New Economics Papers
on Business, Economic and Financial History
Issue of 2013‒09‒28
twenty papers chosen by

  1. The Federal Reserve and Financial Regulation: The First Hundred Years By Gary B. Gorton; Andrew Metrick
  2. Thermodynamic Isolation and the New World Order By Pogany, Peter
  3. Did Nazis save more? Household saving an ideology in pre-war National Socialist Germany By Robin Winkler
  4. Debt sustainability and financial crises in South Africa By Ruthira Naraidoo; Leroi Raputsoane
  5. Agglomeration Economies in Classical Music By Karol J. Borowiecki
  6. Twentieth Century Growth By Crafts, Nicholas; O’Rourke Hjortshøj, Kevin
  7. Keynesian Dominance in Crisis Therapy By Kristina Spantig
  8. The Long-Term Direct and External Effects of Jewish Expulsions in Nazi Germany By Mevlude Akbulut Yuksel; Mutlu Yuksel
  9. Quantity theory, say's law and effective demand in money theories By Giovanni Scarano
  10. Where is the Backward Peasant? Regional Crop Yields on Common and Private Land in Russia 1883-1913 By Michael Kopsidis; Katja Bruisch; Daniel W. Bromley
  11. Was Stalin Necessary for Russia's Economic Development? By Anton Cheremukhin; Mikhail Golosov; Sergei Guriev; Aleh Tsyvinski
  12. Efficiency, Distortions and Factor Utilization during the Interwar Period By Alex Klein; Keisuke Otsu
  13. Four Decades of Terms-of-Trade Booms: Saving-Investment Patterns and a New Metric of Income Windfall By Gustavo Adler; Nicolas E. Magud
  14. Recreating the South Sea Bubble: Lessons from an Experiment in Financial History By Giovanni Giusti; Charles Noussair; Hans-Joachim Voth
  15. The Location of the UK Cotton Textiles Industry in 1838: a Quantitative Analysis By Crafts, Nicholas; Wolf, Nikolaus
  16. The relative income and relative deprivation hypotheses : a review of the empirical literature By Verme, Paolo
  17. L’économie de la fonctionnalité : perspective historique et illustration empirique By Sophie BOUTILLIER; Blandine LAPERCHE; Fabienne PICARD
  18. Sustaining trade reform : institutional lessons from Peru and Argentina By Baracat, Elias A.; Finger, J. Michael; Thorne, Raul Leon; Nogues, Julio J.
  19. External Liabilities and Crises By Luis Catão; Gian-Maria Milesi-Ferretti
  20. Alfred Marshall's Cardinal Theory of Value: The Strong Law of Demand By Donald Brown; Caterina Calsamiglia

  1. By: Gary B. Gorton; Andrew Metrick
    Abstract: This paper surveys the role of the Federal Reserve within the financial regulatory system, with particular attention to the interaction of the Fed’s role as both a supervisor and a lender-of-last-resort (LOLR). The institutional design of the Federal Reserve System was aimed at preventing banking panics, primarily due to the permanent presence of the discount window. This new system was successful at preventing a panic in the early 1920s, after which the Fed began to discourage the use of the discount window and intentionally create “stigma” for window borrowing – policies that contributed to the panics of the Great Depression. The legislation of the New Deal era centralized Fed power in the Board of Governors, and over the next 75 years the Fed expanded its role as a supervisor of the largest banks. Nevertheless, prior to the recent crisis the Fed had large gaps in its authority as a supervisor and as LOLR, with the latter role weakened further by stigma. The Fed was unable to prevent the recent crisis, during which its LOLR function expanded significantly. As the Fed begins its second century, there are still great challenges to fulfilling its original intention of panic prevention.
