The measure of a market (a really old one)

A year ago, about this time, I was on my way to Ottawa for the Canadian Economic Association and Canadian Network of Economic History Meetings. They coincided, so I presented papers at both and took the opportunity to adamantly assert that I was not an economic historian.

A year later, I have a book chapter, a working paper, a paper (almost–I’m just waiting for confirmation it was sent out) under review, and a paper idea percolating that all belong under the label Economic History. I’m trying to get the paper idea in shape to submit to the CNEH meetings again this year, with the deadline fast approaching.

While my coauthors and I were hard at work on the paper on financial portfolios in the early 18th century, the one that is (almost) under review, a seminar participant at Stanford asked my coauthor what an optimal portfolio would look like. We didn’t know. None of us is really a finance person. I got involved with the project because it had a gender component and the others on the papers are economic historians.

I took it upon myself to pick the brain of my colleague who teaches finance at Gettysburg and found myself quickly immersed in the heady world of portfolio optimization, betas, alphas, indices, Markov matrices, and so much more. From my understanding of the literature, the S&P500 represents the closest thing we have to an optimal portfolio, and so creating a similar index for the time period we’re interested in should provide the answer to the seminar participant’s question.

What I find particularly interesting about the index method of portfolio construction is that the S&P500 in particular is thought to provide an accurate picture (returns and growth-wise) of a balanced portfolio of all assets–not just financial instruments. If you were to put a big chunk of your money in a fund that purchased stocks along with the S&P market capitalization strategy, you would actually be bringing your portfolio out of balance by buying things like real estate or durable investment goods.

The idea, I believe, is that the stock market has “evolved” such that it captures the risk and reward of all those types of instruments–not just the stocks themselves. I find this assumption, particularly given the dramatic dips and peaks in the stock market we’ve seen over the past four or five years to be heroic, at best, but it becomes more problematic when we turn to 1700s finance.

The financial instruments available in the period for which I have data are incredibly few in number and even more limited in scope. Besides a bank or two, they are joint-stock, charted trading companies, whose fortunes lie entirely in the wind and the water and the ability of colonists to extract resources from the colonies. There’s no ability to invest in steel or textiles or the machines that make them. I don’t have information about real estate or other investments for most of the people in the sample, and I certainly don’t have their prices. So, our optimal portfolio can really only be for the available stocks, not for the entire gamut of instruments.

I doubt that I’ll be the one to rewrite modern portfolio theory, and I do think this is the best place to start, but it’s not ideal. Story of an economics paper, I guess.

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The British were here first

I’m only beginning to get into this economic history literature. In much of the work I’ve done so far, my comparative advantage came in the form of data work. So while having skimmed, but not read in depth, most of the literature cited was formerly compelling and advantageous, I’m going to have a little catching up to do if I’m going to branch out on my own in this field. Hence, my tweet from yesterday afternoon with three fat volumes of The Constitution and Finance of Early English, Scottish, and Irish Joint-Stock Companies by Scott. It’s okay to say you’re jealous.

The decline of industry and manufacturing in America over the past few decades has been decried as one of the primary culprits behind the decline of the middle class and of blue-collar jobs. It seems as though, we aren’t the first ones to be in this situation.

At the same time that British capital was leaving the island at unprecedented levels, British industry began a decline that signalled the beginning of Britain’s transformation from world’s workshop to banker. While it was no surprise that a nation would eventually surpass Britain in industrial might, the speed of the reversal caused much consternation among the British elite. The city of London, with its perceived propensity to funnel capital overseas rather than into domestic industry, was widely suspected of hastening the decline of British industry.

The growing pains of developing from a manufacturing economy to a service-based economy aren’t new. I think that’s why I like history, because it reminds me that even though nothing is a replica of the past, it’s not like no one has ever been in a similar situation before.

1. Benjamin R. Chabot and Christopher J. Kurz. 2010. “That’s where the money was: Foreign bias and English investment abroad, 1866–1907”. Economic Journal 120 (September), 1056–1079.

It’s not that I do everything Justin Wolfers tells me to do…

But I did find this fun. On the Freakonomics blog today Justin Wolfers uses the 1940 census–which was just scanned and all put online–to find who was living in his house in 1940. I’ve spent quite a bit of time with other US Census records from earlier years. At one point, while taking economic history in graduate school, I found my grandfather and his parents and theirs in Georgia and North Carolina in the 1930, 1920, and 1910 records. I didn’t actually need these things for class; I was supposed to be looking for saloon-hall dancers and prostitutes in the 1860s Colorado mining towns, but that’s a blog post for another day.

