Inflation and tax cuts

At the visible hand in economics blog they write

The common view I work off when stating that tax cuts increase inflationary pressure is that tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.

But why does aggregate demand increase? Why does demand change if I spend a dollar rather than the government spending that dollar?

I guess that the argument is that with a tax cut I get to spend an extra dollar but the government doesn't reduce its spending by a dollar. So the real issue isn't aggregate demand but rather how does the government fund its dollar of spending now that it has given me my dollar back. It can either increase debt by a dollar, but in so far as the world is Ricardian I would see the dollar of extra debt as future tax and thus save my tax cut to pay for the extra tax in the future, or it can expand the money supply but we have an independent central bank so the government shouldn't be able to do this. So why does a tax cut generate inflation?

Another example of the costs of tariffs

Over at Marginal Revoultion, Alex Tabarrok points out that US consumers are suffering because a tariff on imports of coat hangers from China is raising dry cleaning costs. He says that,

The Aplia Econ blog runs the numbers:

Advocates of trade restrictions often argue that protection will save jobs. Since we can observe price and cost increases associated with trade restrictions, we can estimate how much it costs to save each job in a protected industry. According to the NPR story, there are roughly 30,000 dry cleaners in the U.S., and on average, each pays an additional $4,000 per year due to the hanger tariff. This indicates an average annual cost of 30,000 firms x $4,000 per firm = $120 million. According to the U.S. International Trade Commission's report, U.S. employment in wire hanger manufacturing was 564 workers in 2004 and fell to 236 workers by 2006. Let's assume that employment in this sector would have fallen to zero in the absence of the tariff, and that with the tariff, employment will recover to 2004 levels. In other words, assume the tariff "saves" 564 jobs. Dividing the cost of the tariff to U.S. dry cleaners ($120 million year) by the number of jobs saved (564 jobs) indicates that each job saved costs about $212,765 per year. Keep in mind that the typical full-time worker in this sector earns about $30,000 per year. Even if we assume that industry employment doubles, the cost of the tariff is still roughly $120,000 per job.

This exercise clearly shows that US consumers would be better off without the tariff. It would be more efficient to give a $30,000 a year subsidy to each of the 564 workers to do nothing and trade with China. This would make everyone better off than they are in current situation.

In the long run, growth matters

In an article (pdf) in the Otago Daily Times, 23 May 2008, Roger Kerr writes,

“In the long run”, economist John Maynard Keynes said, “we are all dead.”

To which the best reply is, “Yes, but some of us have children.”

A better response would be to point out that "Keynes is now dead and we're stuck with the long run."

The more important point in the article is that it is the long run consequences of economic policy that matter for people,

... it is the long term that matters for increases in material standards of living for most people.

As Paul Krugman has noted

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

Productivity underlies economic growth and it is the increases in economic growth that drives increases in the standard of living. It takes time, but growth is the only way we have to improve the standard of living for people. The recent report, The Growth Report: Strategies for Sustained Growth and Inclusive Development, by The Commission on Growth and Development, notes that growth is the way to reduce poverty and increase a country's standard of living. Michael Spence, the Commission Chair and Nobel Laureate in Economics, puts it this way,

The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth.

The basic idea is as true for New Zealand as it is for India, China or Africa. To improve New Zealand's standard of living we need policies that improve productivity and growth. But as Kerr points out in his ODT piece, policies over the term of the Clark government have done little to help improve productivity and growth. Kerr writes,

Inevitably, it has taken a long time for bad policies to take their toll – economic performance does not change quickly, and many of the former policies have been maintained. But eight years down the track we can see that the economy has reverted to a mediocre level of performance.

The clearest indicator of the damage is the slump in productivity growth, which has more than halved from the trend rates of the 1990s. So much for the government's goal of returning living standards to the top half of the OECD.

He goes on to say

As well, households are under pressure from price increases, employment growth is tailing off and outward migration is rising, central and local government spending and regulation is stifling the productive sector, and the current account deficit is large.

The size of the current account deficit is in all probability not that much of a problem. It just tells us that investment in New Zealand is greater than savings in New Zealand.

The major issue that flows from this is, What will we see after the election? The current situation tells us we need a change in policy direction. But as Kerr notes

... it will take time again to change speed and direction. We must hope that whatever government is in office after the election recognises the need to vigorously pursue much higher quality policies.