    JEL: E5 E6 G21 N0
    Date: 2013–08
  2. By: Pogany, Peter
    Abstract: The general stream of economic thinking is thoroughly a-physical and a-historic. This direction is becoming increasingly absurd as the nexus between the human biomass and its ecological constraints ripens. Economics will eventually have to absorb apodictically that regardless of scientific-technical development and the intensity of entrepreneurial drive, the aggregate, long-run supply of telluric substance-borne free energy is on a path of declining elasticity. To hasten recognition, it would be helpful to consider the Earth an isolated, rather than a closed thermodynamic system. From the perspective of its evolutionary potential, the world is indeed Under the Dome. This paper argues that (a) the emergence of classical capitalism in the 19th century answered the need for global-scale self-organization; (b) this scheme, interrupted by World War I, was replaced after World War II; (c) the implied transformation has been accompanied by a nonarbitrary, causally determined, irreversible socialization of intranational and international economic relations; (d) contemporary civilization is moving toward a new form of self-organization that would recognize limits to demographic-economic expansion. What will it take to go from the current hostile disgust with the dystopia of tightened modes of multilateral governance to people around the world on their knees begging for a planetary guild? It will take nothing less than a mutation in consciousness, as outlined in the oeuvre of Jean Gebser (1905-1973).
    Keywords: limits to growth, thermodynamic view of the economic process, global crisis and impending transformation
    JEL: A10 A12 A13 A14 B0 B00 F0 F01 F02 N0 P0 P5 Z1 Z13
    Date: 2013–09–17
  3. By: Robin Winkler (Balliol College, University of Oxford)
    Abstract: It is commonly thought that the rapid increase in household saving during the early years of National Socialism was partly driven by ideological factors. On this view, the popularity of the regime allowed it to exert ‘moral suasion’ on households to save more than they might have done in the absence of such indoctrination. This paper employs the previously unpublished raw data from a household budget survey conducted in 1937 to identify ideological heterogeneity at the household level. Assuming that households’ responsiveness to the regime’s saving propaganda was a function of their exogenous ideological commitment to National Socialism, the paper tests the hypothesis that Nazi households saved more than others. The new evidence presented here does not confirm this hypothesis.
    Keywords: German economic history, National Socialism, household saving
    JEL: N14 D12
    Date: 2013–09–13
  4. By: Ruthira Naraidoo (Department of Economics, University of Pretoria); Leroi Raputsoane (South African Reserve Bank)
    Abstract: This study assesses debt sustainability in South Africa allowing for possible nonlinearities in the form of threshold behaviour by fiscal authorities. A long historical data series on the debtto- GDP ratio and models with fixed and time-varying thresholds allowing the level of debt to vary relative to its recent history and the occurrence of financial crises are used in the analysis. First, the results reveal that fiscal consolidation occurs at a much lower debt-to-GDP ratio of 46 percent in the period 1946 to 2010 compared to 65 percent in the period 1865 to 1945. Secondly, the results provide evidence of a statistically insignificant fiscal consolidation below these threshold levels. Thirdly, the results reveal that fiscal consolidation occur at a higher debt-to-GDP ratio during financial crises periods.
    Keywords: Sovereign debt, thresholds, financial crisis
    JEL: C22 C51 E62 H63
    Date: 2013–09
  5. By: Karol J. Borowiecki (Department of Business and Economics, University of Southern Denmark, Odense, Denmark)
    Abstract: This study investigates agglomeration effects for classical music production in a wide range of cities for a global sample of composers born between 1750 and 1899. Theory suggests a trade-off between agglomeration economies (peer effects) and diseconomies (peer crowding). I test this hypothesis using historical data on composers and employ a unique instrumental variable - a measure of birth centrality, calculated as the average distance between a composer´s birthplace and the birthplace of his peers. I find a strong causal impact of peer group size on the number of important compositions written in a given year. Consistent with theory, the productivity gain eventually decreases and is characterized by an inverted U-shaped relationship. These results are robust to a large series of tests, including checks for quality of peers, city characteristics, various measures of composers´ productivity, and across different estimations in which also time-varying birth centrality measures are used as instrumental variables.
