Category: History
Cowen’s Third Law, illustrated
We further show that demographic and productivity factors do not represent convincing drivers of real interest rates over long spans.
That is from a new AER piece by Kenneth S. Rogoff, Barbara Rossi, and Paul Schmelzing. Here are less gated copies of the piece. Here are some MR posts on Cowen’s Third Law.
Rent Control Reduces New Development: Bug or Feature?
The minimum wage will tend to increase unemployment among low-skill workers, often minorities. To many people that’s an argument against the minimum wage. But to progressives at the opening of the 20th century that was an argument for the minimum wage–progressive’s demanded minimum wages to get women and racial minorities out of the work force.
Something similar may be happening with rent control. Rent control reduces new development. Bug or feature? California Republican Tony Strickland argues that reduced development is a feature. New state laws in California prevent cities from restricting development but if rent control was legal cities could be used it to do the same thing just by making it unprofitable to build.
Politico: Strickland said Weinstein’s rent control measure [allowing cities to use rent control] would block “the state’s ability to sue our city” because Huntington Beach could slap steep affordability requirements on new, multi-unit apartment projects that are now exempt from rent control. Such requirements, he argued, could stop development that would “destroy the fabric” of the town’s quaint “Surf City” vibe…. “It gives local governments ironclad protections from the state’s housing policy and therefore overreaching enforcement.”
“On paper, it would be legal to build new homes. But it would be illegal, largely speaking, to make money doing so,” said Louis Mirante…
Hat tip: Ben Krauss at Slow Boring.
The French Olympic opening ceremony
I’ve only seen excerpts, but many people are upset. I can vouch “this is not what I would have done,” but perhaps the over the top, deviance-drenched modes of presentation are reflecting some longer-running strands in French culture. La Cage aux Folles? Le Bal des Folles? The whole Moulin Rouge direction? How about Gustave Moreau, not to mention his lower-quality followers? Jean Paul Gaultier? (NYT, “Fashion Freak Show”) Pierre et Gilles?
Zaza Fournier? Even Rabelais.
In my view, these styles work best on the painted canvas, thus Moreau is the one creator on the list I truly like. But please note these Olympics may be less of a break from traditional French culture — or some of its strands — than you may think at first.
My excellent Conversation with Alan Taylor, on American history
Here is the audio, video, and transcript. Here is the episode summary:
Tyler and Taylor take a walking tour of early history through North America covering the decisions, and ripples of those decisions, that shaped revolution and independence, including why Canada didn’t join the American revolution, why America in turn never conquered Canada, American’s early obsession with the collapse of the Republic, how democratic the Jacksonians were, Texas/Mexico tensions over escaped African American slaves, America’s refusal to recognize Cuban independence, how many American Tories went north post-revolution, Napoleon III’s war with Mexico, why the US Government considered attacking Canada after the Civil War, and much more.
Here is one excerpt:
COWEN: Now, here’s a quotation from your writings, page 37: “One of the great ironies of the American Revolution was that it led to virtually free land for settlers in British Canada while rendering land more expensive in the United States.” Could you explain that, please?
TAYLOR: Sure. The war was very expensive. All the states and the United States also incurred immense debts. How are you going to pay for that? This is the time when there’s no income tax, and the chief ways in which governments could raise money were on import duties and then on selling land. There was a lot of land, provided you could take it away from native peoples. All of the states and the United States were in the business of trying to sell land, but also they’re reliant within the states on these land taxes. All of these go up, then, to try to finance the war debt.
Whereas in British Canada, the British government is subsidizing the local government. They’re paying the full freight of it, which means that local taxes were much lower there. It also meant that they could afford to basically give away land to attract settlers. They had this notion that if we offer free land to Americans, they will want to leave that new American republic, move back into the British Empire, strengthen Canada, and provide a militia to defend it.
Substantive and interesting throughout. And can you guess what in his answers surprised me most?
