The Gender Wage Gap is a Myth

The myth is this:

(1) Women, when they do the same job or same type of work as men, get paid on average 77% less in their (i) hourly wages or (ii) weekly or yearly earnings (when they work the same amount of time), and (2) this hourly/weekly/annual wage gap is caused by a systemic, institutionalised, and misogynist wage discrimination against women in the West.

Christina Hoff Sommers discusses this below.





First, one must distinguish between (1) full-time, annual earnings of men and women in vastly different professions and (2) the hourly wage for the same type of work.

If you take aggregated, averaged data on full-time, annual earnings, there is indeed a gender pay gap, but to prove that men and women are paid significantly differently for the same work in their hourly wage, you need to look at disaggregated data of hourly wages of men and women, not an average of lifetime earnings.

That is, you need to look specifically at men and women doing the same type of work, and then see if their hourly wages are different. When this is done, certainly some inequality can be found (and that is a problem), but the scale of this inequality is grossly exaggerated and women are generally paid the same wage for the same type of work as men do (see here).

Clearly the belief that there is some massive institutionalised, misogynist discrimination against women in the Western world is a myth.

The main reasons for the gap in average female full-time, yearly earnings as against earnings of men are (1) the different professions and career paths that women choose, and (2) different life choices of men and women.

If the difference between the full-time, lifetime earnings of men and women is regarded as an issue to be solved (and not, as some people argue, simply the result of the different career paths and life choices of men and women), then paid maternity leave and the encouragement of women into higher-earning professions could mostly fix it.

But what if after such measures a gap remains and it is because women freely choice different careers? Is this really a problem?

The Classical Gold Standard Era was a Myth

UPDATED

And it is very easy to prove that it was a myth. By “myth” of course, what I mean is that it is a myth that the real world Classical Gold Standard (from 1880 to 1914) was

(1) a system with a pure metallic standard, or
(2) one where most money was gold, and where all credit money was backed up by gold.

In reality, credit money (mostly unbacked by metal) was the predominant form of money through the entire period of the Classical Gold Standard.

Of course, I am not denying that gold was the inelastic monetary base in this period, that monetary units were defined in terms of grains of gold, and that the real world system could impose a contractionary and deflationary bias on the nations that used it.

The Classical Gold Standard era is usually dated from 1880 to 1914. Some economists and historians prefer a broader time period from 1821 to 1914, but this seems quite misleading for a number of reasons. During the early 19th century, silver was more important than gold as a commodity money base (Triffin 1985: 153). Right down to the early 19th century most nations were on a bimetallic standard that was based not on gold but on silver (Bordo 1999: 158).

Although the gold standard was adopted by different nations at different times, it was not until 1880 that the majority of nations were on some form of gold standard (Bordo 1999: 159).

But what was the actual composition of the broad money supply in various nations on the gold standard in the 1880 to 1914 era? What percentage of the total money stock was actually gold?

Let us look at the data. Many might be surprised.

Below are pie charts showing the composition of the broad money supply in the following 11 nations for 1885 and 1913: the United States, Canada, the United Kingdom, France, Germany, Italy, Netherlands, Belgium, Sweden, Switzerland, and Japan.

In other words, we have data here on most of the Western world in the 19th century with the emerging industrial economy of Japan. The data are taken from Triffin (1985: 154, Table 8.2).

First, the year 1885. The chart below shows total money supply with component percentages of

(1) gold,
(2) silver,
(3) currency, and
(4) demand deposits.

Note that the “currency” component includes non-silver, fiduciary coinage (and, though it is not clear to me, perhaps also central bank notes). Total credit money consists of both (a) currency and (b) demand deposits, including paper currency.




Notice anything? Only years after the emergence of the international gold standard (around 1880), by 1885 67% of broad money – that is, most of it – was already credit money. Demand deposits were already the largest component of the money supply.

What happened by 1913 at the end of the Classical Gold Standard? Let us look at the second chart for 1913, which again shows the total money supply composition in 11 nations.




Actual gold declined to just 10% of the money supply, and credit money accounted for the overwhelming 85% of the money stock. Demand deposit money (bank money) stood at 63% of total money supply – again the largest component and much larger than in 1885.

What happened is that fractional reserve banking was meeting most of the demand for credit money: money was mostly in the form of demand deposits and banknotes.

Money supply was elastic, and total money supply was partly endogenous and partly exogenous. The exogenous component was the base money (or monetary base) of gold and silver, and the credit money component was endogenous.

The inelastic nature of the commodity base imposed constraints on how much credit money could be created of course (which libertarians and Austrians no doubt applaud), but one wonders how much private investment was prevented and stifled because of the need to maintain gold reserves for final clearing of credit money transactions. To what extent was economic growth in the late 19th century reduced by the “barbarous relic”? Probably to some important degree, if there was significant demand for credit from businesses that was unmet by banks. (Today, as a matter of interest, many Post Keynesians would consider even base money endogenous, so that our monetary system is freed from the straitjacket of gold.)

