Economic History for Economists: Why? (Nicholas Crafts)

the industrial thank you and I thank you very much and thank you for inviting me back to Cambridge some of you will know that I was a student here and I always enjoy coming back so any excuse I think it's only two years since I last spoke to this society but that's probably long enough for everybody to forgotten so I got us again okay all right I set myself this question economic history for economists why I'm not entirely going to proselytize I think it's an open question whether you think it's a good idea or not but I will put a kind of pro case and then you can shoot it down when we get to question time I'm going to talk about a few general points to start with and then I'm going to try and illustrate them with little bits of economic history I'm going to emphasize probably mostly in that thinking about crises and in particular the Great Depression where I think you history does offer you a somewhat different vantage point from what you'd get from just studying say macroeconomics okay so let me start by saying I think the past does have a lot of useful economics by that what I mean is that if you think back through history basically you've got a much wider range of experience to look at you got fast growth you got slow growth you've got periods of inflation you've got periods of price Falls your peers where unemployment seemed intractable periods where it seemed no problem at all and so on we can see a very wide range of policy settings which some of which we don't see in the present day go back to the 19th century and we see the balanced budget and the gold standard for example since from time to time people advocate returning to those policies it might be as well to know something about them and institutional settings well again a wide range of different ways of running the economy different rules of the game differences for example with regard to the central bank is it dependent or independent differences with regard to where the extent to which we see the rule of law being enforced and in what ways differences in the way that capital markets are organized all those sorts of things add to the range of experience as Emily said right at the start one very obvious point is that been a lot of financial crises in economic history and because like anybody else historians like bad news there tends to be quite a lot of writing about those financial crises you really couldn't study a serious course in economic history without realizing that financial crises have been in the past pretty important pretty devastating again it's quite interesting to think about the causes and the consequences on a practical basis if you want a long time series for something you keen to examine its properties as an econometrician economic history is almost by necessity something that you're going to console' if you do consult those long time series it's pretty important to understand the foibles the limitations the basis on which they were constructed otherwise you might end up estimating an assumption which might not be the cleverest thing ever to do you've just rediscovered how the series was created in other words natural experiments that's something which economy traditions have got evermore excited by again history is the place where we might look for some of those in one of the most interesting natural experiments which I think has given rise to some really good work for example was the division of Germany after World War two the division of Germany had some quite important economic consequences because the division of Germany was not essentially predicted beforehand we can think of it as an exogenous shock and that has some important properties and then I think the last thing that I would really really stress and probably more than anything else almost is that if you study history then I think you're studying a story about constraints policymakers in a given period do not inherit a clean sheet they come with his the economy comes with historical baggage there are things that are off limits at particular times or things which I did see NASA say the least politically risky to challenge that's one of the ways in which history matters in the sense that what has gone before constrains the options that you now have and maybe constrains them really quite considerably so why might I advocate thinking about economic history I think I'd probably want to say it's quite important to think of it as in some ways distinctive it's not I think just another branch of Applied Economics although clearly it can be treated as applied economics or analyzed with the tools of applied economics there's nothing wrong in that probably the most important claim that you find economic historians making is that the world is at least sometimes and in some respects path-dependent that's a slightly more extreme version if you like of history matter certainly if math dependency is such as to lock you in completely to no choice whatsoever which is a kind of extreme story who was perhaps one of the biggest advocates of path dependence in economic history well I think it's Douglas North who as she probably know died last week and his branch of path dependence revolves around the importance of institutions for historical outcomes the difficulties of changing institutions and the extent to which societies get locked in to not changing institutions the switching costs are always just too high I think the third bullet is quite important and especially when you start thinking perhaps about after you've studied economics in Cambridge and you're getting a job you might want to say economic analysts have to concert convinced or persuade people who are not really economists when you get out into the city or whatever it's going to be why does convincing historians make it more interesting more difficult because historians like different sorts of evidence they're unlikely to be persuaded by regression on its own they would essentially ask you does this pass the common-sense test as well as satisfying an economists prior I think that's quite an important challenge sometimes to meet to think