    Keywords: agglomeration economies, density effects, peer effects, productivity, urban history, cities, composer
    JEL: D24 J24 N90 R12 Z11
    Date: 2013–09
  6. By: Crafts, Nicholas (University of Warwick); O’Rourke Hjortshøj, Kevin (All Souls College, Oxford)
    Abstract: This paper surveys the experience of economic growth in the 20th century with a focus on technological change at the frontier together with issues related to success and failure in catch-up growth. A detailed account of growth performance based on historical national accounts data is given and is accompanied by a review of growth accounting evidence on the sources of economic growth. The key features of our analysis of divergence in growth outcomes are an emphasis on the importance of ‘directed’ technical change, of institutional quality, and of geography. We provide brief case studies of the experience of individual countries to illustrate these points.
    Keywords: catch-up growth; divergence; growth accounting; technical change
    Date: 2013
  7. By: Kristina Spantig (Graduate Programme "Global Financial Markets")
    Abstract: This paper scrutinizes the debate of Keynes and Hayek concerning the adequate re- sponse to economic crises from a historical perspective. In a first step the develop- ment of the Keynesian economic theory, its ascent during the Great Depression and its use during financially sound times is analyzed. In a second step the Hayekian cri- tique to discretionary government intervention and its long run consequences is scru- tinized. In the last step it is analyzed why, in the wake of a crisis, short-run oriented Keynesian therapy dominates long-run Hayekian therapy as in the most recent crisis.
    Keywords: Keynes, discretionary fiscal policy, monetary policy
    JEL: B20 E12 E52 E62
    Date: 2013–08–22
  8. By: Mevlude Akbulut Yuksel (Dalhousie University, Halifax); Mutlu Yuksel (Dalhousie University, Halifax)
    Abstract: This paper examines the long-term direct and spillover effects of large-scale human capital loss caused by the persecution of Jewish professionals in Nazi Germany. Using region-by-cohort variation in the Jewish population as a quasi-experiment, we find that on average German children who were of school age during the persecutions have fewer years of schooling in adulthood, and are less likely to finish high school or go to college. These results are robust after controlling for regional unemployment and income, wartime destruction, Nazi and Communist Party support, the compulsory schooling reform, migration, urbanization and mortality.
    Keywords: human capital formation, children, Jewish history
    JEL: I21 I28 J24 N34
    Date: 2013–09
  9. By: Giovanni Scarano
    Abstract: The idea that effective demand is closely connected with money supply has emerged a number of times in the history of economic thought, within approaches differing in origin and formulation. In particular, we analyse Lange and Patinkin’s theses and those of Luxemburg and the money circuit theorists. The principal thesis proposed is that the idea is closely bound up with the more or less explicit assumption of two fundamental hypotheses. The first is that Say’s law or, more generally, Walras’ law no longer applies, or in any case that there is no form of complementarity in the exchanges of goods and services within the social product. The second hypothesis is that money is a particular “good”. We stress that this theoretical paradigm is incompatible not only with money as a store of value, but also with commodity money or endogenous money supplied strictly in connection with the credit cycle.
    Keywords: Effective Demand, Money Supply, Say’s Law, Walras’ Law, Store of Value, Endogenous Money
    JEL: D50 E41 E51 E11 E13
    Date: 2013–09
  10. By: Michael Kopsidis (Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO)); Katja Bruisch (German Historical Institute Moscow (DHI Moskau)); Daniel W. Bromley (University of Wisconsin-Madison)
    Abstract: This paper deals with agricultural dynamics in late-Imperial Russia. Based upon a comprehensive micro-level data set on annual yields between 1883 and 1913, we provide insight into regional differences of agricultural growth and the development prospects of Russian agriculture before WWI. Making use of the fact that— unique in Europe— contemporary Russian statistics distinguished between “privately owned” and mostly communally governed “peasant” land, we are able to test the implications of different landtenure systems for agricultural growth. In a broader sense we will challenge the stereotype of the “backward” peasant and the common narrative of Russia as an exception to the pan-European picture of economic development during the era of industrialization.
