The Nobel series: Founding fathers of cliometrics
Through the application of a statistical approach to economic history, Robert William Fogel and Douglass Cecil North traced various facets of institutional and economic change
The Nobel Prize in Economic Sciences in 1993 was awarded to Robert Fogel and Douglass North for "for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
Fogel graduated from Cornell University with a major in history and an economics minor. He was active in the American Communist Party for a while before returning to Columbia University for a Masters in economics in 1960 under George Stigler. After this, he moved to Johns Hopkins University for a PhD which he completed in 1963 under the guidance of Simon Kuznets. Fogel was a faculty at the University of Rochester and then at the University of Chicago from 1964 onwards. In 1975, he moved to Harvard University before returning back to Chicago in 1981.
Douglass North got his bachelor's degree and PhD from the University of California at Berkeley. Later, he worked as a senior fellow with Stan-ford University's free-market think tank — Hoover Institution. Before becoming an economist, he served as a navigator in the Merchant Marines during World War II. After completing his PhD, North taught at the University of Washington in Seattle (1960-83). He left for Washington University in St Louis in 1983 and stayed there till he retired.
Fogel is best known for three areas of research: i) His work on the railways, published in 1964; ii) his controversial research work on slavery, wherein he opined that slavery was an economically efficient system, notwithstanding its inhumane nature; and iii) he worked on economic demography where he showed that the fall in mortality rate was a function of better nutrition.
North's works mainly used economic history to analyse the reasons for economic growth in the USA and Europe and he found that institutions and institutional change were dominant explanatory variables that affected economic growth.
In this paper, we will look at the main works of Fogel and North and their various applications.
Both Fogel and North were economic historians. The novelty in their research was the extensive use of data and statistics in analysing economic history. This field of study is called cliometrics and both the economists pioneered this method in their research. Their research covered areas of economic theory, statistics, history and even other social sciences such as sociology and political science.
As noted above, the main works of Fogel were related to examining the role of railways in the economic development of the USA and the importance of slavery and economic demography.
Railways and economic growth
Fogel's work 'Railroads and American Economic Growth: Essays in Econometric History' (1964) quantified the contribution of railroads to American growth in the 19th century. Fogel used a 'counterfactual' construct of the 1890 American economy and compared it to the actual economy. Using the counterfactual where there were no railways, he argued that the absence of railroads would have shifted transportation of agricultural goods to wagons, canals and other waterways. This would have raised the costs of transportation from the farm to the primary market. The consequence would be a geographical redistribution of agricultural production. The rise in costs would, however, be rather small. Various factors such as more efficient water and road transport, coupled with a geographical redistribution of planning crops, would have neutralised the benefits of rail-ways. Fogel concluded that the railways were not indispensable for American growth. At the time, the dominant wisdom, as outlined by Schumpeter and Rostow, was that modern economic growth was the result of a few important discoveries such as the railways. Fogel rejected this view and suggested that modern economic growth was the sum of many technical changes, rather than a few innovations.
'Importance' of slavery
Fogel's work on slavery is titled 'Time on the Cross: Economics of American Negro Slavery' (1974) — a two-volume quantitative study co-authored with Stanley Engerman. The book argues that slavery was an efficient system because it was organised in a rational manner. Economies of scale ensured that the cotton yield per acre, as well as productivity of slave labour, were maximised. Engerman and Fogel argued that because slave owners approached slave production as a business enterprise, there were some limits on the amount of exploitation and oppression they inflicted on the slaves. The implication of this was that the end of slavery came because of political rather than economic reasons. This work expectedly invited a lot of controversies and even accused Fogel to be an apologist for slavery. To counter this criticism, Fogel published 'Without Consent or Contract: The Rise and Fall of American Slavery' (1989). In this book, he unequivocally criticised slavery as an inhuman system that led to high infant mortality from overworked pregnant women as well as the moral bankruptcy of the religious and political leaders of the time who defended and justified slavery.
In the 1980s, Fogel began to focus on what he called "the problem of creating and studying larger life-cycle and intergenerational data sets." This research led him to write many research papers and several books on the economics of aging. These books included 'The Escape from Hunger and Premature Death' and 'The Changing Body: Health, Nutrition and Human Development in the Western World since 1700'. 'The Changing Body' was written with Roderick Floud, Bernard Harris and Sok Chul Hong. Fogel focused on the changing rate of mortality over long periods of time and its impact on prosperity. He emphasised the importance of nutrition in decreasing mortality rates.
North wrote a number of books to underline the importance of institutions. While he began with the neoclassical framework, he was later convinced that this framework was inadequate to explain economic growth. North is considered as a founder of the field of study known as New Institutional Economics. North was also credited for finding cliometrics — a field of study that uses statistical techniques to analyse economic history. Later, North analysed why some countries are rich and others are poor.
