The California School of Economic History

In the Great Divergence, Kenneth Pomeranz states that

Much of modern social science originated in efforts by late nineteenth- and twentieth-century Europeans to understand what made the economic development path of western Europe unique; yet those efforts have yielded no consensus.

From Adam Smith's The Nature and Causes of the Wealth of Nations, to Max Weber's The Protestant Ethic and the Spirit of Capitalism, to Karl Marx's Das Kapital right down to recent books like Hernando de Soto's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else and Daron Acemoglu's and James A. Robinson's Why Nations Fail the search for the causes of European or western "exceptionalism"continues.

These works have either focussed on the development of institutions beginning with the ideal free market as per Smith's description or of superior cultural norms as per Weber's thesis, or of superior "modes of production" as in the case of Marx.

"Economists seek the 'causes' in a timeless theory of economic development, while economic historians find them in a dynamic process of historical change," wrote Robert C Allen. "Economic history has become particularly exciting in recent years since the scope of the fundamental question - 'why are some countries rich and others poor?'- has gone global. Fifty years ago, the question was 'why did the Industrial Revolution happen in England rather than France?' Research on China, India, and the Middle East has emphasized the inherent dynamism of the world's great civilizations, so today we must ask why economic growth took off in Europe rather than Asia or Africa."

Jack Goldstone has given a name to a group of fellow scholars who have for over a decade now tried to piece together the story behind the world economy as the California School of Economic History. He says that

Instead of seeing the rise of the West  as a long process of  gradual advances in Europe while the rest of the world stood still, they have turned this story around. They argue that societies in Asia and the Middle East were the world leaders in  economics; in science and technology; and in shipping, trade and exploration until about AD 1500. At the time Europe emerged from the Middle Ages and entered its Renaissance, these scholars contend, Europe was far behind many of the advanced societies elsewhere in the world and did not catch up with and surpass the leading Asian societies until about AD 1800. The rise of the West was thus relatively recent and sudden and rested to a large degree on the achievements of other civilisations and not merely on what happened in Europe. Indeed some of these scholars suggest that the rise of the West may have been a relatively short and perhaps temporary phenomenon.

The new institutional economic thinking regarding the "rise of the West" which comes from the work of Douglass North and Barry Weingast which look at the political foundations of capitalism have gained ascendancy in recent times. The World Bank and the World Economic Forum collect and produce data in the form of league tables which compare the legal, cultural and scientific institutions across the globe and rank countries based on how well they conform to western norms.

The augmented Washington Consensus espoused by the International Monetary Fund emphasises the role of
markets and institutions. This is based on the theoretical models of economists and the empirical, econometric "validation" of such theories. This leads to a sort of timeless theory which sceptics like William Easterly have deconstructed by highlighting the methodological flaws inherent in their methods.

This is why the findings of economic historians are all the more valid and significant. Allen states that

According to the California School, China's legal system was comparable to Europe's and property was secure, the Chineses family system kept the fertility rate low so that the population grew no more rapidly in China than in Europe, markets for commodities and for land, labour, and capital were as evolved as those in Europe. As a result, productivity and living standards were similar at both ends of Eurasia. The reason that the Industrial Revolution happened in Europe does not, therefore, lie in institutional or cultural differences but rather in the continent's accessible coal reserves and gains from globalization.

Peer Vries talks about its impact on the age old question as follows

The California School has changed the way we look at the economic history of the world, especially the pre-industrial world of Eurasia. It has rightly pointed at the enormous importance of Asia in the economy of the early modern world and at its very high level of development. It has done so in a couple of years. It is no longer possible to write a book on the rise of the West like the one David Landes wrote only ten years ago, with immense success. That alone is a major feat. One should not, however, thereby be tempted to confront it uncritically. The biggest compliment one can make colleagues in scholarship is to seriously engage with them.  

