Economic Growth before the Civil WarWalton and Rockoff Ch 7-8

OverviewWhat happened to economic growth before the Civil War?Agreement after 1840. Lots of estimates before 1840Census 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.

Walton and Rockoff rely on trade data.Trade data shows that the % trade to Britain and its colonies declinesVolume of trade increases, but per capita exports do not change muchLots of disruption to tradeInternational Trade is important but not crucial

Why does trade increase?Removing trade restrictions reduces cost of imports and exportsConstitution clarifies trade lawStructural change in Textile industry1793, Eli Witney invents the cotton gin which reduces the cost of cotton, raw materialIndustrial Revolution in Great Britain centers on textile production which increases productivity leads to increase the demand for cotton grown in US

What about GDP per capitaPaul DavidThe 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.

Davids estimatesDavid begins with a simple identity that can be estimated with data availableThree separate episodes of growth from 1790 to 1860.1.6 % Per year growth in per capita income, ends with the trade embargo of 1807 and continuing through the War of 1812.mid 1820s to mid 1830s-2.5% per year in per capita growth.1845 to 1860- 2.1 % per year.Overall increase of about 50% from 1800 to 1840.

Why does trade increase economic growth ?Comparative advantage- allows the good to be produced by the lowest cost producerSpecialization and trade go togetherLess costly for US to specialize in cotton production and buy cotton cloth from Britain.When trade is disrupted by Napoleonic Wars, Jeffersons trade embargo and War 1812, rate of growth of US economy declines

Trade EmbargoNot all sectors of the economy are hurtManufacturers in the US gain from the embargo and trade disruptions caused by the War of 1812

Simple model of economic growth Production Possibilities Frontier (PPF) shows the combinations of goods and services which can be produced using the existing technology and existing resources Because resources are scarce, choices must be made between alternatives PPF shows available choices

PPF for economy with lots of producersBWShows combinations of bread and water which economy could produce with existing resources.Slope of PPF is opportunity costLowest cost producers produce firstSlope goes from flat to steepTrade allows country to move off PPF

PPF for economy with lots of producersBWMore resources (land, labor capital) cause curve to shift.Technological change also shifts curve may change its slope

Accounting for GrowthBetween 1840-1860,49% growth due to growth in Labor26% growth due to growth in Capital10 % growth due to growth in Land15% growth due to growth in ProductivityMost of population still in agriculture , so increases in agricultural productivity is most importantWhy does Land increase?

Western Expansion (more land)Louisiana Purchase of 1803 doubled the size of countryMore LandHigher Productivity LandYield per acre is higher

Land PolicyNew QuestionsDistribution of Public LandHow will land be administered?How will sales be organized?

Political organization of new territoryRelation to existing states?

Land Distribution-PriceSell land at full market value?Federalist idea increase revenue to central governmentSell land below market value?Jeffersonian ideal of a nation of small farmersSmall lots, low prices, creditBoth systems create opportunities for rent seeking behavior

Set price at profit maximizing level creates rents for existing governmentWhat is market price?Favors the wealthy and well connectedLow price makes land affordableencourage speculatorsWhat happens when price is set below the market level?Qd>Qs, rationing of some type is necessary

Original Pattern of settlementNew England model-orderly settlementTownships with carefully surveyed tracts of landAuctioned to settlersNo one could own land that had not been surveyedSouthern modelSettler selects tract and asks surveyor to mark it off

Land Ordinance of 1785

Original states initially claimed territory west to Ohio River, last states relinquished claim in 1784 Surveyed parcels, public auction (details in nest slide)Lots of corruptionDifficult to enforce rules Lots of Changing rulesFederal Government never makes much money

Land Survey

Northwest Ordinance of 1787 What is political organization of new territory?Originally consider part of existing statesShould they become independent statesNorthwest territory establishedGovernor and judges appointed by CongressEstablished process for area to become states

Other Land Acts

Continuing controversy about disposition of landHomestead Act 1862Anyone over 21 could have 160 acres of public land if they lived on land or cultivated it for 5 years

Effects of Land SalesLand Policy is successful at distributing landMost of good land distributed by 1860Did not provide a major source of gov revenue How did it effect income distribution?Land speculationInformational asymmetrySome got rich, some did notNot clear it had large effects?

Where did people go? Population Distribution by Regions, 18101860

Moving Frontier

Why did increase in settlement happen at this time?Were settlers reacting to incentives?Returns of agricultural investment about the same as other investments (Not higher or lower)Evidence suggests settlers were reacting to economic incentivesClose correlation between crop prices and land pricesGold and Silver discovery in West encourages migration

U.S. Public Land Sales and Cotton Prices, 18141860*

Why is land settled at this time?Reduction in transport costsIncreased Agricultural productivity because of increase yield of western land Increased specialization possible with larger markets which effects both agriculture and industrial marketsRule of thumb is transport cost make up no more than 50% of total price- lower the cost allow for farther shipping-