you've got to convince them what does that in particular mean I think it means you have to consult a wider range of evidence than economists left to their own devices we'll look at let me take a very simple example which some of you probably come across the claim that in the interwar period in Britain unemployment was search unemployment it was voluntary unemployment very largely the claim made by Benjamin and coaching at the end of the 1970s I think an economic historian trying to convince historians of that claim would in fact have a very hard time because it would keep running up again the evidence which was submitted to royal Commission's the surveys of the time what we know about the behavior of the unemployed inferring this from a regression she's not as it turned out a very satisfactory inference because it's bedeviled by observational equivalence there are several other ways of interpreting their results that would be a neat example and lastly I've always thought that economic historians although they use the tools of neoclassical economics one hopes sometimes quite sensitively are not typically implicit fully paid-up total believers that neoclassical economics includes the sort of full story of the world so I think economic history is actually an antidote to taking much too literally much too far the insights of the other neoclassical modeling strategy this is more for historians but I would want to argue that economics can improve historical understanding so I I see the story as one of synergy symbiosis between economics and history what do economics econometrics what does the understanding of that do to help historians apart from anything else I think it makes the facts better think of my own work on the Industrial Revolution that's entirely about how to construct index numbers properly but if you don't understand how to construct index numbers properly you'll get this all at story seriously wrong that's pretty important in particular in general in measuring economic growth well and in measuring the sources of economic growth well I dwell on that now we could come back to it in questions if you want better analysis of data well I think that's to do with things like getting the econometrics approximately right it's for example at the simplest level distinguishing clearly between correlation and causation thinking about identification strategies whatever it might be new hypotheses well again let's go back to that unemployment one the value of benjamin coaching was they did introduce a new hypothesis to what was then the literature namely that if you change the nature of unemployment benefits or unemployment insurance behavior will probably react to that the standard historians view of the interwar period at that point was the kind of unreconstructed volga Keynesianism which rather ignored that kind of view of the world altogether you can think of lots and lots of examples of those new hypotheses if you put those things together in particular because I think when you put forward the hypotheses makes you think quite hard about the Catrice paribus conditions of what you're trying to infer then one hopes you end up with more robust results major advances have clearly been achieved with regard to the Industrial Revolution that goes absolutely without saying while I'm here you can say something different when I'm gone no we have a completely different view of the role that economic policy did and could have played in the 1930s compared with only thirty years ago I think it would be fair to say we know lots more about the pre-industrial economy in terms of I think having quite a good understanding of various aspects of what a Malthusian economy is really like or a late Malthusian economy and I compared with there now as a student I think it's also fair to say that economics has a massively improved menu for studying economic history let's just take us a modular as an example part of the Acemoglu story is a whole range of interesting hypotheses about the role of institutions but think also of Acemoglu undirected technical change which is a major part of the way economic historians have always thought about the world but not being good at formalizing until these later models came along this is in a sense both of those examples are really to do with endogenous innovation views of the world but you know since I was a student new industrial economics new international economics this requires a massive rewriting of economic history we can also I think think that we nowadays think autumn matically almost about worlds where information is asymmetric and imperfect that again changes the way you think about the past no economists are just big them up but I think he kind of Miss lack various things which a good course in economic history wakes you up to historians have skills which economists either don't have or have less of or are sometimes sort of dimly aware of if you lie there are historical methods that complement and in some cases are essential for using economic techniques certainly for the investigation of the past but arguably also for looking at the present the first one of those would go under the general historians label interrogating sources when you consult a primary source a government document let's say you need surely to ask why was this written who wrote it what are the likely biases in it is it really telling me the truth or is it spin in some sense I guess so you undergraduates probably more cynical now than we were 50 years ago you live in a world of much more spin I dare say but it's always very important to ask of any source can we believe this what are the likely biases in it and I think that applies to present-day materials issued by all sorts of people as well as the past it's a good discipline to have whenever you think about or quote a source secondly again you may not need me to tell you this but I don't don't suppose you doubt me now that it's quite good to help healthy skepticism about data I think you only have to see the chief economist of the ONS an old friend of mine the hapless Joe Rice appearing every three months or so to say yeah we revised our