Revolution, Income and Regional Decline: The American Revolution and the First American Great Depression

Using the framework of neoclassical institutional economics, new institutions are innovated if the perceived expected net gains are positive.  That is, the benefits from the change should exceed the implementation costs plus the net benefits of the existing institutional arrangement.  A primary ingredient of those gains must invariably translate into higher per capita income.  As a result, it is quite intriguing that recent new income estimates for the United States between 1774 and 1800 by Peter Lindert and Jeffrey Williamson show that the aftermath of the American Revolution and Confederation era saw real per capita income in the United States drop by 20 percent – a drop akin to that of the Great Depression from 1929 to 1933.

In their September 2013 Journal of Economic History article “American Incomes Before and After the Revolution,” Lindert and Williamson use a social table approach to estimate income that counts people by occupation and combines it with estimates of average income.  The results find that American colonial incomes on the eve of the Revolution in 1774 were higher than estimates by previous scholars.  Moreover, average colonial incomes were higher than in England and Wales and inequality in the colonies was lower than England and Wales.  However, incomes in the South were much higher than in the North even when the per capita income is calculated including the slave population.

For the period 1774 to 1800, the economic destruction of the war, the disruption of overseas trade and the damage to urban activity resulted in a series of negative economic shocks that reduced real per capita income by 20 percent and needed decades to recover from.  What is more intriguing is the period from 1800 to 1840, which saw a recovery in per capita incomes but with unbalanced regional growth.  Between 1800 and 1840, real per capita income in the North grew at annual rates of 2.3-2.4 percent per annum while in the South the annual growth rate was 0.5 to 0.7 percent per annum.  By 1840, the South was well behind the North in per capita income. 

I suppose one has to wonder if the economic decline of the U.S. South has it seeds right in the American Revolution?  Institutions are innovated in response to perceived benefits.  By the eve of the revolution, industry and manufacturing in the U.S. Northeast was being hampered by British mercantilist policies, which wished to limit or prohibit trade in manufactured goods between the colonies.  The South was primarily a resource export region and despite imperial trade regulations benefited from the colonial arrangement.  By the late colonial era, it is estimated that two thirds of American exports were from the South and the bulk were resource staples with little value added. 

In light of this, it is probably no surprise then that support for the Revolution was greater in the North than the South.  The North had more value added activities on the eve of the Revolution and a substantial shipping industry and its interests were increasingly not as well served by the British Imperial system – hence the desire for institutional innovation.  In the short term, the disruption of the Revolutionary War and the transition to new institutions disrupted the economy of both the North and the South.  The cost of the revolution in terms of a per capita income drop was high.  However, in the long-term, it was the North that primarily benefitted from the new institutional arrangements and trade patterns and did so more than the South sending it into long-term decline.  The American Revolution seems to have provided the greatest economic benefits to the northeastern United States.

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Comments

[Determinant]

There were other factors. Soil exhaustion was a creeping problem by the 1840's in the south. Tobacco is very demanding of the spoil and quickly exhausted it; the effect is a boom followed by a bust. You can see it as tidewater Virginia planter families (see the Jeffersons, notably Thomas and his children) moved west into Alabama and Tennessee in the 1830's and 1840's in search of more fertile land.

Southern agriculture based on corn, cotton and tobacco was precarious as all of these crops are extremely demanding on the soil. The North, comparatively, had a more balanced agriculture based on a more sustainable rotation of wheat, clover and corn. The South therefore had more of a "slash and burn" aspect to its agriculture that required new land and expansion just to sustain itself.

Turning to institutional choices, one of the prime motivators was the British policy of "Indian Territory" which restricted Western expansion. Regardless of costs borne by New York, Virginia and the other established colonies, the goal was to seize control of the Western Frontier and subject it to a home-controlled American expansion policy, which was remarkably effective.

It started early too; the Northwest Ordinance which controlled settlement from the Appalachians to the Mississippi was passed in 1787 after all the states ceded their Western Claims to the US Government.