Indeed. But what we have heard so far from the major parties doesn't leave me with much hope.

Is Austrian Economics Heterodox Economics?

This is the question asked by Peter Boettke at the Austrian Economists blog. Boettke states

I just received this question from a reader who is doing a research project on classifying contemporary schools of economics. The problem is that the question is not as easy to answer as one may think.

And gives the answer

Austrian economics starts from within a heterodox problems situation (heterogenous agents, uncertainty, ignorance, etc.), and they interact within complicated environments (differing tastes, heterogeneous products, market power, etc.), and thus the Austrian answer to how markets work differs considerably from the standard presentation in textbooks, and the non-standard presentation in heterodox writers. Instead, the focus is on how the institutions of property, contract and consent engender market processes of adjustment and adaptation that produce social cooperation under the division of labor.

In other words, the Austrian school is heterodox sociologically, mainline intellectually (tracing back to Adam Smith and David Hume), and mainstream historically (a branch of neoclassicism). But in the contemporary world, the mainstream label makes the least sense, the mainline label is little understood let alone appreciated, and the heterodox label serves a useful sociological function. Though the Austrian school doesn't really fit anywhere easily.

I would argue that the strength of the Austrian School is its view of markets and the way they work to make the most efficient use of the dispersed information held by different people throughout the economy. The weakness I think is their discussion of other institutions, like the firm. But does this add up to heterodox economics? Up until the 1930s the answer would have been no. The mainstream and the Austrians would have been much closer up until this time. Since then have the Austrians grown so far from the mainstream as to become heterodox? It seems doubtful, in many ways they still have more in common with, at least, some areas of the mainstream than with the heterodox. As Boettke himself notes

But many of the main themes in Austrian writers are consistent with arguments presented by classical and neoclassical writers from Adam Smith to J B Say to Milton Friedman.

The trouble with macroeconomics

Arnold Kling is not happy about macroeconomics. At the EconLog blog he is posting on the topic of The Trouble with Macro. He writes,

In my view, macro seriously undermines sound economics. It treats work as scarce and consumer wants as insufficient, which is the opposite of what we teach in micro. Macro treats saving as contractionary and international trade deficits as contractionary, which is contrary to general equilibrium micro. Most people with no economics training intuitively believe that jobs are scarce, that they help the economy when they spend rather than save, and that trade deficits are bad. In general it is the job of economists to explain why those views are fallacies.

He ends by saying,

The combination of IS-LM and AD-AS has so many degrees of freedom that one may tell just-so stories about any conceivable combination of macroeconomic variables. But most economists do not believe that the predictions from macro-econometric models based on those concepts have been sufficiently accurate to validate the models. To me, that suggests a scientific failure.

This post follows an earlier one in which Kling argues for a macro-less economics major. I'm not sure he's wrong. But then I'm a micro-economist. I have often wondered if inflation is the only true macro phenomenon. Micro is about relative prices, rather than the price level. All other macro issues boil down to the working, or not working, of markets. Unemployment is about labour markets, interest rates are about financial markets, economic growth is about the sustained expansion of multiple markets within an economy, GDP is just the sum of activity in multiple markets etc.

Parking games

Over at the Freakonomics blog by Daniel Hamermesh has this to say about university parking, always an important issue,

Many of my colleagues have had parking spots next to our building, but most of that parking lot is being replaced by a new building — so they’ve been exiled to a garage four long blocks away. This annoys me, but using the lot for a building makes sense; the opportunity cost of the land is far too high to waste on parking. I just hope the building has a lot of square footage so that this valuable land is used intensively.

I wonder, though, whether the people who administer this university thought their choices through. The extra 20 minutes (the walks to/from the garage) are a fixed cost of people’s daily commutes. This additional fixed cost gives them a disincentive to come into the office each day, and an incentive to try bunching their appointments, teaching, and office hours on fewer days to spread the fixed costs.

Since they have some freedom over their schedules, henceforth some of them may be working entirely at home more often. They will become a partial tele-commuter thanks to these changed incentives.

The cohesiveness of the university community might be reduced.

