Are we living in the early 19th century?

by on March 4, 2013 at 7:06 am in Data Source, Economics, History | Permalink

I frequently make this reference in talks, though I can’t recall having blogged it yet.

Here is one report from the front today:

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation.

“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

If we turn to the industrial revolution, what do we see?  Relatively high productivity from “restructuring,” (machinery replacing labor) but relatively low productivity from innovation or total factor productivity.  Robert C. Allen, in his “Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution” (pdf, the final version is in Explorations in Economic History, 2009) estimates TFP from the time at about 0.69% a year, hardly a stunning number (the number runs in the 2%-3% range for the 1920s and 1930s) and actually that early number is close to what we are seeing today for TFP.

From 1780 to 1840, output per worker rose 46% and the real wage index rose by only about 12%, noting that none of these numbers are close to exact.  (Contra Ricardo, the share going to land is declining steadily and capital is capturing the gains.)  The significant real wage gains come after 1840 and — in my view — even more after 1870.  After 1830 TFP is growing at the higher rate of about 1% a year, still not impressive by the standards of the early 20th century however.

During the early 19th century, there is much creative ferment, but much less in terms of products which translate into gains in living standards for the average person.

By the way, you also have theorists — Malthus, Lauderdale, Chalmers, Attwood, and others — who thought the main problem was simply lack of aggregate demand, which Malthus called effectual demand.  They were absolutely right about part of the picture in the short run but missed most of the larger truths.

Eventually all of the creative ferment of the industrial revolution pays off in a big “whoosh,” but it takes many decades, depending on where you draw the starting line of course.  A look at the early 19th century is sobering, or should be, for anyone doing fiscal budgeting today.  But it is also optimistic in terms of the larger picture facing humanity over the longer run.

jn March 4, 2013 at 8:37 am

There is also scattered but unsystematic and inconclusive discussion by J. Williamson and others (also mentioned by B. DeLong) about whether the enormous increase in the size of the 18th/early 19th century British state (tax increases and rise in revenue dwarfing that achieved by Continental rivals) may have partially crowded out private investment and thus depressed per capita growth rates in the early nineteenth century.

nurik March 4, 2013 at 8:41 am

“Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation. “There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.”

Maybe wages are not as volatile as profits due to price stickiness? Then a 20 percent increase in profits can be explained by return to normal profitability levels, whereas wages are simply not as cyclical.

I have a feeling that if comparison is made with the end of 2006, conclusion will be different.

RZ0 March 4, 2013 at 9:05 am

Various rises and falls in UK trade unionism seem on the surface to correlate negatively to rises and falls in worker wages – especially the Trade Union Act of 1871.
http://www.nationalarchives.gov.uk/pathways/citizenship/struggle_democracy/trade_unionism.htm
Maybe that’s obvious.

Ray Lopez March 4, 2013 at 9:47 am

Excellent paper; I’ll point out that it may be difficult to measure TFP in the early 19th C, since stats like GDP were only measured from the 1920s onwards, but also econ historian Angus Maddison’s data shows the late 19th century in western economies (USA, UK, GER, a few others) had GDP growth per person roughly the same as the late 20th century, due to immigration from south Europe, China, etc (which of course does not give a high TFP, but does increase growth per capita). And this before the days of central bankers. So my pet theory: we don’t need central bankers, and bring back the gold standard. Would not hurt (or help, but the point being, ti would not be disastrous, and would avoid bank bailouts, which do no good).

jdm March 4, 2013 at 10:05 am

“Eventually all of the creative ferment of the industrial revolution pays off in a big “whoosh,” but it takes many decades, depending on where you draw the starting line of course. A look at the early 19th century is sobering [… b]ut it is also optimistic in terms of the larger picture facing humanity over the longer run.”