estimate again we've realized our revised estimate now some of that is to do with the shambles in which the ONS finds itself at the moment some of which is trying to do things too quickly some of it is because in with the best will in the world data will change and get a more complete picture but again skepticism about data how was this data put together for what purpose what are its likely biases those are questions you should always be thinking to ask the historian as I said earlier tends to look for more than just economics of the conventional narrow kind looking for corroborating evidence and these historians are certainly well aware of the rhetoric and the importance of being prefer persuasive to a wide audience and that's particularly true if later on in your life you want to influence policy perfectly fair also to say that economic history can be misused often is misused and some of the things that you see historical material brought forward to do are surely wrong so a lot of evidence in history requires inference it requires measurement it can't be directly observed it can only be constructed perhaps through a statistical technique take for example the notion of the fiscal multiplier we can't observe the fiscal multiplier we can try in various ways to try to estimate it when we go back and ask ourselves what was the multiplier at some particular point in the past we quite often find either that the data don't exist to estimate it as a modern economists might like or that the data do but they've not yet been used and there are a bunch of sort of old estimates relying on out-of-date techniques or whatever so quite often you find the evidence set is less complete than you would lie I've owned in effect said some of the facts are not reliable I'll come back to that in a moment misleading lessons history is all about contingency histories are all about relationships which operate or work well at a point in time but are not necessarily generalizable think of this an economist arriving from Mars and being shown a bit of data on the interwar period would surely have predicted the collapse of the eurozone at least or years ago and would have inferred that from what happened to the gold standard the gold standard lesson clearly doesn't carry over the reasons for the collapse of that system you do need to think quite hard why and you do need to be a bit cautious about inferring lessons which as I say a perhaps rather contingent and then I think we do have to recognize there is a lot of partisan history sitting out there history is usually written or a lot of it at least is written by people who have a point to make and that includes economists so you always do have to ask where they're coming from but you also I think have to ask have their priors limited their search for evidence limited their interpretation of the evidence delivered a particular story which is not the only way to interpret the history they're looking at think of the controversy over whether late Victorian Britain failed and that would give you very good set of those kinds of examples okay I said I'd just have some general points now let me just try a few historical bits and pieces to illustrate one or two of those points let me start with the Bengal famine which some of you may know about occurred in 1943 1943 for in wartime British India lot of people died made very famous ax men amongst other people looking at it by a Martius an whose big book on poverty and famines relied on this example particularly its classic example of what sin called the entitlements view of famine that it's not about absolute food shortage it's about who has the command of the resources to be able to purchase food it's a distributional view if you like rather than a kind of Malthusian view sends interpretation of the bengal famine is that it was primarily the result of speculation and hoarding that's essentially an entitlements view if you wish and not due to a serious decline in food availability the main evidence I think which sand relied on or sent me an important part was the report of the famine Inquiry Commission that was a British government Commission which reported in 1945 about the inquiry and had a remarkably similar view an economic historian approaches the same problem will that historian get the same result not necessarily calm a COAG Rada revisited this he's done an awful lot of work on famines as some of you may know and he did a very nice Tawney lecture for the economic History Society in 2007 in which he looked at this experience again I think actually the paper may have appeared in 2008 if you're wanting to chase it up in the economic history review so AG Rada did the natural stuff that a historian would he asked what did this government report want people to believe and why he looked at all the evidence presented to the Commission including the stuff which is not covered in the report in other words he went back to all the primary sources he looked at what happened during the famine in particular in at the time when the government tried to reveal and get disbanded if you like hidden hordes he then linked that to an economists analysis of what the differences between food availability deficiency hypothesis a fad hypothesis and an entitlements one he notes the real difference is what happens to the producers producers do badly if it's a fad story because basically they've just seen a massive inward shift of the production function that's going to hit their rents it's going to hit their returns and in entitlements view of the world it's the consumers or a subset of them who get hit very hard and lastly I think to refer to old Rada he didn't have a strong view before the outset as to what he would find I think that was helpful to him okay what did ou granter turn up my needed' did all that work well he firstly showed that the British government had a massively strong motive to cover up that the was a food deficiency famine at the time and subsequently it didn't want to be caught out subsequently that it had been lying it had been lying in 1943 because it was unwilling to provide the food supplies from outside bengal