POLITICAL ARITHMETIC

Simon Kuznets and the Empirical Tradition in Economics

By ROBERT WILLIAM FOGEL, ENID M. FOGEL, MARK GUGLIELMO, NATHANIEL GROTTE

THE UNIVERSITY OF CHICAGO PRESS

Copyright © 2013 The University of Chicago
All rights reserved.
ISBN: 978-0-226-25661-0

Contents

PREFACE....................................................................xiIntroduction: The Amazing Twentieth Century................................11 The Rise of Academic Economists before World War I.......................102 The Early History of the NBER............................................213 The Emergence of National Income Accounting as a Tool of Economic
Policy.....................................................................494 The Use of National Income Accounting to Study Comparative Economic
Growth.....................................................................655 The Scientific Methods of Simon Kuznets..................................896 Further Aspects of the Legacy of Simon Kuznets...........................1067 The Quarter Century since the Death of Simon Kuznets.....................115Acknowledgments............................................................119References.................................................................121Index......................................................................135

Excerpt

CHAPTER 1

The Rise of AcademicEconomists before World War I

Academic economists are so prominent in the making and executionof economic policy that it is easy to take their role in the operation ofthe modern welfare state for granted. However much of a complimentsuch acceptance might appear to be, it slights the role of economistsas contributors to the creation of the welfare state and as a group ofprofessionals who generated public demand for their expertise. Therise of academic economists to their current prominence in publiclife did not happen overnight. We begin by describing some aspectsof the evolution of the economics profession in the United States andthe large role played by academic economists in the design and triumphof the welfare state.

Academic economists had little impact on the economic policiesof federal and state governments during the first three-quarters of thenineteenth century. This absence of influence is not explained merelyby the prevalence of laissez-faire doctrine. Nor is it explained by thelack of involvement of government in economic matters or the lack ofinstruments through which federal and state governments might haveintervened in economic affairs. Quite the contrary, economic policywas central to politics throughout the nineteenth century. Among theissues debated and acted on were tariffs; taxes on property, sales, andincome; banking policy; the promotion of internal improvements(roads, railroads, and waterways); government action to amelioratebusiness cycles; reduction of the labor supply through control of immigration;pensions for veterans; land distribution; the subsidizationof education; and unemployment compensation, workers' compensation,gender differences in pay and occupations, and other aspects ofthe alleviation of poverty.

By and large, the theorists of and experts on these issues beforethe Civil War were not academics but politicians, merchants, bankers,planters, journalists, artisans, and theologians, some of whom hadlittle or no college education. This is not to say that academic economistsdid not sometimes write books and articles or collect and analyzestatistical data. In 1843, George Tucker, a professor of moral philosophyat the University of Virginia, published an estimate of U.S.national income based on the decennial census of 1840 (see Tucker1843). A prophet of industrialization and population growth, Tuckerwas involved in politics and served a term in the House of Representatives.The academy also produced a few writers of textbooks on economics.The most widely used text during the three decades beforethe Civil War, The Elements of Political Economy (1837), was writtenby the Reverend Francis Wayland, the president of Brown University,a principal leader of the Northern Baptist Church, and an advocateof laissez-faire. Its objective, Wayland wrote, was to set forth God'slaws, so far discovered, regarding the production and distribution ofthose products that constitute the wealth of a nation (Dorfman 1946;Studenski 1958).

Property, Wayland argued, was founded on the "will of God," and itwas acquired directly as his immediate gift (as with land) or by labor.As for labor, Wayland accepted the general validity of the Malthusiandoctrine that the excessive fertility of laborers tended to increase theirnumbers and reduce their wages to the point of starvation and death.But that tendency was kept in abeyance in the United States becausecapital increased faster than the population. Hence, distressing povertywas rare except when precipitated by intemperance, indolence,and similar vices. The favorable demand for labor and the laggingsupply made it possible for industrious workers to accumulate capitalin a relatively short period of time. It followed that combinationsof labor (i.e., unions) were not only counterproductive to the interestof labor but also unjust because they deprived laborers of the right todispose of their labor and, as with legislative interference, they weredestructive of industry.

The Response to Industrial Concentration

The widespread embrace of laissez-faire before the Civil War was promotedby an economy that consisted of small producing units. Bothrural and urban laborers could believe that by hard work and frugalitythey would become the masters of their own businesses. After theCivil War, however, new technologies promoted such large economiesof scale that many small operations were driven out of competitionin one industry after another, including iron and steel, petroleum,meatpacking, milling, chemicals, and banking. Large-scaleenterprises arose not only because new inventions required massiveinvestments in plants (as in Bessemer steel) or in grids (as in electricity).They were also promoted by the enormous expansion of urbanmarkets and technologies that drastically reduced the cost of transportationand communication. As a result, efficient firms could competein distant markets in which inefficient local producers had previouslybeen protected by the natural barriers of high transportationand distribution costs.

The losers in this competitive struggle did not accept their fate stoicallybut appealed to the government for legislation that would offsettheir technological disadvantages. Small millers in upstate NewYork demanded reductions in their freight rates to make them morecompetitive with large-scale millers in Milwaukee. Small banks thatcharged higher interest rates in their local markets demanded protectionfrom the eastern banks that began offering comparable servicesat lower rates. Small refineries called on legislators to prevent StandardOil from undercutting their markets with what they describedas predatory pricing. Farmers in Iowa condemned the railroads forcharging more to ship a ton of wheat two hundred miles to Chicagothan it cost to ship that same ton nine hundred miles from Chicagoto New York City.

Thus, the last quarter of the...