Saturday, August 25, 2012

Davis on US Recessions in the 19th Century

Joseph H. Davis (2006) presents 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).

While Davis’s recession list is based on real manufacturing output, not real GDP, it presents an interesting addition to Balke and Gordon (1989).
US Recessions in the 19th Century
Years (Peak–Trough) | Recession Length (years)

1796–1798 | less than 1
1802–1803 | less than 1
1807–1808 | less than 2
1811–1812 |
1815–1816 |
1822–1823 |
1828–1829 |
1833–1834 |
1836–1837 | less than 1
1839–1840 | less than 3
1856–1858 |
1860–1861 |
1864–1865 | less than 2
1873–1875 | less than 3
1883–1885 | 1
1892–1894 |
1895–1896 |
1903–1904 |
(Davis 2006: 106).
Most interesting here is Davis’s finding 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.

Davis shows a recession from 1883–1885, which is not found by Balke and Gordon (1989: 84).

But Balke and Gordon (1989: 84) also show a recession in 1888, which does not show up in Davis’s data.

All this should alert us to how questionable is the whole project of real GNP/GDP estimates for the 19th century.


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


  1. Isn't it better to just work off the "mood" of the day. It's generally recognised that the "long depression" lasted from 1873-79. There's no reason to assume that the people in this era were simply "wrong" about the state of the economy because they didn't have good figures.

    The long depression alone undermines the Austrian mythology about short business cycles if the government leaves the economy alone (not that governments EVER do this in bad recessions, but anyway...).

    1. Obviously there is something to be said for what contemporaries thought, though even they might not have been fully aware of what was happening, given the absence of proper real output measures.

      The "long depression" was probably not a period of continuous real output contraction. More like a severe shock, followed by economic malaise (maybe like Japan's lost decade).

      Still, the rising unemployment - even when growth supposedly resumed - strongly suggests there was something seriously wrong in these years:

      Year |unemployment rate
      1892 | 4.33%
      1893 | 5.51%
      1894 | 7.73%
      1895 | 6.46%
      1896 | 8.19%
      1897 | 7.54%
      1898 | 8.01%
      1899 | 6.20%
      (Vernon 1994: 710).

    2. Agreed in that it resembled the Japanese disease. But it was not the same thing. Japan would have been in great depression were it not for government backing of the banks and 10%ish deficits every year. (Remember in 1997 when they cut spending and they got an instant recession? That shows how reliant the economy was on deficits).

      Fisher thought that the LD was caused by a debt deflation triggered by financial crises and aggravated by bank failures. He was probably correct. The process was, however, fairly mild in comparison to the 1930s, Japan after 1991 or the post-2008 economy. I'd say it was closer to the 1973-74 recession that Minsky analysed in "Stabalizing an Unstable Economy". Because Big Government wasn't there to step in with absolute bank guarantees and deficits, it became a depression.

      Thus, the LD completely debunks the ABCT. The best case that can be made is that malinvestments were made by robber-baron monopoly men in railroads. This certainly accounts for a lot of the debt deflation. But it shows that capitalism tends toward monopoly structures and asset prices bubbles (i.e. malinvestment) all on its own and needs no government to interfere to spark these price rises.

      Queue: deluded Austrian saying that the robber-barons obtained their monopolies due to politics. Wrong. They obtained the monopolies first, then got political sway out of this. If there were no government they would have obtained monopolies regardless.

      JK Galbraith's "Age of Uncertainty" episode on the era:

      Discussion of the railroads begins at about 5.00 in part 2:

    3. All very good points.

      Thanks for the link to Galbraith's "Age of Uncertainty".

    4. Cheers. By the way, I don't know if you saw it, but Nick Rowe opened up the capital debates again over at his blog.

      There were some good PK responses from Vernengo and Vienneau, but the whole debate fell apart on fairly minor (and I though obvious) points about homogeneous profit rates over the long-term.

      However, there was an Austrian saying that the capital debates didn't apply to Austrian theory. At first I didn't believe this, but I looked into it and it does seem that they have a very strange subjectivist theory of investment.

      Might be worth looking into, if you get the time. My impression is that the Austrian theory relies on the Hayek/Wicksell natural interest rate theory as debunked by Sraffa, but I might be wrong. To be honest, I don't fully understand the Austrian argument.

    5. A couple of points to make..

      1) Austrian Capital theory is not Austrian Business Cycle Theory. Capital theory should be non controversial. It's about looking at capital as a structure instead of a stock.