Overturn Euclid v. Ambler
An excellent post from Maxwell Tabarrok at Maximum Progress:
On 75 percent or more of the residential land in most major American cities it is illegal to build anything other than a detached single-family home. 95.8 percent of total residential land area in California is zoned as single-family-only, which is 30 percent of all land in the state. Restrictive zoning regulations such as these probably lower GDP per capita in the US by 8–36%. That’s potentially tens of thousands of dollars per person.
The legal authority behind all of these zoning rules derives from a 1926 Supreme Court decision in Village of Euclid v. Ambler Realty Co. Ambler realty held 68 acres of land in the town of Euclid, Ohio. The town, wanting to avoid influence, immigration, and industry from nearby Cleveland, passed a restrictive zoning ordinance which prevented Ambler realty from building anything but single family homes on much of their land, though they weren’t attempting to build anything at the time of the case.
Ambler realty and their lawyer (a prominent Georgist!) argued that since this zoning ordinance severely restricted the possible uses for their property and its value, forcing the ordinance upon them without compensation was unconstitutional.
The constitutionality claims in this case are about the 14th and 5th amendment. The 5th amendment to the United States Constitution states, among other things, that “private property [shall not] be taken for public use, without just compensation.” The part of the 14th amendment relevant to this case just applies the 5th to state and local governments.
The local judge in the case, who ruled in favor of Ambler (overturned by the Supreme Court), understood exactly what was going on:
The plain truth is that the true object of the ordinance in question is to place all the property in an undeveloped area of 16 square miles in a strait-jacket. The purpose to be accomplished is really to regulate the mode of living of persons who may hereafter inhabit it. In the last analysis, the result to be accomplished is to classify the population and segregate them according to their income or situation in life … Aside from contributing to these results and furthering such class tendencies, the ordinance has also an esthetic purpose; that is to say, to make this village develop into a city along lines now conceived by the village council to be attractive and beautiful.
Note that overturning Euclid v. Ambler would not make zoning in the interests of health and safety unconstitutional. Indeed, it wouldn’t make any zoning unconstitutional it would just mean that zoning above and beyond that required for health and safety would require compensation to property owners.
Read the whole thing and subscribe to Maximum Progress.
Not Lost In Translation: How Barbarian Books Laid the Foundation for Japan’s Industrial Revoluton
Japan’s growth miracle after World War II is well known but that was Japan’s second miracle. The first was perhaps even more miraculous. At the end of the 19th century, under the Meiji Restoration, Japan transformed itself almost overnight from a peasant economy to an industrial powerhouse.
After centuries of resisting economic and social change, Japan transformed from a relatively poor, predominantly agricultural economy specialized in the exports of unprocessed, primary products to an economy specialized in the export of manufactures in under fifteen years.
In a remarkable new paper, Juhász, Sakabe, and Weinstein show how the key to this transformation was a massive effort to translate and codify technical information in the Japanese language. This state-led initiative made cutting-edge industrial knowledge accessible to Japanese entrepreneurs and workers in a way that was unparalleled among non-Western countries at the time.
Here’s an amazing graph which tells much of the story. In both 1870 and 1910 most of the technical knowledge of the world is in French, English, Italian and German but look at what happens in Japan–basically no technical books in 1870 to on par with English in 1910. Moreover, no other country did this.
Translating a technical document today is much easier than in the past because the words already exist. Translating technical documents in the late 19th century, however, required the creation and standardization of entirely new words.
…the Institute of Barbarian Books (Bansho Torishirabesho)…was tasked with developing English-Japanese dictionaries to facilitate technical translations. This project was the first step in what would become a massive government effort to codify and absorb Western science. Linguists and lexicographers have written extensively on the difficulty of scientific translation, which explains why little codification of knowledge happened in languages other than English and its close cognates: French and German (c.f. Kokawa et al. 1994; Lippert 2001; Clark 2009). The linguistic problem was two-fold. First, no words existed in Japanese for canonical Industrial Revolution products such as the railroad, steam engine, or telegraph, and using phonetic representations of all untranslatable jargon in a technical book resulted in transliteration of the text, not translation. Second, translations needed to be standardized so that all translators would translate a given foreign word into the same Japanese one.
