Economic Growth before the Civil War

Overview

• What happened to economic growth before the Civil War?

• Agreement after 1840. Lots of estimates before 1840– Census does not collect data on agricultural

production until 1840. Since most of population is employed in agriculture, estimates before this time are base on limited data.

– Figure 1.1 of text shows different estimates

Take-Off ?

• Most believed that between 1790 to 1807 economy boomed as trade increased.

• 1807 Jefferson’s response to Napoleonic wars was to withdraw from trade caused drop in per capita output and decline in growth

• At some point after that economic growth increased

• Paul David• “The Growth of Real Product in the United States before

1840:New Evidence, Controlled Conjectures,” Journal of Economic History 27 (June 1967)

• David begins with the statement “Prevailing scholarly opinion evinces disturbing symptoms of latent schizophrenia on the subject of economic growth in antebellum United States.”

Paul David

• Most believe that some where between 1815-1860 there was a sharp increase in growth– Many economic historian disagreed with Rostow

that a “ take-off” to modern economic growth occurred after 1843

– Most felt that there had been acceleration at some point

– This would seem to imply a consensus about the path of growth before 1840

• David points out that this is not so.

David refers to the diverse estimates of per capita income in the graph in your text.

David’s estimates

• David begins with a simple identity that can be estimated with data available

production alagricultur-non in per workeroutput P

eagricultur in per workerOutput = P

eagricultur-non in forcelabor of fraction)S-(1

eagricultur in forcelabor theof fractionS

forcelabor thein population theof fraction =

outputcapita per V

:

)1(

n

a

a

a

r

where

PSPSrV naaa

Paul David’s estimate

• If the value of each parameter were known for each date. it would be easy to calculate output per capita (V), or an index of per capita output for each date (t).

• Pn is not known for dates before 1840. – The census did not record output outside of

agriculture before 1840.

1840

a

nP

PZ

• David assumes that the ratio of output per capita in the two sectors (Z) remained constant during the entire 1880/1840 period. (1.957)– If the non-agricultural sector is small throughout the period, changes

in Pn will have little overall effect on the per capita output measures.

• Substituting ZPa for Pn into the equation

• V=r[SaPa+(1-Sa) ZPa ]

• V=rPa [Sa +(1-Sa) Z]

• V=rPa [Z+Sa(1-Z)]

0000

t

)1(

)1(

V

V

ZSZ

ZSZ

P

P

r

r

a

ta

a

tat

• The Productivity index depends only on the values of of labor force participation (rt/ro), the agricultural productivity index , of Sa (the fraction of the labor force in agriculture), and the parameter of relative labor productivity (Z).

• What causes Growth? Increases in labor force participation, agricultural productivity and since Z>1, reduction in fraction of the labor force in agriculture.

Paul David’s ResultsV alue o f C om ponent Ind ic ies

Y ear Z1800 1.957 0.826 0.764 0.966 0.6441810 1.957 0.837 0.739 0.97 0 .6191820 1.957 0.79 0 .766 0.987 0.6761830 1.957 0.707 0.9 0 .976 0.841840 1.957 0.634 1 1 11850 1.957 0.548 1 1.065 1.131860 1.957 0.532 1.215 1.065 1.38

S a P Pa t a 0r rt 1 8 4 0 V Vt 1840

David’s ResultsIndices of Economic Growth, 1800-1860

Per Capita Output Index

Annual Per Capita Growth

1800 64.41810 61.9 -0.41820 67.6 0.91830 84 2.21840 100 1.81850 110.4 11860 137 2.2

Source: Paul David, "The Growth of Real Product in the U.S. before 1840: New

Evidence , Controlled Conjectures, JEH 27 (June 1967)

• The decade averages show no particular break in the 1840’s. Progress is far from uniform-per output declined from 1800 to 1810- but the first forty years of the century are clearly years of substantial growth.