Over at the Free Exchange blog they have this to say,

One obvious point is that a parking lot probably wasn't contributing all that much to cohesiveness in the first place. The university clearly intends to place people in the new building, adding to the agglomeration economies of a dense college campus. By having more students and faculty in a central place, the administration increases the value of being in that place, encouraging more people to spend time there.

The other question to ask is just how costly that four block walk is to most professors. It constitutes just one small part of the entire journey; there are time costs to the rest of the drive, as well as the expense of petrol and added vehicle maintenance, and so on. Tele-commuting would allow a professor to avoid all of those costs, so unless the walk adds significantly to the expense of the trip in, behaviour shouldn't change all that much. The faculty who typically drive have already concluded that the cost of the trip is worth the benefit of coming to campus.

I guess some of the faculty may, at the margin, find the value of the walk particularly costly but I would not expect this to deter too many people. Of course having some of the staff stay at home could be a good thing!

Trade games

In a recent opinion piece, The Democrats' Dangerous Trade Games, in the Wall Street Journal C. Fred Bergsten, who is the director of the Peterson Institute for International Economics, said the following about the actions of lawmakers in the US.

Meanwhile, our venerable House of Representatives, in the context of the Colombia agreement, has recklessly changed the rules for congressional action on trade legislation. By rejecting long-settled procedures that prevented congressional sidetracking of trade deals negotiated by presidents, the House has hamstrung U.S. trade policy and created the gravest threat to the global trading system in decades.

By effectively killing "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.

Later Bergsten writes

The much more profound impact, however, is to remove the U.S. from any significant international trade negotiations for the foreseeable future. Current and former chief trade officials of three of the world's largest trading entities have told me that, since the House action, the U.S. has lost all credibility. In other words, the "time out" proposed for trade policy by one of the major presidential candidates – a central goal of the opponents of globalization – has already been called.

This can not be good news for the rest of the world. Trade negotiations need the support of the world's largest economy if they are to have any serious chance of success. The benefits for all countries, but in particular the poorest countries, of freer trade are huge but are put at risk by the US action. Bergsten notes

The multilateral trade system, including the highly effective dispute settlement mechanism in the World Trade Organization, will erode further and weaken our ability to tear down barriers in China, India and other large emerging markets.

Any form of protectionism by the US will harm both itself and the rest of us.

Home team advantage in sports

Mark Koyama has an interesting post on The Causes of Home Advantage in Team Sports at the Oxonomics blog. Koyama writes

Jimmy Reade and myself have attempt to address the question of home advantage in football in this paper. We find that home advantage in English football has fallen since the 1980s.

He goes on to say

Drawing from Alchian and Demsetz (1972) we argue that players in team games have an incentive to free ride on the contributions of their team-mates. Fans monitor player performance and can single out players they feel are shirking.

How does this relate to the phenomenon of home advantage? We argue that

'Fans as a whole are better able to monitor individual player performance in home games than in away games because a far higher proportion of fans attend home games relative to away games. More specifically, they are better able to measure the effort an individual player exerts in a home game. Therefore average player performance will be higher at home games because shirking is more effectively deterred in home games.'

I hope the Crusaders, and their fans, keep this in mind on Saturday night!

As to the question Why has home advantage declined since the 1980s? Koyama explains

Well, in our argument what happened was television. This enabled supporters to better monitor their team when it played away from home. And this in turn reduced the extent of home advantage.

World competitiveness

The latest World Competitiveness Yearbook is now available. While such rankings do need to be taken, somewhat, with a grain of salt, they do nonetheless contain some useful information. The IMD World Competitiveness Yearbook measures 55 countries, including New Zealand, on the basis of 331 criteria.

The scoreboard for this year has the USA at 1, Singapore at 2 and Hong Kong at 3. New Zealand comes in at 18 just below mainland China, who is at 17. Australia is at 7, Canada is at 8, while Ireland is at 12. Venezuela is last, but to be fair Zimbabwe and North Korea aren't on the list. An interesting point is that there are a series of smaller nations, like Singapore(2), Hong Kong(3), Switzerland(4) and Luxembourg(5), ahead of the larger European countries such as Germany(16), just ahead of China, and the UK (21). In that respect, given its size, the USA is an anomaly. But if smallness is an advantage why isn't New Zealand higher up the rankings? Could it be that recent government policies have be wrong?

