Structural Change and Economic Dynamics 31 (2014) 112–123

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Structural Change and Economic Dynamics

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Structural change in the U.S. economy: 1850–1900

Gregory M. Dempster ∗, Justin P. IsaacsDepartment of Economics and Business, Hampden-Sydney College, VA 23943, United States

a r t i c l e i n f o

Article history:Received November 2008Received in revised form March 2010Accepted September 2014

JEL classification:J4N4N9O1

a b s t r a c t

Structural change models are potentially ideal for abstracting from a “watershed” event likethe U.S. Civil War, in that they seek to explain the transformation of economies from agri-cultural to industrial on the basis of labor movement and incentives rather than on technicalchanges. We define the Civil War as a regime shift that necessitated a structural movementof labor from Southern agriculture to Northern manufacturing, and design empirical teststo determine whether this formulation fits the empirical data better than theories, such asthe Beard–Hacker thesis, that characterize the U.S. transformation as an abrupt adjustmentto technical shocks. We conclude that the data indicate just such a structural movement.

© 2014 Published by Elsevier B.V.

O4

Keywords:U.S. Civil WarBeard–Hacker thesisLewis two-sector modelStructural change models

1. Introduction and literature review

In the past century, there has been a steady flow ofcontributions in the field of economic history analyzingthe growth and development of the American economyfollowing the Civil War. Modern theories and techniqueshave been applied to assess the reasons behind the pat-tern of growth in the late 19th century United States,providing researchers with important insights and under-standing. The U.S. had an overall trend growth patternbefore the war that was, subsequently, unmatched in thedecades following the war. However, regional differences

in growth patterns between the North, South, and Westwere immense even in the antebellum period, and uniqueregional circumstances and conditions required varied

∗ Corresponding author.E-mail address: gdempster@hsc.edu (G.M. Dempster).

http://dx.doi.org/10.1016/j.strueco.2014.09.0040954-349X/© 2014 Published by Elsevier B.V.

responses to the changing economic climate.1 Divergenceof growth patterns between the northern and southernregions may have begun as early as the eighteenth cen-tury, with the North eventually developing an economythat emphasized the ability to improvise economically witha “mixture of flexible enterprises, quick response times,commercial and shipping services, and local and regionaltrade.”2 On the other hand, the agriculture-based economyof the southern United States appeared little different in1860 than it did in 1760, aside from the shift to increasedcotton production.

The fundamental difference that existed between

the North and South for most of the pre-war periodwas the reliance of the northern economy on freelabor and the southern economy on slave labor. Given

1 The West was just beginning its development at this time, so the focusof this paper is on the northern and southern regions of the United States.

2 Coclanis (2000): 89.

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hese different labor inputs, northern enterprises pursuedapital-intensive manufacturing processes that becameeasible in the wake of the industrial revolution, whereashose in the South continued to focus their productionechniques on labor inputs, providing the North with aomparative advantage in manufacturing and the South

comparative advantage in agriculture. Northern enter-rises had to be able to adapt to changing economiconditions and to innovate quickly, whereas southernnterprises found themselves resisting change, eventuallyonfining the South to an overly-specialized, low technol-gy, labor-intensive economy that depended on plantationgriculture, unskilled slave labor, and exports.3 The uniquexperiences of the United States, most notably the Civil Warnd its dramatic effects on nearly all aspects of Americanife, thus provide fertile research ground toward the goalf a fuller understanding of the nineteenth century worldconomy.

In the early 1900s, scholars began to investigate thempact of the Civil War on the development and growth ofhe U.S. economy. The view that came to receive the mostidespread acceptance was put forth by Charles and Maryeard (1927). One of their students, Louis Hacker, later con-ributed to the Beards’ earlier work, and what is now knowns the Beard–Hacker thesis emerged. The Beard–Hackerhesis points to the Civil War as not only a watershed eventn American economic development, but as the primarympetus for its progressive (modernizing) period of growthnd industrialization. Essentially, the Beard–Hacker viewosits that “the Second American Revolution (Civil War),hile destroying the economic base of the slave-owning

ristocracy, assured the triumph of business enterprise.”4

he conclusion is quite plausible on its face, given not onlyhe destruction of the primarily agrarian South, but also theonsolidation of political power in the hands of northernndustrialists associated with the Republican Party. How-ver, the Beard–Hacker thesis, while generally accepted,as not critically examined from a quantitative standpointntil much later.

