The Economist has been hosting a roundtable discussion on deflation in the Eurozone, and asked me to say something about this from a historical perspective. My contribution is here. (I should also say that the copyeditor removed my reference to Barry Eichengreen, the go-to person on these matters.)
Archive for the ‘Economic history’ Category
By Aidan KaneWednesday, November 6th, 2013
The Annual Conference of the Economic and Social History Society of Ireland is being held in NUI Galway on Friday 22nd and Saturday 23rd of November, convened by Niall Ó Ciosáin and Caitríona Clear.
Registration/booking information and the conference programe are available at:
The Society’s main web page is here.
Òscar Jordà, Moritz Schularick, Alan Taylor have a new piece on the issue, available here.
The beauty of the internet is that sometimes you come across papers like this one that you might otherwise have missed (H/T Greg Mankiw). As you would expect, I agree with Temin that economic history has a fundamental role to play in economic education, and MIT is a great example. To repeat a point I have made on the blog before, several superstars who have emerged from that department have a historical sensibility that has made them much better economists. Obstfeld and Rogoff are best known for their path-breaking work in open economy macro, but both have written important books on economic history (Obstfeld with Taylor, and Rogoff with Reinhart), and I don’t think it’s a coincidence that Obstfeld-Rogoff style open economy macro tends to be far more grounded in the real world than some closed economy equivalents. Paul Krugman regularly displays an interest in and knowledge of history, which he uses to good effect; don’t even get me started on Ron Findlay; and so on.
There are many reasons to think that we need more history on the economics curriculum, not less. The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector. Employers are increasingly complaining that young economists don’t understand how the financial system actually works, and are ill-prepared to think about appropriate policies at a time of crisis.
Strikingly, many employers and policy makers are also arguing that knowledge of economic history might be particularly useful. For example, Stephen King, Group Chief Economist at HSBC, argues that “Too few economists newly arriving in the financial world have any real knowledge of events that, while sometimes in the distant past, may have tremendous relevance for current affairs…The global financial crisis can be more easily interpreted and understood by someone who has prior knowledge about the 1929 crash, the Great Depression and, for that matter, the 1907 crash” (Coyle 2012, p. 22). Andrew Haldane, Executive Director for Financial Stability at the Bank of England, has written that “financial history should have caused us to take credit cycles seriously,” and that the disappearance of subfields such as economic and financial history, as well as money, banking and finance, from the core curriculum contributed to the neglect of such factors among policy makers, a mistake that “now needs to be corrected” (Coyle 2012, pp. 135-6). In a recent Humanitas Lecture in Oxford, Stan Fischer (another MIT graduate) said that “I think I’ve learned as much from studying the history of central banking as I have from knowing the theory of central banking and I advise all of you who want to be central bankers to read the history books” (http://www.youtube.com/watch?v=5Y-ZhFbw2H4, 43.48 minutes in).
Knowledge of economic and financial history is crucial in thinking about the economy in several ways. Most obviously, it forces students to recognize that major discontinuities in economic performance and economic policy regimes have occurred many times in the past, and may therefore occur again in the future. These discontinuities have often coincided with economic and financial crises, which therefore cannot be assumed away as theoretically impossible. A historical training would immunize students from the complacency that characterized the “Great Moderation”. Zoom out, and that swan may not seem so black after all.
A second, related point is that economic history teaches students the importance of context. As Robert Solow (yes, that department again, although a Harvard PhD) points out, “the proper choice of a model depends on the institutional context” (Solow 1985, p. 329), and this is also true of the proper choice of policies. Furthermore, the “right” institution may itself depend on context. History is replete with examples of institutions which developed to solve the problems of one era, but which later became problems in their own right.
Third, economic history is an unapologetically empirical field. Doing economic history forces students to add to the technical rigor of their programs an extra dimension of rigor: asking whether their explanations for historical events actually fit the facts or not. Which emphatically does not mean cherry-picking selected facts that fit your thesis and ignoring all the ones that don’t: the world is a complicated place, and economists should be trained to recognise this. An exposure to economic history leads to an empirical frame of mind, and a willingness to admit that one’s particular theoretical framework may not always work in explaining the real world. These are essential mental habits for young economists wishing to apply their skills in the work environment, and, I would argue, in academia as well.