(HT: Economic Logic)

Allan Meltzer on EconTalk

On EconTalk this week is Allan Meltzer of Carnegie Mellon University. He talks with Russ Roberts about what the Fed really does and the political pressures facing the Chair of the Fed. He describes and analyzes some fascinating episodes in U.S. monetary history, discusses the advantages and disadvantages of the gold standard and ends the conversation with some insights into recent Fed moves to intervene with investment banks. It makes for an interesting introduction to the political economy of the money supply and central banks.

Scholes and Posner interviews

Myron Scholes, the 1997 winner of the Nobel Prize in economics, talks with Bloomberg's "On the Economy" host Tom Keene about the outlook for the credit crisis, economic modelling and the need for a new system of accounting.

Keene also talks with Richard Posner about his new book, "How Judges Think," the U.S. Supreme Court, and the impact of ethanol production on food supply and prices.

The debate goes on

The debate around the sale of Panmure House, Adam Smith's former Edinburgh home, goes on. At The Debatable Land blog Alex Massie wrties

So, Panmure House, Adam Smith's former Edinburgh home, has been sold. The ASI reports:

Councillors in Edinburgh have approved the sale... to Heriot-Watt University. They chose the £800,000 bid over a higher offer, on the grounds that the University would make the building more accessible to the public. The University plans to restore the house to promote the study of economics.

Hmmm. Wouldn't it have been more appropriate to sell to the highest bidder?

Over at Freedom and Whisky David Farrer replies by noting

Values are subjective. We each have our own unique scale of values and if that weren't so no trade would be possible at all. Let's imagine that I'm in the market for a property. I might be happy to pay £250,000 for a flat in central Edinburgh but another person might well prefer to spend the same amount of money on a sizeable house in rural Fife. And I might be willing to spend a bit extra on a place in Edinburgh simply because it had once been owned by Adam Smith! Others wouldn't. Values aren't limited to monetary considerations.

So I would argue that the City Council hasn't necessarily sold the Smith abode to a low bidder. It all depends on the Council's scale of values and those values can include a keenness for a particular future use of the property. From its point of view the Council has sold to the highest bidder. For once, in this case the Council's scale of values is not unlike mine!

In response to David Farrer, Gavin Kennedy at the Adam Smith's Lost Legacy blog writes

Some commentators to the various Blogs that have remarked about the sale of Panmure House demonstrate their philistine nature by simply demanding that the City of Edinburgh Council sell to the ‘highest bidder’, or demolish Panmure House and turn it into a MacDonalds, or some such atrocity.

I am pleased to see that a Libertarian takes a more intelligent stance.

At Organizations and Markets Peter Klein writes

Some commentators find it ironic that the house’s current owner, Edinburgh’s City Council, is selling to the university rather than accept a higher, competing bid from a private citizen. So much for the free market! But, as a careful reading of Smith reveals, Smith was hardly an advocate for unrestricted laissez-faire, supporting substantial public expenditures on infrastructure and education as well as the legal system and national defense

I find myself in agreement with David Farrer on this.

Incentives matter: local bounties file

Over at Marginal Revolution Alex Tabarrok points out that one outcome of the economic downturn in the US is that the incentive to call the police with a tip has increased, especially in those regions which suffer a larger number of home foreclosures. He quotes an article in the New York Times

For tips that bring results, programs in most places pay $50 to $1,000, with some jurisdictions giving bonuses for help solving the most serious crimes, or an extra “gun bounty” if a weapon is recovered...

“We have people out there that, realistically, this could be their job,” said Sgt. Zachary Self, who answers Crime Stoppers calls for the Macon Police Department.

Consistent ... but biased

Jeffrey D. Sachs's new book "Common Wealth: Economics for a Crowded Planet" has been reviewed in the New York Times. The review end with this

In an age when we don’t need to have lots of children to work the fields, or to compensate for high infant mortality, Sachs argues that it’s both economically rational — and crucial for a future of sustainable growth — for people to reproduce at a rate close to 2.1 children per family. In his acknowledgments, Sachs thanks his three children.

Interesting blog

An interesting blog I have just found is the The American Association of Wine Economists Wine Blog.

