Monday, September 24, 2012

Rothbard on the US Economy in the 1870s: A Critique

Here is Rothbard on the US in the 1870s:
“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).
If one defines “depression” as a fall in real output of 10% or more, then it is likely that the 1873 to 1879 period was not an era of depression.

But, apart from this truth, virtually everything else Rothbard writes is a travesty of history, on the basis of the most recent real GDP, real per capita GDP, industrial output and unemployment data.

Let us refute Rothbard’s dubious assertions one by one:
(1) Rothbard proclaims:
“Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income?”
Yet the idea that 1873 to 1879 was an era of “large expansion of industry” seems highly doubtful.

Joseph H. Davis (2004, 2006) has provided a new list of recessions in the 19th century, on the basis of his annual dataset of US industrial production from 1796 to 1915. Davis uses 43 annual components of the manufacturing and mining industries in the US, which represented about 90% of manufacturing output in the 1800s (Davis 2006: 105).

Let us look at the relevant data for the 1870s from Davis’s US industrial index:
US Industrial Index, 1870–1880
Index base is 1849–1850 = 100
Year | Index

1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2

1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).
From 1873, industrial output fell, mildly in 1874, but sharply in 1875. Davis (2004: 1203) finds that the cumulative industrial index loss (-10.83) was the second worst of the late 19th century, and only surpassed by the double dip recession of the 1890s.

A mild recovery ensued in 1876, but it is remarkable how feeble the growth was in 1877: indeed one could justifiably speak of recession from 1873–1875, then stagnation in 1877.

Modest recovery came from 1878, which sharply expanded in 1880. Davis finds that the US had a recession from 1873 to 1875 lasting less than 3 years, since unemployment was rising in these years and continued rising until 1878.

On the basis of this recent data, the notion that US industry experienced a “large expansion” from 1873 to 1879 is utterly absurd. These were years of recession, stagnation or very modest growth.

(2) Rothbard asserts that
“the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product ... .”
But “money national product” normally means “nominal national product” (or nominal GDP/GNP), and nominal GDP figures are really not that interesting: what we need is real GDP.

(3) Rothbard asserts the following:
“from 1869 to 1879 saw … an outstanding real national product growth of 6.8 percent per year … .”
But where does this data come from? It appears to come from Milton Friedman and Anna Schwartz’s A Monetary History of the United States (Princeton, 1963).

Friedman and Schwartz were presumably using the standard estimates for pre-1914 real US GNP based on the work of Simon S. Kuznets (1938, 1941, 1946, 1961), whose work was developed by Gallman (1966) and Kendrick (1961). The resulting data is normally called the Kuznets-Kendrick series or Gallman-Kuznets-Kendrick series. Presumably Friedman and Schwartz were using that, or some version of it.

But this data has long been challenged as questionable.

In contrast, let us look at the estimates of Balke and Gordon (1989: 84; the annual growth rates are my own calculation):
Year | GNP* | Growth Rate
1869 | 78.2 |
1870 | 84.2 | 7.67%
1871 | 88.1 | 4.63%
1872 | 91.7 | 4.08%
1873 | 96.3 | 5.01%
1874 | 95.7 | -0.62%
1875 | 100.7 | 5.22%
1876 | 101.9 | 1.19%
1877 | 105.2 | 3.23%
1878 | 109.6 | 4.18%
1879 | 123.1 | 12.31%
* Billions of 1982 dollars
Average real GNP growth rate, 1870–1879: 4.69%.
(Balke and Gordon 1989: 84).
A average annual rate of 4.69% does look high, but falls far short of the 6.8% figure used by Rothbard.

Moreover, how can we reconcile these estimates with the data from Davis’s industrial index which shows industrial contraction from 1873–1875 and a growth so low in 1877 as to be little better than stagnation? And Davis finds actual recession in the overall US economy from 1873 to 1875, which seems to contradict Balke and Gordon’s estimates.

This should alert us to how questionable all GNP estimates for this era are.

What we can say is that, even if one were to accept Balke and Gordon’s estimates, the real GNP growth rates for this era were far lower than Rothbard’s. And Balke and Gordon’s figures themselves can be challenged by using Davis’s industrial index.

