Friday, September 14, 2012

The World Economy in very long view

I've been reading Angus Maddison's Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History. Maddison is one of the major figures in quantitative economic history. As you might expect, the book is a little dry. But it is fascinating to have measures of wealth, income per head and distribution that stretch all the way back to the provinces of the Roman Empire.

In fact, the average gdp per capita was just $473 in France in 14 AD measured in 1990 dollars, $400 in Britain, and a higher $809 in Italy because of cumulative inflows of booty. For Western Europe as a whole in 1 AD, income per head was $576, compared to $19,912 in Western Europe today measured in the same terms.

We have come a long way. But not evenly. On the same measure, average per capital income in Asia was still just $717 in 1950. It had risen to $4434 in 1990 dollars by 2003.

Inflation has also been around for a long time:

Between the first century and 270AD, the silver content of coins fell from 97 per cent to 4 per cent.

Moving on from Rome, he traces the history of the Middle East, Africa and Asia in economic terms from earliest times, and brings it right up to date for the world as a whole.

One thing I didn't know: he (politically incorrectly) says most of the slave trade was organized by Muslim traders preying on non-Muslim populations:

Slavery was endemic in Africa before western contact. There was a flow of more than four million from black Africa across the Sahara in the eight centuries before 1500, an average of somewhat more than 5,000 a year (see Table 4.5a). The traffic was organized by Muslim traders from the north. The flow from north to south was negligible.

Slave traders were generally the most Islamized. Slaves tended to be taken from the acephalous, stateless, and least Islamized groups. There were two reasons for this. The Muslim states tended to have the most powerful armed forces, and they generally avoided enslaving Muslims.

I did know Western slave traders almost never actually caught slaves, who were captured and transported by Africans from the interior, but I didn't know that there was a cultural or religious aspect. I wonder if it is a much older explanation of the tensions between Muslim North and Christian/Animist south that runs right across Africa, including Cote D'Ivoire, Nigeria and former Sudan. That said, I doubt it explains slaving much further south, like Angola.

Turning back to the world as a whole, the most obvious feature is just how much wealth and incomes have risen.

Real per capita income in the west increased 2.8-fold between the year 1000 and 1820, and 20-fold from 1820 to 2003. In the rest of the world income rose much more slowly-slightly more than a quarter from 1000 to 1820 and seven-fold since then.

Capital goods per head soared.

The most dynamic feature was the explosive growth in the stock of machinery and equipment per head. It rose by a multiple of 155 in the UK and 372 in the US between 1820 and 2003, 332 in Japan after 1890. The stock of non-residential structures rose much less, 21-fold in the UK, 33-fold in the US and 89-fold in Japan.

Leisure has increased significantly in longer perspective (even if Keynes' expectations of shorter working hours today have missed the mark.)

A significant part of the augmented production potential was taken in the form of leisure. Labour input per head of population dropped by 47 per cent in Japan, 40 per cent in the UK and 23 per cent in the US between 1820 and 2003.

Explanations for Growth

He offers an explanation of these growth trends, although it seems a bit sketchy. The main ones were as follows:

1. A fundamental change was the recognition of human capacity to transform the forces of nature through rational investigation and experiment.

Europe had an advantage over technologically proficient China, however, because there was less central control.

The major difference between Europe and China was the competitive character of European publishing, and the international trade in books. This frustrated the attempts of the Papacy to achieve thought control through the Inquisition and censorship. China was a centralized state, with vestigial foreign contacts. The education of its bureaucracy was devoted to ancient classics, and they were able to exercise thought control by more subtle and effective methods than the papacy in Europe.

As for other factors,

2. The emergence of important urban trading centres in Bruges, Venice, and other cities in Flanders and northern Italy in the eleventh and twelfth centuries was accompanied by changes which fostered entrepreneurship and abrogated feudal constraints on the purchase and sale of property.

3. The adoption of Christianity as a state religion in 380AD led to basic changes in the nature of European marriage, inheritance, and kinship.

