Tuesday, November 8, 2011

Independence and Depression: Economics of the American Revolution

For at least half a century, economic historians looking at colonial America have started with 1840--when the U.S. census collected useful data about economic issues like occupations and industry--and then worked  backward. A common approach was to divide the 1840 economy into sectors, and then work backwards trying to make reasonable estimates about the number of workers in each sector and their productivity.

Peter Lindert and Jeffrey Williamson have been taking an alternative approach. They have been collecting  available archival data, like local censuses, tax lists, and occupational directories. They look for data on occupation or in some cases on social class, and then combine it with data on wages. They then extrapolate from documented localities within a region to similar undocumented localities within a region, and so on up to the national level. More broadly, instead of trying to estimate GDP from the production side of the economy, they try to estimate it from the income-earning side of the economy.  

A nice readable overview of their work is available in an essay published in July on VOX called "America's Revolution: Economic disaster, development, and equality." Those who want to know more about how the sausage was made can look at their NBER working paper (#17211) from last July: "American Incomes Before and After the Revolution." And those who want to see the actual uncooked meat inside the sausage can look at their open-source data website here. The effort is clearly a work in progress: at one point they refer to it as "controlled conjectures" and at another point as "provocative initial results." Here are three of their findings:

During the Revolutionary War and in its aftermath, the U.S. economy contracted by Depression-level amounts. From 1774 up to about 1790, on their analysis, the U.S economy may have declined  by "28% or even higher in per capita terms." They offer several plausible reasons for this decline: the destruction caused by the War itself;  the sharp decline in exports caused by the Revolutionary War, including the loss of more than half of all pre-war trade with England by 1791; and the departure of skilled and well-connected loyalists. Urbanization is typically a sign of economic development, but during this time period, the U.S. economy was de-urbanizing. They write: To identify the extent of the urban damage, one could start by noting that the combined share of Boston, New York City, Philadelphia, and Charleston in a growing national population shrank from 5.1% in 1774 to 2.7% in 1790, recovering only partially to 3.4% in 1800. There is even stronger evidence confirming an urban crisis. The share of white-collar employment was 12.7% in 1774, but it fell to 8% in 1800; the ratio of earnings per free worker in urban jobs relative to that of total free workers dropped from 3.4 to 1.5 ..." 

These economic losses seem to me an often-neglected part of the usual historical narrative of America's War for Independence. Those fighting for independence were sticking to their cause, even as the typical standard of living plummeted.

The American South was the region that suffered by far the most from the Revolutionary War. 
On their estimate, the New England region suffered only a modest loss in per capita GDP of -.08% per year from 1774 to 1800, and then grew at a robust annual rate of 2.1% from 1800 to 1840. The Middle Atlantic region suffered a larger annual decline in per capita GDP of 0.45% from 1774 to 1800, but bounced back with an annual growth rate in per capita  GDP of 1.45% from 1800 to 1840. However, the Southern region experienced a near-catastrophic drop of 1.57% per year in per capita GDP over the quarter-century from 1774-1800, and rebounded to a growth rate of just 0.43% from 1800 to 1840. On their numbers, the South is has by far the highest incomes of the three regions in 1774, and by far the lowest per capita GDP of the three regions by 1840. Indeed, on their estimated, real per capita GDP in the South in 1840 was about 20% below its level in 1774!

This absolute and relative decline of the South has been used as an example of how institutions can shape long-run economic development. The basic argument is that when the New World was settled, certain areas seemed well suited mining and plantation agriculture. Those areas ended up with what  Daron Acemoglu, Simon Johnson, James A. Robinson in a 2002 article referred to as "extractive institutions, which concentrate power in the hands of a small elite and create a high risk of expropriation for the majority of the population, are likely to discourage investment and economic development. Extractive institutions, despite their adverse effects on aggregate performance, may emerge as equilibrium institutions because they increase the rents captured by the groups that hold political power." The alternative is areas where extractive economics won't work, and these areas instead receive a "cluster of institutions ensuring secure property rights for a broad cross section of society, which we refer to as institutions of private property, are essential for investment incentives and successful economic performance." In their 2002 article in the Quarterly Journal of Economics, the authors apply this dynamic broadly across the settlement of the New World, and they title the article: "Reversal of Fortune:  Geography and Institutions in the Making of the Modern World Income
Distribution." For a nice readable article laying out a similar theory, see "Factor Endowments, and Paths of Development in the New World," by  Kenneth L. Sokoloff and Stanley L. Engerman, in the Summer 2000 issue of my own Journal of Economic Perspectives. (The JEP is publicly available, including the most recent issue and archives going back more than a decade, courtesy of the American Economic Association.)

I can't claim any expertise on the interaction of economic conditions and public mood in the years leading up the U.S. Civil War. But it does seem to me that seeing the U.S. South as a region where per capita GDP had for decades been struggling to recover from an enormous decline, while in relative terms falling ever farther behind other regions of the country, helps to deepen my understanding of the South's sense of separateness which fed into a willingness to secede.

Without the economic damage from the Revolutionary War, the U.S. economy might have started its period of more rapid economic growth several decades sooner--and perhaps been the first nation in the world to do so. Economic historians do love considering counterfactual possibilities, and this one strikes me as a good provocative one. Lindert and Williamson write: "It seems clear that America joined Kuznets’s modern economic growth club sometime after 1790, with the North leading the way, while the South underwent a stunning reversal of fortune. And without the 1774-1790 economic disaster, it appears that America might well have recorded a modern economic growth performance even earlier, perhaps the first on the planet to do so."