[Joe]

"Using the framework of neoclassical institutional economics, new institutions are innovated if the perceived expected net gains are positive."

Excuse me, what is the standard reference for this? I mean, I thought neoclassical economics was about individuals. How is the collective-action problem overcome in "neoclassical institutional economics"?

[Nick Rowe]

Joe: It's commonly called "New Institutional Economics".

Wiki

Ronald Coase Institute's reading list

A survey article (pdf) from 1999

[Livio Di Matteo]

Joe:
There is a literature in economic history called "neoclassical institutional economics" or sometimes institutional economic. It looks at the process by which new institutions are created and old ones discarded and applies it to historical change. Key names in the early development of the literature are Paul David and Douglass North.

[Livio Di Matteo]

Joe:
Just a followup - neoclassical institutional economics sees long run change as the product of a long run "cost-benefit" process where individual economic agents form groups or coalitions that strive to drive the institutional change. Institutions persist as long as there are benefits to be realized - institutions change when these groups or coalitions can achieve net gains. You might want to check out:
Lance Davis and Douglass North (1971) Institutional Change and American Economic Growth.
Douglass North (1981) Structure and Change in Economic History.
Paul David (1994)"Why are institutions the carriers of history?: Path dependence and the evolution of conventions, organizations and institutions" Structural Change & Economic Dynamics, 5,2,205-220.

[Joe]

Thanks to both of you. Does the Acemoglu/Robinson book "Why nations fail" follow the same approach?

[Livio Di Matteo]

The Acemoglu/Robinson book does focus on how institutions and their evolution influences economic growth and development.

[Paul Friesen]

Interesting.

I have often noticed that revolutions seldom seem to do well. Many countries have thrown off the colonial yoke and then just stagnated or sunk into a morass of corruption, war, poverty, and general bad governance. The American revolution often seems an exception, but perhaps it is less exceptional than previously thought.

Americans tend to credit good institutions for their success, but I think it was more coincidence than anything that led to their eventual wealth. Industrialization started in Britain, but by 1800 was ripe to expand into new areas. Continental Europe and other countries with European connections were the easiest places for it to spread to because cultural ties and migration aided the flow of skills and ideas. In the early spread of industrialization, resources were much more important than they are now, so the U.S. benefited there, too.

[Bob Smith]

"The American revolution often seems an exception, but perhaps it is less exceptional than previously thought."

Mind you, there's a key distinction between the American revolution and other countries "throwing off the colonial yoke" - the Americans weren't really looking to throw-off the colonial yoke. They were simply Englishmen seeking to protect their rights as Englishmen (ok, there were other factor, but that doesn't take away from the American's self-perception). Can you imagine many Zimbabweans (other than the white variety) identifying themselves as "Englishmen" or Congolese identifying themselves as Belgians? The American "revolution" was really the last British civil war.

"Americans tend to credit good institutions for their success, but I think it was more coincidence than anything that led to their eventual wealth. Industrialization started in Britain, but by 1800 was ripe to expand into new areas."

That doesn't necessary contradict the story "good institutions" creating wealth. The US was arguably blessed with the benefit of many of the same institutions that resulted in industrialization (and before that, the agricultural revolution) starting in Britain and that by 1800 had made Britain the wealthiest country in the world (despite several decades of warfare). (And, while I'm admittedly partial, one can't help but notice that the British institutions of the 18th century have proved to be remarkably robust in a variety of different countries well into the 21st century). While most revolutions involve overthrowing the existing order, beheading its leaders, and replacing it with a radical new structure. The American revolution largely involved replacing an English King with an elected one and calling him "Mr. President".

[Frank Restly]

Livio,

"In light of this, it is probably no surprise then that support for the Revolution was greater in the North than the South."