Solving these two problems became one of the Institute’s main objectives.
Here’s a graph showing the creation of new words in Japan by year. You can see the explosion in new words in the late 19th century. Note that this happened well after the Perry Mission. The words didn’t simply evolve, the authors argue new words were created as a form of industrial policy.
By the way, AstralCodexTen points us to an interesting biography of a translator at the time who works on economics books:
[Fukuzawa] makes great progress on a number of translations. Among them is the first Western economics book translated into Japanese. In the course of this work, he encounters difficulties with the concept of “competition.” He decides to coin a new Japanese word, kyoso, derived from the words for “race and fight.” His patron, a Confucian, is unimpressed with this translation. He suggests other renderings. Why not “love of the nation shown in connection with trade”? Or “open generosity from a merchant in times of national stress”? But Fukuzawa insists on kyoso, and now the word is the first result on Google Translate.
There is a lot more in this paper. In particular, showing how the translation of documents lead to productivity growth on an industry by industry basis and a demonstration of the importance of this mechanism for economic growth across the world.
The bottom line for me is this: What caused the industrial revolution is a perennial question–was it coal, freedom, literacy?–but this is the first paper which gives what I think is a truly compelling answer for one particular case. Japan’s rapid industrialization under the Meiji Restoration was driven by its unprecedented effort to translate, codify, and disseminate Western technical knowledge in the Japanese language.
Hollywood evidence on McCarthyism
There is a new NBER working paper on this topic by Hui Ren Tan and Tianyi Wang, here is the abstract:
We study a far-reaching episode of demagoguery in American history. From the late 1940s to 1950s, anti-communist hysteria led by Senator Joseph McCarthy and others gripped the nation. Hundreds of professionals in Hollywood were accused of having ties with the communist. We show that these accusations were not random, targeting those with dissenting views. Actors and screenwriters who were accused suffered a setback in their careers. Beyond the accused, we find that the anti-communist crusade also had a chilling effect on film content, as non-accused filmmakers avoided progressive topics. The decline in progressive films, in turn, made society more conservative.
Here is extensive (positive) commentary by Alice Evans:
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- Dissidents who had organised against the House Un-American Activities Committee (HUAC) were 27 to 32 percentage points more likely to be accused.
- Celebrities – actors with more experience and Academy Award nominations were more likely to be accused.
- Actors and writers involved in progressive films were more likely to be accused.
Quicker and easier to read than the paper. I also would like to see numbers on how many exactly were in fact communists.
Every Stock is a Vaccine Stock, Revisited
In May 2020, I wrote a post titled Every Stock is a Vaccine Stock highlighting that the stock market reaction to good vaccine news indicated that vaccines were worth trillions and that most of this value was external to the vaccine manufacturers, meaning that the vaccine manufacturers were under-incentivized.
It’s not surprising that when Moderna reports good vaccine results, Moderna does well. It’s more surprising that Boeing and GE not only do well they increase in value far more than Moderna. On May 18, for example, when Moderna announced very preliminary positive results on its vaccine it’s market capitalization rose by $5b. But GE’s market capitalization rose by $6.82 billion and Boeing increased in value by $8.73 billion.
A cure for COVID-19 would be worth trillions to the world but only billions to the creator. The stock market is illustrating the massive externalities created by innovation. Nordhaus estimated that only 2.2% of the value of innovation was captured by innovators. For vaccine manufacturers it’s probably closer to .2%.
Who can internalize the externalities? Moderna clearly can’t because if they could then on May 18 Moderna would have increased in value by $20.52b ($4.97b+$6.82b+$8.73b) and GE and Boeing wouldn’t have gone up at all. Massive externalities.
A clever institutional investor like Blackrock or Vanguard could internalize some of the externalities by encouraging Moderna to work even faster and invest even more, even to the extent of lowering Moderna’s profits. Blackrock would more than make up for the losses on Moderna by bigger gains on other firms in its portfolio. Blackrock does indeed understand the incentives, although its unclear how much beyond jawboning they can actually do, legally.