Redistributing Wealth and the US Election

In their book Innovation Economy, authors Robert D Atkinson and Stephen J Ezell talk about the competing ideologies with regard to the tax system and wealth redistribution between the Democratic and Republican parties that were clearly debating points in this closely fought US presidential election of 2012. They say that

Washington economic politics has become a redistributionist battleground between ...the Right, seeking to funnel resources to their Main Street members (small business), and ... the Left, seeking to funnel resources to their Main Street members (low- and moderate-income Americans).

Behind this tussle between the Left and the Right in America is a fundamental question about what grows the economy. The Democrats using the arguments of John Maynard Keynesian essentially believe that growth occurs by supporting demand from the middle class. The Republicans borrowing from the thinking of Robert Mundell and Arthur Laffer and supported by Milton Friedman believe that growth comes by supporting the supply side of the economy through entrepreneurs and small business.

Atkinson who also wrote the book Supply-side Follies has been arguing that this debate is the wrong one to have. Borrowing from the ideas of Joseph Shumpeter, Douglass North and Mancur Olson, he believes that the reason why the US economy has stagnated in recent years has been because of existing policy failures to encourage investments in technology and innovation.

Over time, he believes the US tax system has diminished the incentives for innovative activity. The problem was created by economic advisers of both parties who advocate for flatter tax rates with a broader base. In line with this, broad based tax cuts have been offered to corporations and small business owners in exchange for disallowing tax deductions for productivity enhancing measures.

As a result, much of the tax cuts aimed at the top income bracket have been wasted on businesses that don't trade with the rest of the world or invest in productivity enhancing innovation. Rather than squander these tax cuts on the wealthy, it would be better spent targeting future wealth-creators. This includes entrepreneurs that are forced to innovate in order to remain internationally competitive as well as universities and research institutions that prepare scientists and engineers to become innovators.

This targeted approach for spurring innovation through tax policy is what is missing from the current debate which has focused more on the justification for auto bailouts, renewable energy companies, and the loosening of business regulation. Not a lot of attention has been devoted to what really drives growth in the economy, structural as opposed to cyclical growth. And that is perhaps why the race is so dead even.

Mind the (Gender) Gap

This week, as the second presidential debate unfolded, as Republican standard bearer Mitt Romney sought to close the lead of President Barrack Obama among women, an unfortunate choice of words used in relating a story about his search for women to fill his cabinet as governor of Massachusetts set off an internet frenzy around the phrase "binders full of women".

Despite that, it appears Mr Romney has been able to narrow the gap with women in the key battleground states that will decide the election, although nationally, the gap remains sizeable. Around 1980 was when the women's vote swung in favour of the Democrat Party, and vice versa for men according to Ronald Ingleheart and Pippa Norris. They pointed out that

The emergence of the modern gender gap in America is due to the way that women moved towards the Democrats since 1980 while men moved towards the Republicans on a stable, long-term and consistent basis, thereby reversing the pattern of voting and partisanship common in the 1950s. 

They theorised that as women grew more educated, career-oriented and independent, they began to abandon their conservative leanings in favour of a more progressive message from the liberally-minded Democrats. In  every US presidential race since 1988, every single Democratic candidate has been supported by a majority of women voters up until Barrack Obama's election in 2008.

Meanwhile in the eight presidential elections since and including 1980, the Democrats have only twice secured a majority of male voters--in the 1992 and 2008 elections when the US economy was in bad shape.

Using the World Values Surveys, Ingleheart and Norris show how that the women's vote has consistently shifted more and more towards the more progressive parties in most advanced countries, some post-communist countries and a few developing nations.

By 1995, a solid pattern had emerged. The key to George W. Bush's victories in 2000 and 2004 was in narrowing this gender gap, which Romney is emulating.

Meanwhile in Australia, PM Julia Gillard has changed the definition of misogyny by branding the leader of the opposition as such in parliament.

Her 15-minute speech which went viral worldwide helped to convince the Macquarie and Merriam-Webster dictionaries to adopt her usage of the word and define misogyny as "an intense prejudice against women" instead of merely "hatred towards women".