because the shipping was being prioritized for other wartime purposes putting it there are there simply it's a bit more subtle than that but that's the story grinder also has a view about complicit Indian politicians who for various reasons of their own wanted to play along with that secondly he shows that actually there was no evidence that hoards could be found even though government tried very hard to get them released into the market in July 1943 he looks through all the survey evidence of the period it's very clear that producers in particular land holders were distressed many of them were able to unable to produce enough to keep their land the conclusion sends interpretation is not really persuasive there is a food availability problem here and quite a serious one I'm just suggesting if you think about what I've just gone through that epitomizes using the historical skills together with the economic analysis and not accepting the primary source at face value that's a really important set of lessons too to appreciate ok I said economic historians probably are not terribly persuaded by some bits of neoclassical economics let's take the most fundamental bit of that and again the different way in which economic historians think about how things evolve divergents big time I think we know about in a sense is the widening income gaps across the world that characterized the era of modern economic growth after about the mid 19th century you can certainly say in this period that institutional policy failures matter and I'll come back to that in a moment but I think another thing which I think a view of the data would tell you is there's a very strong spatial correlation of development outcomes which is something which no where as far as I know in neoclassical economics is that a model which will you that result in other words pick any country in sub-saharan Africa and it's going to be fairly poor pick any country in Western Europe is going to be pretty rich you know those sorts of things are pretty clear if you like it's very definitely when you look at the data and when you analyze it do the econometrics on it it's not a neoclassical world of rapid beta and Sigma convergence remember beta convergence is if you're behind you grow faster as you catch up Sigma convergence is basically that the variation of incomes variance of incomes around the world tends to zero over time incomes per person I should say it's clearly not the data you don't only need to look at the data to see that but then why not neoclassical economics has at best a rather shaky answer to that I think those are some numbers from the Madison project purchasing power parity adjusted done in 1990 gierek Armus dollars the standard Madison numbers looked at China and India at least through 1973 compare them with yes West Europe China and India do start to catch up Africa gets left behind the gaps in 2010 are much bigger than they were in 1870 the ratios of those numbers so this is a world which is a combination of divergence delayed catching up but it's certainly not a smooth beta sigma convergence of the kind that a neoclassical model would predict you could do it a different way and look at shares of world GDP measured in the same sort of numbers these Geary karmis dollars China has a third of world GDP in 1820 5% in 1973 and it started to catch up and may get back to it so sort of early 19th century share well probably not in my lifetime but possibly in your lifetime let's put it like that okay and you can see that the converse things happening to Western Europe and the United States in the 19th century Robert Lucas in a quite well-known paper in 2000 that that was an aberration in the 21st century normal service would be resumed the divergence would be superseded by convergence if you wish and this intersociety income inequality would start to die away what was Lucas's argument well I'm not I may be doing him a slight injustice but I think this were more or less summarized it obstacles to growth had been removed by the start of the 21st century in the sense that historically experienced by now gave you a blueprint what sort of policies would work what sort of institutions would be conducive to economic growth you could work it out from the successes and failures of the previous century in 1900 you might have believed that a soviet-style growth program would work when I was a student I read a textbook written by a very famous economist which told me that Soviet Union would overtake the United States by the year 2000 yet another of those economist predictions that didn't quite work Lucas I think argued that globalization was good for catch-up moma more mobile capital if you got it right you could borrow other people's savings rather than have to rely on your own the speed of catch-up growth would increase markedly capital to labour and total factor productivity gaps would be rapidly reduced said Lucas okay so it would be back to beta and ultimately Sigma convergence just after a little delay while people got things wrong in the 20th century well I think economic historians and at least quite a few economists a bit less sanguine than that let me suggest a few reasons why you might be based on the large volume of historical evidence sitting out there about the process of economic growth across the world the lucas story in a sense invokes the solo model of neoclassical growth it basically relies on the proposition that total factor productivity levels will be the same all the way across the world everybody has access to the same technology and can achieve the same level of efficiency I think that very strong and implausible assumption and I think history would tend to press us to that view that it is implausible when people have looked at TFP levels in the late 20th or early 21st century they invariably find that they're hugely different however you try to measure them I'll skip the second bullet the third one though I think economic historians would stress that geography has effects on economic outcomes institutions do and so do policies but policies don't automatically get changed to follow a blueprint nor do institutions