University of Groningen
A note on technology shocks and the Great Depression
Inklaar, Robert; de Jong, Harmen; Gouma, Fokke Reitze
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Journal of Economic History
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Publication date:
2016
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Citation for published version (APA):
Inklaar, R., de Jong, H., & Gouma, F. R. (2016). A note on technology shocks and the Great Depression.
Journal of Economic History, 76(3), 934-936.
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Download date: 15-06-2017
AnoteontechnologyshocksandtheGreatDepression
RobertInklaar,HermandeJongandReitzeGouma
March2016
ThepaperbyShingoWatanabe(2016)analyseswhethertechnologyshocks–theprimedriver
of business cycles in Real Business Cycles (RBC) models – could have set off the Great
Depression,addingtoarecentdiscussioninthisJOURNAL.Inlinewithourownwork(Inklaar,
deJongandGouma,2011),heconcludesthatanappropriatelyconstructedtechnologyseries
doesnothavethepositiverelationshipwithfactorinputsthatisrequiredforRBCmodelsto
holdtrue.
HispaperandoursareinspiredbytheworkofBasu,FernaldandKimball(BFK,2006),who
analysethesamequestion(“aretechnologyshockscontractionary?”)andweeachreachthe
sameconclusionsasBFKdidforthepost-WorldWarIIperiod.However,comparedwiththe
‘goldstandard’ofBFK,analysingthepre-WWIIperiodrequirescompromises;forinstance,
regardingthedata.Inourpaper,thisledustoanalysebiennialcensusdataongrossoutput
and inputs for 19 manufacturing industries for the 1919–1939 period, which precluded us
fromanalysingannualfluctuations.Watanabe(2016)usedannualvalueaddeddataforthe
private non-farm sector for the period 1892–1996, which requires assumptions regarding
technology.NeitherempiricalsettingmatchesBFK’sannualindustry-leveldatawhichcovered
theentirenon-farmsectorafterWWII,buttakentogetherthepaperofWatanabe(2016)and
ourown(Inklaar,deJongandGouma,2011)presentacompellingcaseagainstRBCmodels
oftheGreatDepression.
AlthoughWatanabe(2016,p.17)arguesthatourresults“maybepartlyduetocoincidence”,
wewouldarguethatthecriticismsraiseddonotwarrantsuchadrasticassertionandthat,
instead,thetwopapersshouldbeseenasprovidingconvincingandcomplementaryevidence.
Comparing the empirical analyses, Watanabe argues that we should have run a weighted
regressionandexcludedoilpricesasaninstrument.Yetbothchangeswouldhaveledtoa
fairlymodestincreaseintheestimatedreturntoscale(from1.17to1.23)withnoeffecton
ourfindings.1Anothercriticismisthatthechangeinhis(non-farmsector)technologyseries
isdifferentlysignedthaninour(manufacturing)technologyseriesinmanyperiods.However,
thereareveryfewyearsinwhichthesignofnon-farmtechnologychangecanbedetermined
1
Detailsavailableonrequest,oreasilyestimatedfromtheonlinedatasettoourpaper.
with(statistical)confidence(Watanabe,2016;Figure1)andnocompellingreasonwhythe
signsshouldmatchinthetwodifferentsectors.Theargumentthatweshouldhavebeenable
torecoveran(effectively)one-yearnegativeresponseoftechnologyonhoursworkedwith
biennialdataisevenlessconvincing.2
A larger discussion is whether our specification lets us adequately capture unmeasured
changes in input utilization. It is true that by not finding a significant effect of changes in
averagehourspaidperworker,wecannotfollowthesameidentificationstrategyasBFKand
Watanabe,endingup,rather,withadifferentspecificationthanthetheoreticalideal.Atthe
sametime,inhisanalysis,Watanabehastoresorttostringentassumptionsaboutproduction
technology; specifically that intermediate inputs and factor inputs are used in strict
proportion.Suchanassumptionhasbeenrepeatedlyrejectedintheliterature,includingin
ourworkwhenwedemonstratethebiasincoefficientswhenestimatingourparametersina
valueaddedratherthanagrossoutputframework(Inklaar,deJongandGouma,2011,page
847andOnlineAppendixTable8).
Itisnothardtocomeawayfromthisdiscussionwithasenseofdisappointmentaboutthe
qualityofthedataavailabletoholdthisdebate.However,wewouldofferamoreoptimistic
conclusion,namelythatwhatevertheshortcomingsintheanalyses,theyareapparentlynot
criticaltothecentralargumentofthesetwopapers.Andthefactthattwostudies,eachwith
itsownlimitations,comestotheconclusionthattechnologyshocksdidnotdrivetheGreat
Depressionshouldcertainlybeconsideredscholarlyprogress.
References
Basu, Susanto, John G. Fernald, and Miles S. Kimball. “Are Technology Improvements
Contractionary?”AmericanEconomicReview96,no.5(2006):1418–48.
Inklaar,Robert,HermandeJong,andReitzeGouma.“DidTechnologyShocksDrivetheGreat
Depression?ExplainingCyclicalProductivityMovementsinU.S.Manufacturing,19191939.”JournalofEconomicHistory71,no.4(2011):827-858.
Watanabe, Shingo. “Technology Shocks and the Great Depression” forthcoming Journal of
EconomicHistory,(2016).
2
Inaregressionoftechnology𝑧onhoursworkedℎ,theparameterofinterestis𝛽$ inlog ℎ( − ℎ(*$ ≡ 𝑑ℎ( =
𝛽$ 𝑑𝑧( + 𝛽/ 𝑑𝑧(*$ + 𝛽0 𝑑𝑧(*/ , which was significantly negative in BFK. The same equation, lagged one year is
𝑑ℎ(*$ = 𝛽$ 𝑑𝑧(*$ + 𝛽/ 𝑑𝑧(*/ + 𝛽0 𝑑𝑧(*0 . The biennial nature of our data means that 𝑑𝑥( and 𝑑𝑧( are not
observed,butrather 𝑑𝑥( + 𝑑𝑥(*$ and 𝑑𝑧( + 𝑑𝑧(*$ .Thismeansthat𝛽$ cannotbeidentifiedusingbiennial
data: adding up the two equations leads to 𝑑𝑥( + 𝑑𝑥(*$ = 𝛽$ 𝑑𝑧( + 𝛽$ + 𝛽/ 𝑑𝑧(*$ + 𝛽/ + 𝛽0 𝑑𝑧(*/ +
𝛽0 𝑑𝑧(*0 .