Fellow Shortrunners,

     Explaining economic growth prior to the industrial revolution is not an easy task.  For the great majority of history economic growth has been sporadic and slow.  It was not however, simply extensive growth (employing more land and a growing population) as some historians have argued.  Instead, there is a plethora of evidence which suggests that prior to the industrial revolutions intensive growth (rising productivity) did occur.  It is also clear however that most pre-modern economies were far from their potential.  The great majority of important innovations employed during the industrial revolution were invented prior to its onset.  This suggests that there was simply a missing factor that would lead economic growth to occur, some spark necessary for economic activity to occur.

     Some economists argue that the answer lies in examining institutional change. The field of economic history has struggled to explain institutional change.  The field of new institutional economics which has grown out of Douglass North's research has argued from the vantage point of neoclassical economics.  Namely, changing institutions can bring about a lowering of transactions costs which in turn sparks economic growth.  For example, the development of price currents in Amsterdam and London dramatically altered international commerce in the pre-modern period, lowering information costs and risk.  Similarly, the use of naval force to curtail piracy is a primary factor in the remarkable growth of the Atlantic sea ports during the 17th century and the decline of the Venetian hegemony on Asiatic trade.  It is not clear however, what sparks institutional change.  It could be, as some historians have argued a combination of luck, politics and social factors.  Or it could be, as Marxist historians have suggested class struggle.

     North and Weingast argue that it is not one single factor, nor is it constant over time.  They believe that institutional change prior to the sixteenth century in Europe was the result of changing factor proportions.   Specifically, population growth would cause swings in the prices of food and thus drive institutional change.  This explanation is still exogenous, it is explained by looking outside the economic system and instead at population.

     Another appealing argument has been put forward by Mancur Olson.  He suggests that it is the costs of collective action which determine whether an economy is innovative.  When societies are characterized by a high degree of collective organization in the form of guilds or unions, then there is likely to be slower growth.  The result then becomes that economies characterized by revolutions and dynamic activity, such as England after its civil war, are more likely to experience institutional change which raises the opportunity cost of collective action.  There does not appear to be a cookie cutter explanation to what factors influence institutional change, nor will there likely ever be.  There are however, important lessons that can be drawn by looking at early economic history.  In particular, we should be wary of making the assumption that the status quo of institutions is the most efficient or that there is one set of institutions which can be applied in any country.  If it teaches us anything, history should teach us that history will never be over.

Economic Releases
The data section provides charts and data for the most important economic indicators.

Personal Income/Spending: 0.4%/0.4%
Release Date: 4/28

• On Monday, the Commerce Department reported that measures of personal income and personal consumption rose 0.4% in March.  The strong consumption figure was readily accepted by the market which is looking for signs that consumer spending, the largest component of the US economy, would drive growth and recovery.

Consumer Confidence: 81
Release Date: 4/29

• Consumer confidence in the US leapt following the closure of the war.  During April, the Conference Board's consumer confidence index jumped from 64.4 to 81.  Improvement in gasoline prices and continued income growth will likely drive further gains in confidence.

Construction Spending: -1%
Release Date: 5/01

• Overall spending on construction projects in the US contracted 1% in March.  The headline figure masked two trends: a decline in public spending projects and an increase in residential spending.  Given low mortgage rates and the resilience of the US housing market, continued new housing construction plans is to be expected.

Jobless Claims: 448,000
Release Date: 5/01

• Falling by 13,000, initial jobless claims shrank to 448,000 last week.  The improvement was less than satisfactory and jobless claims are still indicative of a weak labor market in the US.  Furthermore, continuing claims rose yet again during the week.  With the lack of significant improvement all eyes will be on Friday's BLS employment report.

ISM Manufacturing Index: 45.4%
Release Date: 5/01

• The Institute for Supply Management's manufacturing index fell to 45.4% in April from a reading of 46.2% the previous month.  The continued declines foretell of yet another dip into recession for America's manufacturing sector which appears to have only briefly recovered from its last recession.  The report cited worsening in the labor market and a decrease in the backlog of orders.

Productivity: 1.6%
Release Date: 5/01

• During the first quarter, productivity at non-farm business organizations in the US expanded below expectations at an annual rate of 1.6%.  Though weaker, this continued positive productivity release is good news for the economy, and should in the long run make leeway for future income gains and improvement in the job market.

ECRI Weekly Leading Index: 119.5
Release Date: 5/02

• As the ECRI WLI rose 0.5 points to 119.5, economists for the Economic Cycles Research Institute continued to argue that the index is suggestive of a weak recovery.

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Issue #151

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