As the head of a Labor government, Ms Gillard has enjoyed a substantial advantage among women voters as the preferred prime minister of Australia, while here rival, Mr Abbott has enjoyed a similar advantage among men.

It was at the end of the 1990s that Australian voting patterns followed America in developing this gender gap, based on the analysis of Ingleheart and Norris back in 1999. This seems to have continued.

The Father of QE3

Now that QE3 is nearly upon us, it is worth understanding the rationale behind it from the man responsible for developing the views of policymakers. Tyler Cowen, the man responsible for giving prominence to his ideas declared September 13 "Scott Sumner Day" after the US Federal Reserve announced that it would engage in a third round of quantitative easing. Here is the man responsible for this new course of action by the Fed:

A Penchant for Redistribution

I am taking the liberty of recycling the following article from my drafts bin from three years ago when the debate in America was raging over healthcare. This post could have been written yesterday given the way things have played out, which is why I am posting it here:

Many commentators have opined that America under Pres Obama is re-casting itself in the mould of European socialist regimes. As Alan Wolfe observes,

the covers of National Review ("OUR SOCIALIST FUTURE"), The Nation ("REINVENTING CAPITALISM, REIMAGINING SOCIALISM"), and Newsweek ("WE ARE ALL SOCIALISTS NOW") have--respectively--lamented, heralded, and observed the coming rise of socialism (Obama vs Marx, The New Republic, April 01, 2009).

From his statements, Richard W Stevenson surmises the intent of Obama to reshape capitalism by

diminishing the consumerism that has long been the main source of growth in the United States, and encouraging more savings and investment. He would redistribute wealth toward the middle class and make the rest of the world less dependent on the American market for its prosperity. And he would seek a consensus recognizing that an activist government is an acceptable and necessary partner for a stable, market-based economy (Redefining Capitalism After the Fall, New York Times, April 18, 2009).

A High Tolerance for Inequality

Politically the cover for undertaking redistributive policies in the US is being provided by the current crisis. According to Alberto Alesina and Paola Giuliano who have studied income and wealth inequality, Americans are less “inequality intolerant” by nature compared to the Europeans. This is due to the perception that prevails in the US that social mobility is possible (the World Values Survey found that 60%, compared to 40% in Europe, believed in the possibility of improving their standing income-wise).

Only during the “Great Compression” lasting from the mid-40s to the 70s has the US seen inequality decline continuously; that is apart from what seems now to be a blip that lasted from the mid-90s to the early 2000s. Franklin Foer and Noam Scheiber write in The New Republic that

(b)eginning in 2004, the data gradually began to undermine the Clintonites' central assumption: that the benefits of growth would accrue to the poor and middle class ... Workers' wages had once tracked productivity growth. Now workers were producing more, but only the wealthy were reaping the rewards; everyone else's income had basically flattened out.

Alesina and Giuliano tell us that by August 2008, inequality in the US had returned to its previous level in the 1920s. Following the crisis which is widely perceived to be the fault of financiers at the top of the income pyramid less tolerance for inequality will ensue as

voters (will) demand especially strong action to reduce inequality, even in a country like the US, where inequality is much more tolerated than in Europe.

While there is a greater appetite for social levelling, it is the extent of that levelling that will be determined soon. Alesina again:

(w)ill Americans turn into “inequality intolerant” Europeans? Probably not, but this crisis may imply a turning point towards more government intervention and towards redistribution.

Chief Nudging Officer of Obama administration resigns

The frontpage of the Washington Post reported that Cass Sunstein a co-author of the influential book Nudge and advisor on regulatory reforms resigned from the Obama White House. responsible for streamlining existing regulatory policies and procedures while acting as gatekeeper to new ones, Sunstein is said to have left for personal as well as professional reasons.

Tackling Obesity

Mayor Bloomberg’s ban supersized 16 ounce servings of sugary beverages in New York’s restaurants, street carts, movie theatres, and stadiums has placed the issue of obesity squarely on the map.

