Panel 5
Economic History: What Does It Have to Teach Us?


Professor Carol E. Heim
University of Massachusetts, Amherst

Like all of the panelists I benefitted greatly from my teachers here at Yale. My two most important mentors were Bill Parker, whom I'm very glad to see here today, and David Levine. But economic history and development were very rich fields here and there also were opportunities to study nonmainstream economics. In addition to Bill and David, I was able to do coursework with Gus Ranis, Carlos Diaz-Alejandro, Albert Fishlow, Hugh Patrick, and while they were visiting scholars, W. Arthur Lewis and Donald Harris.

Economic history has important things to teach us both about the world as it is and about the world as it might be. I'll address each of these aspects in my comments today. Many have observed that economic historians bring a different perspective to studies of the economy and that they can point to factors others are likely to miss, particularly those working in theory alone. Economic history brings a fuller appreciation of the ways in which the growth process depends not only on ordinary market processes but on what I term nonmarket and hypermarket processes as well. I'd like to illustrate this with an example based on issues on which I'm currently working concerning capital gains and economic growth, and in particular capital gains resulting from property development and infrastructure creation.

I became interested in this topic after working on problems of declining industrial regions in the United Kingdom and being asked to present a paper at an AEA/session comparing post-World War II regional development in the United Kingdom and the United States. While both countries had declining industrial regions the United States differed in also having rapid urban and suburban growth, particularly in the Sunbelt states, which contributed to overall macroeconomic growth. From the historian's perspective comes the awareness that city-building also was very important for nineteenth-century growth and that the pursuit of capital gains was a crucial motivation for those who built the nation's cities and transportation infrastructure.

Capital moved to the Midwest from the 1830s onward not simply in pursuit of a marginally higher rate of return -- 7 percent rather than 6 percent --but to reap the very large gains resulting, for example, from the creation of a city such as Chicago where previously none had existed. Increases in land values resulting from railroad construction made significant contributions to the rates of return of some nineteenth-century railroad companies. The property sector remained a very important source of capital gains in the twentieth century. But this motivation for investment--large expected capital gains--has not been incorporated well into modern growth theory, despite all of the recent work on growth theory. There has been work on the impact of capital gains on savings and consumption behavior and an extensive literature on the effects of capital gains taxation, some of which could be linked with long-run growth issues. But for the most part growth theorists tend to assume that the inducement to invest is not a problem -- that available savings will be invested. As the case of Japan currently is making clear, that is not necessarily a safe assumption.

Of course not all property developers succeeded in realizing capital gains, in the nineteenth or the twentieth century. But here the perspective of the economic historian also is useful in focusing attention on the role of nonmarket processes, in which I include both government policies and the ways in which economic agents such as property developers operate in the political as well as the economic sphere to ensure that capital gains are realized. Government programs such as land grants to railroads in the nineteenth century and highway and dam construction in the twentieth century created opportunities for capital gains and for city-building on previously inaccessible or arid land. Property developers did not simply take the rules of the game as given or maximize subject to constraints but sought to structure the rules to their advantage, for example through lobbying or bribes to ensure that trolley lines were built on their land, to influence zoning, to alter the tax treatment of capital gains, or other measures. In one of yesterday's sessions Thomas Synnott referred to the increasing importance of intellectual capital relative to physical capital in the U.S. economy. As we move into the twenty-first century it will be interesting to see, and important to study, how government policies and the actions of economic agents in the political sphere create (or destroy) opportunities for capital gains associated with intellectual rather than physical capital.

To the extent that economic theory addresses the activities of economic agents in the political sphere it often does so under the rubric of rent-seeking, with the implication that a fixed amount of rent or surplus is merely being redistributed from one group to another. But at least some of this activity historically has resulted in a genuine increase in surplus and economic growth, as have some of the speculative booms in property markets that I refer to as hypermarket processes. Moses Abramovitz pointed out in 1964 that the long swings in construction found in the United States from the Civil War to 1950 had the following characteristic: upswings were clearer than downswings, which in some cases even took the form of a slower rate of growth rather than a reversal cancelling out the effects of the upswing. This raises the possibility that transport and urban development booms contributed to a higher rate of growth than would have occurred in the absence of such booms. The interesting question then becomes: under what circumstances do property booms motivated by a search for capital gains lead to real economic growth as opposed to instability which is primarily destructive and eliminates most or all of the gains from the preceding boom?

In the case of the current East Asian crises, real estate speculation has been identified as an important contributing factor. It is at least possible that the long-run rate of growth in some of these countries will turn out to be higher than it would have been in the absence of these speculative excesses. Here, however, it is very important to ask how severe the downturns following booms are, who bears the brunt of them, and what the social and political consequences are both within that country and in others in the region. The current consequences for East Asian residents certainly appear to be much more severe than the consequences for U.S. residents of the aftermath of building booms in the nineteenth and twentieth centuries, although other factors obviously also are contributing to the severity of the crises in East Asia.

Let me turn now to the second part of my comments. Economic history has important things to teach us about the world as it might be, by creating an awareness of possibilities for change. This is a theme I emphasize in my teaching of economic history .I frame the point as follows: "Things haven't always been this way; therefore they can be different." I'll illustrate with two examples.

The first is the length of the working day or the average work week. In the early days of the industrial revolution in both Britain and the United States, working days of thirteen hours or more were taken for granted and so the work week could run to eighty hours or more. In Britain, decades of struggle to achieve a ten-hour day for factory work finally succeeded in passage of the Ten Hours Bill in 1847. By the turn of the twentieth century in the United States the average nonfarm work week was about sixty hours. By the mid-1990s the average work week for wage-earners in nonagricultural activities had fallen below forty-five hours in the United Kingdom and below thirty-five hours in the United States. Why should the current U.S. work week of thirty-five hours or less be taken for granted in the twenty-first century any more than an eighty-hour or sixty-hour work week was previously? And if, as some believe, the work week recently has shown tendencies to increase, why should that be accepted?

My second example concerning possibilities for change is the case of service jobs and manufacturing jobs. Currently many, although by no means all, service jobs are unstable, low-paying, low-quality jobs with few opportunities for advancement -- what have been termed secondary sector jobs. There has been considerable concern about the loss of good manufacturing jobs within the United States. The point I want to make is that manufacturing jobs were not always good jobs. They started out having many of the negative characteristics of today's service jobs. Manufacturing jobs often were unstable, dangerous, with low pay, poor working conditions, and few benefits or internal job ladders.

Some manufacturing jobs were transformed into good jobs through a combination of union and government action. The same thing could be done with service jobs in the twenty-first century. Union organizing in manufacturing, particularly the rise of the CIO, played an important role from the 1930s onward. State and federal legislation helped raise wages and improve working conditions both directly and by supporting unionization. Fringe benefits such as vacation pay, sick leave, hospitalization insurance, and pension plans expanded somewhat during World War II when the National War Labor Board allowed them as a way for workers to get more compensation while the Board was restricting pay increases to prevent inflation. After the war unions pressed successfully for more widespread expansion of benefits. If service jobs were upgraded now, as manufacturing jobs were previously, there certainly would be distributional consequences. McDonalds hamburgers and many other services might well cost more. But those costs need to be weighed against the economic, social, and political benefits of reducing income inequality, many of which already have been discussed in other sessions.