Economists need to add history to their tool kit

Back in 2011, as the US and other countries debated what to do about a recession that was stretching on much longer than expected, economists Brad DeLong and Larry Summers bemoaned what they considered a major gap in their fellow economists’ toolkit. Economists, they noted, learn a lot of mathematical models and empirical facts about the present, but not much history. If graduate programs taught more economic history, DeLong and Summers argued, they wouldn’t have been so blindsided by the financial crisis or the long, grinding recession that followed.
DeLong and Summers are right to say that economic history is underemphasised.
Neither graduate nor undergraduate programs generally require the subject. It’s not a prestigious field; economic historians don’t tend to win Nobel Prizes, and not many professors get hired to work in the area. But there are several reasons why history is extremely useful for understanding not just economics, but society itself.
One reason is that economic history focuses economists on real events rather than allowing them to live in theoretical fantasy worlds of their own creation. Suppose you’re a macroeconomist trying to understand and model inflation and monetary policy. It helps to know a lot of facts about how inflation developed in the past, and what kind of monetary policy prevailed at the time. You therefore might want to crack open a copy of Milton Friedman and Anna Schwartz’s book “A Monetary History of the United States, 1867-1960” — as well as competing accounts that might emphasise different events.
But economic history functions as more than just the history of the economy. Because it uses economic theory to analyse past events, it can help generate plausible explanations for some of the biggest and hardest questions.
For example, why did China fall behind the West economically and technologically? As recently as the early 1800s, China was richer, but by the turn of the 20th century it was impoverished and weak. The cause of this great reversal will never be known with certainty, but economic historians can offer some insight.
For example, Robert Allen has theorized that because European wages were much higher than Chinese wages, industry there was forced to innovate and automate while Chinese entrepreneurs could stick with cheap and abundant labor. Ultimately, Allen says, the effort that European businesses were forced to expend on replacing expensive labour with cheap machines led to the discovery of key industrial technologies, which in turn propelled Europe to global dominance. Allen’s theory has plenty of critics, including British economic historian Judy Stephenson, but the idea has obvious relevance for the modern economy — globalisation has allowed countries around the world to bask in a flood of low-wage labor, which might have reduced companies’ incentive to invest in new technologies.
How poor countries develop into rich ones is, in general, a question that economic history is uniquely suited to address. Because most Western countries industrialised before good data was widely recorded, economic historians poring through old archives are often able to shed light on the mystery. For example, they’ve noted that the Industrial Revolution was accompanied by an increase in work hours, and come up with some competing explanations for why that was the case. They’ve also been able to more accurately pinpoint when fits and starts turned into a pattern of sustained growth. Studies like these bring economists a bit closer to solving the ultimate mystery of how to eliminate global poverty once and for all.
Economic history can also serve as a check on the more dramatic claims of mainstream historians. For example, in his popular book “The Half Has Never Been Told: Slavery and the Making of American Capitalism,” historian Edward Baptist uses archival documents to theorise that the American South increased cotton production by finding new ways to torture slaves into increasing production. But economic historians Alan Olmstead and Paul Rhode, who have made their careers studying the economics of slavery, reject Baptist’s claim — a hard look at the data, they argue, reveals that torture alone couldn’t account for most of the increase in cotton production. Most of the increase, they argue, came from new strains of cotton plants.
Economic history’s power is more than simply theoretical and explanatory, however — sometimes, it can be used to predict the future. In 2011, economists Barry Eichengreen, Donghyun Park and Kwanho Shin analyzed the history of economic slowdowns, and came up with some heuristic rules to predict when fast-growing countries can be expected to falter. Based on those rules, they predicted that China’s economy, which was then growing at about 9.5 percent, would slow down by at least 2 percentage points in about 2015.
Cryptocurrency enthusiasts should also take note: Eichengreen has a recent paper analyzing monetary history, and concluding that a switch from fiat money to Bitcoin or some other cryptocurrency is unlikely.
Finally, economic history can often help us understand broader social phenomena. But the economics profession itself should realise that the field of economic history is neglected. More classes on the subject, and more awards and recognition for economic historians, would be a good thing for a discipline that too often ignores the lessons of the past.

—Bloomberg

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion