No matter how smart or hardworking or well-meaning the system’s leaders, there was no chance for sustainable improvement, given the enormity of its dysfunction. Then the levees broke and the city was devastated, and out of that destruction came the need to build a new system, one that today is accompanied by buoyant optimism. Since 2006, New Orleans students have halved the achievement gap with their state counterparts. They are on track to, in the next five years, make this the first urban city in the country to exceed its state’s average test scores. The share of students proficient on state tests rose from 35 percent in 2005 to 56 percent in 2011; 40 percent of students attended schools identified by the state as “academically unacceptable” in 2011, down from 78 percent in 2005.
Via Greg Mankiw, an interesting remembrance of Milton Friedman including “the world according to Milton Friedman”. Here’s a sample:
1. Concentrated power is not rendered harmless by the good intentions of those who create it.
2. With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.
3. The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from overeating.
4. If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.
I recently watched a good documentary called “The Better Hour,” which tells of the life and works of William Wilberforce. Wilberforce was among the leaders of the abolitionist movement in England that led to the end of slavery there in 1807.
In the film, Prof. James Walvin, a historian at the University of York, argued there was “a huge amount of money to be made in the slave trade…” which got me thinking about the old Eric Williams thesis and the rebuttal by Stanley Engerman (and, curious to see if there has been any more recent work on the topic since Williams’ published his book in 1944 and Engerman’s paper was published in 1972).
Williams’ major arguments have been summarized as: (1) racism was a consequence of slavery but not its cause; simply put, slavery was a way of exploiting labor, (2) profits earned in the slave trade were used to finance industrialization, and (3) abolition of the slave trade was driven by changing economic incentives, not by humanitarian interests.
The second argument has been of primary interest for economic historians since Williams’ original thesis appeared in Capitalism and Slavery. Was, as Williams claimed, the British Industrial revolution financed by the slave trade? To what extent does modern industrial capitalism depend on that supposedly highly profitable institution?
These are ultimately empirical questions and the Williams thesis simply does not hold up to empirical scrutiny, as Engerman showed back in 1972 (and whose critique has been pretty widely accepted).
The economic logic behind this is the simple story of competition eroding high profits: entry was, as David Richardson pointed out, easy since merchant ships could easily turn into slave transport ships. One would, under those circumstances, not expect exorbitant profits and Engerman’s work showed that prediction to be consistent with the evidence.
While some individuals certainly grew wealthy from the slave trade and invested those profits into British factories, they were of minor importance in the Industrial Revolution. The slave trade was not especially profitable relative to alternative investments and revenues from it were not big enough to have had much of an impact on British capital formation. The slave trade was actually quite a small part of British trade overall and, as McCloskey pointed out in Bourgeois Dignity, “to attribute great importance to a tiny trade would make every small trade important – we are back to the brass industry as a cause of the modern world.”
As for other recent scholarship on this topic, here is a short list for the interested reader:
Eltis, David and Stanley L. Engerman, “The Importance of Slavery and the Slave Trade to Industrializing Britain,” Journal of Economic History, Vol. 60, No. 1 (March 2000)
Darity, William A., “British Industry and the West Indies Plantations.” In The Atlantic Slave Trade, edited by Joseph. E. Inikor and Stanley L. Engerman, 1992.
Bailey, Ronald, “The Slave(ry) Trade and the Development of Capitalism in the United States: The Textile Industry in New England.” In The Atlantic Slave Trade, edited by Joseph. E. Inikor and Stanley L. Engerman, 1992.
Engerman, Stanley L. and Barbara Solow (eds.), British Capitalism and Caribbean Slavery: The Legacy of Eric Williams
McCloskey, Deirdre N. “Slavery and Imperialism Did Not Enrich Europe” in Bourgeois Dignity
For some time now, I have assigned students in my Political Economy class a well-known paper by Knack and Keefer on social capital and its connection to economic development. Kenneth Arrow (1972) also argued that trust was a predictor of economic success. In short, trust is an important element in market exchange. Glaaeser et al (2000) have dealt with the same issue, finding that both trust and trustworthiness rise when individuals are socially closer to each other (for example, of the same race or nationality). Of course, trust need not be of the informal and personal type we normally think of when we hear the word; instead, it could be “institutionalized” trust that facilitates exchange between complete strangers over the Internet, for example . It’s not so much that I trust the stranger who is selling something to me on Amazon but there are institutional mechanisms in place that allow the transaction to happen anyway.
The General Social Survey (GSS) has included a question for many years that sheds a bit light on trust of the more personal type (the GSS survey question is vague and it’s not entirely clear how we should interpret it, but it is still pretty widely used in the literature and is hopefully a reasonably good proxy for social capital). I’m not entirely sure why this has happened, but the extent to which we trust each other has declined noticeably over the last couple of decades according to the GSS. Here’s the percent of respondents to the GSS who said they can generally trust other people:
If this indicates declining levels of trust and an erosion of our civic ethics, we should be concerned; as Adam Smith told us long ago, trust and reciprocity are foundations of market exchange. The less we trust each other, the greater the costs of transacting and the more rules we must have in place to structure our transactions (government plays an important role in establishing those rules, of course, but has its own problems including the likelihood of rent-seeking). As Jerry Evensky once wrote:
When trust is shaken, individuals pull back and the system contracts. Where trust grows, individual energy and creativity are unleashed and the system grows. In Smith’s vision of humankind’s progress, trust is the central theme.
Let’s take a look, for example, at NYMEX trading in the May crude oil futures contract. A single contract, if held to maturity, would require the seller to deliver 1,000 barrels of oil in Cushing, OK some time in the month of May. Last Friday, 227,000 contracts were traded corresponding to 227 million barrels of oil, which is indeed a large multiple of daily production. But it is worth noting that at the end of Friday, total open interest– the number of contracts people actually held as of the end of the day– was only 128,000 contracts, much smaller than the total number of trades during the day, and not much changed from the total open interest as of the end of Thursday. Many of the traders who bought a contract on Friday turned around and sold that same contract later in the day. If the purchase in the morning is argued to have driven the price up, one would think that the sale in the afternoon would bring the price back down. It is unclear by what mechanism Representative Kennedy maintains that the combined effect of a purchase and subsequent sale produces any net effect on the price. But the only way he gets big numbers like this is to count the purchase and subsequent sale of the same contract by the same person as two different trades.