Wednesday, 22 April 2020

The Past’s Long Shadow: Network analysis of Economic History

Author: Gregori Galofré-Vilà (Postdoctoral Researcher at Universitat Pompeu Fabra and Barcelona Institute of Political Economy and Governance).

This column uses network analysis to review the development of economic history over the last 40 years. It shows how economic historians are interconnected through their research, which scholars are most cited by their peers, and the main debates within the discipline. The survey also shows that after 2000, the number of publications rapidly accelerated. This rise has been driven by research conducted at continental European universities instead of those from the US and UK.

Economic history has emerged as a crucial discipline to understand how our past was shaped by the different economic trends and forces and, crucially, to inform our thinking about our present and future economic realities (Abramitzky 2015; Diebolt and Haupert 2018; Eichengreen 2018; Margo 2018). Therefore, as an academic field, it has an enormous potential to contribute to many crucial debates in economics and public policy. Hence, it is a matter of great interest to elucidate how this area of academic inquiry has evolved in terms of its central debates and publishing trends.
By using the details of articles published in the main eight journals in economic history since 1980 (Table 1), in this column I review the development of the discipline by using network analysis, mapping out disciplinary silos in authorship and areas of inquiry in economic history.[1] Although economic history goes beyond what is being published in economic history journals (of course, journals in economics, demography and sociology also publish the findings of economic historians),[2] it seems reasonable to focus on papers published by the top economic history journals, namely, those publishing articles in economic history broadly-construed and, hence, capturing the main debates and interests in the research area under scrutiny here.

Table 1. Journals included in the review

Network analysis in Economic History
Figure 1 shows the relatedness among economic history. Network analysis is based on the assumption that authors cited together share some kind of intellectual affinity. Hence, a network map captures how authors (and, consequently, the ideas and debates associated with them) sit in relation to each other across the field. In the network map, bubble sizes (nodes) correspond to the number of citations received by each author, while the distance between bubbles corresponds to the tendency for authors to be cited together within articles. Clusters (represented by different colors) group together bubbles (i.e. authors) that display some degree of similarity according to research topics or debates.
As reflected by the bubble size and position, the most important economic historian in the network is Jeffrey Williamson. Williamson is well-known for showing that globalization began in the early 19th century and not before (during the time of Columbus) and for exploring America’s income distribution since 1650. He is followed by Robert Allen, who defended a ‘high wage economy’ thesis for England to industrialize first; Nicholas Crafts, who conducted research on growth accounting and England’s industrialization; Richard Steckel, who shed new light on the health of the slaves in the US South and the development of well-being in America and Europe over the very long-run; and Peter Lindert, who explored the causes and effects of modern fiscal redistribution and the interaction between social spending and economic growth. From a list including 325 scholars, other well-positioned economic historians in the network are Gregory Clark, Jan Luiten van Zanden, Sara Horrell, Stephen Broadberry, Joerg Baten, Jane Humphries, Knick Harley, John Komlos, Robert Margo, Cormac Ó Gráda, David Jacks, John Turner, Kevin O’Rourke, Deborah Oxley, Price Fishback and Hans-Joachim Voth.

Figure 1. Authors’ publications

Network analysis also allows us to visualize what economic historians are doing research on and the main debates within the discipline. Figure 2 maps the keywords listed in the articles studied. Research on economic growth (yellow bubbles), i.e. exploring why some countries became rich while others stayed poor, has been the most important area in terms of publications. Another vigorous area of research has been the social history of demography (blue bubbles), that is, exploring changes in fertility, health and mortality. Green bubbles correspond to papers devoted to changes in inequality driven by wealth, labor markets and migration; while bubbles in turquoise (tracking keywords such as ‘revolution’, ‘real wages’ and ‘property rights’) connect with yellow and blue bubbles at the crowded center of the network and with some thematic areas (red bubbles) such as market, economic depressions, the gold standard and the railroads. Red bubbles also include some statistical keywords such as ‘models’, ‘time-series’ and ‘cointegration’, which display the important component of statistics in the discipline.