Fourth, even once the current economic and financial crisis has passed, the major long run challenges facing the world will still remain. Among these is the question of how to rescue billions of our fellow human beings from poverty that would seem intolerable to those of us living in the OECD. And yet such poverty has been the lot of the vast majority of mankind over the vast majority of history: what is surprising is not the fact that “they are so poor”, but the fact that “we are so rich”. In order to understand the latter puzzle, we have to turn to the historical record. What gave rise to modern economic growth is the question that prompted the birth of economic history in the first place, and it remains as relevant today as it was in the late nineteenth century. Apart from issues such as the rise of Asia and the relative decline of the West, other long run issues that would benefit from being framed in a long-term perspective include global warming, the future of globalization, and the question of how rapidly we can expect the technological frontier to advance in the decades ahead.
Fifth, economic theory itself has been emphasizing – for well over twenty years now – that path dependence is ubiquitous.
Finally, and perhaps most importantly from the perspective of an undergraduate economics instructor, economic history is a great way of convincing undergraduates that the theory they are learning in their micro and macro classes is useful in helping them make sense of the real world. Far from being seen as a “soft” alternative to theory, economic history should be seen as an essential pedagogical complement. From experience, I know that there is nothing as satisfying as seeing undergraduates realize that a little bit of simple theory can help them understand complicated real world phenomena. Think of Obstfeld and Taylor’s use of the Mundell-Fleming trilemma to frame students’ understanding of the history of international capital market integration over the last 150 years; or Ronald Rogowski’s use of Heckscher-Ohlin theory to discuss political cleavages the world around in the late nineteenth century. The Domar thesis that Temin refers to in his paper is a great way to talk to students about what drives diminishing returns to labour. Economic history is replete with such opportunities for instructors trying to motivate their students.
Coyle, D., ed. (2012), What’s the Use of Economics?: Teaching the Dismal Science After the Crisis, London Publishing Partnership.
Solow, R. (1985), “Economic History and Economics,” American Economic Review 75, 328-31.
By Frank BarrySaturday, June 15th, 2013
The institutional innovations over the deep crisis of the 1950s gave birth to the modern Irish economy. I analysed the process in this article in the Irish Independent last week. Brendan Keenan re edited it slightly to highlight his interpretation of what I was saying. One of the fascinating things about writing anything is how it takes on a life of its own in readers’ minds. (”And the word was made flesh and dwelt among us”). Edna Longley once destroyed the meaning of something I had written by aggressive editing; fortunately no such problems arise with Brendan. I wrote a similar piece for historyhub.ie, a new site developed by a group of young historians. Though I disagree with much of what Bryce Evans has to say on Lemass, I found his interpretation of what I had written illuminating: “it makes the case very convincingly for expertise offered as a basis for policy-making being more robustly based on both independence and breadth of opinion.”
By Aidan KaneTuesday, April 23rd, 2013
The annual Conference of the Economic and Social History Society of Ireland 2013 will take place in NUI Galway, on Friday 22nd and Saturday 23rd November. Cormac Ó Gráda will give the Connell Memorial Lecture. The deadline for paper proposals is 31st July.
Details of the call for papers downloadable from www.eshsi.org
By Aidan KaneTuesday, January 15th, 2013
The annual Irish Quantitative History group meeting will take place in TCD, in the IIIS seminar room, 6th Floor, Arts Building, on Friday 25th January 2013, 2pm-6 pm.
As numbers are limited, please email firstname.lastname@example.org if you intend to go along, and/or if you wish to be added to the IQH group mailing list. The workshop page (hosted by the Centre for Economic History at QUB) is here. The convenor of IQH is Eoin McLaughlin (University of Edinburgh).
Moritz Schularick and Alan Taylor have a useful piece on the topic, informed by economic history, here.
By Frank BarryMonday, October 1st, 2012
I am delivering a public lecture on this topic in TCD this coming Friday night. (The date is significant). The subtitle is “A Tale of Two Liberalisations”. Details available here. The talk is open to all but prior registration of interest is encouraged.
By Frank BarryMonday, September 24th, 2012
In this paper - part of a series on the institutional innovations of the 1950s, and related to my paper of last year on the 1956 introduction of export profits tax relief - historian Mícheál Ó Fathartaigh and I describe the circumstances surrounding the establishment of the Industrial Development Authority in 1949 and chart its evolution and expansion of influence over the following decade.
