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Introduction
*The Queen's; College, University of Oxford; e-mail: nicholas.dimsdale{at}economics.ox.ac.uk
University of Virginia
This Special Issue of Oxford Economic Papers contains a collection of papers, which have been submitted in response to a general invitation from the Guest Editors. It is entitled New Perspectives in Economic History, since it was intended to encourage submissions either in new areas of the subject or those which showed new insights into more familiar topics. The resulting collection provides an indication of the type of work which is being done in the field. The published papers are distributed over an extensive historical period, which ranges from the early 18th century to the mid 20th century. Of the seven papers in the issue, three relate to the period before 1820, three to the middle period up to 1938 and one relates to the postwar years. Some papers use historical data sets to test economic models, others take an economic model and use it to illuminate some aspect of economic history. One paper uses a wide range of historical evidence to refocus conventional views on economic development. All of the papers make a contribution to our understanding of past economies; many also shed light on contemporary issues and questions.
The lead article by Kevin O’Rourke employs a computable general equilibrium model to model to examine the economic effects of trade restrictions imposed during the Napoleonic Wars on Britain, France, and the United States. This is an example of using a small economic model to shed light on a much discussed issue in economic history. The next three papers by Offer, Seltzer and Frank, and Shea are concerned with the testing of microeconomic theories using historical data sets. Offer evaluates the ability of the Akerlof ‘lemons’ model to explain the prices of used cars in Britain and the United States in the 1950s and early 1960s. Stelzer and Frank look at the applicability of the tournaments model proposed by Rosen and Lazear to explain staff promotion policies of Williams Deacon's Bank. Shea uses the modern theory of option pricing to examine the pricing of partly paid shares in the South Sea Company at the time of the bubble in 1720. In the following paper Baten et al. investigate the determinants of innovation by firms in 19th century Germany. They examine what characteristics of firms and industries explain patenting activity, a subject of particular interest to industrial economists. The last two papers, by Huff and Mora-Sitja, are concerned with aspects of economic development. Huff examines the reasons for rapid economic growth in South East Asia and West Africa despite a lack of lack of foreign investment. Mora-Sitja looks at the evolution of wages in industry and agriculture in Catalonia during the late 18th and early 19th centuries.
The first paper, by Kevin O’Rourke, investigates the relative welfare losses suffered by Britain, France and the United States during the various trade embargoes and blockades associated with the Napoleonic Wars. It uses a relatively parsimonious model drawn from Anderson and Neary (1996
) and produces powerful results. O’Rourke's use of price data indicates that the Continental Blockade did have detrimental effects on the British economy, contrary to the claims of some economic historians. But the price shocks were even greater on the Continent, such that the welfare consequences were larger in France, despite being a less open economy. What is perhaps most surprising is that it was a neutral country, the United States, that suffered the largest welfare loss, due to the combination of a large terms-of-trade shock and considerable economic openness. Those historians who have charged Thomas Jefferson with putting the immature American economy at risk by imposing unnecessary restrictions on foreign trade will find support here. An important finding is that the most damage was done not by the embargo, despite its severe effects on US trade, but by the British blockade of American ports during the War of 1812. The paper extends previous quantitative analyse of the effects of naval blockades during early industrialization, such as Irwin (2005) and Hueckel (1973). It is also provides an extension of the model of Anderson and Neary by showing that the welfare consequences of trade policies depend on both the elasticity of substitution between importables and domestic goods in consumption and the elasticity of transformation between exportables and non-traded goods rather than the substitution elasticity alone.
Offer's paper starts from the observation in Akerlof (1970) that new cars lose much of their value as soon as they are sold. Akerlof's explanation for this outcome is that an almost new car which is offered for sale is likely to be a ‘lemon’, while good cars are unlikely to be traded by owners who appreciate their qualities. Thus bad cars tend to drive out the good in the used car market. Offer undertakes a valuable exercise by examining how far Akerlof's theory can explain the behaviour of used-car prices cars in the United States and Britain in the early post war period. He shows that cars did not depreciate exceptionally during the first year; indeed initial depreciation was usually smaller than in later years. While the buyer of a new car who resold it after a short interval would incur a substantial cost, this would apply equally to those who resold an older car shortly after buying it. Large differences were found between the retail price of new cars, which included some form of warranty and the wholesale price, which excluded it.
The dealer markup captures the loss in the value of a car when its ownership is passed from the dealer to the buyer. The markup is a fixed selling cost and rises as a percentage of the selling price as cars age. Private sellers largely avoid these costs, forcing dealers to withdraw from the market for older cars. At this stage no warranties were provided by sellers and the risk of a car being a ‘lemon’ was transferred from seller to buyer. It was only in the market for the oldest cars than adverse selection effects could be found. This confirms the importance of Akerlof's extension of his basic theory by the introduction of warranties. Their effect is to shift the risk of a car being a ‘lemon’ to the manufacturer or the dealer.
