Tuesday, June 2, 2015

What history can tell us about economics

I've had a number of people tell me over the years that with my interest in history, I should have been a history teacher. Thus, it's often surprising for them to hear that I majored in business instead. I also got a certificate in economics, which might likewise seem very different from history. And it's quite true that economics and history are two very different majors. But there is actually some overlap between the subjects - more than you might think - and so your average economics class has more history content than one might suppose.

What is the overlap between history and economics?

What is the overlap between these things? In short, there are two main areas where they intersect: the history of economics, and the economics of history. The history of economics is the history of economic thought - or the history of the social science of economics, and how people have attempted to find answers to important questions about economics. It has roots going back far before Adam Smith, but the modern social science of economics began with this great individual's magnum opus in 1776 - a book called "The Wealth of Nations." It is one of the great books of history - up there with Isaac Newton's Principia - and it has had an enormous influence on the way people think about economics. (Here's my blog post about it, if you're interested.)

Adam Smith

The economics of history is about historical case studies in economic policy

The economics of history, on the other hand, is about the various economic problems that societies have faced; and their various attempts to find solutions to these problems. History is rife with economic case studies that show us which policies work and which ones don't, and a good economist tries to learn from the lessons of economic history. I have talked about the history of economics in a number of posts, so I will instead focus this post on the economics of history - about the economic case studies my classes have talked about, and about what history has to offer us in the way of practical experience with economic policy.

Some anecdotes from international trade: The history of free trade agreements

I will start off with some examples from my international trade class. This class talked a little about the history of the international trade system; which includes topics from the Hawley-Smoot Tariff Act of the 1930's (which always makes me think of Ben Stein in Ferris Bueller - see above), to the stopping of trade between belligerent nations in World Wars One and Two. The typical class in this subject also discusses the creation of the World Trade Organization, and the formation of the free-trade zones of NAFTA (a.k.a. the "North American Free Trade Agreement"), and the European Union (which is as much about free trade as the Euro currency or anything else). These are all fascinating topics of study, and one can learn a lot about free trade by studying economic history.

Euro banknotes

Some anecdotes about international finance: Gold standards, fixed exchange rates, and Euros

There is also much interesting history from international finance as well. In my textbook about this, for example, they talked about the history of the gold standard, about the fixing of exchange rates to other currencies (always a bad idea), and about the formation of the Euro currency in 1999 - where the French franc, the German mark, and several other currencies were replaced by the common currency of the Euro - a currency that is still in use today. All are topics of great importance internationally, and even domestically for anyone connected with the outside world. This was another fascinating subject, and one that business majors are often required to study in college.

Federal Reserve headquarters, Washington DC

Some anecdotes from money and banking: Renaissance banking and the Federal Reserve

And as far as domestic topics go, there is much of interest in the history of money and banking as well. In my money and banking class, for example, they talked about such topics as the Italian merchant-bankers of the Renaissance era, and the more specific history of money and banking in the United States. They even talked about the Founding Fathersdebates over a national bank, about the so-called "wildcat banking" era (without central banking), and about the history of the Federal Reserve system - the central banking system created in 1913, which is still in use today. (Not a great system, in my book; but that's a topic for another post.)

"Continental" currency, 1776

Confederate $5 bill

Other anecdotes from money and banking: Periods of inflation in the United States

Some other topics covered in money and banking are the runaway inflation of the Revolutionary era, with the worthless currency called the "Continental" - giving rise to a popular expression at the time "not worth a Continental" - and the South's attempts to create its own currency during the Civil War, with the Confederate dollars competing with Yankee dollars. (Incidentally, the South faced some terrible inflation during that war - which may be part of the reason why they ended up losing. Their economy wasn't worth a darn.) This class was required for many of the business majors at my school; which might underscore how important it is for students of contemporary commerce to learn about the history of the subject. Even in practical subjects like business, you learn about history.

Book I had to read about the Great Depression

Economic historian Amity Shlaes, the author of the book above

The ongoing debate about the Great Depression (the worst catastrophe in our own history)

And economists have great interest in periods of catastrophe, such as the Great Depression. In my money and banking class, for example, we were assigned to read an entire book about this subject; written by an economic historian named Amity Shlaes. (More about that here.) This book attempted to make some sense out of the complicated economic history of this time, with all its expansion of government, and the "alphabet soup" of government agencies that it left behind.

Poor mother and children during the Great Depression, Oklahoma 1936

He who does not learn the lessons of history is doomed to repeat it ...

It is said that history repeats itself, and that he who does not learn the lessons of history is doomed to repeat it. Both of these prophecies are currently being fulfilled, as we make many of the same mistakes that led us to the Great Depression. (Out-of-control government spending, massive regulations - all of the same big-government nonsense that prolonged the Great Depression into the decade-long disaster that it was. The economy would have recovered from the stock-market crash quickly, if not hindered by the big-government policies of Herbert Hoover and FDR; but you'd never learn that listening to the liberal economists of today.)

FDR meets with defeated rival Herbert Hoover, Inauguration Day 1933

Historical case studies can be found in virtually every area of economics

And there are other economic phenomena with histories of their own - you could find economic case studies for labor economics, environmental economics, or any other topic in the broad field of economic history. I have focused on my own classes, because I have more experience with these subjects than with the others I've mentioned; but you could find interesting historical anecdotes from any of these subjects. One of my classes even talked about hunting the buffalo on the Great Plains, in a discussion of environmental law - showing what diverse topics are covered in economic history.

We can't afford to make all these mistakes ourselves, so we must learn from our ancestors in this regard

You name the economic policy, and it's probably been tried somewhere - and economic history will tell you about whether or not it works. (Always an important question for economists and policy-makers, including voters.) History has much to teach us about economics, and we can learn a lot from the successes and failures of our ancestors in this area. We can't afford to make all these mistakes ourselves, so we can learn from their mistakes; and have better policy in the future as a result.

If you liked this post, you might also like:

Lessons from the Great Depression

Lessons from history about communism

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