I find this side of economics endlessly fascinating. We take a single, relatively short, highly non-stationary time series representing economic growth since the start of the industrial revolution, and based on this single time series, which itself is the product of many complicated, poorly understood, inter-connected nonlinear and non-stationary processes, we confidently proclaim that we should be optimistic in terms of the big picture facing humanity in the long run. I personally would have much more confidence in this approach to long term forecasting if the practitioners of this art were able to actually predict something which is both observable and unexpected such as for example the (supposed) slowdown in innovation in recent decades which is one of Tyler’s themes but so far as I know none of them are able to do so. Instead what we tend to get are after the fact just so stories and analogies with the past based on observations of the present. I personally don’t find these kinds of stories terribly compelling.

mavery March 4, 2013 at 10:27 am

You’ve just described the fundamental problem with macroeconomics.

And a lot of time series analysis for that matter.

John Yard March 4, 2013 at 1:14 pm

How much of the recent rise in corporate profits can be
attributed to near record low interest rates , and
the dramatic fall in net capex ( capital investment less
capital consumption ) ?

These are non-sustainable ( assuming economic growth is
desirable).

mkt March 5, 2013 at 12:02 am

And the fundamental problem with history too. But this is hardly news to the historians.

JasonL March 4, 2013 at 10:35 am

Well yes, but to be fair to TC, he was responding to an article that tried to make hay out of “there hasn’t been a situation like this in the past 50 years”.

Yancey Ward March 4, 2013 at 10:49 am

I bet you don’t call the Psychic Hotline either.

Go Kings, Go! March 4, 2013 at 1:57 pm

North American countries curb-stomped most of the world’s chthonic henotheist deities in the early 19th century, producing disunity and vulnerability to exploitation, which paid off in a big “whoosh” of European economic development. North American countries are now fracking the ethereal mono deities, again fracturing vulnerable believer societies, whose exploitation is bubbling up the pipeline of our wealth toward a future “whoosh” geyser. Or something; your macro-theory may vary.

Rahul March 4, 2013 at 10:24 am

How does a 20% rise in earnings every year tie in with Tyler’s favorite TGS thesis? At least in the corporate world, no TGS?

sam March 4, 2013 at 11:05 am

TGS was Tyler’s straussian foray into the technological singularity discourse, so by that standard more earnings don’t mean less stagnation.

Brian Donohue March 4, 2013 at 12:18 pm

Earnings are much more volatile than wages. This is a version of “The capitalist always gets paid last.”

Start from a low earnings base, like the end of 2008, and you can produce marvelous and meaningless statistics.

Also, compared to the early 19th century, Joe Sixpack has a much more direct interest in corporate earnings, as they likely underpin a substantial portion of his retirement assets.

gwern March 4, 2013 at 1:01 pm

It fits fine. Remember that one of the major and most-debated claims of TGS was that median wages had stagnated for the last 30+ years even as the economy and productivity kept growing.

derek March 4, 2013 at 10:40 am

I’d suggest that it will end up like it did last time in a war that kills millions of people. The middle east turmoil is the result of economic forces exacerbated by the financial crisis and the increase of food costs driven by various western policy initiatives. So we see one country after another where governments fall, some more peacefully than others, and war.

I wouldn’t be surprised to see something similar arise in Europe. 50% youth unemployment in much of the south is catastrophic. A populist blowhard in Italy shakes the foundations of institutions.

I take the bellicose language towards Japan as a more accurate indication of the Chinese economic situation than any published numbers.

The only advantage this century has is that it is old. There aren’t millions of young men to throw into battle, they were aborted or not born. So I suspect that we will see essentially the shrinking of the influence of the state. There is no reason why, for example, a young man with a family in Spain or Italy would have any thought of allegiance to Brussels, or even would have the faintest notion that somehow this is a structure that I should support for the benefit of my children. Rome or Madrid will barely be respected, more likely would receive a hostile response.

Go Kings, Go! March 4, 2013 at 2:05 pm

In short, “World Coming to End. Rashaida, Mangaka, Walloons Hit Hardest.”

