). I also admire him for wanting to “Go big or go home” (which you can see in all his other work, especially on enclosures). My point is that I am willing to be convinced of HWE, but I find that the evidence leans towards rejecting it. But that is very limited and flawed evidence and asserting this clearly is hard (as some of the flaws can go his way). Nitpicking Allen’s HWE is a necessary step for clearly determining the cause of BIR. It is not sufficient as a logically consistent substitute must be presented to the research community. In any case, there is my long summary of the twitteminar (officially trademarked now!)

P.S. Inspired by Peter Bent’s INET research webinar on institutional responses to financial crises, I am trying to organize a similar (low-cost) venue for presenting research papers on HWE assessment. More news on this later.

Myths of Sovereignty and British Isolation XII, 16th Century England in relation to the Dutch Revolt, Germany & Spain

The idea of a very sovereign and separate England, which does not really fit with the highly French oriented Middle Ages as discussed in the last post, may look a bit more plausible after 1485 when the Tudor dynasty came to power, ending the Wars of the Roses between different Plantagenet claimants to the throne. Under the Tudors, the English (including Welsh) state system is consolidated, the English church passes from authority of the Pope in Rome to the monarchy, and the dynasty ends in the unification of England and Scotland. That is when Elizabeth I died in 1603, the throne passed to the Stuart King of Scotland, James VI, who became James I of England.

The break with the church in Rome was an accident which had nothing to do with the religious inclinations of Henry VIII, who took the national church under his control for marital reasons. In the mid-1520s, he wanted an annulment of his marriage to Catherine of Aragon, in which the Pope would declare the marriage to have been invalid according to Canon law (in this case  because she had been married to Henry VIII’s late brother) . The Pope would have been willing to co-operate, but was under the control of Catherine’s uncle Charles V (German ‘Holy Roman’ Emperor and King of Spain), who regarded the proposed annulment as an insupportable insult to the imperial-royal family honour.

Conveniently for Henry, it was a good time for finding a religious base for a national church independent of Rome. The Reformation, that is revolution of new Protestant churches agains the Catholic church was underway, in a process normally dated back to Martin Luther posting 95 theses critical of the hierarchy on a church door in Wittenburg in 1517. Henry VIII did not break with Rome because of Protestant inclination and though there was a dissident religious tradition, the Lollards going back to the  fourteenth century, which anticipated Protestant thinking, it was a movement of strictly minority interest. Henry seized church lands and allied himself with Protestants. This accidental partial adoption of Protestantism was followed by swing towards more pure Protestantism under Edward VI then a swing back towards Catholicism under Mary Tudor followed by a final victory of Protestantism under Elizabeth I, though not a victory of the most radical Protestants, and not a result of majority sentiment in the nation, which would have favoured Catholicism before decades of state pressure and persecution made Protestantism the majority religion.

The struggle of the Protestant cause in England was associated with an intensified presence in Ireland through very bloody means, and an international struggle against Catholic Spain, associated with support for the Dutch Revolt against Spanish and Catholic control. Overall this might give the picture of England, as a proto-United kingdom fully incorporating Wales and partly incorporating Ireland, rising up as a free Protestant nation outside the control of the major trans-European institution of the time, the Catholic church. However, Protestantism was an import from Germany (Martin Luther) and Switzerland (John Calvin’s Geneva and Huldrych Zwingli), even if some tried to see it as the product of Lollardy.

The time of Elizabeth and the first Stuart James I was the time of colonialism in the Americas, which sovereigntist-Eurosceptic enthusiasts are inlined to see as part of Britain’s unique global role. This claim seems strange given the major colonial ventures of Portugal, Spain, and the Netherlands at this time. Britain was not uniquely Protestant or uniquely colonial and trading. The consolidation of a national state at that time has equivalents in Spain, Portugal, France, the Netherlands, Denmark and Russia. The ‘growth’ of Parliament under the Tudors absolute monarchs who conceded that taxes had to be raised by Act of Parliament, and that laws properly speaking were also from Acts of Parliament, but held onto complete control of government  and saw no need to.call Parliament except when new taxes or laws were needed, is paralleled by representative institutions in the new Dutch Republic, the continuation of German and Italian city republics along with self-governing Swiss cantons, the continuing role of regional assemblies in Spain and local courts ‘parlements’ in France which had the power to comment on new legislation, and the elective-representative structure of the Holy Roman Empire all provide parallels.

English state and national life was caught up in Europe most obviously through support for the Dutch, but also in the trade and diplomatic activities of the time. Mary Tudor, who attempted Catholic restoration, was married to Philip II of Spain while she was Queen, so placing England under heavy Spanish influence. Defeat of the Armada (Spanish invasion fleet) under Elizabeth became a symbol of English independence, but was itself strongly linked with English involvement in the Netherlands. So it was not a period of continuous English independence from European powers and was certainly not a period of isolated separation. The connections with the continent were reinforced during the reign of James I who had dynastic connections in Denmark and Germany.

More on Jacobean (from Jacobus, the Latin form of James) and seventeenth century England in the next post.