Essays in Economic History: Purchasing Power Parity, Standard of Living, and Monetary Standards

Published by EH.Net (July 2023).

Lawrence H. Officer. Essays in Economic History: Purchasing Power Parity, Standard of Living, and Monetary Standards. New York: Palgrave Macmillan, 2022. xxvii + 542 pp. $109.99 (hardback), ISBN 978-3030959241.

Reviewed for EH.Net by John Devereux, Department of Economics, Queens College, City University of New York.

Lawrence Officer has had a long and productive career. His second collection of articles, Essays in Economic History: Purchasing Power Parity, Standard of Living, and Monetary Standards, covers the highlights of his research in these areas, on which he has worked for most of his career.

The collection begins with purchasing power parity (PPP). Over the past fifty years PPP has gone in and out of fashion. The continuing relevance of PPP is shown by the influential work of Itskhoki and Mukhin (2021), whose reconciliation of the various paradoxes in international macroeconomics hinges on the properties of the real exchange rate.

First up is the history of thought on PPP taken from Officer’s definitive account from 1982.  Here Officer makes clear his intellectual debt to Gustav Cassel. What follows is an exhaustive study of empirical work on PPP, focusing on years before 1940.

Next are three empirical studies, published in 1978, 1986 and 1989, on absolute PPP, the relative price of nontraded goods, and the absolute price level. The papers differ in key respects from the recent empirical literature on PPP. As we might expect, Officer emphasizes getting the data right before starting empirical work. He favors broad-based price indices such as the GDP deflator. At a more subtle level, he identifies thorny index number problems that arise when comparing absolute price levels. In simple terms, we get vastly different price levels if we use Fisher-Ideal or Geary-Khamis measures. For the most part, the literature ignores such problems.  Berka, et al. (2019) is one of the few exceptions.

A second difference with the PPP literature is that Officer evaluates PPP using mostly economic criteria. For example, what are the errors using PPP to forecast absolute price levels (p. 90), and what size of error is consistent with accepting absolute PPP. McCloskey and Zecher (1984) make a similar point. The focus on economic rather than statistical criteria may explain why Officer (p. 50 and elsewhere) appears lukewarm on testing for PPP by looking at real exchange stationarity. He is more receptive towards cointegration tests as they have clearer economic interpretations. Officer’s intellectual honesty is refreshing given that some of the strongest evidence supporting PPP comes from the findings of real exchange rate stationarity in very long run data.

Before leaving PPP, it is worth noting one omission from the book. In 1979, Officer published a paper with Morris Goldstein of the International Monetary Fund providing price indices for tradables and non-tradables derived from output side GDP measures. The paper showed, probably for the first time, that the relative price of nontradables increases with growth. Their methodology is superior to the other measures of nontraded prices developed before or since. It is a wonderful paper that stands with the best work in the area.

Chapters 9 through 12 provide long-run U.S series on the terms of trade, compensation in manufacturing, and the consumer price index. For earnings and the consumer price index, the U.S has seen nothing like British controversies on standards of living during the industrial revolution so there is less work for Officer to begin with. In each case, Officer breaks new ground, improves on previous work, and provides close to a definitive series given the material that he had available to him.

The collection then turns to Officer’s recent work on monetary standards. What follows are chapters on metallic standards – silver and gold – with a short interlude on Bretton Woods. Chapters 17 and 18 on sterling and the dollar are particularly good. Even scholars who work in the area will learn something. A unifying theme is Officer’s notion that the floating and fixed periods for the U.S and U.K should be considered as a single specie standard. The U.S specie standard therefore lasts from 1792 to 1932. There is, however, replication across the various essays that might have been avoided.

Next there are discussions of the bullionist periods in Sweden, Britain, and Ireland, along with the highlights of his well-known work on the efficiency of the dollar/sterling exchange. Chapter 22 is an important chapter as it gives the monetary base for the entire U.S specie standard with a new series before 1867. After 1867, Officer is in the exalted company of Friedman and Schwartz (1963). But he holds his own and he arguably improves on Friedman and Schwartz for the greenback era, where they added estimates in gold and depreciated dollars – apples and oranges. Officer uses gold prices which is surely the correct procedure. The differences are dramatic. Consider 1867, where Officer’s base estimates are half those of Friedman and Schwartz, thereby changing our interpretation of an important period in U.S monetary history. Officer also provides a series for the British base after 1790. It is a pity that he did not present the British results in more detail, as they might fill a large hole in the British series put together by Palma (2018).

The collection concludes with something completely different — a foray through science fiction through the lens of an economist.

Throughout the book, Officer is a happy warrior whose enthusiasm for history and economics is infectious. He is generous in his praise of other scholars and gentlemanly with his critics. Only Paul Samuelson’s gibes against PPP arouse his ire (pp. 32-33). Who should read this book? Clearly, it should be read by anybody interested in PPP or in U.S and British monetary history. Most certainly, it should be read by those who use the long-run data series he creates. Outside of these areas it can be read with pleasure by those of us who enjoy seeing a master craftsman at work.

References

Berka, Martin, Michael B. Devereux, and Charles Engel (2018). “Real Exchange Rates and Sectoral Productivity in the Eurozone.” American Economic Review, 108, 1543-1581.

Friedman, Milton, and Anna Jacobson Schwartz (1963). A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press.

Goldstein, Morris, and Lawrence H. Officer (1979). “New Measures of Prices and Productivity for Tradable and Nontradable Goods.” Review of Income and Wealth 25: 413-427.

Itskhoki, Oleg, and Dmitry Mukhin (2021). “Exchange Rate Disconnect in General Equilibrium.” Journal of Political Economy 129: 2183-2232.

McCloskey, Deirdre N., and Richard Zecher (1984). “The Success of Purchasing-Power Parity: Historical Evidence and its Implications for Macroeconomics.” In A Retrospective on the Classical Gold Standard, 1821-1931 (pp. 121-172). Chicago: University of Chicago Press.

Officer, Lawrence H. (1982). Purchasing Power Parity and Exchange Rates: Theory, Evidence and Relevance. Greenwich Conn.: JAI Press.

Palma, Nuno (2018). “Reconstruction of Money Supply over the Long Run: the Case of England, 1270–1870.” The Economic History Review, 71(2), 373-392.

John Devereux is professor of economics at Queens College, City University of New York. His areas of research are International Economics and Economic History.

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