Paul Zrimsek March 4, 2013 at 11:00 am

I dunno; were people who mistake cyclical effects for structural effects generally taken seriously in the early 19th century, by people who ought to know better?

happyjuggler0 March 4, 2013 at 12:36 pm

How much of this is really an artifact of the fact that the S&P500 companies now gain a much larger amount of their earnings (than they used to until very recently) from subsidiaries that are overseas which sell to customers that are overseas?

In other words, how much of this is a comparison of apples to oranges?

mulp March 4, 2013 at 1:30 pm

hmmm, after writing some comments and then being interrupted, I copy my comment and refreshed, and then pasted my comment back in the cleared comment box and got this:

– See more at: http://marginalrevolution.com/marginalrevolution/2013/03/are-we-living-in-the-early-19th-century.html#comments

Oh the wonders of monetizing the Internet’s ability to collect the writings of of millions.

mulp March 4, 2013 at 1:59 pm

The demarcation of the mid 19th century is a shift of industrial policy from the States to Federal with the Republican industrialist progressives gaining overwhelming national power.

Look at the Federal industrial policies that Lincoln signed into law, and the shift in power from the States to the Federal he and the Republicans drove from 1860 to 1910.

Starting with social policy, Republicans Federalized marriage with the Morrill Anti Bigamy Act. Then the Land Grant colleges which Federalized education and R&D policy. Then the authority to build the transcontinental railroad specifically to provide economic growth opportunity for the Civil War vets after the war ended.

The railroads were of particular importance. They transformed farming and ranching from largely local economic activities to national and then global activities for the internal part of the US. While timber could be cut and sent to market where rivers provided the transportation, the railroads provided the means for the US to ship lumber internally and globally from regions that were previously inaccessible. Cattle could not be shipped nationally so the West could profit from demand from the East and then Europe. The building of rail lines required steel which drove the building of steel mills and that drove coal and iron mining, with railroads providing the means to bring them together, and then ship the steel globally. The cheap steel delivered by rail meant construction and manufacturing was possible in places without waterways. Cheap steel everywhere the railroad served meant farm workers could also work in factories – factories could now be built where the workers were so all workers did not need to move to the cities. The cheap steel meant farms could be mechanized, in large part because a farmer could ship his grain to the nation and Europe.

Before the Civil War, the driver of economic growth was either the concentrated industrial policy of the Northeast States, or the land redistribution of the Federal government in the South and West. The conflict behind the Civil War was over the South expanding its land redistribution policies West and Northwest. Kansas and Oklahoma were needed for the Southern slave based capitalism – the land was not the capital asset but the resource to be consumed – it was the growing slave population that was the capital growth in the South’s economy.

The Republicans replaced land redistribution from promoting slave expansion and farming, to promoting industrial development through crony industrial capitalist. That, and the concentration of power in the Federal government led by Lincoln but clearly Republican Party policy for half a century, in my view explain that period of high growth.

Mikedc March 4, 2013 at 4:08 pm

1840 is a rough point at which steam powered travel started becoming widespread. I’d look at the link between large scale labor and output mobility and increasing income.

Output per worker going up is great, but by greatly expanding the speed and extent of the labor market, you create many more trade opportunities.

Brett March 5, 2013 at 1:26 am

The 1830s and 1840s is really when you had a second “wave” of industrialization that led to the use of steam power outside of textiles, mining, and steel production to industries across society. It’s no surprise that it’s when TFP and wages started to take off. As highly productive and enviable as the textile sector was in early 19th century Britain, it was still only one sector, and not one that employed more than a fraction of the British population.

dmox March 5, 2013 at 1:50 am

How much of the 40% increase in output per worker is increased hours worked then? If there’s only a small increase in TFP for labor, doesn’t that mean people are just working many more hours?

Sam Gardner March 6, 2013 at 4:24 pm

So income went only up when people started organizing in unions. Is there a lesson for workers here?

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