on the contrary interest groups political constraints those sorts of things imply that they differ persistently and so economic historians unlike Lukas would I think see this convergence processes undermined by something which Doug North would have called path dependence or at least that the footprint of history sits quite heavily there and so I think we as economic historians are much less optimistic than neoclassical economists about convergence examples of path dependence technological historians think of technological walk in the most famous alleged example some of you are using as we speak QWERTY the keyboard the layout of the keyboard still as it was in the 1880s when typewriters were invented the new institutional economic history tradition that's Douglas north institutions which develop their own interest groups and network externalities which are too strong to allow reform in some cases new economic geography which I think gives economic resonance to old stories about core and periphery persistent advantages of the core over the periphery based on larger markets better ad la more Asians and so on those are things which are not in the simple neoclassical playbook but a study of economic history I think makes it quite hard to ignore them you realize much more than if you've never looked at this stuff that when you use a neoclassical model you are to some extent suspending your disbelief you're using it for a purpose that's fine as long as you recognize its limitations as well as its strengths I'll finish with a few minutes on the Great Depression if I may partly because I think this is almost the best example of why maybe the Economist in in the classroom in the first year or maybe the second year of their undergraduate career might feel that exposure to economic history gave them something they won't get elsewhere Great Depression of the 1930s was a massive event it's traumatic be much better actually if every schoolchild studied this rather than the great dictators the great collapse of the world economy would be a much better module it seems to me but it's not quite a sexiest Hitler and Stalin I appreciate that maybe sex is the wrong word but you know what I mean somehow it doesn't quite have the same sort of appeal I think it could be made to have the same appeal you just need some imaginative videos of sort of people being ruined anyway never mind jumping off skyscraper it's that sort of thing if you want the sort of videogame approach to it okay now Great Depression the 1930s I think actually any economics students should have a bit of an introduction to this simply because it really does epitomize this much wider range of experience things that we've on the whole not seen since certainly not in the same way and which give us important things to think about and to analyse so the Great Depression includes really strong price falls at least in the worst-affected countries that's tie mean by deflation I mean price deflation very large increases in unemployment and decreases in real GDP in the most affected countries complete collapse of the international monetary system of the late 1920s the most important set of financial crises in Western economic history eclipsing even what we've been through in the last few years I've signaled that by bank failures and until recently almost the only well a learner analysed experience we've had of an economy at the zero lower bound of economies where interest rates nominal interest rates are as low as they can go but maybe real interest rates are very high because prices are falling yet when you talk to people you know you have a drink with somebody or you talk to somebody on the bus or whatever they found out you're an economic historian they want to know about the Great Depression they'll always come out with its bunch of myths and I feel that a lot of economists also believe them The Wall Street Crash cause the American Great Depression I don't think so we can come back to that no serious economic historian would give any credence to that whatsoever Roosevelt's dear New Deal was a big fiscal stimulus only if you think a stimulus amounting to about 2% of GDP in an economy with a demand gap which is probably 25 percent of GDP only if you think that's big I don't think so again that's been known in the professional literature for at least 60 years since people first did the sums a technology shock caused the American Great Depression only in the imagination of some amazing ivory tower economists some were stuck in the Midwest of the United States it is inconceivable that you can tell me a sensible argument for a technological shock to create this a big downturn and the people who tried to test the idea have unanimously concluded this hypothesis does not work world war ii saved the united states from secular stagnation this newly fashionable again idea put forward by summers in the 1930s it was Alvin Hansen oh no I don't think it did what the United States had throughout the 1930s and even the 1920s was a very strong rate of technological progress it was a very strong trend rate of growth which was inherited from the technological prowess of the early decades of the 20th century which drove the United States through the one big wave so World War two might have helped the labor market by dealing with hysteresis problems but it isn't the solution to secular stagnation I like numbers you probably know if you had to read my book there are some numbers on the USA this is a serious depression look how these are index numbers for real GDP and the GDP deflator big fall in GDP big fall in prices strong recovery in the later 1930s big unemployment shocked if we have a banking crisis we'd better analyze it all the analysis we've got says bank failures made a massive difference to the American economy and bank failures were not ruled out by an efficient markets hypothesis neither then nor later the bank failures weren't random they reflected a world of moral hazard a world of asymmetric information a world in some cases of weak regulation you can partly infer that because states in the u.s. differed in their regulation you can see what difference