Why was the Beard–Hacker thesis accepted despite theack of empirical proof? One plausible explanation put forthn Cochran (1961) is that many people accept “neat” inter-retations of history, and that Americans in particular likedo perceive their history with progressive optimism.5 Theeard–Hacker thesis made it possible to view the Civilar as beneficial for the nation because it not only led

o the emancipation of slaves but also encouraged indus-rial progress; in addition, it was a neat interpretation withhich to view the United States as an agrarian society

efore the Civil War and an industrial society afterwards.ochran’s 1961 article was one of the first major objectionso the Beard–Hacker view. Making use of a data series cre-

ted by Robert Gallman,6 Cochran argued that, in fact, theivil War had acted as an impediment to economic growth

n the United States. This encouraged other researchers to

3 Coclanis (2000): 93.4 Andreano (1967): 181.5 Cochran (1961): 210.6 Gallman (1960): 13–71.

Economic Dynamics 31 (2014) 112–123 113

re-evaluate the validity of the Beard–Hacker hypothesisand scrutinize the associated issues more closely.7

Whatley (1985) introduced the “Institutional Hypothe-sis” to explain the lack of technical progress made in theSouth following the war. Like others who have conductedresearch with a focus on institutional frameworks, What-ley asserts that many of the factors contributing to theslow development and growth of the post-war southerneconomy rested on conditions that had already existed inthe region prior to the war. The cornerstone of the ante-bellum southern economy had been large-scale plantationagriculture that depended on slave labor. After the war,when slave labor was no longer an option, most of the largeplantations were forced to break up into smaller parcels.Share-cropping became prevalent, and this system, muchlike slavery, discouraged the advent of labor displacingmechanization. Whatley provides four general explana-tions for the South’s aversion to mechanized farmingtechniques and other internal developments: (1) the newsystem of small-scale tenant farming left most units of pro-duction below the threshold scale required to cover the costof mechanization; (2) the abundance of cheap labor madefactor prices unfavorable for the adoption of labor savingtechniques; (3) the uneven terrain in much of the Southreduced the efficiency of many of the mechanized tech-niques; and, (4) many of the pre-harvest tasks associatedwith southern agriculture were simply not mechanizableat the time.8 Whatley’s “Institutional Hypothesis” thusattempts to endogenize the above factors as by-productsof the structure of the antebellum southern economy.

The research presented here can be considered anextension of the institutional literature on the economicimpact of the Civil War. As such, we avoid some of the prob-lematic assumptions of mainstream “neoclassical” analysisthat are, in our view, inappropriate for a massive disloca-tion (or “disequilibrium”) such as occurs with an event likethe war. More importantly, we attempt to address the ques-tion of whether the post-war divergence between Northand South was primarily a matter of technical change (dueto the destruction of the “agrarian” sector of the economyand political ascendancy of the northern industrialists) orof structural change (due to the unique labor conditionscreated by emancipation).

We discuss, among the alternatives to Beard–Hackerand other theories that argue for a technical explanation,an important class of theories called structural changemodels. These models are potentially ideal for abstract-ing from an event like the Civil War, in that they seek toexplain the transformation of developing economies fromagriculture-based to industrial on the basis of surplus labormovement, rather than a “watershed” moment of eco-nomic (i.e. technical) shock. Furthermore, these theories

allow for endogenous changes in economic parameters thatdo not necessarily conform to neoclassical assumptions.We define the Civil War as a regime shift that changed the

7 Most notably, Engerman and Fogel (1974), also using Gallman’s data,showed that the war cost the nation about five years of growth and thatthe increase in growth after the war was mostly “catch-up.”

8 Whatley (1985): 1193.

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114 G.M. Dempster, J.P. Isaacs / Structural Cha

productive capacity of southern factors of production, andnecessitated a structural movement of labor from south-ern agriculture to northern manufacturing. Our analysisand results provide a link between many of the diverseconclusions drawn in previous research from within theinstitutional paradigm.9

We begin our analysis with a discussion of the basicstructural change frameworks available for empiricallyinvestigating hypotheses about the growth process, fol-lowed by a brief overview of the U.S. growth experience toprovide a context for the empirical work that follows. Next,we develop an econometric model that is designed to testthe technical and structural change views as alternatives,and subject this model to empirical estimation techniques.The paper concludes with a summary and suggestions forfurther research.

2. Structural change models of economic growth

In general, structural change theory represents a mech-anism by which underdeveloped economies transformtheir domestic economic structures from a heavy emphasison traditional subsistence agriculture to a more modern,industrially-diverse manufacturing and service economy.The two most well known representations of the structuralchange approach are the Lewis (1954) “two-sector surpluslabor” model and the Chenery et al. (1986) “patterns ofdevelopment” analysis.