      2) Also, the UK/US capital debates are to some extent, irrevelent. For example, Austrians already concluded that Capital was immeasurable in disequilibrium decades before the Capital debates (see Hayek's "On The Maintenance Of Capital"). Robinson showed that capital was immesurable but her models in demonstrating this are all wrong. She completely rejects the notion of expectations by assuming that past events demonstrate future events (totally rejecting the non ergodic, transmutable part of reality). To the Austrians, the neo Ricardian approach was backwards lookIng. Though, to a neo Ricardian, this isn't an important criticism, for subjectivism is a sin in the eyes of a neo Ricardian.

      See Lachmann's "Macro-economic Thinking and the Market Economy" for more info

    6. @ IIM

      Thanks. Reading now. Lachman completely misrepresents the Cambridge school, by the way:

      "In their view, the mode of distribution of
      the national income between wages and profits is indeterminate,
      which means that profits are not an 'economically necessary'
      type of income and, in practice, might almost indefinitely be
      squeezed with impunity by taxation."

      Maybe Sraffa thought this. But not all of them. And it is not key to their critique. This looks like red-baiting, frankly.

      This is also nonsense:

      "...were it not that to Marx and Engels the very
      idea that the mode of income distribution under capitalism is
      indeterminate would have been abhorrent."

      What about John Stuart Mill? This pamphlet appears politically motivated -- like most Austrian tracts -- and I shall read it wit great caution.

    7. 1) what neo Ricardian disagreed with sraffa?
      Also this was not meant to be a key critique. The point of the paper was to show the lack of micro foundations on both the neoclassicals and neo Ricardians, this is the key critique.

      2) of course read it with caution, but I hope this doesn't mean that you are going to be closed minded about Lachmann. This is one of the few papers where he mentions policy, usually he doesn't say anything about policy. But Lachmann is hardly considered an ideological person. This actually serves as a negative to the "" Austrians, often calling him a "non economist", "Keynesian sympathizer" "statist" etc.

    8. The onus of proof is on Lachmann and his supporters. Find me quotes from Kaldor, Robinson and Kahn where they say that profits are "economically unnecessary" and that they can be taxed without repercussions. Seriously. If Lachmann is not simply engaged in hyperbole, you should be able to find the quote. It should be particularly easy in the case of Kaldor who worked on British taxation policy extensively after the war years.

      You might start here:

      "All taxation causes anomalies and discontents, and most has unwanted side effects." -- Joan Robinson and John Eatwell "An Introduction to Modern Economics" P. 210

      Do you really wonder why people don't take the Austrians seriously? They are poor scholars who distort history (see Lachmann's quote regarding Marx and Engels as being the first to contest distribution theory) and the stances of other academics to fit with their own political propaganda. It's pretty seedy, if you ask me. But I'll read Lachmann's agitprop, because I'm interested to see how he bends capital theory in order to fit with his political agenda. Nothing fascinates me more than refined sophistry.

    9. Or try this:

      “This is the theory that Kaldor consistently proposed in all his abundant works on taxation. As he openly acknowledged (Kaldor, 1956), the theory is in line with Classical economic analysis, but with a dramatic reversal of the chain of causation. As is well known, Ricardo took wages as exogenously given and concluded that all taxes on wages are eventually shifted on to profits. For Kaldor, the opposite is the case. Profits, by being the source of the savings that are necessary to sustain the exogenously given full-employment investments, have a sort of prior claim on income. Thus, for Kaldor, all taxes on profits are eventually shifted on to wages.” -- Luigi Pasinetti "Ricardian Debt/Taxation Equivalence in the Kaldor Theory of Profits and Income Distribution" P. 29

    10. No I don't wonder why people don't take Austrians seriously... Radical subjectivists in general have always been critical of the neoclassical branch of Austrian Econ, who are the vast majority of Austrians, and we don't take some of their ideas as serious either.

      Again I don't know how politically motivated Lachmann was, probably not much at all, I mean he was a right winged economist, thus his conclusions are going to be "right " oriented but this hardly makes him a political propagandist

    11. This paper is typical of Austrian economics. Poor scholarship. Replete with political attacks and moralistic arguments. An all around bad piece of work.

      A couple of points:

      (1) Lachmann misrepresents the Cambridge use of the equilibrium concept. They are only using it to debate the neoclassicals on their own terms. Here are some quotes from Joan Robinson showing that the Capital Debates were, in part, deployed to get rid of the notion of equilibrium:

      "The long wrangle about ‘measuring capital’ has been a great deal of fuss over a secondary question. The real source of trouble is the confusion between comparisons of equilibrium positions and the history of a process of accumulation.”

      “A model applicable to actual history has to be capable of getting out of equilibrium; indeed, it must normally not be in it.”