regulation makes we know from the work of Ben Bernanke and a whole host of people who followed him with lots of detailed micro studies that when banks failed financial intermediation services were reduced and there is a big effect on GDP this causes a credit crunch a drying up of investment was virtually no investment by 1933 and so on lastly from a quasi natural experiment amongst other things different bits of the Fed behaved differently we know that a seriously aggressive lender of last resort could have made a lot of difference could have prevented many of the bank failures there are a series of really important policy lessons there which you cannot get out of studying the economy of sort of 1985 to 2007 what ended the Great Depression well my story would be its regime change it's not to do with fiscal stimulus in the normal Keynesian sense it's to do with the change in inflationary expectations and falling real interest rates the New Deal I've already said essentially it didn't raise aggregate demand but it probably might have had a big effect on inflationary expectations here I think is an example of the old literature until about ten years ago would have taken you through something close to an islm view of the world would have looked to calculate the change in the government's fiscal position and have some idea about what the multiplier might have been more modern approach says you need to think about a depressed economy with interest rates at the lower bound and an imperative need to get real interest rates down that creates a quite different way of thinking about what happened during the New Deal so the battery or the more interesting for me at least economics gives you a new handle on the experience you don't want the really old stuff but equally this range of experience is giving you something to use these ideas on to explore them to see if they work and I get snis the man who did that inflationary expectations there's some sort of textual analysis which says actually when you look at other sources you don't just look at the economic model you can find the same thing once the United States leaves the gold standard everybody starts talking about inflation you know you can capture that through a computerized textual analysis show it so a big statistical effect and so on I've already I think told you why Alvin Hansen was wrong so I can skip over that one there are some numbers just to show that I didn't make it up that's a growth accounting story which says that total factor productivity growth was actually very strong during the 1930s I'm running out of time so I've got one last slide in sup if you've been asleep for the last 40 minutes probably slightly ahead of the game but you could wake up at this point in France at this slide I have claimed any fact economic history can make you think in a constructively critical way about mainstream economics for various reasons that I've tried to itemize secondly a usefully different past increases the variation of the experience that you can analyze it can offer in size economic history can improve your skills by giving you some so of those I called them historical skills but they're not just historian skills which can complement your economics and for me at least I think some of these episodes are quite exciting you know I would be worse off if I'd never studied the 1930s it would be a duller place I'd say at the end is sadly I'm not sure that everybody who teaches the economic history to university students quite delivers on this prospectus but we can hope it will get better a student satisfaction surveys say I want this exciting useful sort of economic history thank you oh yeah oh we're sorry you guys start your question cuz these are the two that I okay well on the New Deal one I thought I think I dealt with that really in the talk didn't know so I think what I'm saying about the New Deal is the degree of fiscal stimulus was quite small there is a fiscal stimulus but I think we're looking at as I say something of the order of two percent of GDP the American government never runs a really big deficit during this period that's more doubtful difficult is what the size of the multiplier might have been that is controversial the estimates that people come up with seem to be very sensitive to the method that they use so we do see estimates which have fiscal multipliers as low as about point six and other ones which are up at about one point eight or something like that but in a sense I think what the literature says and this is pretty unanimous in the literature is it might have worked it wasn't really tried and if you want the most recent statement I can think of of that price fish backs chapter in the book I edited on policy lessons from the Great Depression would fill in the detail and give you the earlier references the Wall Street Crash I promise lightly overact the pudding but I think people haven't yet been able to provide the answer I think some of the things we probably think we do know he is reasonable to suggest that stock prices were too high in 1929 we can argue about technically whether there was a bubble or not but stock prices were pretty ambitious I think that has been agreed and by people like Brad DeLong does see symptoms of irrational exuberance so I think one could certainly say there is scope for some kind of puncturing of the bubble or ending of the exuberance that that will cause stock prices to fall nevertheless the vast majority of the stock price falls over the next three to four years I would have thought are seriously endogenous they're not an exogenous shock they're reflecting the fact that earnings are declining very rapidly the fundamentals of what informs a share price are worsening very quickly if you're going to say The Wall Street Crash caused the Great Depression or offered a big shock then you've got two more hurdles to me one is to say was this something which couldn't have been can to buy adequate policy response which was Friedman and Schwartz's position answer yes it surely could as happened after October 1987 which was a bigger crash but I think more important you might want to say