Econ 210c, Spring 2002, Reading Notes for February 13

Brad DeLong

Claudia Goldin and Kenneth Sokoloff (1984), "The Relative Productivity Hypothesis of Industrialization," QJE 99 (August).

C. K. Harley (1992), "International Competitiveness of the Antebellum American Cotton Textile Industry," JEH 52 (September).

Naomi Lamoreaux (1986), "Banks, Kinship and Economic Development," JEH 46 (September).

C. Knick Harley's article is the--modern--conventional wisdom on the American cotton textile industry. It was born in the embargo of 1807, raised during the War of 1812, and grew during the post-War of 1812 tariff. What would have happened to this infant industry in the tariff's absence? Contrary to what F.W. Taussig had concluded early in the century, Harley argues that the tariff on cotton textiles was absolutely essential to the development of American industry in the northeast United States in the 1840s and 1850s. All agree that American textiles would never have flourished in the 1820s and 1830s without the tariff. The question is whether by 1840 this "infant industry" had grown up. And Harley argues "no."

One point on which Harley's article is relatively weak is the analysis of the real exchange rate. The real exchange rate is, after all, an equilibrium price--the price that balances imports and exports (and capital flows). A high tariff can improve the terms of trade: can make the value of the domestic currency greater, and thus make an industry that would be competitive in a free-trade environment appear uncompetitive. What, if anything, can we say about the impact of the tariff on the real exchange rate between Britain and America? What can we guess?

Claudia Goldin and Kenneth Sokoloff focus on the relatively ample supply of female and child labor in industrializing New England. Their argument is that New England industrialized not because technology or culture was favorable but because costs were low. Where, in their view, does the abnormally large gap between male and female wages in post-colonial New England come from? Why wasn't young female labor worth more in agriculture? Is their argument convincing?

Naomi Lamoreaux tries to look not at what economic theory says that banks should do as financial intermediaries but at what they actually did in nineteenth century New England. She finds that banks were overwhelmingly the arms of entrepreneurial kinship networks. But the vulnerability of banks to nepotism did not, in her view, greatly harm their operation. Because entry into banking was free, any entrepreneurial kinship group that could convince potential noteholders that it was trustworthy could mobilize capital through a bank.

A standard argument in economic history is that financial sophistication is essential for successful industrialization and economic development. Someone, somehow, has to mobilize the capital to build the factories. How much of this argument survives Lamoreaux's examination of what banks actually did in nineteenth century New England. What does her model predict would happen in places--like the midwest of America--that lacked such entrepreneurial kinship groups? Are there more general conclusions about kin, clan, and commerce that are suggested by her study?