I’d like to see more innovation in mechanisms to internalize externalities–perhaps in a pandemic vaccine firms should be given stock options on the S&P 500. Until we develop those innovations, however, the government is the best bet at internalizing the externality by paying vaccine manufacturers to increase capacity and move more quickly than their own incentives would dictate. Billions in costs, trillions in benefits.
A new paper by Acharya, Johnson, Sundaresan and Zheng formulizes this intuition. The authors combine a model of preferences in which uncertainty can be priced with an estimate of the stock market reaction to vaccine news and conclude that “ending the pandemic would have been worth from 5% to 15% of total wealth”.
One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) toward disaster resolution. We show that the stock market response to duration news is essentially a sufficient statistic to identify the welfare gain to interventions that alter the state. Using information on clinical trial progress during 2020, we build contemporaneous forecasts of the time to vaccine deployment, which provide a measure of the anticipated length of the COVID-19 pandemic. The model can thus be calibrated from market reactions to vaccine news, which we estimate. The estimates imply that ending the pandemic would have been worth from 5% to 15% of total wealth as the expected duration varied in this period.
That was then, this is now
The fairly quick on his feet Captain Queeg nonetheless was relieved of his command:
Circa 1954.
Why don’t they compose music like Bach any more?
Well, they do, or at least they did once. I am thinking of a recent recording by Nikolaus Matthes, namely Markus Passion, which fills 3 compact discs and sounds remarkably like a Passion from Bach’s time. It could even be by Bach. The text is from the time of Bach. Yet Matthes was born in 1981.
To be clear, it does not rival Bach’s best work, but I have no problems comparing it to a median Bach cantata, which still is pretty good. It is also better than many of the works by Bach’s contemporaries, including the better-known ones.
And yet no one cares. Have you heard of this work before? How many times will you hear of it from now on?
Perhaps you doubt my judgment as to the quality of this work? Well, you might check out Fanfare, the world’s number one classical music review outlet. Fanfare gives the work six distinct reviews.
Colin Clarke for instance wrote: “But does it work? Absolutely. This is the most remarkable Baroque music of our time — by which I mean this does not feel like the 21st century looking back, instead, it feels as if it were written back in Bach’s time, with the exception of the odd detour forwards. Most of the time, it could be music written by Bach himself, and I can offer no higher praise to Matthes’s achievement.”
Or from David Cutler: “…Matthes has accomplished something marvelous. It has more than a hint of Bach, but is it Bach? The jury must be out on that, but is that not the idea?”
James A. Altena writes: “In sum, both the work itself and this performance are a complete triumph, and do full and worthy honor to Bach. I cannot think of higher praise than that.”
All the reviewers are very positive, as was a composer friend of mine who listened to the piece. The home page for the work offers further positive reviews. And no, I don’t like Prokofiev’s “Classical” Symphony.
You can buy it on German Amazon, and a few other places, streaming links here.
I feel I need to update some of my views on aesthetics, I am just not sure which ones. And who exactly is Matthes? Is this another Ossian thing, or rather the inverse?
Emile Zola’s The Ladies’ Paradise Reviewed by Furman
Jason Furman (eight years as a top economic adviser to President Obama) is an excellent economist who reads a lot of books. His Goodreads has 2300 books read, with some 1200 reviews in economics, fiction, history and science. I greatly enjoyed his latest review of Zola’s The Ladies Paradise which came about after he “asked a colleague in the English department if any fiction had positive depictions of business and capitalism (other than Ayn Rand).” Here is Furman’s review:
A 19th century novel that is a paean to the consumer welfare standard.
…The department store is really the leading character in this book, the protagonist of the Bildungsroman. It is like a living, breathing creature with needs, desires and most importantly constant growth. It becomes increasing complex, mature and alive as it develops. From a few departments to many, takes over more and more of the square block—eventually engulfing the one stubborn holdout. The novel also has amazing depictions of innovations, not just classical invention (e.g., an improved type of umbrella at one point) but also management of inventory, holding sales, selling some products at a loss, advertising, managing inventories, and more. I never thought an entire chapter of a novel (and they’re long chapters) devoted to inventory management could be so thrilling but that one was nothing compared to the description of the sale.
