economist has a recent article discussing an interesting natural experiment.
Nevertheless, history gives rise to “natural” experiments. In an earlier paper, Brzezinski, Palma, and two co-authors exploited one factor in money supply fluctuations in early modern Spain: maritime disasters. Ships carrying treasure from the Americas to Spain sometimes encountered hurricanes, privateers, and the Royal Navy. In 42 incidents between 1531 and 1810, Spanish merchants lost some or all of the precious metals they had expected to receive. The losses amounted to an average of 4% of Spain’s money stock. The authors draw on a variety of sources, including tax records and sheep counts, to show the damage these losses have done to Spain’s economy. A lack of credit made it difficult for merchants to purchase materials from weavers, delaying the adjustment of consumer prices. A 1% loss in the money stock can reduce real output by about 1% in the following year. Sheep flock size decreased by 7%.
I like this discovery, but there is a caveat. The statistical significance of this study appears to be quite low.
If this study is inconsistent with my preconceptions about financial shocks, it is barely significant at the 90% level, which could easily reflect the journal’s tendency to favor studies that find positive effects. I would say it’s sexual. than something that has no effect at all. (I think I said that. :))
But for now, let’s assume this finding is true. The loss of gold hit Spain’s labor market hard. After all, we have seen many modern examples of negative financial shocks resulting in rising unemployment, particularly following the large declines in the US monetary base in 1920–1921 and 1929–1930. Ta. Why does this effect occur?
There is no obvious reason why Spanish workers would want to work less hard just because Spain is a little poorer. Rather, you would expect extreme poverty to motivate people to work harder just to avoid starvation. The real problem is that negative financial shocks act as a type of price control, pushing important market prices out of equilibrium.
We typically think of unbalanced prices as being caused by things like price controls, rent controls, and minimum wage laws. ryan bourne I recently edited an excellent book on this subject. This book includes numerous case studies. However, price regulation is not always an issue. Monetary policy instability can cause similar problems. The same goes for irrational public attitudes such as opposition to “price gouging” and monetary illusions.