Explaining American economic growth
His first major work, published in 1961, was 'The Economic Growth of the United States from 1790 to 1860'. It was grounded in the neoclassical framework. Starting from an export base model that he had previously formulated, North analysed how one sector (the cotton plantations) stimulated development in other sectors and led to specialisation and interregional trade. North concluded that it was not possible to explain the long-run poor economic performance in a neoclassical framework and that the institutions were important. In his major follow-up work, 'Structure and Change in Economic History' (1981), he dropped the neo-classical assumption that institutions were efficient.
These two works led North to conclude that sustained economic growth requires an efficient system of property rights so that individuals can channel their efforts into activities that will bring private returns close to the social rate of return. Economies get better institutions through a pro-cess of adaptive efficiency. Adaptive efficiency focuses on how economic agents acquire knowledge and skills to develop innovative solutions for resolving problems. It brings about improvement in the overall institutional structure, but is also conditioned by it.
As noted above, North's initial work was on the importance of institutions in the economic growth in the US and western Europe in the 19th century. As the Nobel website tells us:
North tested his hypotheses on development in the USA during the nineteenth century, and showed how agricultural policy, banking, transport, etc. could be explained by the institutional arrangements. In the following book, he considered the economic development of western Europe from the middle-ages to the eighteenth century, and showed that economic incentives, based upon individual property rights, were a prerequisite for economic growth. Changes in relative prices and fluctuations in population growth led to institutional changes. The speedier industrialisation in England and the Netherlands depended upon the fact that certain conservative institutions, such as the guilds, were weak. Private property rights were also guaranteed in these countries, as opposed to the case of Spain where the lack of institutional innovation led to a century-long stagnation. Innovations, technical changes and other factors that are generally regarded as explanations, are not considered to be sufficient by North. They are them-selves a part of the growth process and cannot explain it. Effective economic organisations are the key to economic change. "Institutions are sets or rules, compliance procedures, and moral and ethical behaviour of individuals in the interest of maximising the wealth or utility of principals".
Importance of institutions
North began underlining the importance of institutions from the late 1960s onwards. In a 1968 article on ocean shipping, he showed that organisational changes played a greater role than technical changes. In his writings in the 1970s (books published in 1971, 1973 and 1981), North continued to talk of institutions and specifically of the importance of property rights. He also got into the question of how institutions arise and how they change.
In his book 'Institutions, Institutional Change and Economic Performance' (1990), North applied his earlier research on institutions to answer why some countries were rich and some were poor. North explains how institutions and institutional change affect the performance of economies, both at a given time and over a certain time. Uncertainties involved in human interaction are smoothened over by institutions. North argues that institutions determine the growth path of various economies. He also suggests that transaction and production costs determine the type of institutions that arise in different economies. On institutional change, North says that institutions create the incentive structure in an economy, and organisations arise to take advantage of the opportunities provided within a given institutional framework. Greater changes occur more slowly. Greater the institutional uncertainty, greater the transaction costs of entering into contracts and enforcing them. North also suggests that institutional development may lead to a path-dependent pattern of development. In other words, a particular institutional structure in the past will lock the development path of an economy in a particular way. All in all, North suggests that institutional analysis must be incorporated into neoclassical theory to explain economic change.
North also introduced the concept of credible commitment which is reflected in gradual improvements in the enforcement of complex contractual arrangements. He applied this concept to England's Glorious Revolution of 1688, which enhanced the security of property rights, thus contributing to the country's successful economic development and to its eventual emergence as a leading world power. It may be recalled that the Glorious Revolution gave the English Parliament a dominant role vis-à-vis the Crown in fiscal and government matters. According to North, the institutional settlement of 1688 had the following features: (1) It curtailed royal prerogatives, subordinating them to the common law; (2) it gave Parliament a dominant role in the area of taxation; (3) it created an independent judiciary; and (4) it reaffirmed and strengthened the protection of property rights. In addition, the removal of the previous monarch, James II, sent a clear message to the serving monarchs, William and Mary, that the social forces represented in Parliament were supreme. And secondly, the considerable powers retained by William and Mary provided Parliament with a strong incentive to honour its side of the bargain.
England's success in establishing institutions is apparent when compared with the fate of France and Spain during the same period. While the political settlement of 1688 enabled England to thrive economically and politically, France was unable to do so. (I have dealt with these issues in a series of articles in this column).
Both Robert Fogel and Douglass North attempted to achieve an integration of various social sciences such as economics, sociology, history and political science using statistics and scientific methods. This led them to establish the field of 'cliometrics'. Their work has led to a better understanding of various facets of economic change. Their work has also inspired a lot of research in a fresh interpretation of economic history.
The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal.
Views expressed are personal