Nightcap

  1. So you want my opinion (as an economist)? Scott Sumner, EconLog
  2. Don’t Let Doubts About Blockchains Close Your Mind Tyler Cowen, Bloomberg View
  3. Hayek, Radner, and Rational-Expectations Equilibrium David Glasner, Uneasy Money
  4. Beautiful art from the Armenian diaspora Avedis Hadjian, Le Monde Diplomatique

Nightcap

  1. Xi Jinping Looking More and More Like Mao Doug Bandow, National Interest
  2. Fear, Loathing, and Zulm in Iran Mehrad Vaezinejad, History Today
  3. India, Pakistan, and Balochistan: A History of Trouble Ahsan Butt, the Diplomat
  4. A History of Craft Beer in America Derek Thompson, the Atlantic

Minorities and Economic Growth: Evidence from Jewish Communities in Premodern Europe

Urban theorist Richard Florida is celebrated for arguing that cities today succeed by attracting members of the “creative class.”  In a similar spirit I have a recent paper with Noel D. Johnson where we investigated whether or not cities in medieval and early modern Europe grew faster if they possessed a Jewish community.

Scholars have long noted the role of minority groups in economic development. This is particularly true for the the premodern period. The great scholar of long-run historical development in Europe, Fernand Braudel, observed that “successful merchants who controlled trade circuits and networks often belonged to foreign minorities.” These minorities could be other nationalities or religious minorities, for example, “the Jews, the Armenians, the Banyans, the Parsees, the Raskolniki (Old Believers) in Russia or the Christian Copts in Muslim Egypt” (Braudel, 1979, 1982, 165).

Hornung (2014) studies the impact of the Huguenot migration to Prussia. Since the nineteenth century, scholars like Friedrich List linked the presence of Huguenots with the transmission of human capital, skills, and innovation. Hornung (2014) is able to test this hypothesis using Prussian immigration lists from 1700 that document the location of Huguenot settlements and firm-level data on input and output for all 750 textile manufactories in Prussia in the year 1802. Approximately 16,000 to 20,000 Huguenots fled France to Prussia at the end of the seventeenth century.  Hornung finds that the presence of Huguenots significantly increased firm productivity. Specifically, a 1 percentage point increase in the share of Huguenots was associated with 1.5 percentage points higher productivity in 1802.

Jewish Communities and City Growth

In our paper we take a broad sweep of European history from 1400 to 1850.  We have a total of 1,792 cities in our panel data from the Bairoch (1988) dataset and 1,069 Jewish communities that appear in the Encyclopedia Judaica. The figure below shows both the cities in the Bairoch dataset and the Jewish communities mentioned in the Encyclopedia Judaica.

 

bairochandjewishcitiesgreyscale

To understand the relationship between the presence of a Jewish community and subsequent city growth we conduct a difference-in-differences style regression analysis.

The fact that we have data on city populations every century means we can hold constant the identity of a city using city fixed effects and see whether or not it grew faster in the centuries when it had a Jewish community in comparison to those centuries when it did not. We can also control for the possibility that overall city growth was faster in some centuries in comparison to others using century fixed effects.

We are also able to hold constant other factors that could plausibly have affected city growth. We control for local geography including cereal suitability, proximity to rivers, and proximity to coast, as these factors likely affected city growth in different ways over time. We also control for local infrastructure including presence of university and distance to a medieval trade route.

Our  analysis suggests that, indeed, cities with Jewish communities grew faster on average between 1400 and 1850. The effect we find suggests that cities with Jewish communities grew about one third faster than those that did not have Jewish communities. This analysis remains a correlation, however. We do not know if the presence of a Jewish community brought with it economic benefits or if Jews merely choose to settle in faster growing cities.

Instrumenting the Presence of a Jewish Community

We model the network of Jewish communities as one way to see whether the effect of Jews on city growth was indeed casual. By examining how Jewish communities expanded we hope to isolate a source of exogenous variation in the presence of a Jewish community.