Eventually, the gold standard system itself required new sources of base money, and banknotes of central banks came to be effectively a form of base money in many nations. Within other nations, the banknotes of the most powerful or trusted private banks no doubt also came to be used as if they were base money.

As another interesting datum, it was not just gold that was the international reserve currency: the UK pound sterling – often just banknotes of the Bank of England – was also a fundamental reserve currency in the international payments system of the 19th century.

Robert Triffin’s verdict on the 19th-century gold standard is significant:

“[the] reconciliation of high rates of economic growth with exchange-rate and gold-price stability [in the 19th century] was made possible … by the rapid growth and proper management of bank money, and could hardly have been achieved under the purely, or predominantly, metallic systems of money creation characteristic of the previous centuries. Finally, the term ‘gold standard’ could hardly be applied to the period as a whole, in view of the overwhelming dominance of silver during its first decades, and of bank money during the latter ones. All in all, the nineteenth century could be far more accurately described as the century of an emerging and growing credit-money standard, and of the euthanasia of gold and silver moneys, rather than as the century of the gold standard.” (Triffin 1985: 153).

Triffin (1985: 152) estimates that in 1800 bank money or credit money probably constituted less than 33% of the money supply. By 1913, paper currency and bank deposits accounted for 83% of overall currency circulation in the world, and actual gold itself for not much more than 10%.

The final collapse of the gold standard in the 1930s – after the disastrous attempt to restore it via the gold exchange standard – was the understandable culmination of a process already well underway in the late 19th century: the increasing irrelevance of gold and its shrinking role as a form of money.

Finally, the graph below shows the rise in the money supply from 1885 to 1913.




As we can see, the gold standard did not stop the continuous, annual expansion in the money supply.

Nor did it stop the remarkable expansion of the credit money component of national money stocks, which came to dominate national money supplies by 1913.

In short, the gold standard was a myth.


BIBLIOGRAPHY

Bordo, Michael D. 1999. The Gold Standard and Related Regimes. Cambridge University Press, Cambridge.

Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds.), The Gold Standard in Theory and History. Routledge, London and New York. 140–161.

The Myth of Ludwig Erhard and Economic Policy in Germany in 1948

There is a myth that has grown up around Ludwig Erhard and his abolition of price controls in Germany in 1948.

That mythology is illustrated well in this section of the Commanding Heights documentary below.



First, nobody denies that Germany experienced economic chaos after 1945. The war devastated the economy. The destruction of so much of Germany’s capital stock and its severe supply problems obviously meant that special economic polices were required. Demand-led Keynesian stimulus was obviously the wrong policy in the immediate post-1945 period.

Nevertheless, let us review the myths and problems with this video:

(1) This video creates the myth that in 1948 the German economy was suddenly and completely liberalised. Nothing could be further from the truth. The West German economic miracle in the 1940s and 1950s occurred with a high degree of government intervention.

(2) We are told that Ludwig Erhard decided to abolish “all price controls.” That is simply not true. Ludwig Erhard’s abolition of price controls was hardly complete. The “Law of Guiding Principles” that outlined Erhard’s reform reveals a very different program from the myth created in this documentary. For example,

(1) food and raw materials remained under control;

(2) textiles, clothes, shoes and soap continued to be rationed, and

(3) prices for staple foods, raw materials, and rents were also still subject to regulation. (Mierzejewski 2004: 71).

(3) There is no doubt that moderate liberalisation of prices eliminated the black market in many goods. But the speed with which goods “reappeared” is exaggerated in the documentary; it did not happen “overnight.” In fact, it took weeks for goods to reappear in serious quantities (Mierzejewski 2004: 72), and one consequence of the reform was that unemployment rose (Mierzejewski 2004: 72).

Arguably, three other factors did far more for the German economic recovery from 1948. First, the currency reform of 1948 and the introduction of the new Deutsche Mark (on 20 June 1948) was an important step, since the old Reichsmark was near worthless.

Secondly, the industrial and economic problems in Germany were partly caused by the “industrial disarmament program” pursued by the Allies from 1945 that involved actual removal of capital goods equipment and an import embargo on raw materials. The abandonment of that policy was a major step in the economic recovery.

Thirdly, the Marshall aid program did more to provide consumer goods in Germany after 1945 than the liberalisation of price controls. Germany’s import needs were greatly depend on Marshall aid: 70% of imports in 1946–1947, 65% in 1948 and 43% in 1949 (Hitchcock 2010: 164). When the recovery of 1948 caused a balance of payments crisis, Marshall aid covered the deficit.