(4) Rothbard’s next claim:
“the decade from 1869 to 1879 saw … a phenomenal rise of 4.5 percent per year in real product per capita.”
Again, the per capita GDP data appears to be calculated from the Gallman-Kuznets-Kendrick series, but that series is largely rejected today as being reliable.

What of the most recent real per capita GDP estimates? (for what they are worth, of course).

We can turn to Angus Maddison’s data on real per capita GDP calculated from Balke and Gordon (1989):
Real US Per Capita GDP 1870–1880
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate

1870 | 2445 |
1871 | 2489 | 1.79%
1872 | 2524 | 1.40%
1873 | 2562 | 1.50%
1874 | 2601 | 1.50%
1875 | 2643 | 1.61%
1876 | 2686 | 1.62%
1877 | 2732 | 1.71%
1878 | 2780 | 1.75%
1879 | 2829 | 1.76%
1880 | 2880 | 1.80%
(Maddison 2006: 87–89).

Average Decadal Real Per Capita Growth Rates
Average Growth Rate 1871–1880: 1.64%
Average Growth Rate 1873–1879: 1.64%.
I cannot calculate data for 1869 and 1870, but I would be surprised if they would make much difference.

The average real per capita GDP growth rate from 1871–1880 was 1.64%.

As I have just shown in the previous post, this was the third worst rate for a peacetime decade of all US decades from 1870 to 2000. Only those decades affected by the Great Depression (1920s and 1930s) were worse.

The Keynesian 1960s were a far more prosperous era than the 1870s, and even the roaring ’20s (1920–1929) had a higher average real per capita GDP growth rate (at 2.04%).

Historically speaking, Rothbard’s assertion that the 1870s saw some “phenomenal rise … in real product per capita” is utterly false and absurd, on the basis of the most recent estimates.

(5) Finally, let us look at unemployment in the 1870s, a variable that Rothbard does not even consider.

Here is US unemployment in the 1870s from J. R. Vernon (1994):
Year | Unemployment Rate
1869 | 3.97%
1870 | 3.52%
1871 | 3.66%
1872 | 4.00%
1873 | 3.99%
1874 | 5.53%
1875 | 5.83%
1876 | 7.00%
1877 | 7.77%
1878 | 8.25%
1879 | 6.59%

1880 | 4.48%
1881 | 4.12%
Far from having low unemployment, the period from 1874 to 1878 was an era of persistent rises in unemployment, which soared to 8.25% by 1878, and the fall in 1879 was only modest at best.

What sort of period of significant prosperity or real output growth had persistently rising unemployment?

In short, the unemployment figures confirm that something went badly wrong with the US economy from 1873 to 1879.
All in all, the Austrian idea, derived from Rothbard, that the 1870s were an uninterrupted era of “prosperity …[,] economic growth, and the spread of the increased living standard” is grossly exaggerated at best, and an outright historical travesty at worst. And, while apologists for Rothbard might claim that he did the best with the data he had at the time, that is no excuse for modern Austrians repeating his flawed analysis today.

While 1873 to 1879 might not have been a full blown depression, they were most probably an era of economic malaise: industrial recession or stagnation and rising unemployment. Real per capita GDP growth was not very high by historical standards: indeed it was some of the lowest growth seen in 130 years of modern US history.


BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.

Gallman, R. E. 1966. “Gross National Product in the United States, 1834–1909,” in Output, Employment, and Productivity in the United States after 1800 (Studies in Income and Wealth, vol. 30). Columbia University Press, New York.

Glasner, D. and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York.

Kendrick, J. W. 1961. Productivity Trends in the United States. Princeton University Press, Princeton.

Kuznets, S. S. 1938. Commodity Flow and Capital Formation National Bureau of Economic Research, New York.

Kuznets, S. S. 1941. National Income and Its Composition, 1919–1938 (2 vols). National Bureau of Economic Research, New York.

Kuznets, S. S. 1946. National Product since 1869. National Bureau of Economic Research, New York.

Kuznets, S. S. 1961. Capital in the American Economy: Its Formation and Financing. Princeton University Press, Princeton, N.J.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

9 comments:

  1. Murray Rothbard: poet of the new era of government intervention, imperialism and monopoly capitalism. The man's general ignorance really is outstanding.