We assume that a Jewish community is more likely to be established close to another Jewish community because of trade networks, financial relationships, or cultural linkages. We then calculate the closest travel path between Jewish communities using our information about the location of roads and river networks and estimates of premodern transport costs. The important assumption we make is that if cities with Jewish communities share certain “unobservable” characteristics that might make them more likely to grow rapidly, these characteristics become less correlated with distance.

We then divide Europe into 5km x 5km grids and assign the lowest travel cost to each grid. We apply Djikstra’s algorithm to determine the lowest cost of travel between all 3,211,264 city pairs (van Etten, 2012). This allows us to create a measure of ‘Jewish network access’ for each city.

Jewish network access itself is, of course, correlated with the unobservable characteristics of the city for which it is calculated. To overcome this we adopt two strategies to create valid instruments out of the network access measures. First, we calculate Jewish network access for cities that are only more than a certain distance away from each other. Second, we use information on expulsions to weight our measure of Jewish network access. The intuition behind this is that Jewish expulsions consist of an exogenous “push” factor leading to Jews settling in new cities close to the existing network of Jewish communities. Using these two strategies we obtain similar (though larger in magnitude) effects from the presence of a Jewish community on city growth. This provides further suggestive evidence that the correlation we found in our baseline analysis was indeed causal.

The Relationship Between Urban Growth and the Presence of a Jewish Community Over time

Across specifications, we find that cities with Jewish communities experienced no growth advantage in the 15th and 16th centuries. After 1600, however, they began to grow significantly faster.

motivationlpoly

The relationship we observe in the Figure does not appear to be inline with a pure human capital story. Jews had higher human capital than Christians throughout the medieval and early modern period. But the growth advantage of cities that had Jewish communities only became evident after 1600. This raises the possibility that something else changed around  17th century that made the human capital and skills of Jews more complementary to economic growth.

Two Mechanisms: Jewish Emancipation and Market Access

The two factors that stand out in explaining the emergence of a growth advantage for cities with Jewish communities after 1600 but not before are: (1) Jewish Emancipation after 1750; and (2) a complementarity between the presence of a Jewish community and market access.

The process of Jewish emancipation began in continental Europe after 1780. It was a major institutional break that signified a major change in the economic, social, and political status of the Jews in Europe. In work with Jean-Paul Carvalho, I’ve shown that Jewish emancipation lead to a religious schism and the emergence of both Reform and Ultra-Orthodox Judaism.

In the period before Jewish emancipation, legal barriers limited the ability of Jews to put their labor to its highest value use. Jewish businesses were prevented from hiring non-Jewish workers. Jews could not attend universities. Moreover, Jews and Christians were culturally isolated. This changed with emancipation, and we expect to see it reflected in the contribution of Jewish communities to city growth in the post-1750 period.

The second factor we study is the complementarity between the presence of a Jewish community and the development of markets. The historical literature points to the importance of Jewish trading and financial networks. But, while economic historians have conducted numerous studies of market integration during the early modern period, with a few exceptions these have focused on the grain trade with little systematic study of other markets due to data limitations. Jewish merchants in medieval and early modern Europe, however, did not play a prominent role in the grain trade but, rather, were involved in the transport of diamonds, sugar, silks, tobacco, and other luxury products in addition to playing a large role in banking and finance. Therefore, rather than looking at grain markets, we explore a more general measure of market integration based on market access.

Market access depends on the population size of nearby cities weighted by the cost associated with the least cost travel path. We show that market access was increasing for all cities after 1700. We find evidence that cities with Jewish communities were better able to take advantage of this increase in market access. As we detail in the paper, our findings are consistent with the argument made by numerous historians that Jewish trading and finance networks help to knit together the European economy, particularly in the period 1650 to 1800 (Israel, 1985).