Except that it wasn't.

http://en.wikipedia.org/wiki/Loyalist_(American_Revolution)

"The largest number of loyalists were found in the middle colonies: many tenant farmers of New York supported the king, for example, as did many of the Dutch in the colony and in New Jersey. The Germans in Pennsylvania tried to stay out of the Revolution, just as many Quakers did, and when that failed, clung to the familiar connection rather than embrace the new. Highland Scots in the Carolinas, a fair number of Anglican clergy and their parishioners in Connecticut and New York, a few Presbyterians in the southern colonies, and a large number of the Iroquois Indians stayed loyal to the king."

http://en.wikipedia.org/wiki/Resolution_of_independence

The last colonial delegates to affirm a declaration of independence were Maryland, Delaware, Pennsylvania, and New Jersey. New York abstained.

[Livio Di Matteo]

Frank:
That is an interesting point. I suppose we would need to define what "support" means. i recall reading once that ardent support for the revolution probably did not characterize more than one third of the population of the 13 colonies but cannot recall the reference. Given that Philadelphia was associated with the Congresses and Boston with so much agitation I suppose it's logical to assume that the northern colonies were more supportive than the southern ones when it came to the revolution. However, there may also be a difference between the business and economic elites and the general population when it came to support for the revolution. Will be interesting to learn more about this aspect of the revolution.

[Determinant]

Mind you, there's a key distinction between the American revolution and other countries "throwing off the colonial yoke" - the Americans weren't really looking to throw-off the colonial yoke. They were simply Englishmen seeking to protect their rights as Englishmen (ok, there were other factor, but that doesn't take away from the American's self-perception). Can you imagine many Zimbabweans (other than the white variety) identifying themselves as "Englishmen" or Congolese identifying themselves as Belgians? The American "revolution" was really the last British civil war.

Nice try, but no. See the Intolerable Acts, specifically the Royal Proclamation of 1763 (with a nod to the Quebec Act) and its "freeze" on westward American expansion. Underneath the windowdressing of "rights" was a pure grab for economic power and a change of economic course procured through military means.

Nice try at the Whig View of History though Bob.

[Lorenzo from Oz]

When looking at the American Revolution, the question is why did 13 colonies revolt but a whole lot of other North American colonies not revolt? The Canadian ones, the Caribbean ones did not revolt.

1763 Great Proclamation. If you weren't interested in grabbing Amerindian land because there was none near you (Caribbean) or you did not feel strong enough to do so (Canadian colonies), no revolt.

1772 Somersett's Case. The spectre of the abolition of slavery encouraged revolt. But the Caribbean colonies did not. Why?

British victory in French and Indian War (1763). If you felt vulnerable to foreign attack (as all the island colonies did) no revolt.
Also, Canada needed the Crown to arbitrate between the English and French settlers.

So, it is a trade-off. A: Did you want to grab Amerindian land? B: Did you want to keep slavery? C: Did you feel vulnerable to foreign attack? If the answer to either A or B was "yes" and the answer to C was "no" -- then you revolted. The Caribbean colonies did feel vulnerable, so that trumped concern to keep slavery. The Canadian colonies did not want to grab land or keep slavery, so did not revolt. (They also had some internal vulnerability questions). The 13 Colonies either wanted to grab Amerindian land or keep slavery (or both) and did not feel vulnerable, so they revolted.

Things such as the Navigation Acts and currency controls added to the irritations and affected how strongly support for revolt was in particular industries.

[Gene Callahan]

1) "new institutions are innovated"
That reads very awkwardly to me. What is wrong with "are created"? Given that they are "new" isn't innovation implied?

2) Creating an abstract theory and then forcing history to fit tends to produce a priori history like "support for independence was greater in the north." Why not just do actual historical work to see why people rebelled?

[Gene Callahan]

Oh, and
3) "A primary ingredient of those gains must invariably translate into higher per capita income."
No, there is no reason whatsoever that it "must invariably" so translate. Unless one considers economic reductionism a reason here!