    ReplyDelete
  2. Lord Keynes,

    A couple of points (I'll be brief, since it seems that what I say goes past you again and again).

    I'm not really sure where you get the 10.83 as the second worst of the 19th century, considering what Davis wrote on page 28 of his first paper (2004). Out of all the recessions during the years he analyzed, the 1873-1875 decline ranks 8th. In terms of the 1800s, it ranks 5th.

    Lets not forget what he also writes:

    "The new set of industrial
    cycles may also change the conventional view on specific nineteenth-century business cycles. The largest changes in the duration of cycles shared by the new and NBER chronologies involve periods when wholesale prices dropped dramatically and persistently, such as following the War of 1812 and the financial panics of 1837 and 1873. The quantity-based production data display
    shorter contractions and shallower losses following those crises than that portrayed in the popular and trade press. One plausible explanation for the disparity may be that the media confused commercial crises with financial ones, because the latter were better characterized by falling commodity and security prices, rather than declines in real industrial activity "

    I have already written extensively about B&G figures and Vernon's unemployment estimates. As I have said before, I have a paper on this coming out, and I will let you know when it is available.

    Thirdly, the per capita GNP estimates don't take into consideration the fact that population growth was MUCH higher in the 1800s than in the post WWII 1900s. From 1860-1890, the population increased 100%. From 1940-1970, the population 50%.

    http://www.u-s-history.com/pages/h980.html

    Happy Hunting,

    Patch

    ReplyDelete
    Replies
    1. (1) "I'm not really sure where you get the 10.83 as the second worst of the 19th century,"

      You've failed to read what I wrote properly:

      "Davis (2006: 1203) finds that the cumulative industrial index loss (-10.83) was the second worst of the late 19th century, and only surpassed by the double dip recession of the 1890s."

      Do you notice that word "late," meaning 1850-1900?

      (2) Davis's findings that the recessions in the 19th century were shorter than in the NBER's data is perfectly consistent with everything I have said above in criticism of Rothbard.

      (3) regardless of the increase in population, Rothbard is wrong, on the basis of current estimates.

      Your petty comments do not refute the fact that almost everything Rothbard says is wrong.

      Delete
    2. Okay, I didn't see the word late. But that hardly changes anything considering that the 1850s and 1880s panics barely differed from the 1870s panic in terms of severity. Also, late from conventional economic historians generally means the gilded age, eg. Post civil war. I would hardly call my criticisms of your interpretation of the data, petty, BTW. And how can you blame Rothbard for using the most up to date statistics at the time? The only people you can blame are current day people.

      Delete
    3. You get my comment, LK

      Delete
    4. "And how can you blame Rothbard for using the most up to date statistics at the time? The only people you can blame are current day people."

      I have in fact said this above:

      "And, while apologists for Rothbard might claim that he did the best with the data he had at the time, that is no excuse for modern Austrians repeating his flawed analysis today"

      Delete
    5. Yes but my point is you spared Rothbard no kindness, when he was only working with what he had.

      Delete
  3. First,

    Far be it from me to defend Rothbard, but I will defend Friedman and Schwartz; The Kuznets data was the best available data they had at the time.
    Second, as you said, the estimates back then were highly unreliable. Personally I find the Balke and Gordon estimates of Real gdp /gnp growth to be most compelling. And what you find with these authors is a growth period as good if not SLIGHTLY better than the postwar period. Also, the unemployment rate, while not fantastic and not optimal, was not any worse than what we have now in the U.S. Only 1878 saw an unemployment rate above 8%, which is the rate now in the U.S.

    Thirdly, the recessions of the era are probably due to bad monetary or fiscal policy. Had there been Friedmanite or "libertarian Keynesian" (tax cuts, rather than increased government spending) countercyclical policy, with fiat money and a central bank, the growth rates would have been even higher than the post world war 2 era or even the neoliberal era.

    ReplyDelete
    Replies
    1. "Also, the unemployment rate, while not fantastic and not optimal, was not any worse than what we have now in the U.S."

      Meaning the US now is and was then in a serious economic crisis??

      On the last point, I agree: if the 19th century had seen fiat money, central banks, and Keynesian fiscal policy we would have seen much better growth rates.

      Delete