 

Our analysis provides support for the accounts of historians who have emphasized the important role played by Jewish traders in 17th and 18th century Europe (such as Fortune, 1984; Israel, 1985; Trivellato, 2009). Furthermore, our story is in line with institutional arguments such as those developed by Douglass North, John Wallis and Barry Weingast, and Daron Acemoglu and James Robinson.  In the Middle Ages, the presence of Jewish communities was part of an institutional arrangement that extracted rents from society and distributed them among members of the ruling elite. The eradication of these rent-seeking arrangements and the liberalization of Jewish economic activity, first in the Netherlands and England and then in the rest of Europe following Jewish Emancipation, was of critical importance as it is in those cities that possessed emancipated Jewish communities that we observe the strongest relationship between the presence of Jews and economic growth.

Does the EU promote liberalization?

This is in response to Brandon’s earlier post asking for literature on the EU’s effect on promoting liberalization. The short reply is the EU promotes liberalization – sometimes. Below are two pieces of the literature on the issue.

On a quick aside, I have mixed feelings towards the recent Dutch referendum on the Ukraine-EU Association Agreement. I don’t think that the EU should extend a hand to Ukraine. Namely because I think the Russians are much more willing to use force over the issue than West Europeans. Secondly, because I think it gives peripheral countries the idea that they don’t need to join/remain in the EU to receive its protection. Moral hazard if you will.

However I disagree with co-blogger Evgeniy Grigorjev that Ukraine, and other peripheral nations, should be denied EU affiliation until they reach certain benchmarks. I’m sure that Ukrainian politicians would consider EU association a victory and feel less compelled to act. However the long term effect of EU membership would be greater trade in goods, people, and ideas. With any luck liberal ideas. I would welcome the EU expanding into North Africa and parts of the Near East if it meant the expansion of liberal ideas to those regions.


The Effect of Labor Migration on the Diffusion of Democracy: Evidence from a Former Soviet Republic {LINK}

This empirical paper looks at the effect of return migration on political attitudes in Moldova. The basic idea is that return migrants bring with them new political ideas from abroad.

In the late 1990s Moldova experienced financial trouble that encouraged many of its laborers to migrate temporarily to Russia and the west (largely Italy) in search of work. Regions with more return migrants from Italy were found to have the least support for the Communist Party in future Parliamentary elections. Regions where migrants went to Russia had increased (albeit sometimes small and/or statistically insignificant) support for the Communist Party.

There are two take aways here:

(1) Trade in ideas matter.
(2) The type of ideas you trade matter.

The EU, and the Schengen area, can promote idea trading but what makes the EU important is that it is a liberal institution. An institution that needs reform, but one worth keeping.

Anchoring Democracy from Above? The European Union and Democratic Backsliding in Hungary and Romania after Accession {LINK}

This paper looks at the different responses the EU took towards Hungary and Romania when the national governments of both respectively introduced illiberal measures. Discusses some of the weak points in the EU and how it can be reformed to improve its ability to react to similar future events. As Evgeniy points out, the EU has a weakened ability to punish illiberal policies once EU membership has been granted. Intra-EU coordination is also difficult to achieve to use those tools it does have. The EU is not however impotent and reforms could be introduced to rectify this.

When Europe Rejected Morocco

Did you know that in 1987 the government of Morocco formally submitted an application to become a member of the European Union?

Brussels flatly rejected the application, arguing publicly that Morocco was not a European country and also that Morocco had a poor human rights record. This rejection marks one of the biggest mistakes that Brussels has ever made in its short-but-brilliant history (along with instituting a central bank).

Does anyone know of any scholarly literature showing that the admittance of authoritarian states to the EU or other federal-esque institutions will have the effect of liberalizing the political regimes of such states, as long as the republics admit these states one or two at a time? I did a blog post on it awhile back, but a blog post is not a peer-reviewed journal article.

The best counter-example of federalism-as-a-path-to-liberty that I can think of is the pre-Civil War US. The US federal system was made up, in part, of a number of authoritarian states that promoted and enforced chattel slavery. This example does not address the EU model, however, where Brussels admits neighboring poor states and a gradual liberalizing effect takes place.