2.1. The Lewis theory of development

In the mid-1950s, Nobel laureate W. Arthur Lewis(1954) first formulated his structural transformation modelbased primarily on subsistence economies, and the Lewismodel has since been the dominant model for explain-ing growth in developing countries with surplus labor.10

The Lewis model consists of a two-sector economy, atraditional and overpopulated rural subsistence sectorcharacterized by zero marginal labor productivity and ahigh-productivity industrial sector that is more modernand urban into which labor from the subsistence sectoris gradually transferred.11 The expansion of output in theindustrial sector allows for labor transfer, and the speedof this change is determined by the rate of investment

and capital accumulation in the “modern” industrial sec-tor. These investments are, in turn, a function of the earnedprofits generated in the modern sector.12

9 See, e.g., Williamson (1974).10 Unlike the standard, over-populated, rural subsistence associated

with modern developing economies, the post-Civil War South moved froma highly productive agricultural system—albeit one based on force—to aninefficient system of sharecropping. This structural change led to a “sur-plus” of agricultural labor relative to the optimal scale of production. Thenew system created a rural agricultural sector that mirrors the scenariodescribed by Lewis (1954), where there is a high dependency ratio and anincentive to plant cash crops, and where wages are based on the averageproduct of the household.

11 Smith and Todaro (2003): 116–117.12 For an informative overview of the Lewis (1954) two-sector model

and associated extensions and criticisms, please see Ranis (2004).

Economic Dynamics 31 (2014) 112–123

In this scenario, growth becomes self-sustaining in themodern sector, and labor continues to transfer until all sur-plus labor from the subsistence sector is absorbed into themodern sector. Declining labor-to-land ratios in the subsis-tence sector will eventually cause the marginal product inagriculture to rise above zero, since surplus labor is beingremoved, and the removal of additional laborers beyondthe surplus will be sub-optimal. Finding the proper bal-ance between the economy’s two sectors thus leads to animproved overall economy capable of sustained growth,and it is not the exogenous accumulation of capital, butlabor movement, that achieves this balance.

Lewis makes three assumptions about the traditional(agricultural) sector. First, there is surplus labor, thus ren-dering the marginal product of labor equal to zero in theagricultural sector. Second, agricultural laborers all shareequally in output so that the wage rate in the sector is deter-mined by the average product and not the marginal productof labor.13 Finally, there are no costs for labor movementbetween the two sectors.14 Capital accumulation occursin the modern sector when manufacturing firms reinvesttheir profits and thus cause total product to increase. Inorder to maximize profits, owners will pay new laborersup to the point where their marginal physical product inmanufacturing equals the real wage. More profits are gen-erated and then assumed to be reinvested, thus leadingto greater amounts of capital in manufacturing, which inturn induces another rise in the demand for labor. Withwages in manufacturing assumed constant, the modernsector can now accommodate more laborers, and the cyclecontinues.

This process of self-sustaining growth and employ-ment repeats itself in the modern sector until all surpluslabor from the traditional economy is absorbed into theindustrial sector. Thereafter, additional workers from thetraditional sector can shift to modern sector only at theexpense of higher opportunity cost of agricultural pro-duction, because any further declines in the labor-to-landratio make the marginal product of agricultural laborgreater than zero. After the balance is achieved in shif-ting economic activity out of the traditional, agriculturalsector into the modern, industrial sector, the completestructural transformation of the economy will have takenplace.

The construction of this model entails a number ofimplications for our empirical approach. The first impli-cation is that the rates of labor transfer and employment

opportunities in the modern sector are proportional to therate of modern sector capital accumulation. This meansthat growth can be achieved in the modern sector with

13 These assumptions fit nicely with the historical description of thesouthern states after the Civil War. In particular the development of thesharecropping system fits well with the assumptions of laborers sharingequally in the output; see Ransom (1989).

14 This final assumption is employed as an abstraction from reality—it isobviously false—but will affect the results only in terms of the “smooth-ness” and “completeness” of the transition; in other words, the existenceof transactions costs in labor markets will mean that the overall transfor-mation will be more incomplete and haphazard than the model suggests.The basic results of the model, however, remain unaffected.

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ittle change in the sector’s capital-labor ratio. A secondmplication is that surplus labor in the traditional sector co-xists with full employment in the modern sector, meaninghat optimizing behavior will cause the traditional sector’sapital-labor ratio to rise. A third implication is that urbanages will be constant up to the point where the supply

f surplus rural labor is exhausted, so that we can safelygnore relative price effects.15

