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 nineteenth century and the first quarterof the twentieth witnessed a fierce confrontation between the newbig businesses and traditional businesses. On the one side were multimillionaires,the “robber barons.” On the other were small ruraland urban businesses, farmers, and those who labored for the robberbarons.

Railroads were the earliest and the most persistent target. Duringthe railroad-building booms preceding and following the Civil War,state and local governments outdid each other in offering tax exemptionsand other inducements for companies to lay track through theirareas. Once the railroads were completed, however, discontent arosewith the structure of rates, the quality of service, and the failure ofrailroads to pay their fair share of taxes. Led by the principal farmers’organization in the Midwest, the Grange, lobbies were successful inpassing state laws regulating the railroads, in raising taxes on railroadproperties, and in bringing suits in the courts.

Labor also protested, often using its most powerful weapon, thestrike. During the Civil War, the first of the great railroad brotherhoodswas organized among locomotive engineers, and that examplewas followed by other groups of workers on and off the railroad. By1870, there were thirty-two national trade unions, and most of thelarger cities had also established trade assemblies and publications.The most violent strike of the postwar era began during July 1877 inresponse to wage cuts on many of the railroads east of the Mississippi.Trains were halted by workers, and troops were brought out to dealwith angry mobs. Buildings were burned and blood spilled in Baltimore,Pittsburgh, and other major railroad centers. By the time thestrike was over, about one hundred people had been killed, and theresulting property damage ran into the millions of dollars. The conflictwas so bloody it revived fears that America could be visited by arevolution of the French type. Those fears were reawakened in 1892and again in 1893 when strikes at the giant Carnegie Steel Companyand the Pullman Palace Car Company touched off pitched battles andmob violence, and state militias and federal troops had to be broughtin to reestablish order. Labor strife led some reformers to doubt theprevailing theories of poverty and to question whether the frontierwas still an adequate safety valve for urban labor (Fogel 2000).

The Social Gospel Movement and the Wisconsin Idea

The change in thought is illustrated by the career of the Reverend JohnBascom, who taught economics at Williams College and published atextbook in political economy in 1859. Holding views quite similarto those of Wayland, Bascom argued that the tactics of trade unions,especially strikes, were vicious attempts by incompetent workers toprevent workers with “superior intelligence, economy, and integrity”from achieving the benefits of free competition. By the mid-1880s,however, when Bascom was serving as the fifth president of the Universityof Wisconsin, he deplored the prevailing lack of sympathy fortrade unions. Capital, he charged, was combining in ways that madethe contest between capital and labor highly unequal. Consequently,government should curb the tyranny of big business and favor labormore. The state, he believed, had to become a vehicle for social improvement,including a mild redistribution of income from the richto the poor (Dorfman 1946, 967 [quote]; Curti and Carstensen 1949;Henderson 1993).

Bascom was one of the pioneers of the new reform movement thathistorians refer to as the “Social Gospel.” Although his change of economicheart was typical of many of the leaders of this wave of reform,it would be a mistake to presume that the evolution reflected a changein underlying spirit, from complacency to compassion. The reformersof the “Second Great Awakening,” the name that historians have givento the reform movement that began during the antebellum era, couldhardly be called complacent. They were imbued with the ethic of benevolence.Their ambition was to make the world “a fit place for theimminent return of Christ.” They were committed to the “universalreformation of the world” and to the “complete and final overthrow”of “war, slavery, licentiousness, and all such evils and abominations.”But they were slow in recognizing a new set of issues precipitated bythe rise of big business (McLoughlin 1978, 128 [quotes]; Fogel 2000;Curti and Carstensen 1949; Henderson 1993).

Although the Social Gospel movement arose out of the theologicalcurrents of the Second Great Awakening, it was transformed by thedeepening economic and social strife of the 1870s and 1880s, by theintensification of corruption in the rapidly growing cities, and by theintellectual turmoil precipitated by the new findings in geology and bythe Darwinian controversy. In this context, Social Gospel leaders arguedthat, if America were to revitalize itself, it would have to changenot only its creed, its theory of man’s relationship to God, but also itsethics. It would have to make poverty not a personal failure but a failureof society, and evil would have to be seen not as a personal sin butas a sin of society. According to these radicals, it was the obligation ofthe state to improve the economic condition of the poor by favoringlabor and redistributing income, reforms necessary to put an end tourban corruption (Fogel 2000; Curti and Carstensen 1949; Henderson1993).

Bascom was not only one of the earliest academic expositors of SocialGospel theory; he was also a highly influential teacher who putan indelible stamp on the culture of the University of Wisconsin and,in time, on the state government of Wisconsin. Bascom’s influence atthe university was intensified and extended after 1891 by Richard T.Ely, the most prominent economist of the period and the most ardentacademic expositor of Social Gospel theory. Hired to head thenew School of Economics, Political Science and History, Ely sought tocreate a program that would do for the civil service what West Pointhad done for engineering. He quickly hired two of his former studentsfrom Johns Hopkins University and developed a large numberof courses on such topics as the history of political economy, recenteconomic theories, statistics, money, and the distribution of wealth(Henderson 1993; Furner 1990; Curti and Carstensen 1949).

