Canadian Economic Development

The Methods of Economic History: Data and Models

  1. The goals and methods of economic history.

    2. Economic historians:
    1. are concerned with identifying the sources of growth.
    2. make explicit use of:
      1. Models – use of economic theory to make predictions
      2. Data – quantitative information about the past.
      The weight placed on the importance of each varies, but both are utilized.
    3. focus on how institutions and economic agents interact
      1. institutions – any social structure made up of economic agents but acting collectively. This includes firms, government, as well as the formal legal structure and informal traditions determing how economic activity takes place. For example, the legal structure defines what we can expect when we buy a product or service. It is modified by politicians who make decisions on behalf of many constituents, not always voters.
      2. economic agents
        • individuals act as economic agents
        • institutions are composed of individuals acting as economic agents
        • any individual may act in several capacities, as a consumer, as an employee in a firm or government, as a legislator, as a voter, etc.
      3. institutions serve economic agents, both those within and those without.
        • economists in general and economic historians in particular then interpret the existence of institutions and their changes over time as resulting from the interactions among the economic agents within the institution and those outside
        • institutions may therefore not always do exactly what they are supposed to do

  2. Define and discuss growth

    3. · Differentiate between extensive and intensive;
    1. Intensive growth – the growth in per capita income due to more productiveuse of inputs
      1. one input versus many inputs

        2. The identification of intensive growth is subsumed within the area of growth accounting. If a process requires only labour to produce output, then it is easy to measure productivity improvement, i.e. envelopes licked per hour – input, labour; output, sealed envelope.

        What if a process has more than one input: say one person and a envelope-licking machine? Then more sealed envelopes will be produced per hour because of the help of the machine. The person has become more productive by virtue of the availability of a machine. We call the introduction of the machine labour-saving technical change if less labour is required per unit of output assuming that the wage relative to the rental rate of machines has not changed.

        What if, further, that after having worked with the envelope-licking machine for a month, the person finds that they can produce even more sealed envelopes than they could when the machine was first introduced. Now we have an example of capital-saving technical change. Presumably the worker has become more familiar with the workings of the machine. In the jargon of economists, they have accumulated human capital, in this case specific to a certain type of machine. This may be termed learning-by-doing. Now the introduction of the machine was a necessary, but not a sufficient condition for human capital acquisition.
         

      2. economies of scale

        3. What if after another while, our envelope sealer discovers that by buying enough envelopes to last the whole day rather than simply buying an hour’s worth at a time, more sealed envelopes can be produced. We now have an example of productivity improvement through economies of scale. We note that the worker hasn’t changed, nor has the machine, just the sequence of events, or the layout of the production process. By the way, this was Ford’s contribution to industrialization; rearranging the workshop floor by physically moving workers so that their work stations were in proper sequence enabling throughput to increase. Economies of scale will appear to save on all other inputs. In Ford’s case, he got more cars with the same labour force and the same investment in capital.

        Often the realization of economies of scale requires an investment in machinery, capital, and possibly a larger workforce as well. The classic example of economies of scale is due to geometry. If one stores a liquid, say oil, in a cubed shaped vessel exactly 1m3, then to build such a vessel one would require six sides each of 1m2 (1m by 1m). If the material is $1 per m2, then the vessel would cost $6 per m3 of oil stored. Now to store more oil, one builds a vessel out of sides that are 4m2 (2m by 2m). This would cost $4 per side for each of 6 sides for a cost of $24, four times as expensive as the smaller vessel. One could now store 8m3 of oil at a cost of $24 for the vessel resulting in a cost of $3 per m3 of oil stored, compared to $6 per m3 for the smaller vessel. The unit storage cost has fallen. Of course in the real world, the sides of the larger vessel would have to be stronger as they support more weight associated with the larger volume. The economies of scale realized will therefore be less than in the example, and at some large enough size, the increase in cost of the stronger sides will be greater than the gain in volume. At that point economies of scale will be exhausted.

        Historically, the identification of the sources of growth is inexact. Usually changes that occur in firms’ production processes display all three types of changes simultaneously, and dividing them up is part method and part assumption. We also observe that productivity improvement, whatever its source, may be generated by an entrepreneurs desire to improve the production process, but also by the perception of a large market. Going back to Adam Smith's observations that the division of labour is limited by the extent of the market, what may motivate the introduction of a new process is an entrepreneurs view that they can sell more output if only they could produce more. Usually this coincides with an invention of a new process, although it is not often that the inventor is also the successful marketer.

        In summary, we usually observe improvement due to the introduction and improvement of machinery, often termed labour-saving technical change; through the acquisition of human capital, or by the realization of economies of scale. Often the introduction of new machines allows for economies of scale and we observe more output, more machines, but not necessarily more workers.
         

