Economics and the historian

What are some of the important ways in which economic analysis is pertinent to historical research and explanation?  This was the topic of a cutting-edge collection edited by Tom Rawski over ten years ago (Economics and the Historian), and it is still a unique contribution.  Rawski is a good historian of China and a good economist (Chinese History in Economic Perspective, China's Transition to Industrialism: Producer Goods and Economic Development in the Twentieth Century), and the volume is genuinely useful today.  The project began with a focus on Chinese history, but this volume takes a broader look at aspects of world history more generally.  Here is the overriding goal:

Our book is rooted in the conviction that historians will find it useful to acquaint themselves with economics.  The chapters that follow provide repeated examples of how standard items in the economist's intellectual arsenal extend the reach of historial source materials by revealing unexpected connections between different elements of market systems. (3)

The point of the volume is not how to conduct "economic history", but rather how to bring economic data and analysis into many aspects of historical research.

So what are the important foundational insights that economics can bring to history? Here is Rawski's statement of the fundamental object of economic thinking:

Economic theory is built around the logical analysis of profit-seeking behavior by large numbers of well-informed, independent individuals in competitive markets governed by legal systems that enforce contracts and ensure the rights of private owners. (5)

But he also emphasizes that economic theory in the past thirty years has given much more extensive attention to institutions -- the sets of rules through which transactions take place within an economy and within society.  Transaction costs and imperfect information fundamentally alter the logic of a pure market populated with rationally self-interested agents with perfect information.  Rawski's approach, and that of many of the other contributors, is very sympathetic to the "new institutionalism in economics."

If the market system, including the whole penumbra of legal, financial, and other enabling institutions, operates within a broader socio-cultural matrix that helps to determine the course of economic evolution, then the study of any economy, past or present, must involve a range of knowledge that reaches far beyond the focal points of conventional economic theory. (11)

Rawski's substantive essay focuses on "trends" as an important historical phenomenon.

Here he presents data on the cost of living and the real wage in three cities in the sixteenth through the eighteenth centuries.  And he points out that these data suggest several very interesting stories.  Valencia shows a steep downward trend in the real wage through 1620; but we have no data to answer the question whether this trend continues.  Vienna shows a downward trend throughout the whole three-hundred year time period; but, as Rawski points out, between 1600 and 1650 shows the opposite trend -- a fifty-year rising trend in the real wage.  So we have to be very specific in defining the time period over which we are investigating these movements, before we can say anything about the trends that exist.  This implies an important point: that we can't look at a "trend" as objective feature of history, but rather as a feature that is dependent on the frame of analysis.

At the same time, the phenomena recorded in the three graphs raise an important and interesting set of questions for the historian: what are the causes that pushed the prices of the basket of consumable up so sharply in all three cities between 1550 and 1650?  And equally important, what social consequences might these trends have had?   Was family size affected?  Were mortality statistics affected?  Did the incidence of bread riots and other forms of civil unrest increase?

Rawski's essay provides a fine tutorial for the historian on the difficulties of calculating the cost of living: index problems, data blind spots and data bias, and variation across a region.  But he also makes a clear case for why this kind of analysis is so important for historians generally -- not just economic historians: the circumstances of life that are indicated by rising rice prices or falling wages are fundamental to behavior.  So historians who want to understand how urban Austria in the 16th century or rural China in the 19th century developed in response to political and social changes need to have a good grasp of the material circumstances of the period as well.  (Robert Allen's work on the cost of living across Eurasia is an outstanding example; link.)

Other topics covered in the volume include institutions (Jon Cohen), labor economics (Susan Carter and Stephen Cullenberg), neoclassical supply and demand (Donald Deirdre McCloskey), macroeconomics (Richard Sutch), money and banking (Hugh Rockoff), and international economics (Peter Lindert).

McCloskey's treatment of economic rationality is a good place to close:

To reduce the humans in the rice market to single-minded seekers after profit does not seem to accord with common sense.  It does not.  We see ourselves failing every day to make the best decision about which food to buy or whether to change jobs. Considering that most of us wander in a fog of indecision and emotion the bright sunlight in which the rational man strides toward his goal is difficult to credit. (143)

However, McCloskey does not think that this element of realism about real actors does not make economic reasoning based on rationality a pointless exercise:

An English farmer choosing a reaping machine did not need detailed engineering specifications for each of the dozens of machines available in order to make up his mind to buy. Nor did he need perfect foresight about the future price of harvest labor.  A crude decision is rational if information to make a more subtle one is expensive. (143)

In other words: imperfect rationality is enough to get the economic theory enterprise going.