It is as American as burgers and apple pie. Yet, Mayor Bloomberg who founded a business empire on free trade, wants to restrict the sale of sugary drinks to the public. There is a simple reason behind it: obesity costs the city billions a year in related health expenses. A better way of reducing the burden is by way of prevention.

Gary Becker of the University of Chicago, whose insights into the rational thought processes behind addiction opened the door for others to push the boundaries that separate economics and psychology, discusses the opposing views in this debate:

On one side of the question are the libertarians who argue that individuals, in particular consumers, should have the freedom to make their own choices unless they hurt others. According to this view, consumers have the right to drink and eat what they prefer, but driving while drunk should be punished because drunk drivers are more likely to get into accidents that hurt others. One qualification is that when consumers do not have enough information to make good decisions, governments may help in providing that information. An example is the requirement that packaged foods show the amount of fat and certain other ingredients they contain.

On the other side are those who claim that many consumers are not able to make decisions in their self-interest. These consumers, according to this argument, can be fooled by the way choices are presented, may have limited self-control, may rely on inefficient rules of thumb, or for other reasons make bad choices. There is even a literature on “libertarian paternalism”, which argues that governments “ … should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice” [emphasis mine].

To tackle obesity, there are a whole slew of policy options. On the less interventionist side, public campaigns such as the one championed by First Lady Michelle Obama aim to inform and advocate healthier eating habits and lifestyle choices. Part of this includes labelling on menus that provide the caloric content of the items served. 

The problem is they do not always work, and businesses complain that they are an additional cost burden. Some Republicans like Sarah Palin believe that requiring such labelling is already too intrusive much to healthy food advocate Jamie Oliver's chagrin.

It is true that the costs of information cannot be taken for granted, but one can argue the benefits of supplying such information outweighs whatever costs are involved. The same sort of argument is behind providing warnings on cigarette packs or alcoholic content on liquor drink bottles. Mayor Bloomberg’s approach however is based on the notion that people don’t always heed such warnings.

If information and advocacy campaigns have limited success, particularly to those who are predisposed to certain forms of behaviour (as proven by neuroscience), the more interventionist policy tools might be called for including imposing a combination of taxes and subsidies, regulations and restrictions on the unwanted commodities and activities.

Becker believes that a ban on large drinks might actually lead to the public consuming more sugary drinks rather than less. He supports instead the idea of not serving sugary drinks to children whose discretion as consumers can still be moulded

Suppose that drinks come only in 10 and 16-ounce sizes. If the 16-ounce size were banned, enough consumers might substitute 2 10-ounce drinks for 1 16-ounce drink to increase total consumption of these drinks. Of course, the drink market might respond with offering other sized drinks, but the main point would still hold that the ban could raise consumption of sugary drinks.

Children are less likely than adults to make an effective trade off between current pleasures and future costs. This is a traditional reason for distinguishing between children and adults in formulating policies. The implication in the case of sugary drinks would be to restrict access by children to these drinks. For example, these drinks could be banned from schools and other places where children congregate, or young persons might not be allowed to purchase these drinks [emphasis mine].

One other approach to curbing consumption of unhealthy food and drink is the so-called fat tax. Recent research has demonstrated that for this to work, a threshold level of 20% needs to be imposed as a tax to lower consumption among adults. Denmark, France and Hungary already have introduced some version of a junk-food tax or sweetended-drink tax. Twenty three states in the US including New York have done the same.

Though the effects of this tax may be regressive as the poor generally consume more of it as a proportion of their intake, if the tax were used to expand health insurance coverage to the lower income classes, it might correct the regressive nature of the tax. It would at the same time improve the fiscal positions of cash-strapped governments.

Despite what the business lobby and libertarians say, the public cannot turn a blind eye towards the problem. With over a third of its adult population now clinically obese, costing American taxpayers $150 billion annually, and with 20-50% of the populations obese in countries as diverse as Kuwait, Columbia, the Philippines and China, it is high time that policymakers focus on tackling the problem before it literally eats them out of house and home.