• Three separate episodes of growth from 1790 to 1860.– Per year growth in per capita income stopped by the trade

embargo of 1812.– mid 1820’s to mid 1830’s-2.5% per year in per capita growth.– to 1860- 2.1 % per year.– Overall increase of about 50% from 1800 to 1840.

• Leaves Rostow without much to support take off theories. • The periods before and after 1840 are similar. In both periods, the

U.S. experienced steady growth in per capita income.• There was no take-off.

What Caused Growth? Labor Force Participation

Increased labor force participation (r’s).Labor force participation increased by about 10% but 2/3rds of the increase occurred in the last 2 decades.The major sources of change in LFP are

percentage of slaves in the population.Proportion of slave in pop. fell from 16.9% to 14.5%. Since slave LFP is high this reduced overall LFP.

Rate of immigration and birth rate among white Americans.

Shift to immigration as a source for pop. growth increased labor force participation.

Overall increases in labor force participation raised per capita output by just 3.5% before 1840 and 6.5 % from 1840 to 1860.

Shift Out of Agriculture and Increase in Agricultural Productivity

Shift to Non agricultural Jobs.Non agricultural jobs increased from 17% to 37%. This increased per capita output because agricultural workers produced .399 to .551 as much as non-agricultural workers.

Shift from agricultural to non-agricultural production increased output 19% to 27%.Change Agricultural Productivity

David estimates agricultural productivity increased by 37%.

ResultsSources of Change in Per Capita Output, 1800-1860

DecadeLabor Force Participation

Shift out of Agriculture

Increased Agricultural Productivity

1800 0.30 -1.00 -3.901810 1.90 3.90 9.201820 -1.20 6.60 24.301830 2.50 5.50 19.001840 6.50 6.10 13.001850 0.00 1.10 22.10

1800-40 3.50 15.80 55.301840-60 6.50 7.20 38.00

Based on Variant II in 1840 prices.

What Caused these changes?

• Reduction in transport costs– Increased Agricultural productivity because of

increase yield of western land – Increased specialization possible with larger

markets which effects both agriculture and industrial markets

• Rule of thumb is transport cost make up no more than 50% of total price- lower the cost allow for farther shipping-

Major Causes of Reduced Transportation Costs

• Turnpikes– 1790-1820– 60% in New England

• Canals– 1790-1840-Erie Canal 1825– Northeast and Midwest

• Steamships– First used widely in 1820– Rivers and Great Lakes

Railroads

• Railroad technology is available in 1830• Used on a small scale until the Civil War and after• Why?

– While RR are more efficient not dependent on water– Marginal cost of moving goods on existing canals is low– Large capital costs– Dependent on increase in Demand

Is Transport a Public or Private Good?

• Is MC of one more person using it zero?– Maybe, depends on number of users

• Is the cost of excluding high?– Probably

How important is Government Involvement?

• After Jefferson’s Embargo of 1807, Sec of Treasury Albert Gallatin asks Congress for Federal Funding for a highway improvement program in 1808– 20 million over 10 years– It was vetoed, not implemented until 20 century– Most of the tranportation innovations of this

period came from the private sector with some government help, mostly from state and local governments

Funding Turnpikes and Roads

• Rates of return for both Turnpike and Canal stock are low– Not surprising cost of excluding non-payers is high– Social rate of return is higher than private rate of

return – Social rate of return includes increase in land

values along route, lower transport prices, lower commodity prices, value of time saved

Why were they built?

• Other ways to capture the gain– Increased land values along the route– Increased value of business in cities and town along the

route– Evidence that towns did put pressure on land and business

owners to invest (reduce free rider problem)

• Not surprising that state and local government investment was greater than federal investment

Results

• Lower transportation costs

• Increase volume of trade

• Increase in shipping distance (See book)

• Reduced prices• Increase in Urbanization• Increase in Land values

1800 1825

wagon $.30 $.15

Down river $.015 $.005Up river $.09 $.01Erie Canal $.015