Also, government earnings from the sale of Marshall aid goods were used by the government to finance public investments in electricity, coal mining, agriculture, housing, railways and shipping (Hitchcock 2010: 164).

(4) The soaring inflation and difficulty many people had in obtaining basic consumer goods caused what can only be described as a volte face by Erhard.

By September 1948, Erhard oversaw an intervention called the “Everyman Program” designed to control the inflation unleashed by his liberalisation. In this program, raw materials were directly allocated to producers of consumer goods, so that these businesses would charge prices deemed fair by the government. The public had access to consumer goods such as clothing, shoes, and kitchen utensils at prices well below what were being charged on unregulated markets, and the type of goods subject to control varied as circumstances dictated (Mierzejewski 2004: 75). That program did not end until 1951.

(5) Erhard happily accepted Marshall aid which, crucially, overcame the balance of payments constraint in post-WWII Germany and provided the imports of consumer goods and capital goods that the Germans badly needed given their crippled economy (Mierzejewski 2004: 76). Needless to say, Marshall aid was hardly a “free market” policy.

(6) Also, much is made in this documentary of the fact that the German economy overtook that of the UK in the post-war period, as if this had to do with Germany’s alleged laissez faire policies. In fact, Germany, had always been the largest economy in Europe from the early 20th century, and its return to that position by post-1945 economic growth was nothing but the natural consequence of its reconstruction and the recovery of its export-led growth sector.

(7) Another paradox is that it was Ludwig Erhard who popularised the term “social market economy,” the term that described the West German mixed economy after 1945. Mises spits bile at West Germany’s “social market economy,” and regarded it as just another interventionist state that would allegedly lead to totalitarian socialism. One wonders how Austrians could seriously point to West Germany as an example of their brand of economics.

(8) One final statement in the documentary is that after 1945 “most countries preferred to plan their economies” (in contrast to West Germany), a gross exaggeration. West Germany had the same fundamental mixed economy as most other Western nations. The mixed economies in the capitalist West – even those with some nationalised industries – were hardly “planned economies,” for that phrase, if it is to have any meaning, must refer to communist command economies.

What about other aspects of West German economy policy after 1948?

Although the West German government practised fiscal restraint in the 1950s, the mass destruction of so much of Germany’s capital stock allowed good returns from investment in capital for many years, and the growth of the post-war era was a function of reconstruction. Germany required a great deal of reconstruction, much greater than, say, the United States and even the UK.

Germany policies in the 1950s essentially drove the economy back to its export-led growth model, though one consequence was that Germany suffered a serious problem of unemployment in the 1950s: unemployment was shockingly high at the beginning of this decade and only gradually fell from about 10% to 3% during the course of the decade. At the same time, the 1950s saw a great expansion of the welfare state in West Germany, and social outlays provided automatic stabilisers to some degree.

But the economy was hardly an example of a free market paradise. Even in the 1950s, a vast swathe of German industry was still owned by the government: about 40% of coal and steel, 66% of electricity production, 75% of aluminium and most German banks. For example, Volkswagen was owned by the West German state until 1961 when the government sold its majority stake in the company (a move which was part of a privatisation program by Konrad Adenauer that had begun in 1957). The German government also prevented foreigners from taking over German automakers.

By the mid-1960s, the post-war boom ended, and German governments turned to overt Keynesian policies to stimulate demand.

In general, though I have not read these German works, Berger (1997) and Nützenadel (2005) detail how there was a great deal of macroeconomic management of the West German economy by the government from the early 1950s.

BIBLIOGRAPHY
Allen, Christopher. 1989. “The Underdevelopment of Keynesianism in the Federal Republic of Germany,” in Peter Hall (ed.), The Political Power of Economic Ideas: Keynesianism Across Nations. Princeton University Press, Princeton. 263–289.

Berger, Helge. 1997. Konjunkturpolitik im Wirtschaftswunder : Handlungsspielräume und Verhaltensmuster von Bundesbank und Regierung in den 1950er Jahren. Mohr Siebeck, Tübingen.

Hitchcock, W. I. 2010. “The Marshall Plan and the Creation of the West,” in Melvyn P. Leffler and Odd Arne Westad (eds.). The Cambridge History of the Cold War. Volume I. Origins. Cambridge University Press, Cambridge. 154–174.

Mierzejewski, Alfred C. 2004. Ludwig Erhard: A Biography. University of North Carolina Press, Chapel Hill, N.C. and London.

Nützenadel, Alexander. 2005. Stunde der Ökonomen: Wissenschaft, Politik und Expertenkultur in der Bundesrepublik 1949–1974. Vandenhoeck & Ruprecht, Göttingen.