what's the transmission mechanism what was it that the Wall Street Crash affected don't think you can say that it really seriously affected bank balance sheets so it's not really responsible for the banking crisis I think that's been known for a long time I think you could also say any impact it had on consumption any measurable impact must have been pretty small it's not a very big change in wealth of the private sector overall with any kind of reasonable propensity to consume out of wealth you're not going to get a big effect peter teman showed that some years ago I think then that leaves channels which just might be there but they're not documented in the literature that's why I said I think I overate the pudding if you were to investigate this in a modern way I think you might want to say did the Wall Street Crash create a lot of uncertainty could we find an uncertainty argument undermining spending undermining aggregate demand if you like the sort of analysis that people like Nick Bloom at Stanford have been doing in a very sophisticated way for the modern period at the moment I think there's a really big opening for somebody to go seriously into that analysis and visit the question in 1929-30 so I think as the story is normally told it is a myth but it might yet be possible to find ways in which this was more important than it looks according to the literature at the moment yeah I mean I personally think if you're looking for a financial argument about the Great Depression it's the collapse of the financial system in the form of banks which really matters and I don't think the Wall Street Crash is really particularly important for that yeah to people almost in line the the guy behind you and then yourself yep you and the very nice t-shirt to understand other economics now so do you mean the study of the Great Depression and all the depression crisis in history it helps you now to identify the causes of the current crisis and the solutions well I think that would be a pretty big claim so not as such I think it gives you a list of suspects it gives you some hypotheses to investigate but it might even be that this time is different in various ways so I'm rather against this notion that you can easily map from one period to the other I think it's more about thinking about things it's about thinking what the suspects are it's offering some diagnostic hypotheses and so on if you do do that then it seems to me that in terms of banking crises a pretty big question mark has to be raised against regulation in the pre-crisis period and I think anybody who studied the Great Depression would certainly go to that as something which is quite important I think you probably would in that context think that moral hazard is quite important in financial crises if I'd given you a longer store you'd also I think see the Great Depression as the end of a very big buildup of credit in the economy and that is again I think the pre 2007 experience so thinking of papers like the one by Moretz Julianne Alan Taylor from 2012 which has a big data set and documents that for the period from 1870 so I think it would then be incumbent to say that if you think about this very intricate literature on banking in the 1930s it's full of the micro economics of banking it's full of implications of asymmetric information so on and so forth it becomes very hard to believe in a naive efficient markets hypothesis when you've basically got various people with very different interests they're not perfectly aligned and so on so I think the big message that an economic historian would probably offer is constructing macro models in which there is in effect no financial sector may be fine depends what purpose you're using it for and it may work very well in years like the Great Moderation but in a sense you're running a risk if you believe implicitly that that's how the world is as opposed to this is a very useful tool for various forms of economic analysis there's an element there of horses for courses but I do think this sort of large literature on financial crises had basically been pushed aside and largely forgotten by modern macro Kirk R 2005 I don't think this is an argument for saying we should just throw economics away i think it's an argument for saying we need to be a bit more thoughtful about which bits of economics we bring to the party you were next I think perhaps combined teaching health but also to understanding the development of economic ideas and approaches because I was quite at first I was persuaded into what compelling idea the teaching of history of economic thought should be combined with teaching of history of economics since a lot of the if not all of the approaches the rate of payment well develop through reflecting some of the problems of the age and that may also teach some of the different strands of economic thought being more humble and approach reality yeah I think that's a perfectly fair view it wasn't of course what I was saying here but it's consistent with it it's complimentary to it I think the one thing I would say is that that's very different from the sort of history of economic thought course which was traditionally taught in the past I think you are advocating and asking for what in a sense is a much more user-friendly kind of history of economic thought which has a slightly different agenda from the sort of historiography of the history of economic thought it's more about what happens when economic ideas are challenged how they change why do they change I think this does have some sympathy with the kind of new course design that people like Wendy Carlin are trying to introduce which has a little element of that so I would be quite keen to see us try to do more and I think this is a very small toe in the water No so limited subset I agree but it is a kind of small step in that direction as to the way she thinks about how macroeconomics changed as things went wrong just what you could find I think as the I mean how the ideas rise should be part of the teaching of what those ideas are yeah no no no I understood what you said yeah and now I think that's a perfectly good idea at the