    Keywords: Russia, land productivity, peasant communal agriculture, land tenure
    JEL: N53 O13 Q15
    Date: 2013–09
  11. By: Anton Cheremukhin; Mikhail Golosov; Sergei Guriev; Aleh Tsyvinski
    Abstract: This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin's economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin's policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios.
    JEL: E6 N23 N24 O4 O41
    Date: 2013–09
  12. By: Alex Klein; Keisuke Otsu
    Abstract: In this paper, we analyze the International Great Depression in the US and Western Europe using the business cycle accounting method a la Chari, Kehoe and McGrattan (CKM 2007). We extend the business cycle accounting model by incorporating endogenous factor utilization which turns out to be an important transmission mechanism of the disturbances in the economy. Our main findings are that in the US labor wedges account for roughly half of the drop in output while efficiency and investment wedges each account for a quarter of it during the 1929-1933 period while in Western Europe labor wedges account for more than one-third of the output drop and efficiency, government and investment wedges are responsible for the remaining during the 1929-1932 period. Our findings are consistent with several strands of existing descriptive and empirical literature on the International Great Depression.
    Keywords: International Great Depression; Business Cycle Accounting; Efficiency; Market Distortions
    JEL: E13 E32 N10
    Date: 2013–09
  13. By: Gustavo Adler; Nicolas E. Magud
    Abstract: We study the history of terms-of-trade booms (during 1970–2012), with a focus on Latin America, through the prisms of a simple metric that quantifies the associated income windfall. We also document saving patterns during these episodes and propose a measure of how much of the income windfall was saved. We find that Latin America‘s terms-of-trade shocks of the last decade have not differed much in magnitude from those observed during the 1970s, but that the associated windfall have been substantially larger. While aggregate saving increased more than in past episodes, the share of the windfall saved (the marginal saving rate) seems to be lower, suggesting that greater aggregate saving reflects mainly the sheer size of the windfall rather than a greater 'effort' to save it. Finally, we find evidence that, while savings during the boom help to increase post-boom income, the composition of such savings matters. Specifically, in past episodes, savings allocated to foreign asset accumulation appear to have contributed more to post-boom income than those devoted to domestic investment.
    Keywords: Terms of trade;Latin America;External shocks;Savings;Investment;Income;Business cycles;Cross country analysis;Terms of trade, windfall, real income, aggregate saving, saving rate
    Date: 2013–05–09
  14. By: Giovanni Giusti; Charles Noussair; Hans-Joachim Voth
    Abstract: Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debt equity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.
    Keywords: financial bubbles, experiments, South Sea bubble, risk-shifting, government debt, equity issuance
    JEL: G01 G12 G14 N23 C92
    Date: 2013–09
  15. By: Crafts, Nicholas; Wolf, Nikolaus
    Abstract: We examine the geography of UK cotton textiles in 1838 to test claims about why the industry came to be so heavily concentrated in Lancashire. Our analysis considers both first and second nature geography including the availability of water power, humidity, coal prices, market access and sunk costs. We show that some of these characteristics have substantial explanatory power. Moreover, we exploit the change from water to steam power to show that the persistent effect of first nature characteristics on industry location can be explained by a combination of sunk costs and agglomeration effects.
    Keywords: agglomeration; cotton textiles; geography; industry location
    JEL: N63 N93 R12
    Date: 2013–09
  16. By: Verme, Paolo
    Abstract: The paper provides a review of the empirical literature in economics that has attempted to test the relative income hypothesis as put forward by Duesemberry (1949) and the relative deprivation hypothesis as formalized by Runciman (1966). It is argued that these two hypotheses and the empirical models used to test them are essentially similar and make use of the same relative income concept. The review covers the main intellectual contributions that led to the formulation and tests of these hypotheses, the main formulations of the utility and econometric equations used in empirical studies, the main econometric issues that complicate tests of the hypotheses, and the empirical results found in the literature. The majority of studies uses absolute and relative income together as explanatory factors in utility models and finds absolute income to have a positive and significant effect on utility (happiness). The majority of studies also finds relative income to be a significant factor in explaining utility but the sign of this relation varies across studies. The source of this variation is complex to detect given that few results are directly comparable across studies because of differences in model specifications.