Figure 2. Thematic areas

Recent trends in publications
Finally, a look at the number of publications in the main economic history journals (Figure 3), reveals that the number of publications was fairly constant between 1980 and 2000 and then rapidly accelerated after 2000. This rise after 2000 has been driven by a shift in publication distribution from the US/UK to continental Europe.[3]
The percentage of articles published in the top economic history journals by scholars working in US universities plummeted between 1980 and today (going from 60% to 30% of all scholars), whereas economic historians working in UK and non-European universities (chiefly, Canada, Australia and Japan) maintained their publication shares at 17% and 14%, respectively. Hence, the rise in the number of publications since the early 2000s appears to be due to continental European-based economic historians; countries most responsible for the change in the publication trend were Germany, the Netherlands, Spain, and Italy.
European universities are not only the ones leading the discipline in terms of quantity (number of publications), but also in terms of quality as measured by the adjusted number of citations.[4] For instance, since 2010, these universities received, on average, 5.5 citations for published paper, compared to 5.3 in the UK, 4.2 in the US, and 3.8 outside these three areas. This hierarchy differs from earlier periods. For 1980-1989, the US was the leader in accumulating citations (18.8 citations per paper), followed by the UK (15.0), Europe (13.0), and other areas (12.7). For the period 1990 and 1999, the UK received 17.6 citations per paper, compared to the US (15.7), Europe (14.6), and outside these three areas (11.6).[5]

Figure 3. Journal’s publications and publications by main continental areas

The present study shows that economic history is a dynamic discipline: the evolution of publication trends speaks to the changes in the distribution of academic excellence, and there is clear evidence that a healthy variety of topics capture the attention of researchers across the globe. We cannot know how the field will evolve but, as we enter the third decade of the 21st century, economic historians have every reason to look without complacency but with confidence and excitement at an increasingly open-ended and diverse future based on what we have learnt from our past.

Abramitzky, R., 2015. "Economics and the Modern Economic Historian," Journal of Economic History 75: 1240-1251.
Diebolt, C., Haupert, M., 2018. "We Are Ninjas: How Economic History has Infiltrated Economics," Unpublished manuscript.
Eichengreen, B., 2018. The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era. Oxford University Press.
Galofré-Vilà, G., 2020. "The Past’s Long Shadow. A Systematic Review and Network Analysis of Economic History," Research in Economic History (Forthcoming in vol. 36).
Margo, R. A., 2018. "The Integration of Economic History into Economics," Cliometrica 12:3, 377-406.

[1] For more details see Galofré-Vilà (2020).
[2] For instance, economic history papers published in the top-five economic journals are narrowly focused on persistence studies that explain present outcomes as a function of events in the distant past. The paper from Acemoglu Johnson and Robinson ‘Reversal of Fortune’ is a good example of this practice.
[3] While the rise of publications by scholars in European universities correlates with the launch of two European journals (EREH and CLIO), the appearance of these two European journals does not seem to explain the success of European scholars. Nearly half of the articles published by these two journals were signed by non-European scholars and since 2000 European based scholars also increased their share in Anglo-Saxon journals.
[4] The EU-14 group consists of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain and Sweden.
[5] Naturally, older papers are more likely to accumulate citations.

Tuesday, 21 April 2020

Secular stagnation and the global surge in house prices

by Julius Probst

The decline in global real interest rates

Back in 2013, Larry Summers started to believe that most advanced economies have entered a new macroeconomic regime, a prolonged period of lower economic growth as a result of insufficient aggregate demand. In a recent piece, I argued that Summers' revival of the secular stagnation hypothesis has been the most important contribution to modern macroeconomics (Probst, 2019a). According to the secular stagnation theory, a combination of macroeconomic factors have pushed down real interest rates on a global level. These forces include adverse demographics, falling productivity growth, and rising inequality. With the decline in interest rates, Central Banks increasingly struggle to keep the economy at full employment because they cannot reduce interest rates substantially below zero. Therefore, many countries will also have a higher risk of experiencing recessions and might suffer from prolonged negative output gaps when interest rates remain constrained by the so-called effective lower bound (Summers, 2015; 2016).

The chart below displays the secular downward trend of real interest rates for the Japan, the US, the UK, and the Eurozone. Most other rich economies have suffered the same fate since the 1980s. A lot of economic research has shown that global interest rates have declined significantly and that they are nowadays at record-low levels across advanced economies since the late 19th century (Probst, 2019c, Schmelzing, 2017). Some economists have even suggested that current interest rates have never been that low throughout human history since the early Antiquity (Haldane, 2015). The decline in interest rates also had the unintended side-effect of pushing up the price of financial assets around the world, both stock markets and real estate.

Figure 1: Real Interest rates
CB policy rates minus CPI, 1 year MA

Source: Macrobond

The global surge in real estate prices

The second figure below shows that inflation-adjusted house prices have almost tripled across many advanced economies since the end of Bretton Woods in the early 1970s. This has especially been the case for Anglo-Saxon economies, but the social-democratic economies of Scandinavia have been severely affected as well. While increasing financialization and the globalization of capital flows probably also played their part in pushing up local real estate prices in global cities like London, New York, and Paris, etc., researchers at the Bank of England have argued that a significant part of the increase is due to the decline in global real interest rates. The reason is simple. The value of any financial asset is simply the net present value of all its future cash flows discounted at the rate of interest. As interest rates decline, future cash flows become more valuable and therefore the fundamental value of the financial asset increases.