In the US example, factions within the slave states benefited economically from the use of slaves, and this economic prosperity was tied up directly to the political institutions of the US. So, the US Senate had a number of pro-slavery representatives that not only made sure slavery could not be attacked politically, but also that the interests of slaveholders were advanced at the expense of the non-slaving states (and, of course, the slaves themselves). In other words, a powerful minority with interests very different from the general intent of the classical liberal framework of Madison’s constitution.

Once the number of free states became great enough to overcome the number of slave states in the Senate, a war became much more likely. It became more likely because the interests of the (illiberal) slaveholders were directly challenged by the numerical superiority of free state representatives in both houses.

In short, the pre-Civil War US was made up of two factions – one liberal and one illiberal – that were almost equal in power. The EU does not have to worry about this, though. It should be much bolder in admitting despotic, neighboring states into its apparatus. (The same goes for the US.) Imagine if Morocco had been admitted into the EU in 1987. There would likely be representatives in Brussels bitching about austerity instead of representatives of the King torturing and imprisoning Moroccan citizens for reasons unknown.

Of Uber, cab drivers and compensation

What a title for a blog post right? Where am I going with this? A few days ago, I debated a few of my academic colleagues who tend towards libertarianism in the predominantly left-leaning province of Quebec. The topic? How the rise of Uber is killing the taxi cartel? I authored a paper on ride-sharing a year ago and I cannot be more enthusiastic towards such technologies that are allowing consumers much more choices at lower prices than with the taxi cartel. Thus, we were all in agreement. The point of contention appeared when the topic of compensation was raised. I favor partial compensation of the owners of taxi licences. Instantly, I was cast in the minority position and branded as a statist. A debate ensued and I made the case that it was not acceptable to right a wrong by committing another wrong (how Christian of me).

First, let me lay out some facts first and some assumptions

  1. A taxi licence restricting competition is a subsidy. But it is a strange type of subsidy that occurs through a redistribution of property rights (limiting the right to use one’s own car to carry individuals in exchange for payment to those who buy the transferable right to do so). Unlike cash subsidies, quotas, trade barriers and tax credits, it is the only form of income transfer that exists that is a property. You can abolish any cash subsidy, tariff, quota, tax, tax credits or legal monopoly without having to compensate since no one has property of such things. That is the source of the odd nature of the taxi licence – a subsidy with a property deed.
  2. The two benefits from these licences occur through limiting competition and thus allowing higher prices/quality ratios and through higher asset value (the permit’s value). The extent of those benefits depends on the extent of the curtailment of the liberties of other to compete. The more restrictive the policy, the greater the redistribution from consumers to producers in the long-run.
  3. However, new drivers have to pay a high price and they must have some time to recoup the acquisition of the asset. Their recovery will take some time as they also hike prices and lower quality.

So, if you want to abolish a taxi licensing scheme, is it acceptable not to compensate? According to my colleagues, yes it is. Since the benefits of higher prices were so considerable to those drivers (at the expense of consumers), compensation is not necessary.

Yet, the drivers do own property don’t they? The licence is worth many thousands of dollars, basically the value of a small house. Many drivers rely on this asset for their retirement. Now, let me make another presumption which is crucial to this discussion: the change is caused by legal changes, not technological changes.

I believe that, in the presence of the technological change, there is no case for compensation. Nobody would compensate telecoms companies for the rise of Skype since it is a process of entrepreneurship. However, the case is different if a government decides to abolish the licences. So here, my entire reasoning for compensation is contingent to a case where the state abolishes the licences, not a situation where technologies render the licences worthless like the car killed the street horses.

Clearly, it was unjust for consumers to deal with a cartel that gouged them and which was legally sanctioned to do so. But can you right an injustice by committing another injustice (the de facto dispossession of an asset)? Normatively speaking, I simply believe that using the monopoly of violence of the state to right the abuses caused by past uses of the monopoly of violence of the state is not that productive. Why? Because I have this assumption lodged firmly in my head as a result of my training in public choice theory: rent-seeking matters.

