Was medieval seigniorage welfare improving?

The presence of coins improves social welfare, as it allows for more trades than barter would allow. Coin minting also provides income to the minting authority, as it can buy stuff with coins that have more value than their production cost. This is called seigniorage. This was also the case in medieval times, where "seigneurs" would mint gold or silver coins with somewhat less metal content than indicated and thus get income. One would thus think that these minters would be profit maximizing, and thus enhance welfare only as a by-product.



Angela Redish and Warren Weber say this is not quite true. They build a random matching model of commodity money, where the supply of silver is exogenous. They derive the welfare maximizing size and quantity of coins as a function of the quantity of silver and the probability of acceptance of cash. Using data from medieval Venice and England, they find that the model predictions follow remarkably well the historical record. This probably means that authorities were benevolent. I say probably because they may have acted in the same way out of selfishness, but that is not documented in the paper. Indeed, the model assumes than any holder of silver can mint, while in reality a limited number of people could do that.

We are turning into a rentier society again

Wouldn't it be nice to live on old money? One does not really need to work, or at least on a regular basis, one is worry free, and one gets to enjoy life at its fullest. But this is only a dream that is reserved to a preciously small elite.

Thomas Piketty, Gilles Postel-Vinay and Jean-Laurent Rosenthal show that about a century ago in Paris close to 10% of the population were in fact rentiers, that is, people who consume more than their labor income during their lifetime. They thrived in an economy where the return of wealth was substantially higher than the growth rate. And by the looks of it, it appears that we are heading into a similar situation, as a small proportion of the population is generating substantial wealth from labor income, wealth that cannot be spent in a lifetime and will be inherited by happy an idle descendants. Perhaps more importantly, existing wealth is enjoying far better returns than average wages are growing at, laying the seeds of a new rentier society. History repeats itself.

The child quality/quantity trade-off in the Industrial Revolution

Non-economists cringe when they hear us talking about investment in children and the quantity/quality trade-off in this regard. Yet, this is a very real aspect of child rearing pointed out by Gary Becker that is at the core of many models, and has been found wild in nature. This trade-off is though to be an integral part of the demographic transition, where fertility suddenly drops massively in the course of development.

Marc Klemp and Jacob Weisdorf look at data from Anglican parish registers from the 18th century that contain all sort of demographic data to look at the child quality/quantity trade-off during the Industrial Revolution. Theory tells us that if the returns to education and/or the cost of time (wages) get larger, parents switch from having many children with no education to few of them with better education. Klemp and Weisdorf's data indicates clearly that this trade-off is present: each additional sibling reduces by 8% the probability of a child eventually becoming literate. That is a strong effect, in particular considering the larger number of children at the time, and its rather large standard deviation during this time of transition.

Could the Shadow Open Market Committee have outperfomed the Fed?

Decisions of the Open Market Committee of the US Federal Reserve bank have long been scrutinized, both by market for obvious reasons and by academics. Some of the latter have even formed a Shadow Open Market Committee in reaction to the decision by President Nixon to impose price and wage controls in 1971, with the support of the Fed president. This committee has evaluated Fed policy and criticize Fed actions when due. But would it have done a better job?

William Poole, Robert Rasche and David Wheelock, who are all Fed employees, study how the policies advocated by the SOMC during the period of high inflation in the 1970s would have performed. Those policies where at odds with what the Fed was doing and even with what many academics were proposing. The policy rule was rather simple: reduce the target money growth rate by one percent every year, down to 4%. To evaluate this rule, you need a model, so they take the New-Keynesian model of Clarida, Gali, and Gertler (1999) off the shelf and run various experiments: one with the SOMC rule, one with the historic data (the Fed's action: a one time drop in money growth). While both policies eventually achieve their goal of reducing inflation, the SOMC one does so with less cost in output.

Now things are not that easy. To be fair to the Fed, it had at the time had rather little credibility, and it is not clear it could have gained any more credibility by adopting the SOMC's policy, as it requires some long-term commitment. Also, the Fed had to fight against attempts by Congress to take over monetary policy, and thus its policy choices were limited. And had the SOMC known that it policy would have been actually implemented, I am not convinced it would have taken the same choice. Indeed, it was rather risky, as it was at odds with what most other people were advocating. And markets may have reacted with incredulity to such an odd move.

Fertility differences and agricultural techniques

There are times when you read a paper and you really wonder how the authors came up with the idea to check out a particular correlation in the data, because it seems to be so far-fetched. But thus a correlation can be beautiful if it also has a nice theory that comes with it.

The correlation that Alberto Alesina, Paola Giuliano and Nathan Nunn study is between current fertility and adoption of plough agriculture in history. OK, I did not think about that one. But now that they find a nice positive correlation, how could one explain it? They argue that this has to do that women and children are not particularly useful when ploughing, as strength is required. The traditional task of weeding, that fell on women and children, is not necessary with ploughing. Thus, there is a preference for fewer children that is ingrained in the culture of these regions to this day.

Health cults in ancient Greece

Ancient Greece is a fascinating period as this is the start of the rational and scientific study of the world and many scientific principles were laid down. The Greek philosophers where in particular the first to think seriously about the role of institutions, markets and the functioning of government. In terms of health and medicine, we have all learned about the first attempts to explore and rationalize the human body, using a secular and scientific approach that was unparalleled until much later in history.

Carl Hampus Lyttkens points out that there was also a counter-movement where health care was leaning much more on religion. He also remarks that this is not unlike what we experience now with alternative medicine that has many followers and is even part of state sponsored health care in some countries. Calling these health cults, Hampus Lyttkens claims they arise because people are afraid of the uncertainties of life and cling to anything to reassure themselves. Just think about how many people believe in life after death while there is no scientific evidence for it. And healing cults are often, now and then, the realm of those who cannot afford the services of the scientific healers.

Fiat money, 1683

We tend to think that fiat money is an invention of the twentieth century and thus does not predate the Italian car industry. But there have been a few experiments before this and in particular a remarkably successful one in the Netherlands starting in 1683.

Stephen Quinn and William Roberds tell the story of the Bank of Amsterdam that in 1683 started limiting the ability of depositors to withdraw coin. At a time where this would have been interpreted as "taking the money and running," this was remarkably well accepted by the depositors, and the Bank of Amsterdam never abused the situation, maintaining stable prices over the next century and greatly facilitating trade in the kingdom. All this without government supervision, basically out of private initiative. Call that almost-private central banking (the bank was sponsored by the city of Amsterdam), even conducting open market operations. Of course, this all ended went the Bank of Amsterdam went bust in 1795: the rest of the world still relying on precious metal, the lack of access to fresh silver during the Fourth Anglo-Dutch War led to a strong depreciation of the guilder, and the experiment ended due to lack of fiat.

A neolithic prisonner's dilemma

Why did humans adopt agriculture in Neolithic times? Our intuition would say because it has better nutritional outcomes. But the evidence points to the contrary: the bones of early farmers consistently show poorer health than the preceding hunter-gatherers. So why would agriculture be adopted if it lead to a disadvantage?

Robert Rowthorn and Paul Seabright say it was individually rational to adopt agriculture, even though it was detrimental to society, much like in a prisoner's dilemma. The problem of a farmer is that he needs to defend his land and his cattle. That seems an additional disadvantage with respect to hunter-gatherers. But farmers can team up in villages, and fortify them. And voilà, now that they have a secure base, they can start raiding around them instead of only defending. This is where the prisoner's dilemma comes in: it is individually rational for every farmer to dedicate resources to defense, but this lowers everyone's welfare.

And thus started the grip of the defense industry on the economy.