Brad DeLong and Barry Eichengreen have a really nice piece on the lessons today’s policy makers might usefully draw from the work of the great Charles Kindleberger.
It prompted the following two thoughts on my part, neither of which is perhaps relevant to Kindleberger.
Rui Esteves discusses nineteenth century Greek debt crises here.
So I thought I would share my thoughts on how the Irish are faring on this front.
By Frank BarryWednesday, November 30th, 2011
Kevin O’Rourke delivered a hugely insightful talk on the crisis and the global situation at a conference in Dublin last week. His presentation is here.
By Frank BarryWednesday, October 12th, 2011
I was asked to write this chapter for a forthcoming RIA volume on Irish foreign policy. A summary:
A country’s foreign policy is largely driven by what it perceives to be in its economic interests. That this does not provide a complete picture is evidenced by the fact that Irish development assistance has never taken the form of tied aid. Nor can the influence of powerful vested interests be discounted. A case can be made that Ireland turned protectionist again once membership of the European Union had been achieved. Agricultural and sheltered-sector interests have sought to stymie the liberalisation efforts of the WTO and the European Commission respectively. A further complicating factor is that a society’s own economic interests can occasionally be miscalculated. Joseph Lee has noted that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged… there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” Irish foreign policy through the years has nevertheless recorded many successes in defending the economic interests of the citizens of the state.
The paper considers the political and economic determinants of Irish trade policy, the evolution of its inward foreign direct investment strategy, and the country’s position on international migration and on the broadening and deepening of European integration. A separate case study focuses on how successive governments have sought to defend and exploit the advantages of Ireland’s low corporation-tax regime in international negotiations.
Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ’science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance.
I recently came across this quotation from Mark Blaug’s 1980 book on the methodology of economics which seems worth quoting, given when it was written:
At this point, it is helpful to note what methodological individualism strictly interpreted…would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications.*
Now, as Krugman points out, this ain’t necessarily so. (See his point 5 in the last of the three links, and see this paper for an example of how you can have all the theoretical bells and whistles these days and still make a sensible argument.) But there is no doubt that a lot of people have been more than happy to say goodbye to the whole of received macroeconomics — for example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.
One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure at a fancy university, but another thing entirely to say something about the real world. For that you need a little common sense.
Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.
One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others. For example, the Reverend Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.
If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.
*I am looking at the 2nd edition, published in 1992, but I am betting that this sentence dates from the 1980 edition.
I did my bit for Irish service exports the other week, organising the 9th conference of the European Historical Economics Society in the fabulous Guinness Storehouse. There were a couple of plenary sessions, one of which was a roundtable on the causes of the Industrial Revolution, featuring Bob Allen, Nick Crafts, Deirdre McCloskey, and Joel Mokyr. There was also a keynote speech by Bob Allen on the causes of wealth and poverty. Karl Deeter very kindly came along and filmed the two events, and you can find the videos here and here. My sincere thanks to Karl.
I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.
But this is a new one to me, I must confess.
(I would add two comments. First, that when people talk about fiscal union they can mean many different things. And second, that we already have the politically noxious conditionality which Kantoos is worried about.)
Tony Wrigley has posted a short introduction to his work on the role of energy during the Industrial Revolution, here.
This post is well worth a read, if necessary using google translate. It essentially takes the well-known point that moderate inflation can be beneficial in that it helps downward real wage adjustment, in circumstances when this is necessary; and extends this to the context of real exchange rate adjustments in a diverse currency union. It also cites some supportive evidence from the history of the classical gold standard, courtesy of Flandreau, Le Chacheux and Zumer.
One of the things that has always marked out economic history as a subfield within economics is its focus on the economics of technological change. The Habbakuk thesis held that the high wage environment of the United States helps explain the nature of that country’s technological progress in the 19th century, and Bob Allen has recently argued that high wages and cheap energy are key to understanding the British Industrial Revolution.
I was pleased to see John Bruton referring to this in his recent LSE speech.
Since this is the weekend, here is another example of directed technological change (or at least, such is Roger Cohen’s interpretation), this time from Denmark.