One recent posting on the blog is about the obvious problem that EU wine production vastly exceeds demand. The result is that the EU has to buy thousands of liters of wine and distilled into them into alcohol to prevent prices from dropping through the floor. The distillation price support only encourages continued production, waste and expense. It is a mess, but what price support scheme isn't? But reform is in the air. The posting states

A fairly radical plan was introduced a few years ago, one that would have paid farmers to grub up thousands of hectare of vines and introduced market reforms to allow (by deregulating) and to encourage (through supporting programs) European winegrowers to compete more effectively with New World winemakers who are taking their markets.

The package that the Council of Ministers agreed last week is significant even if it is less radical than the original initiative (Decanter magazine called it “watered-down” — never a good thing when you are talking about wine). The program called for subsidies to encourage winegrowers to eliminate up to 175,000 hectares of vines (versus 400,000 hectares in the original proposal), limit chaptalisation (the addition of sugar in the wine-making process) rather than eliminating it, and market-based reforms that encourage and enable winegrowers to compete on world markets (through varietal labeling of wines) rather than hide behind protective barriers.

[...] The program includes money for grubbing up, of course, and deregulation of wine labels, removal of some vine planting restrictions (so marketable grape varieties can replace uneconomic grubbed up varietals), funds for wine promotion abroad, and so forth. Like any EU program, it is a complicated balance of economic reality, fiscal feasibility and political necessity.

The interesting thing about the posting is that it says the ideas being put forward to help the European wine industry transition to the new market environment, where export markets are growing, domestic markets shrinking and competition is fierce, were learned from New Zealand. The posting says

New Zealand today is famous as one of the great success stories in the world wine market. A small nation in an unlikely location, it punches above its weight in the global wine market, holding the title as champion exporter. Not in quantity, obviously, but in price. New Zealand has the highest average export price of any wine producing country.

But such was not the case 25 years ago. New Zealand suffered from a surplus of mediocre wine that could only be sold domestically behind high protective barriers. The industry collapsed with many failed firms from a combination of bad wine and surplus production. The government paid to grub up vines and then opened the market to international competition. Cheap but better wines from Australia flooded in to fill the domestic bulk wine market, leaving New Zealand producers only one choice — make better wine for export. They have done so brilliantly. Their success inspires the EU reforms.

The message ends by noting

It is possible to envision a future where the reforms can work, where the marginal vineyards have gone out of production, where consolidation has increased efficiency and where branded varietals can compete with the world market. (I have even seen some early attempts at EU branded varietals in the discount bins of a local store — more about this in a future posting.) I think it is possible that this vision may be realized — eventually.

But oh, it is such a big jump. The institutions of the small family vineyard and the local wine cooperative seem to me to make these reforms much more difficult. New Zealand’s success will be difficult to repeat.

Korean trade deal?

This news report states that

A free trade deal with Korea would hopefully see the country slash its "horrifically" high tariff rates for New Zealand exports, Prime Minister Helen Clark says.

Korea is sixth largest export market for New Zealand with exports to Korea being worth $1.33 billion in 2007. The report says that the an average agriculture tariff rate is 52 percent. Removal of tariffs that high must have a huge effect on Korean farmers. If they really are as inefficient as that sized tariff would suggest, they will not be able to compete with New Zealand farmers. Depending on how politically powerful farmers in Korea are this could make a trade deal difficult to negotiate.

The report also notes that

Her visit follows hot on the heels of a successful trip to Japan, where Miss Clark this week won agreement to undertake a study on the benefits of a free trade deal.

An expansion of free trade deals is a step in the right direction.

Brazil facts of the day

Tyler Cowen, over at Marginal Revolution, gives us his "Brazil facts of the day".

1. Brazil has become a net creditor nation for the first time in its history.

2. About 15% of the Congress is under formal investigation for crimes, ranging from attempted homicide to money laundering.

3. Since 2005 more than 20 million people have entered "the middle class," defined as a monthly income of $635. The percentage of middle-class Brazilians has grown from 34% to 46%.

3. sounds good, but 2. is somewhat worrying, to say the least. Makes New Zealand look very tame in comparison.