    Keywords: Inequality,Economic Theory&Research,Labor Policies,Poverty Impact Evaluation,Rural Poverty Reduction
    Date: 2013–09–01
    Abstract: Cet article étudie les fondements historiques et théoriques de l’économie de la fonctionnalité et analyse au travers d’une enquête qualitative la réalité de sa diffusion dans les entreprises industrielles françaises. L’économie de la fonctionnalité qui repose sur la vente d’un service aux clients plutôt que d’un bien matériel s’inscrit dans la recherche de nouveaux modes d’organisation des activités économiques compatibles avec le développement durable. Mais peut-elle être considérée comme un moteur de croissance économique ? Nous montrons que l’économie de la fonctionnalité se positionne en rupture avec certains des fondements du modèle d’organisation fordiste sur les plans de la production, de la consommation et de la prise en compte de la contrainte environnementale. Les entreprises interrogées s’intègrent peu à peu dans cette logique en développant des systèmes produits-services qui restent cependant basiques, au sens où il s’agit davantage d’une combinaison de produits et de services plutôt que d’une substitution des services aux produits. Les freins restent nombreux pour la généralisation des systèmes produits-services et pour que l’économie de la fonctionnalité soit à l’origine d’une nouvelle phase de croissance. This a rticle examines the historical and theoretical foundations of the functional economy and analyses through a qualitative survey the reality of its dissemination in the French industrial companies. The functional economy, which is based on the sale of a service to a customer rather than a physical product corresponds to the search of new ways of organizing the economic activities, consistent with the promotion of a sustainable development. But can it be regarded as an engine of economic growth? We show that the functional economics breaks out with some of the foundations of the Fordist model in terms of production, consumption and in the way the environmental constraints is taken into account. The companies surveyed are gradually implementing this logic by developing product-service systems which however remain basic in the sense they are more a combination of products and services rather than a substitution of services to products. Some brakes remain for the generalization of product-service systems into companies and so that the functional economy contributes to a new trend of growth.
    Keywords: économie de la fonctionnalité, systèmes produits-services, environnement, entreprises industrielles, functional economy, product-service systems, environment, industrial companies
    JEL: O14 Q56
    Date: 2013
  18. By: Baracat, Elias A.; Finger, J. Michael; Thorne, Raul Leon; Nogues, Julio J.
    Abstract: This paper examines trade policies in Peru and Argentina since the reforms of the 1990s. Peru provides a valuable example of sustaining reform. Leaders have used negotiations and other international instruments to disseminate among Peruvians a positive vision of Peru in the international economy and to extend the application of World Trade Organization-based governance principles. Peru has introduced few new restrictions and all of them have been through World Trade Organization-sanctioned policy instruments. Argentina, by contrast, has introduced multiple restrictions, through procedures that eschew World Trade Organization governance principles. Moreover, leaders there have returned trade politics to the dependencia philosophy that sees the international economy as an exploitive environment. The paper brings out the weakness of international obligations to limit Argentina's return to import substitution and the pains at which Peru has gone to maintain the management of its economy within the same rules that Argentina has so easily violated.
    Keywords: Trade Law,Trade Policy,Economic Theory&Research,Free Trade,Emerging Markets
    Date: 2013–09–01
  19. By: Luis Catão; Gian-Maria Milesi-Ferretti
    Abstract: We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “normsâ€; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu.
    Keywords: External debt;Financial crisis;Current account;Foreign exchange;Foreign direct investment;Economic models;International Investment Positions, Sovereign Debt, Currency Crises, Current Account Imbalances, Foreign Exchange Reserves.
    Date: 2013–05–16
  20. By: Donald Brown; Caterina Calsamiglia
    Date: 2013–09–19

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