Rent-seekers will always exist. They are the social-science equivalent of gravity in physics. You just have to deal with their existence. Rent-seekers are basically political entrepreneurs who have very concentrated benefits from applying policies whose costs are not that obvious or that important for a large population. These political entrepreneurs are very alert to opportunities and they will seize them. Sometimes, they discover that their preferred course of action leads to resistance. They will automatically shift gear and find another way to obtain an unearned reward thanks to the complicity of those they bargain with (politicians and bureaucrats). Their rhetoric will change, their narratives will change, their arguments will evolve, but at the core, they will continue to rent-seek. True, you can conceive constitutional rules that limit rent-seeking (I am a big fan of that). However, one way or another, it will remain and some will find ways to connive with politicians and bureaucrats to obtain undue rewards. And even if there was such a utopia free of rent-seekers (I just won’t buy that for a dollar) where a constitution would ban their activities or even a stateless utopia (again, I am not buying it), is it acceptable to justify all means possible to reach such a destination?

What if associations of cab drivers lobby for special tax discounts on gasoline since they provide a public service? What if they lobby for stricter security checks on drivers (needless security checks) which end up having the same effects? What if they convinced regulators that only certain types of vehicles (less than 5 years old for example) should be allowed to operate? What if they mandated association with a dispatcher to better avoid traffic jams? How could a politician oppose special tax treatment for drivers, better security for consumers or all these other bogus motives? In the end, they will find a way to rent-seek. However, by dispossessing them of an asset worth many hundred of thousands of dollars, you are basically creating the certainty that they will aggressively rent-seek to recuperate their losses. Thus, you don’t end up breaking a vicious policy cycle, you end up encouraging its continuation in stranger, hidden and subtle manners whose perniciousness continues equally.

Hence my case that you can’t right a wrong by committing a wrong. Respect the rule of law, liberalize the market and compensate and attempt to rewrite constitutions to prevent arbitrary redistribution of property rights.

From the Comments: The Suprastate and the Substate

My post on American Senator Rand Paul’s recent remarks on Kurdistan elicited the following response from fellow Notewriter Michelangelo:

If a neo-Ottoman federation arises I suspect it will begin as a political alliance between Turkey and Israel. Perhaps such a federation will arise from the Mediterranean Union, who can know really. The two countries are already relatively close in interests and are, alongside a few of the Gulf States, the closest things the region has to secular liberal powers. The Turks at this time would not favor an independent Kurdistan though and I fear they might withdraw support for a federation if that was part of the package.

I think it would be easier to first form an Ottoman federation and afterward grant Kurds their independence within the federation.

It is hard for me to imagine the Arabs joining said federation either way. The Egyptian-Syrian Arab republic went nowhere. Part of me (an infinitely small part!) kind of hopes ISIS manages to defeat the Iraqi and Syrian forces and creates the core of a Pan-Arab nation.

I’ll let him have the last word here (be sure to scroll though the entire dialogue), but I just want to take this opportunity to stress the importance of thinking about the world in terms we might not be used to. The standard unit of measurement – for lack of a better term – for thinking about international affairs is the nation-state, but this way of thinking about the world has, like all devices humans use to make sense of their world, weaknesses as well as strengths. To my mind, as the world becomes increasingly interconnected thanks to liberalization, the nation-state becomes less and less useful as a tool for understanding human action.

What Michelangelo is doing here is thinking ahead of the curve; he is applying the notions of suprastate and substate to international affairs. A suprastate is an organization or union that is composed of various nation-states, such as the ones Michelangelo uses in his argument (i.e. “Mediterranean Union”). A substate is a region within a nation-state, such as Kurdistan or Scotland or Somaliland.

Often, especially in debates here at NOL, the notions of suprastate and substate are used in conjunction with the developing, or post-colonial, regions of the world. This doesn’t mean these notions can’t be applied to places like the United States or Argentina. Indeed, the US itself was created as a supranational union in order to combat the strategies of the British, French, Spanish, and various Native nations. If you can entertain the notions of suprastate and substate when you think about human action, you will be that much closer to advocating clearly for the free and open society (see this piece on the informal economy by Dr Gibson, for example).