In the shadow of the Ladies Paradise are a number of small shops that are having an increasingly difficult time competing. The larger shop buys out some, builds on innovations by others, and aggressively competes on price with still others. Émile Zola does not sugarcoat the pain of all of this, depicting deaths and suicide attempts in the wake of the store. But he does not blame all the maladies on the Ladies Paradise itself and, consistent with the consumer welfare standard, he keeps the focus on the ways in which this profit ultimately benefits customers. Moreover, some of the small businesses do innovate in ways that help keep themselves in business: “longing to create competition for the colossus; [a small business owner] believed that victory would be certain if several specialized shops where customers could find a very varied choice of goods could be created in the neighbourhood.”
Interestingly there is a chapter that reads like an explanation of an economic model, Bertrand competition, in which two competitors keep lowering prices by smaller and smaller amounts until they are pricing as low as they possibly can (their marginal cost). What made this especially interesting to me was that The Ladies Paradise was published in 1883, the same year Joseph Louis François Bertrand published his model.
And it is not just consumers. The novel depicts how the productivity gains the Ladies Paradise makes as a result of its scale and its innovations are passed through to workers in the form of higher pay and improved benefits. For example, early on there is a brutal depiction of the process of laying off workers during the slow time of year. Later on, the store develops a system that is more like furloughs with insurance. And also, unlike the small shops in the area, it has opportunities for advancement within the store, moving up the ranks of managerial positions. Notably, all of this is not because of the benevolence of the owner (as it is in a few other 19th century novels) but because of competition from other stores so the need to attract and retain talent.
All of this makes employment in the colossus considerably better than the smaller, neighboring shops where people are poorly paid, lack opportunities for advancement and face harassment. Although it is still not all wonderful—for example, the department store frowns on women who are married and dismisses them when they have children.
Overall, the combination of low prices for consumers and high expenses—including pay and benefits to attract and retain employees—mean that the business has a very thin profit margin but applies that margin to a very large base: “Doubtless with their heavy trade expenses and their system of low prices the net profit was at most four per cent. But a profit of sixteen hundred thousand francs was still a pretty good sum; one could be content with four per cent when one operated on such a scale.”
The biggest wrinkle in the consumer welfare standard is some of the ambivalence Zola has about consumer preferences themselves….The idea that people—or women to be more specific—are buying things they do not “need” but “desire” is an issue it grapples with. And that desire can even rise to the level of a mad frenzy, like the sales it depicts or the shoplifters, some of them affluent but driven by an almost mad desire to acquire lace, silk, and more.
All of this is embedded in a larger economic and technological system that is operating in the background: large factories in Lyon that are producing at scale in a way that is symbiotic with the department store, rail transportation to bring the constant inflow of goods, a mail system that supports catalog purchases, and more.
…I’m still astounded about how breathtaking fiction can be made which understands and depicts the ways in which innovation and scale combine with competition to generate benefits for consumers and workers—while also not sugarcoating the many that lose from this process.
Thinking about the Roman Empire
The full title of the piece is “Identification and measurement of intensive economic growth in a Roman imperial province,” by Scott G. Ortman et.al. Here is the abstract:
A key question in economic history is the degree to which preindustrial economies could generate sustained increases in per capita productivity. Previous studies suggest that, in many preindustrial contexts, growth was primarily a consequence of agglomeration. Here, we examine evidence for three different socioeconomic rates that are available from the archaeological record for Roman Britain. We find that all three measures show increasing returns to scale with settlement population, with a common elasticity that is consistent with the expectation from settlement scaling theory. We also identify a pattern of increase in baseline rates, similar to that observed in contemporary societies, suggesting that this economy did generate modest levels of per capita productivity growth over a four-century period. Last, we suggest that the observed growth is attributable to changes in transportation costs and to institutions and technologies related to socioeconomic interchange. These findings reinforce the view that differences between ancient and contemporary economies are more a matter of degree than kind.