      3. macro effects

        4. In the long run at the macro, or economy wide, level we tend not to observe labour-saving technical change. Perhaps it appeared more obviously in the mid-19th century as the potential impact of technical change on reducing the size of the labour force figured prominently in Marx's (Karl, not Groucho) predictions that capitalism would bring about its own demise. While one cannot prove conclusively whether he was correct or not, what an economist will argue is that if labour is freed up by the introduction of labour-saving machinery, and if this continues over time, wages must fall. As wages fall, the employment of labour becomes more and more attractive. Also, as more and more machines are introduced, the cost of capital must rise making their use less attractive. We will observe that the pace of adoption and modification of machinery is very much influenced by the relative price of inputs.

        What probably happens is that over the long run, employment in other sectors expands to absorb all labour released from the sector undergoing rapid labour-saving technical change. This tends to occur with wages continuing to rise. For example it has been recently noted that employment in the service sector in Canada has been steadily increasing while employment in the capital-intensive manufacturing sectors has been steadily declining. Some claim that this is bad because productivity growth in the service sector is more limited than in manufacturing and therefore as the service sector grows, intensive growth in Canada will accumulate more slowly. This view is not universally accepted, however.

        Another theory is that growth in services represents capital-saving technical change. In this story, the management component of a firm grows because it acts to coordinate more efficiently the activities of the manufacturing component. We observe growth in the managerial class relative to the working class. While we measure greater productivity gains in manufacturing, we neglect to attribute some of those gains to the service sector.

    2. Extensive Growth – growth in national output (income) due to the use of more inputs.

  3. The Colonial Economy and Growth
    1. Description: characterization of the economy and the importance of trade
      • Reading: Atack and Passel, and McCusker and Menard
      1. Both these sources provide an outline of the nature of the colonial economy
      2. Identify the colonial economy as a source of resources to the Old World.
      3. Discuss Mercantilism: the institutional framework by which the legal status of the colonies and their ability to trade was determined.
      4. The importance of trade for colonists to earn exchange to purchase goods produced in the Old World.
      5. Think about the nature of trade and comparative advantage
        • Were colonies valuable to the Old World?
      6. Debate: degree to which colonists where independent of Old World.
        • Was the Old World vaulable to the colonists?
    2. Measure growth in the the 18th-century British colonies, and in early 19th-century Upper Canada.
      • Readings: Weiss and Mancall - skim in some detail; Lewis and Urquhart - definitely skim, paying attention to the tables.
      1. Growth in the 18th century British Colonies (Weiss and Mancall)
        • Output has been measured for the early 19th century, but pace of growth in 18th century unmeasured.
        • Evidence on growth usually gleaned from trade flows.
        • More formal attempts have been to assume that economic growth was somewhat greater in the colonies than in England, and then to set an upper bound on its rate of increase.
        • Weiss and Mancall attempt to conjecture pace of growth by extrapolating backwards
        • knowing what was consumed and stock of investment at end of period, they make assumptions about what changes may have occurred over the course of the century.
        • Principally, they assume that individual food consumption patterns did not change. Each person consumed the same at the end as at the beginning.
        • The small non-agricultural sector is handled by assuming that the ratio of productivity in non-agri to agri remained constant over the century. Since it is a small sector, even if this assumption is wrong, little will change in the estimates.
        • Since children, slaves and natives are assumed to have consumed less than adults of European origin, increases in income are driven essentially by changing demographics.
        • They conclude that if the population is only Europeans and slaves, there was virtually no growth in per capita income over the century. If, however, the native population is included, there is more growth. They attribute this to the Europeans taking resources from the native population.
      2. Growth in early 19th century Upper Canada (Lewis and Urquhart)
        • Expansion of improved land dominates indicators of growth.
        • Per capita agricultural output grows very little from 1826-1851, and then most of its increase is in the last decade.
        • Suggests that there was much investment in the form of improving land such that increases in agricultural output were continuously deferred.
        • Evidence that people's standard of living were rising is gleaned through counts of housing and the increase in stone relative to wood.
        • Lesson: a prosperous economy may not appear to have intensive growth due to the importance of investment in land during the settlement phase.
    3. Navigation Acts: use of an economic model to assess a debate over the economic burden of mercantilism on the colonists.
      • Reading: Thomas
      1. Assess debate that economic hardships imposed by the "Navigation Acts" caused colonists in 12 colonies to rebel and withdraw from Empire.
        • Navigation Acts: the form in which mercantilism was implemented by Britain
      2. Uses model of impact of trade, and data on trade volumes and values to quantify the economic hardship of mercantilism on the colonists.
      3. Compares the cost calculated with estimates of per capita incomes to determine burden.
      4. By quantifying the cost of the Navigation Acts, the relative burden can be determined. This helps us understand what was at stake for the colonists.