The paper by Seltzer and Frank provides an interesting test of the tournament model of labour markets developed by Lazear and Rosen (1981) and Rosen (1986). It is used to explain decisions about staff promotions in Williams Deacon's Bank. A data set is drawn from the payroll records of the Bank to examine the career structures of employees. Typically promotion was for employees progressing from being clerks to becoming managers of small branches; a small number of successful managers were promoted to the management of a large branch. Nearly all promotions were internal and even the managers of the largest branches started their careers as junior clerks. Promotion was by merit rather than seniority, consistent with an internal labour market, arising from the desire of the Bank to promote the right employees because of the costs arising from poor managerial decisions. Promotion to the management of a small branch brought higher financial rewards, which were further enhanced by the prospect of promotion to managing a larger branch with further increases in salary. The hypothesis advanced in the literature on promotion tournaments, that to maintain incentives in an employee's career, salaries need to rise at an increasing rate with ascendance in the management hierarchy, can be tested. Early in an individual's career promotion has an additional value related to the probability of further promotion. Higher up the hierarchy there are fewer potential promotions so that salary increases must be larger to maintain incentives. The authors find sharply increasing salaries with promotion, which are consistent with approximately equal incentives to effort over an employee's career. The historical records also support an extension of the basic theory, namely that the expansion of the branch network of William Deacon's Bank after the First World War would lead to a reduction of salary incentives as the larger number of management positions, which became available, increased the probability of promotion.
Shea has developed a model to explain the relationship between the fully paid shares of the South Sea Company and the subscription or partly paid shares during the boom and bust of 1720. Partly paid shares are shown to be a form of financial derivative; more precisely, they were compound call options on fully paid shares. An important feature of subscription shares was that a defaulting subscriber would be liable only to the extent of his holdings in the Company. Forfeiture would occur after three months, granting the defaulter a period in which he could restore ownership by paying a missed instalment plus three months interest. This gave investors an opportunity to postpone decisions. The dates at which future subscriptions were due were clearly stated, so that the present value of future payments could be readily calculated. These conditions explain Shea's finding that the price of partly paid shares including the present value of future instalments generally exceeded the price of fully paid shares. The pricing of a subscription share at the time of the final instalment is shown to be equivalent to a call option on a fully paid share. Previous instalments were call options on partly paid shares, which implies that they were call options on a call option or compound call options.
The paper derives an algorithm to compute the value of partly paid shares as compound call options using the Cox and Rubenstein (1985) binomial tree approximation to the model of Black and Scholes (1973). This is used to compute the value of subscription shares drawing data from the records of the South Sea Company. During the summer of 1720, when the price of fully paid shares was rising sharply, large values of the upward step in the binomial model and small negative steps are required for calibration. When the price of fully paid shares was plummeting in the autumn, calibration using small upward steps and larger downward steps is required by the model. On these assumptions it is shown that the model gives a reasonably good account of itself in explaining the behaviour of subscription shares during both phases of the bubble. Shea concludes that subscription shares were generally correctly priced in relation to fully paid shares, thus providing an example of rational working of financial markets in the highly disturbed conditions of 1720. This conclusion is in sharp contrast to that of Dale et al. (2005), who emphasize the irrationality of financial markets at this time. Shea questions their conclusion by citing a powerful counterexample.
The paper by Baten, Spadavecchia, Streb, and Yin examines the sources of innovative activity among firms in the southwest German state of Baden in the early 20th century. The authors have assembled a data set of patents taken out between 1907 and 1913, together with the characteristics of each filing firm. These data are used to test a number of hypotheses regarding the economic environment of technical innovation. Was innovation governed by positive externalities, associated with clusters of firms in the same industry sharing thick labour and intermediate input markets and the consequent exchange of new ideas, concepts proposed in Marshall (1920) and extended by Krugman (1991)? Or was it promoted by the diffusion of ideas between different industries within a diverse local economy, as emphasized by Jacobs (1970)? Were there positive spillovers from innovative firms to others in the same sector? Did negative spillovers (congestion costs) arise from the dominance of non-innovative firms in the local economy? Which of Schumpeter's theories concerning innovation was dominant—the idea that entrepreneurship and new firms were central to successful implementation of new technology, or that established large-scale producers, with their access to resources, were key? The authors have provided a data set that can address a range of important empirical questions about technical advance in an industrial economy. Their work follows a similar study of innovation in postwar Britain and Italy by Beaudry and Breschi (2003).
They find that Marshallian economies were important among the firms that dominate patenting activity in Baden, while Jacobs’s externalities were confined to smaller firms. Similarly, Schumpeter's emphasis on the entrepreneurial origins of innovation applies to smaller firms, while the evidence of path dependence of patent levels among larger firms indicates the presence of routinized forms of patenting, which is consistent with his alternative interpretation. The authors conclude that while internal economies are crucial to innovation at the firm level, knowledge spillovers associated with clustered firms and thick markets helped to reinforce technical diffusion, thereby making Baden one of the more technically progressive regions in the rapidly growing economy of Wilhelmine Germany.