front and then behind you the estimate I mean when you look at how you got estimates you can see quite a bit of a logical jump sometimes it's not very robust and a lot of the debate I think it's based on one thousand saying oh I've got this estimate and I've got this data and the lab doesn't say ok another data and therefore these different leaders come up with different stories and in light of you know a lack of perhaps robust reliable data how strong conclusions of economic dystrophy you're right to say that sometimes data do not exist when we wish they do or there aren't reliable estimates got important to know what we think is reliable and for what purpose because I don't think we're really talking about a criterion of complete purity so to speak we're often asking are the data good enough to infer something which is useful economic historians in that context often use Fogle's intellectual trick of trying to bias the calculation against the result he really wanted to see by every time making the sort of extreme opposite assumption where the data were incomplete that Fogel intellectual strategy is actually quite a useful one if you're not worried about precision but what you actually want is to rule out a hypothesis as being anything other than pretty implausible so I think it's a question of how good does the data need to be for what purpose it's difficult to and your question in the abstract on the Industrial Revolution that clearly are quite a lot of gaps in the data there are quite a lot of things where one could take a reasonably different view it's not clear for example exactly what happened to real wages it's clear what happened if you make the interval large enough but within a narrower interval it's more debatable again one shouldn't probably imagine that the rate of growth is known with any certainty either that said I do think we know enough the data have been recently reinvestigated very thoroughly to say that what I was taught in the sixties by philistine the Dean and Cole view of the Industrial Revolution is almost certainly wrong but I wouldn't be prepared myself to rule out that the growth rate would say half a percent lower per year than I thought it was or maybe even half a percent higher you know there is definitely a range and so then the interesting question is if that's the sort of reasonably sensible range to think about does that rule out some things is have you achieved something by narrowing it down to that rather than narrowing it down to a perfect point estimate you had a question I think the president obviously York was hugely influential in any kind of cold revolution but recently I read an article which is also completely biased because it was essentially saying you know in light of the financial crises and you know the importance the time failure is not you know stopped yourself in the literature this theorists argue that the Industrial Revolution was largely caused by another group of credit in the moment of national debt and I was wondering overdue on that was the importance of credits and come at that moment let me just say something slightly more general first if I may I think you would be right to say that as time moves on different preoccupations different concerns about the present inform the way that people think about the past you go back and revisit it for example when we were last really interested in the 1930s in Britain actually during the nineteen eighties the focus was of the literature then was almost entirely on unemployment this time we've been through a recession in which unemployment doesn't seem to be the big problem it's something to do with productivity performance and perhaps the financial system and worries about government debt government debt was a massive issue in the interwar period it is therefore the present generation to go and think about again so I think each generation does ask its own different questions about history and that's something that keeps freshening it up you know something different happens on the credit and the Industrial Revolution story I think the thing that's always impressed me is that Britain was really quite a wealthy country in many ways prior to the Industrial Revolution they'd have this long period of very slow economic growth but it's way above sort of subsistence income level it also has a very unequal distribution of income so the implication is there is a quite large investable surplus if you want to to talk about that and then I think you've always had two hypotheses sitting there about that one is do people start to invest more essentially because the world starts to look much more attractive there are much better investment projects so I mean one way in that which that works is technological progress creates new investment opportunities and that gets the savings put to work or is the problem that the savings are finding it difficult to work through an external finance mechanism because the capital market is in various ways so primitive I think the answer has got to be some combination of those two the capital market does improve in various ways but in the industrial revolution itself I think one might still be quite interested in the idea that basically there is a significant amount of crowding out happening in the context of the wars with France and the fact that at that point the usury laws become an effective sealing of constraint and so on the longer term implications of the change in the market for government debt the innovations which take place in banking and so on is surely positive the short term not so obviously so but I think that remains an interesting issue I think those are the two things which must have been happening exactly what the balance between the two is I don't think we have a I don't have a clear view at this point No okay well thank you very much

Channel: Cambridge Society For Economic Pluralism

Views: 3,976

Rating: 4.9310346 out of 5

Keywords: CSEP, Cambridge Society for Economic Pluralism, Economics, University of Cambridge, Economic History (Field Of Study), Nick Crafts

Id: BTXnkxLKv7w

Length: 59min 40sec (3580 seconds)

Published: Thu Dec 10 2015