The Economics of Pirate Tolerance

More from Peter T. Leeson on the economics of pirates. This time his paper is on The Invisible Hook: The Economics of Pirate Tolerance (pdf). The abstract reads:

Can criminal profit-seeking generate socially desirable results? This paper investigates this question by examining the economics of pirate tolerance. At a time when British merchant ships treated black slaves as slaves, some pirate ships integrated black bondsmen into their crews as full-fledged, free members. Enlightened notions about equality did not produce pirate tolerance, however. I argue that self-interest seeking in the context of the criminally-determined costs and benefits of pirate slavery was responsible for pirates' progressive racial practices. Analogous to Adam Smith's invisible hand, whereby legitimate persons' self-interest seeking can generate socially desirable outcomes, among pirates there was an "invisible hook," whereby criminal self-interest seeking produced a socially desirable outcome in the form of racial tolerance.

For more on Lesson's studies into the economics of pirates see More on pirates and Governance without government.

(HT: The Austrian Economists).

Zimbabwe: Inflation Hits 355 000 Percent

This report tells us that inflation in Zimbabwe has managed to work its way up to a mere 355,000 percent. The report says

YEAR on year inflation for the month of March surged to 355 000% from the February figure of 165 000% as prices rose on the back of increased money supply to finance the 2008 harmonised elections.

Just stop printing money seems like good advice.

Eighteenth century globalisation

For the economic historians among us, there is an article on VoxEU.org which argues that there was a potential for globalisation as early as the 18th century. Economic globalisation is a political phenomenon. The column presents new evidence on the Anglo-American wheat trade in the eighteenth century and explains how politics, war, and natural disasters thwarted economic integration.

In his article Why globalisation might have started in the eighteenth century, Paul Sharp explains that

Economists say there is globalisation when prices influence each other across continents over relatively short periods of time. Much of the evidence for globalisation at the end of the nineteenth century has come from the impressive growth in trade in foodstuffs – especially grain – in these years. The most important trade was between the United States and Britain, and price evidence demonstrates the integration of these two markets as, for example, a poor harvest in the United States resulted not only in increased prices at home, but also in Britain.

New evidence shows, however, that the grain trade – and specifically trade in wheat – was important as far back as the eighteenth century. Given that this was the case, it follows that it might be possible to find earlier periods of market integration – that is ‘proto-globalisation’.

Sharp goes on to say

The evidence for the early importance of the transatlantic wheat trade comes from two sources. First, statistics survive for the wheat trade between the American colonies and the early years of the United States and Britain. These show the beginnings of intercontinental trade in a bulky product, which at the time was a leading component of consumption in Britain.

Second, lending support to the trade statistics is primary evidence, ranging from presentations, to Parliamentary select committees to the correspondence of individual farmers, which all suggests that contemporaries were aware of the significance of this trade. Indeed, by 1800, the British Board of Trade wrote that ‘America be, or is hereafter to be the granary of Europe’, a role which it only fulfilled at the end of the century.

In fact, when the United States did finally emerge as the major supplier of wheat in the 1860s and 1870s, it appears that contemporaries considered this to be a new development, seemingly unaware of the events of the previous century. Their reason for this mirrors the belief that many hold today that globalisation is a modern phenomenon: the early growth in trade was continuously being knocked off course by ‘extraordinary’ events, such as war, politics and even plagues of insects.

Moreover, the trade was finally closed down altogether by the imposition of prohibitive new Corn Laws after the Napoleonic Wars in 1815. That observers had forgotten the importance of this trade after half a century is similar to commentators now often being unaware of the level of globalisation prior to the First World War.

Sharp continues his story by arguing that

The ultimate proof for eighteenth-century proto-globalisation is that prices of grain in the United States and Britain influenced each other. As far back as the 1770s, when Britain became a net importer of wheat and large volumes started to be imported from the United States, there is evidence that prices on both sides of the Atlantic were moving together.

Later he notes

The co-movement of American and British wheat prices in the eighteenth century suggests a potential for globalisation one hundred years before the so-called “first globalisation.“ What happened?

The reason why globalisation did not take hold in the eighteenth century was that it was continuously being disrupted. It was not the improvements in transportation technology of the nineteenth century that made globalisation possible. It was rather wars, politics and natural disaster that made globalisation impossible prior to this.

The moral of the story seems to be that history has shown that globalisation can reach impressive levels, but the institutional framework supporting it is important and if it collapses, or if natural disaster strikes, then the disintegration of important markets can, and does, occur within a short period of time.