Figure 2: Real house prices, Dallas Fed Price Index
Source: Macrobond

A standard way of pricing financial assets is by using the dividend discount model, according to which the net present value (NPV) of a financial asset is given by the sum of all future cash flows (R) discounted by the rate of interest (i):

While the formula is usually applied to stock prices, it is equally valid to use it for housing or other investments. As inflation-adjusted interest rates have declined significantly across the world in recent decades (and the same is true for nominal interest rates), the price of real estate and other financial assets increases as future cash flows are now discounted at a lower rate of interest. Halving the rate of interest would roughly correspond to a doubling of financial asset prices. It therefore stands to reason that the secular downward trend of interest rates has indeed contributed to a large extent to the spectacular surge in house prices across advanced economies.

Germany and Japan are the outliers

However, the researchers from the Bank of England might have gone one step too far in attributing almost the entirety of the increase in house prices to falling interest rates. Dwellings are after all not only a financial asset, but they also provide us with one of the most important services in life, namely housing. The demand for housing in large metropolitan areas has increased significantly in recent decades as most jobs high-income jobs have been created in the large agglomerations. The forces of economic geography have increasingly favored big cities since the 1990s while more rural regions have largely lost out (Florida, 2016). This has been the case in the US, but also in most European countries like Germany, the UK, and Sweden. Consequently, house prices have performed extremely different across regions within countries. Furthermore, there also seem to be vast differences internationally. While some countries have seen their house prices explode in recent decades, mostly a combination of stronger population growth and restricted supply, other countries have experienced a very different trend. Most noticeably, real house prices in Germany and Japan have stayed relatively flat for a longer time period (see below). Japan has seen stagnating house prices for more than 2 decades since the explosion of its asset price bubble in the early 1990s while Germany’s house prices have only started to catch up to the international trend very recently. This suggests that supply-side factors are also extremely important in determining house prices. According to the following statistic, the metropolitan area of Tokyo added more individual housing units in 2014 than the entire country of England. Consequently, house prices in Tokyo have experienced a very different trend than most other metropolitan areas around the world where supply has been much more constrained.

Figure 3: Real house prices, Dallas Fed Price Index. Germany and Japan
Source: Macrobond


Summing up, the evidence for secular stagnation seems to be increasing as advanced economies continue to suffer from even lower interest rates and economic growth rates than what was widely expected just a few years ago (Probst, 2019a; 2019b). Moreover, this does not seem to reverse any time soon as financial markets have priced in low interest rates for the foreseeable future. Secular stagnation also had the undesirable side-effect of bidding up house prices around the world as a result of low interest rates. However, the financial blog by the Bank of England might have somewhat overstated its case. Dwellings are not only a financial asset, but also a real commodity. While the entire advanced world has suffered from low interest rates during the last decade, supply-side constraints can explain why San Francisco or New York have experienced exploding house prices whereas this has not been the case in Tokyo, for example.

·         Florida, R. (2016). Winner-take-all urbanism: Geographic divisions in the modern era. Brown J. World Aff., 23, 103.
·         Gordon, M. J. (1962). The investment, financing, and valuation of the corporation. Homewood, IL: RD Irwin.
·         Haldane, A. (2015). Stuck. Bank of England Speeches.
·         Probst, J. (2019a). Lawrence Summers Deserves a Nobel Prize for Reviving the Theory of Secular Stagnation. Econ Journal Watch, 16(2), 342.
·         Probst, J. (2019b). Secular stagnation: it’s time to admit that Larry Summers was right about this global economic growth trap. The Conversation.
·         Probst, J. (2019c). Global real interest rate dynamics from the late 19th century to today. International Review of Economics & Finance, 59, 522-547.
·         Schmelzing, P. (2017). Eight Centuries of the Risk-Free Rate: Bond Market Reversals from the Venetians to the ‘VaR Shock’.
·         Summers, L. H. (2015). Demand side secular stagnation. American Economic Review, 105(5), 60-65.
·         Summers, L. H. (2016). The age of secular stagnation: What it is and what to do about it. Foreign Aff., 95, 2.

Julius Probst is a Customer Specialist at Macrobond Financial, a macroeconomic search engine and analysis tool and provider of financial time series data. Previously, he was a PhD student at the Economic History Department at Lund University and a PhD trainee at the ECB. He also has a blog on macroeconomics at macrothoughts.