The Church's prohibition of cousin marriage made it much more likely that narrow tribal kindship groups would be broken up and loyalties would shift to broader entities like nation states. The variety of nation states also helped:

4. A fourth distinctive feature was the emergence of a system of nation-states in close propinquity, which had significant trading relations and relatively easy intellectual interchange in spite of their linguistic differences.


Macro measurement & Defense

Maddison also looks at the history of macroeconomic measurement. It essentially began with Englishman William Petty in the 17th century.

Macro-measurement started in the seventeenth century, but did not emerge as a basic analytical tool for policy analysts and economic historians until the 1940s. In the past 60 years there has been an explosion in the sophistication of policy analysis and the interpretation of history.

One of the most important steps in macro measurement in the twentieth century was Keynes' How to Pay for the War, published in 1940. The title is a clue. In fact, one of the most important drivers throughout the history of macro measurement, from Petty onwards, was war potential. Governments wanted to measure both their own and adversaries' potential military resources.

This was also a major driver of measurement in the twentieth century.

The main reason for the massive increase in coverage and quality of official national accounts from 1950 onwards was the realization of their usefulness as a tool of macro-economic policy. Denison, Gilbert, Kaldor, Kuznets, Ruggles, Stone, and others in the UK and US, knew from personal experience that such accounts were also an extremely important tool for resource mobilization in wartime.

In other words, much of the usefulness was war-related - and if one thinks about it, this measure of resources in many ways underlies how we still see the economy. It helped lead to a focus on economic growth, although it helped measure more than just tanks and planes.

New measures of GDP and other quantities were not universally welcomed in the economics profession, which I find very interesting as well.

This new macro-economic perspective was very different from that of Hayek and Schumpeter. The latter considered `total output a figment which, unlike the price level, would not as such exist at all, were there no statisticians to create it. We seem indeed to be faced by a meaningless heap-for most purposes, a highly inconvenient composite' (Schumpeter 1939: 484, 561).
I didn't realize there was so much opposiiton. National accounts data just seem so much like a fixed fact of life today. But the measures really only date back to the 1940s and 1950s and to particular narrow purposes.

Hedonic measures

Perhaps the most interesting single thing in the book is his deep distaste for hedonic measures of economic activity, which take into account the quality as well as the quantity of output. Maddison thinks they are "hallucinogenic" and "chaotic."

Hedonic indices are perfectly respectable in small doses, but one can be skeptical about the widespread assumption that quality changes have been so large and monotonically positive. ..

More than 40 years ago, Milton Gilbert warned that such adjustments could open Pandora's box: `In the end, they would make it impossible to construct measures of output and price changes that are useful to the study of economic growth' (Gilbert 1961: 287).

That undermining of simpler quantitative approaches may of course be why Maddison is so opposed to them. But it does not necessarily help if we have accurate measures of a misleading measure.

One of the most famous examples of the hedonic approach is William Nordhaus's measures of improvements in lighting. Maddison says of Nordhaus:

He illustrates the implications of his approach in measuring real wages. The conventional measure showed a 13-fold increase between 1800 and 1992. The `true' rise, he suggests, was between 40- and 190-fold. He derived this result by converting conventional price indices into hedonics for three economic sectors.

Maddison thinks this implies past income would have been much too low.

I estimate that US per capita GDP rose 21-fold from $1,087 in 1800 to $23,169 in 1992. An increase of 190-fold would mean an 1800 level of $122 which would be well below subsistence.

But that doesn't really follow. It just means the incomes were not commensurate in price terms. It is a matter of apples and oranges, as if we tried to measure everything today in terms of grain equivalent. People today would be consuming, who knows, ten tonnes of grain a day in Roman terms, which doesn't make sense either.

I'm very sympathetic to hedonic measurement, because it allows for shifting needs and consumption patterns. But clearly it undermines the usefulness of the standard national accounts, which Maddison is not enthusiastic about.

Overall, it's very interesting to see good quantitative measures over so long a period and have a sense of the deeper history of national accounts. But I'm reminded one has to be careful of quantitiative economic measures as well


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