I’m in the process of searching for my great grandparents in the 1940 census, as I know they moved around quite a bit after the crash, and my grandfather had already left home by 1940, but I did look at my current address in the Pennsylvania records ala Wolfers. The plaque outside my house in Gettysburg says it was built by a doctor who served in the Civil War and stuck around after it was over. By 1940, however, the house belonged to Helen Culp, a 52-year old single schoolteacher who finished college, and her sister, Margaret, a 37-year old department store employee, who finished high school. Though entirely coincidental, it feels appropriate that I should spend my time in Gettysburg in an educated, female teacher’s house. Helen and Margaret were white, their parents were born in Pennsylvania just as they were, and they grew up speaking English at home*. Helen earned $1400 in 1939 and her sister, $700. Helen’s salary is worth about $22,000 in 2010 dollars if we use Purchasing Power Parity calculations, but could have represented a lot more if we measure it by ‘prestige’ or ‘economic power’. If you haven’t used www.eh.net‘s “How Much is That” tool, you should; it’s super fun.

Helen said the value of her house was $5000. This is almost three years’ salary for her, which tells me that either she was paid very well for the time, or that houses were much cheaper in Gettysburg in 1940. I’m fairly certain I could not purchase my house with three years’ salary (although, Helen, at 52, had likely been teaching for much longer than I have). Currently, houses in Gettysburg are pretty expensive, at least compared to surrounding areas, primarily due to historical value, laws governing historical buildings and their preservation or destruction, and limits on building height and density.

This particular exercise amuses me because I’ve never actually lived in a house that was old enough to be in any of these records. Even in Boulder, CO, which is a fairly old town for the Western US, none of the places I lived was more than 40 or 50 years old. And now, I live in a house that is 145 years old. As an American from a relatively recently populated part of the country, I think all this old stuff is so interesting. It’s how I felt in Boston, too; history just seems to weigh heavier.

I only skimmed the pages before I found my address, but in looking at all the people who lived on my street and neighboring ones, I’m also struck by how little migration there is in and out of Adams County. Most people on the page lived in the same place 5 years before. If they didn’t, they came from New Oxford and Ortanna and Cashtown, towns that are within 7-10 miles of Gettysburg. This internal migration map of the US in 2011 shows that not much has changed. Like the 1940 inhabitants of my house and their neighbors, people don’t really move to, or leave Gettysburg, particularly not when compared to Boulder.

Well, except me (and college students).

*Two respondents per page were asked some supplemental questions about their parents, marriage history, and veteran status. Helen happened to be #14 on the page, so she was asked those questions as well. Some of these questions were standard on earlier Censuses, which is part of how I traced my greatgreatgrandparents back to North Carolina.

The value of financial history

Last week, when Eric Hanushek was at Gettysburg College for the Finance Symposium, we got into a post-symposium debate over a couple of glasses of wine concerning the usefulness of historians. In a place like Gettysburg, where most everyone is a historian of some stripe, this is a relevant argument. Gettysburg hosts the Civil War Institute and several scholars who study just that. Civil War buffs travel from all over the country–and perhaps even the world (are there non-American Civil War buffs?) to visit the battlefield and the town. They walk over Cemetery Ridge and Seminary Ridge and talk about Pickett’s Charge* and strategy and the people who died and go on ghost tours. Students and scholars read books and reimagine history, too. Hanushek argued that history is unlikely to change much because we already know all the facts and thus studying it, or at least writing several new books and papers on topics that had been exhausted, was perhaps not the best use of intelligent peoples’ time.

Last summer, I attended the Canadian Network of Economic Historians conference. It’s a great group of scholars who I’m sure would profoundly disagree with Eric’s argument, and they were particularly excited when I told them about my plans. “Gettysburg is going to have three economic historians!?” someone asked me. Actually, no. One retired, one is on leave–the one whom I’m replacing–and me, well, I don’t really consider myself an economic historian.

Despite that lack of self-identified association, I was ready to tell Eric he was wrong. I do have a few papers in economic history, using financial transaction and shareholding data from 18th century England. It’s really cool. Which is exactly what I told Eric. Perhaps I’m not going to entirely rewrite the History (with a capital H) of the establishment of the English stock market and modern portfolio theory, but I probably can make little changes to our understanding of how financial markets worked, how investors made decisions, and what effect that might have on commerce, trading, and the like.

In one of these papers, a coauthor and I show that despite relatively established secondary markets for trading shares of companies, individuals did not tend to buy in more than one company. Wealth constraints and the value of being able to vote likely trumped the relative ease with which one could stroll down to Garroway’s in Exchange Alley and pick up a few extra shares. In another, we show how women (who likely couldn’t stroll down to Exchange Alley for propriety reason) used the market.

Like I said, I’m not changing the history of the world, but it’s kind of cool to know that investors weren’t diversifying over these kinds of assets as we might expect modern investors to do. (Which, incidentally, they don’t always do, either).

I’ve been discussing some of these ideas with a few colleagues and all of a sudden, the ideas are flowing. Over lunch today, we mapped out at least half a dozen papers that could come out of these data. So now, my problem is this: how do I go on the market as a labor economist with a slew of papers that fall better under financial macro and economic history? I usually say that being a labor economist means I can do whatever I want, so there it is, I guess.

*Notes:

  1. The Battle of Gettysburg was July 1-3, 1863.
  2. You now know pretty much everything that I do about the Battle of Gettysburg.