Thereby pondered! Via Alexander Le Roy.
Poland’s PPP income is likely to exceed that of Japan by 2026.
Here is the link.
My excellent Conversation with Brian Winter
Here is the video, audio, and transcript. Here is the episode summary:
It’s not just the churrasco that made him fall in love with Brazil. Brian Winter has been studying and writing about Latin America for over 20 years. He’s been tracking the struggles and triumphs of the region as it’s dealt with decades of coups, violence, and shifting economics. His work offers a nuanced perspective on Latin America’s persistent challenges and remarkable resilience.
Together Brian and Tyler discuss the politics and economics of nearly every country from the equator down. They cover the future of migration into Brazil, what it’s doing right in agriculture, the cultural shift in race politics, crime in Rio and São Paulo, the effectiveness and future consequences of Bukele’s police state in El Salvador, the economic growth of Colombia despite continued violence, the prevalence of startups and psychoanalysis in Argentina, Uruguay’s reduction in poverty levels, the beautiful ugliness of Sao Paulo, where Brian will explore next, and more.
And here is one excerpt;
COWEN: What’s the economic geography of Brazil going to look like? All the wealth near Mato Grosso and the north just very, very poor? Or the north empties out? How’s that going to work? There used to be some modest degree of balance.
WINTER: That’s true. Most of the population in Brazil and the economic center, for sure, was in the southeast. That means, really, São Paulo state, which is about a quarter of Brazil’s population but roughly a third of its GDP. Rio as well, and the state of Minas Gerais, which has a name that tells its history. That means “general mines” in Portuguese. That’s the area where a lot of the gold came out of in the 18th and 19th centuries. That’s gone now, so it’s not as much of an economic pull.
You’re right, Tyler, though, that a lot of the real boom right now, the action, is in places like Mato Grosso, which is in the region of Brazil called the Central West. That’s soy country. I’m from Texas, and Mato Grosso is virtually indistinguishable from Texas these days. It’s hot. It’s flat. The crop, like I said, is soy. There’s cattle ranching as well.
Even the music — Brazil, as others have noted, has gone from being the country of bossa nova and the samba in the 1970s to being the country of sertanejo today. Sertanejo is a Brazilian cousin of country music with accordions, but it’s sung by people — men mostly — in jeans, big belt buckles, and cowboy hats. They’re importing that — not only that economic model but that lifestyle as well.
COWEN: What is the great Brazilian music of today? MPB is dead, right? So, what should someone listen to?
Recommended, interesting throughout.
30th anniversary of the Brazilian real
That is the topic of my latest Bloomberg column, here is one excerpt, starting with the reality of Brazilian hyperinflation in the early 1990s:
Fortunately, economists and other reformers came to the rescue and designed an effective plan for currency stabilization. Brazil first created a virtual currency, called the URV, and switched contracts and prices to the new accounting unit. Next, a new currency, the real, was introduced as equal in value to the URV and roughly equal to the US dollar. That created the prospect of a new and more stable currency.
The crucial part of the reforms was a credible plan for fiscal stability. Brazil wasn’t experiencing hyperinflation for no reason — rather, the freshly printed money was needed to make good on promised government expenditures. So to make the numbers add up without hyperinflation, the Brazilian government carried out some budget cuts, privatized some assets, transferred some functions to state and local governments, and made some constitutional and legislative pledges in the direction of a balanced budget…
Yet the ending to this story is by no means entirely happy. For several years Brazil’s economy has been growing below 1%, though it has recently climbed above 2%. The country has bountiful natural resources, plenty of human talent, some excellent companies and universities, and no natural geopolitical enemies. Still, its economic growth has been mediocre. Brazil ought to be able to achieve annual growth of 4% to 6%.
The causes of this disappointing growth are varied and subject to dispute. Possible culprits include corruption, excess protectionism, an economy too dependent on natural resources, an unreliable education system and, perhaps, a loss of economic dynamism. In the golden years of the late 1960s and early ‘70s, Brazil had very high growth rates, hitting 14% in 1973, so extremely good performance is possible.
Worth a ponder.