Projecting Economic Theory onto History

Bryan Caplan has recently written a post titled, The Economic Illiteracy of High School History, where he looks at a passage from a AP US history text book and rips it apart using some basic economic theory. Here is the specific passage from Ray Billington’s American History Before 1877:

The Plight of the Worker. The rise of the factory system placed such a gulf between employers and employees that the former no longer took a personal concern in the welfare of the latter. As competition among manufacturers was keen and the labor supply steadily increasing through foreign immigration, they were able to inflict intolerable working conditions on laborers. Hours of labor were from thirteen to fifteen a day, six days a week, while wages were so low after the Panic of 1837 that a family could exist only if all worked. Hence child labor was common. Factories were usually unsanitary, poorly lighted, and with no protection provided from dangerous machinery. Security was unknown; workers were fired whenever sickness or age impaired their efficiency. As neither society nor the government was concerned with these conditions, the workers were forced to organize to protect themselves.

First let me say that Caplan is right to point out that arguments like these often miss the bigger picture. The industrial revolution was a monumental epoch in human history given the past centuries of economic stagnation. Never before have we seen economic growth and technical innovation of that magnitude. However, I really don’t like the way he analyzes this passage. He’s projecting economic theory onto history and it’s not very convincing. His appeal to neoclassical theory of income distribution, i.e. wages equals marginal productivity (or w = p times MPL, where w = the wage rate, p = the price of output and MPL is the marginal product of labour), is especially questionable, given that the theory is very disputable.

But even assuming that the theory is correct, I still have two major objections.

First, without looking at other factors that influence wages, the theory lacks explanatory power. To be the only factor in wage determination, marginal productivity theory requires perfect competition to hold. Caplan knows this, which is why he said “the main determinant of wages and working conditions is workers’ marginal productivity,” and not that marginal productivity is the determinant of wages. But still, this view ignores other factors that influence how wages are determined. If you actually look at empirical evidence, marginal productivity doesn’t always correspond with wages.

Wages and Productivity

This data isn’t exactly from the 19th century or the Industrial Revolution, but even if we look at more relevant data, it can be seen that real wages didn’t always correspond with marginal productivity:

The Walker Report (p. 1690) notes an 1834—44 decline of 40 per cent in unit labor cost for the Saco cotton mill, while wages rose 10 to 20 per cent. Declines in unit cost over the 1824—32 period were frequently noted in these early reports. They are also common in the Weeks Report, covering primarily the 1850-80 period. Instead of the closely proportional change that exists between wage rates and upward productivity trends in today’s more highly organized labor markets, these early records do not suggest wages gaining in proportion to productivity.

Now this data is a bit old and I don’t want to throw around a bunch of empirical papers, but it clearly shows that marginal productivity isn’t the only determinate of wages. This is why economists of all colors, neoclassical and heterodox, have looked at things like market power, bargaining environment, politics, and institutions as factors that influence wages. As Mark Thoma states (also see these posts by Thomas Palley and Dani Rodrik), “there has been a lot of work in this direction, we should first be sure that incorporating market and political power relationships into the standard structures won’t explain what we observe in the world.”

And this brings me to my next point, the standard of living debate. Much of the debate on the industrial revolution isn’t about if workers benefited (they certainly did benefit), but when they benefited. As Clark Nardinelli says:

The standard-of-living debate today is not about whether the industrial revolution made people better off, but about when. The pessimists claim no marked improvement in standards of living until the 1840s or 1850s. Most optimists, by contrast, believe that living standards were rising by the 1810s or 1820s, or even earlier.

Between 1820-1860, real per capita incomes in the US did grow 62 percent, but some economists have pointed out that gains made by the antebellum working class were modest and subject to significant short run fluctuations (Margo 1987, Margo 1990, and Kiesling 1997 are just some examples.). Although the US still had high wages relative to many other Western European countries, the unskilled working class might not have gained too much from the Industrial Revolution, at least between the period of 1820-1860.

It’s important to keep in mind that the “optimistic” vs “pessimistic” view on the Industrial Revolution is a long debated subject with a ton of important variables to be analyzed. It certainly won’t be decided any time soon and I don’t want to assert that the pessimistic view is correct. But within the setting of this debate, even if we look at wages and the standard of living within their historical context, Billington’s passage might not be wrong. Caplan ignores these historical dynamics in his post.

Now, I won’t go in great detail on every aspect of Caplan’s arguments. I think his paragraph on “personal concern” ignores the utilitarian individualist system of the bourgeois (1). I also don’t like his claim that the labor movement “wasn’t quantitatively important”. But that’s not the main issue. The main issue is that Caplan is projecting economic theory onto a historical period without referencing relevant empirical evidence. This is bad economic history. As a result, he takes an overly optimistic view on working class conditions in US history. No doubt that Caplan is correct to point out that Billington leaves out a lot of important information. However, his own analysis is no better.

1. I hate to sound Marxist:

The first course, as we have seen, was not merely technically difficult for those who lacked the minimum entrance fee of property or education, but profoundly distasteful. The introduction of a purely utilitarian individualistic system of social behavior, the theoretically justified jungle anarchy of bourgeois society with its motto ‘every man for himself and the devil take the hindmost’, appeared to men brought up in traditional societies as little better than wanton evil. (Hobsbawn 1962: 200)



Filed under Economics, History, Home

6 responses to “Projecting Economic Theory onto History

  1. I think that looking at relative factor prices, in effect projecting economics onto history, can be very useful. But I agree with your verdict on Caplan’s piece. The problem was there were a lot of empirical points which were not remotely substantiated.

    • You certainly have a point. And technically speaking Economic history is projecting economic theory onto history. You have your empirical data on some historical period, and you use some model to interpret that data. If done well, there isn’t any major issue. So my title is a bit rhetorical and probably misplaced. But regardless, Caplan didn’t do that and on that we agree.

  2. Good post. I’m glad someone is calling Caplan out on that, his post was terrible. Its nice that unlike him, you actually used historical evidence rather than presuming what you wished was the case.

  3. Blue Aurora

    Economists have been criticised for using history selectively or treating it as “exogenous” (as Professor Harold James of Princeton University said once in some video that I can’t recall exactly). I’m not intimately familiar with U.S. economic history, but even from what I know, I felt that Bryan Caplan wasn’t giving the full story.

    He is right to say that American workers’ standards of living and pay were arguably better than those of the nations on the European continent in the 19th Century. But it wasn’t completely smooth-sailing – hell, one could make the argument that no period in history has been smooth sailing – even the ones which we like better and view as “good times”. (To take J.M. Keynes’s earlier life from 1883 to 1914 as an example, although he was born and raised in an environment which was cultured, refined, dignified, and orderly, that was really a small circle – women were campaigning for the ballot during that time, in Ireland – to possibly put things a bit too minorly – upheavals were abound, and the Boer War was going on.)

    One of the reasons why Otto von Bismarck set up what we now call the “welfare state” in Germany was actually to slow down the outflow of German people to America (where there was little-to-no such support) to the United States.

  4. Pingback: The Critics of Income Equality | Economics and Society

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