      “To construct models that cannot be applied is merely an idle amusement. It is only by interpreting history, including the present in history, that economics can aspire to be a serious subject.”

      (2)Lachmann completely misunderstands the relation between Post-Keynesianism and what he calls "subjectivism". The PK school, in their rejection of value theory and their embrace of Keynes' theories of uncertainty are far more thorough proponents of "subjectivism" than the Austrian school. Lachmann glimpses this in an heroic misreading of Robinson:

      “The reader will not fail to notice, we trust, what an effective use, in the heat of combat, our eminent neo-Ricardian is making of an argument which spells pure subjectivism! A century of it has left its mark even in the minds of our Ricardian counter-revolutionaries.”

      Em, no. That was not a "mistake" in the "heat of battle", but rather part of the argument. Robinson fully recognised the subjective element of investment and consumption. As far as value creation goes, the rejection of value theory as “metaphysics” by Robinson was the most radically subjective position taken by any economist. Marginal theory presupposes a fixed amount of preferences and rational behaviour on behalf of the consumer. Post-Keynesian rejection of value theory supposes fluctuating, unquantifiable preferences and indeterminate behaviour on behalf of the individual. Far more subjective than Austrian theory.

      (3) The "attack" that Lachmann makes on the Cambridge school is that long-run equilibrium does not actually occur. Duh! That's what the Cambridge school were trying to say. But they felt that they had to first debunk the neoclassical view that the economy tends toward long-run equilibrium. That was the whole point of the debates! Sheesh! Lachmann is just critiquing the neoclassical school and in doing so he thinks he's going after the PKers. The myopia is stunning!

      (4) Queue complete misunderstanding of of the link between Keynes' case for an exogenous interest rate and Sraffa's work -- which was also geared in this direction:

      "We may also imagine a system of inter-temporal markets such as Keynes envisaged, in which present goods can be exchanged for future goods as well as against one another. An 'own rate of
      interest' would come to exist in each market, but a general rate would prevail in the end in such a way that it is no more profitable to carry a stock of timber than one of coal. This
      general rate of interest would of course reflect the 'time preference' of the market as a whole in the same way as Stock Exchange prices reflect the degree of risk aversion or preference
      of the market as a whole."

      Conclusion: That's enough. This paper is garbled muck. It has no relevance to the debates and completely misunderstands the motivations of the Cambridge critiques, which are all about trying to destroy the idea about long-run equilirbria.

    12. Neo Ricardians are not post Keynesians and both have totally different views on uncertainty (this is quite implied in Lachmann's writings ). PKs view uncertainty through an ontological scope. Neo Ricardians tend to reject this because as Paul Davidson states, "In the long run, in the modern neo Sraffian- neo Ricardian theory, the classical system is important." This is to say, believe in some persistent force pulling the economy towards the "center of gravity" (equilibrium), thus rejecting an ontological uncertain world. Davidson also noting that not only do they reject this but also pride themselves in rejecting this, for they do not get tied up in analyzing the ephemeral problems of decision making under uncertainty (as opposed to the PKs that do get "tied up" in it ). (see

      Ironically, Lachmann does not deny that Keynes (and his followers such as Shackle) are more subjectivist than the Austrians, in fact he is quite known to hold this exact view (in fact this is a view held by most radical subjectivists). The role of expectations in economic anaylsis was indeed a big step forward for econ theory.

    13. Well then, this paper is fairly irrelevant. What he's really attacking is Sraffa's pure-strain neo-Ricardianism which, although formed the basis of the capital debates, was not absolutely necessary for the capital debates. I, like Robinson, think that Sraffa's critiques are solid but think that his methodology when applied positively was flawed.

      But you're wrong about Lachmann distinguishing between the different arguments. Lachmann is not conscious of any of the differences in theories between the Cambridge school or how these might affect the debate (or not!). In his "berzerker"-style argument he claims that Joan Robinson "accidentally" uses a subjectivist basis for her argument. Thus we can conclude that he had NO idea where Robinson was coming from.

      As I said: poor scholarship, papered over with rhetoric and red-baiting. Pointless. Like most of the Austrians' output. No one is listening because there's nothing to listen to beyond political rhetoric.

  2. Honestly, I think our modern GDP (or earlier, GNP) measurements are pretty bogus themselves, since they treat financial shenanigans as production.

    I'd trust the manufacturing, agricultural, and most of all the employment numbers a lot more. Though of course we don't have good *employment* numbers for the 19th century either. So there's that. I would go with the mood of the public, given that.

    1. GDP/GNP do not include financial assets or stocks etc.