The next two papers by Huff and Mora-Sitja are concerned with problems of economic development in an historical context. Huff asks why the tropical economies of South East Asia and West Africa were able to develop so rapidly in the period from before the First World War to 1938 despite receiving little foreign investment. This was in sharp contrast to the development in New World economies, such as the Americas and Australasia, in which European migration was closely associated with substantial capital inflow, needed to open up the agricultural and mineral resources of newly settled lands. The close connection between migration and capital inflow in New World economies has been discussed by writers, such as Cairncross (1953), Thomas (1972), and Edelstein (1982).
Huff points to a different course of development in a review of the experience of tropical economies (Burma, Indonesia, Malaya, the Philippines, and Thailand in Asia; Ghana and Nigeria in Africa). He makes use of a vent-for-surplus model, following Myint (1958). Unlike the New World where investment in railways was necessary to open up the hinterland, geography, particularly in South East Asia, provided favourable water systems for the transport of goods from inland to the coast. The opening up of world markets by improvements in oceanic transport provided an outlet for the production of tropical regions. These were well endowed with natural resources and tended to be lightly populated before the expansion of international demand for their products. Rapid growth was made possible by mass migration of labour from within and across national borders. Dual economies evolved as the specialised export sector met international demand for a narrow range of primary products, while its labour requirements were met by migration from the traditional sector. In South East Asia the growth of the labour force was augmented by an inflow of migrants from India and China.
Rapid growth of production was associated with little growth in real wages, unlike the rapid rise in real wages which occurred in New World economies, where real wages matched or exceeded European levels. Capital requirements were largely met from the retained profits of small farmers, who were the main source of enterprise. This was in contrast to plantation agriculture, where capital requirements were higher. Where plantations were introduced as in Malaya, there was more dependence on external capital. Governments in Huff's sample of tropical countries assumed responsibility for social overhead projects but they did not borrow heavily. Successful Asian economies could have readily attracted foreign investment, but such borrowing was discouraged by the fiscal caution of colonial governments, which wished to keep down tax burdens, balance their budgets, and avoid costs of debt servicing. Huff argues that such financial policies constrained investment in education. This resulted in expenditure on education in tropical regions lagging behind that in the New World economies.
In the final paper Mora-Sitja looks at labour market integration in Catalonia in the late 18th and early 19th centuries. There has been an ongoing debate among economic historians on the connection between the evolution of labour markets and industrialization. According to one view the migration of labour from agricultural to urban areas was a source of substantial gains in overall productivity. Against this, wage differences between urban and rural areas may merely reflect the higher cost of living in an urban compared with a rural environment. According to this view the gain in real wages from shifting labour from agriculture into urban employment may be slight. There is conflicting evidence on this issue from studies carried out in Britain, France, and Spain for the 19th century, see Williamson (1987, 1990), Sicsic (1992), and Rosés and Sànchez- Alonso (2004).
Mora-Sitja studies the development of labour markets in 18th century Spain, focusing on wages in Catalonia. She compares wages in the textile industry of Barcelona with wages in neighbouring agricultural areas. Cotton manufacturing, principally calico printing, developed in Barcelona from the 1730s. Nominal and real wage series for unskilled workers in the calico printing industry are calculated to allow for direct comparison with agricultural wages. The resulting index indicates that industrialization in Barcelona was not associated with a rise in real wages for unskilled workers. Gaps between wages paid in industry and in agriculture were smaller than those found in other studies of European labour markets. Empirical tests on the process of wage adjustment show a strong association between changes in regional wages with a well determined error-correction term indicating rapid adjustment. The empirical results suggest a considerable degree of integration in the Catalonian labour market.
In December 1987 and 1988 this journal published a collection of papers on economic history, which appeared in book form edited by Crafts, Dimsdale, and Engerman (1991). At the end of their introduction the editors attempted to predict the future direction of research in economic history. They mentioned specifically time series econometrics and developments in the theory of games and information as providing good opportunities for future work. This Special Issue, which is in some sense a successor to the earlier collection, has confirmed that new developments in microeconomics including finance are stimulating interesting research in economic history. Other areas which the editors consider to be very promising for future research are macroeconometrics, economic growth and quantitative studies in international trade and finance, together with the new institutional economics. We hope that this journal will attract submissions in these areas in the future as well as in other branches of economic history. One of the most promising developments in economic history that is reflected in this Special Issue is the diffusion of interest beyond the Anglo-American academic community that dominated the earlier collection. A number of the authors in this issue are associated with European universities. In addition there is a broadening of subjects being studied beyond aspects of development in Britain and the United States to topics involving both continental European economies and South East Asia.
We wish to thank the authors of articles and the referees of submissions. We are most grateful to Albrecht Ritschl for acting as a Guest Editor and also to the Managing Editors of the journal for making the Special Issue possible.
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