Three events made it possible for Ely to pursue his vision of academicsas partners with politicians in the creation of a welfare state.The first was the election of Robert M. LaFollette, a disciple of Bascom’s,as governor of Wisconsin in 1900. The second was the accessionof Charles R. Van Hise, another disciple of Bascom’s and a classmate ofLaFollette’s, as university president in 1903. The third was the arrivalof John R. Commons, a student of Ely’s at Johns Hopkins and a zealousSocial Gospeler, as professor of economics in 1904. Commons,who had had a good deal of experience with government and business,had learned that it was necessary to tone down the religious rhetoric.He also emphasized that his arguments for reform were aimednot at undermining capitalism but at regulating the abuses of big businesses.Commons recognized that the case for change had to be basedon careful empirical analysis of the organization of business and theoperation of labor markets. This approach became known as institutionaleconomics (Henderson 1993; Furner 1990; Curti and Carstensen1949).

When LaFollette needed advice on the implementation of his legislativeagenda, he turned to Commons. Commons draft ed legislationfor a civil service bill (which based employment on competitiveexaminations) and for a bill establishing a Wisconsin state commissionto regulate railroads, both of which were enacted in 1905. He wassubsequently involved in designing the state’s programs for regulatingpublic utilities, workmen’s compensation, and apprenticeships. Otheruniversity economists who were involved either in consulting withthe government or in serving on regulatory commissions includedThomas S. Adams (a specialist in public finance and taxation) andBalthasar H. Meyer (a specialist in railroad regulations). Beyond economics,members of the faculty were drawn to serve on state commissionsfrom such diverse fields as geology, bacteriology, agronomy,and engineering. In 1908, about one-sixth of the university faculty hadappointments on government commissions (Henderson 1993; Furner1990; Curti and Carstensen 1949).

The “Wisconsin Idea,” as LaFollette called it, for a partnership betweenacademic and political reformers was duplicated in other states.At local and state levels of government, where constitutional scruplesagainst government intervention in the economy were relativelyweak, many politicians saw the advantages of using nonpartisan academicexperts to investigate the issues reflecting popular discontent,while academic reformers, such as Ely and Commons, believing thatthe facts were on their side, saw such investigations as powerful instrumentsin rallying public and legislative support for proposals theyembraced. Of course, belief in the efficacy of particular policies neednot undermine fruitful, objective research, as the career of Commonsillustrates. Everything depends on the investigator’s turn of mind, onhis or her dedication to professional standards.

The Entry of Economists into the Making of Federal Policy

The idea of a partnership between academic and political reformersthat was so strong in Wisconsin was not easily transferred to the federallevel. Although other universities had religiously driven economistswho wanted to turn the federal government into a welfare state,the majority of economists outside Wisconsin were orthodox in theireconomic principles. They believed that, although there was a legitimaterole for government to play in addressing market failures, thatrole had to be lightly exercised. Otherwise, the government mightbecome a serious obstacle to the effective performance of the economy.Another and perhaps more formidable barrier to the penetrationof the federal government was the absence of a strong demand foreconomists among members of Congress and officials in the executivebranch. Prior to World War I, the demand for the advice of economistsin the making of federal policy was as modest as the supply ofeconomists who sought to influence federal policy directly.

Nevertheless, between 1880 and World War I, economists did becomeincreasingly involved in federal policymaking. Three factorsdrove this evolutionary process. The first was the rising tide of unrestover economic conditions among workers, farmers, and small businessmen,particularly the periodic outbreaks of violence by railroadand industrial workers. These outbreaks stirred alarm in Congress,which took measures to obtain more information about real wagesand other aspects of the economy. The second factor was the emergenceof a small corps of economists with expertise on the issues ofconcern to Congress and the president. As late as 1900, there werehardly seventy economists in the twenty-two top research universitiesof the nation. Some of these experts were largely self-taught, withoutdoctorates in economics. This was, for example, true of Charles F.Dunbar, the first person appointed to a chair in economics at Harvard,whose only earned degree was an A.B., awarded in 1851 (Parrish1967). The third factor, especially after 1900, was the determinedeffort of Social Gospel economists to project their program for thetransformation of the federal government into a welfare state. Fewerin number than mainstream, orthodox economists, the Social Gospelerswere able to gain an audience in Congress and among otheropinionmakers, partly because of their considerable expository skills,and partly because of the large role they played in amassing empiricalevidence on the wretched conditions of life among a large proportionof industrial workers.

An important step in the transformation of the federal governmentinto a welfare state was the establishment of an agency to systematicallycollect information on labor conditions. The U.S. Bureau of LaborStatistics (BLS) was established in 1885 with Carroll D. Wright,one of the self-taught economists and statisticians, as its first commissioner,a post he held until 1904. Although Wright (who taughtat Johns Hopkins, Columbia, and Harvard Universities) was muchcloser in his economic analyses to such orthodox economists than hewas to Ely, he believed that the rise of big business and the growth ofan industrial labor force had produced injustices that required illumination.He had earlier pioneered the collection of data on the earningsand expenditures of working-class families and was one of thepropounders of the so-called Engel curve, which purported to show,from cross-sectional data, how consumption of various items changedwith income (Stigler 1954; Furner 1990). Although many of the projectsundertaken by the BLS were dictated by requests for informationby Congress, Wright launched many studies on his own initiative.
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