.2. Structural change and patterns of development

The Lewis two-sector model has proven to be very “valu-ble as an early conceptual portrayal of the developmentrocess of sectoral interaction and structural change” butequires amendment if it is to be applied to the realitiesf post-bellum U.S. economic development.16 In partic-lar, the Lewis model, as originally conceived, assumedhat capital accumulation is sufficient for modern sectorrowth, and more importantly, that the modern sectors developed enough to absorb agricultural sector labor-rs. The patterns-of-development analysis, described byhenery et al. (1986), complements the Lewis model inhat it attempts to explain the transformation of under-eveloped economies on the basis of labor movementrom agriculture to industry as the dominant engine ofrowth. However, the patterns of development model dif-ers from that of Lewis in that it treats pre-existing savingnd investment as necessary, but not sufficient on theirwn, to lead to economic growth; in addition, capital accu-ulation must be accompanied by structural changes in

he relationship between the sectors for the transition from traditional to a modern economy to be in the interestf economic actors.17 It is possible for these structuralhanges to come gradually over time, or to come quicklyf catalyzed by an economy-wide shock. We suggest thathe U.S. Civil War provided just such a shock. Becausef the destruction of farmland and the emancipation oflaves—which changed the efficient structure of the factorsf southern agricultural production—southern farms wereorced to move from large-scale, plantation production tomall-scale, sharecropping farms. This created sub-optimalgricultural production at the existing capital-labor ratio,riving the average product of labor toward subsistence,nd making the transformation welfare-maximizing.18

. U.S. growth and development in the 19th century

Economic growth is often accompanied by gradualtructural changes combined with dramatic regime shifts,nd the U.S. experience was no exception to the rule.

tructural evidence tentatively shows that that “the Amer-can economy began to experience the process of modernconomic growth in the years after the War of 1812;

15 The Lewis model also includes the standard, but not necessarily real-stic, assumption of diminishing returns in the modern sector. This isn contrast to theories of endogenous growth that allow for increasingeturns over time in modern, industrial economies.16 Smith and Todaro (2003): 116–21.17 Smith and Todaro (2003): 121–22.18 See Whatley (1985), Ransom & Sutch (1977), and Higgs (1977).

Economic Dynamics 31 (2014) 112–123 115

by the 1840s the modern components of the economywere large enough and growing rapidly enough to havean observable impact on the rate of growth and the struc-ture of the economy.”19 According to Gallman and Wallis(1992), “the record of manufacturing productivity duringthe antebellum period conforms well to the gradualistpath of development envisioned by scholars who sharethe Smithian perspective on early economic growth.”20

Growth of output depends on the growth of inputs, effi-ciency in hours of work, land’s bounty, managerial skill,and machine-hours in a product. Fundamental changes inboth social and economic institutions necessarily had tocome before significant growth in the American economywould be possible. Advances in managerial organizationhelped to improve the allocation of resources in raising out-put, capital markets developed, technical improvements innew transportation and communication networks reducedtransportation costs, and new urban centers emerged.Aside from the South’s adherence to the institution ofslavery, the nineteenth century can be characterized as pro-gressive, and gradual is an appropriate adjective to describethe rate at which advances were made.

Gallman and Wallis contend that technical innova-tions played a relatively minor role in the accumulation ofphysical capital before the Civil War, citing evidence thatlabor-intensive and less-mechanized firms tended to growat about the same rate as technologically-advancing firmsdid in the first half of the nineteenth century.21 It was notuntil the 1850s that extensive capital formation began tohave significant impact on the firms’ growth. It was changesin the organization and allocation of labor that allowed formost of the increases in productivity and growth in theearly nineteenth century, and “overall, the evidence indi-cates that Americans were quite responsive to economicopportunities, and that the expansion of markets duringthe antebellum era stimulated a wider spectrum of produc-ers to raise their commitments of resources to inventiveactivity and to squeeze whatever increases in productiv-ity could be obtained.”22 However, this evidence only tellsa portion of the story. Although there were a number ofnew employment opportunities created by the increasingnumber of established firms, it appears as though the Southfailed to fully take advantage of these changes due to theregion’s slave-based system.

In the 1840s the pace of capital stock began to grow sub-stantially. The rates of change in the capital stock can helpto describe particular aspects about America’s economicgrowth, but a structural analysis of the economy can morefully explain the process of growth and development. Fur-thermore, in a short time the Civil War would be waged,resulting in dramatic structural changes for the South inparticular. It is our task to disentangle the “gradual” from

the “dramatic” effects of this process of structural change.In particular, we believe that there was a gradual process topost-Civil War growth that could have only resulted from a

19 Gallman and Wallis (1992): 95.20 Gallman and Wallis (1992): 373.21 Gallman and Wallis (1992): 361.22 Gallman and Wallis (1992): 347.

116 G.M. Dempster, J.P. Isaacs / Structural Change and Economic Dynamics 31 (2014) 112–123

Table 1Farm size distribution in five major cotton states.

Percentage of farmsin size class

Percentage of land insize class

Improved acres 1860 1870 1860 1870

3–49 36.9 60.9 7.4 20.250–99 24.2 19.8 12.0 19.6100–499 32.0 17.2 47.6 49.1500+ 6.9 2.1 33.0 11.0

Average Acreage Per Farm

146 .2

202 .6 199 .2

153 .3136.5133.7

0.0

50.0

100.0

150.0

200.0

250.0

190018901880187018601850Year

Acre

s

opted to remain in the region, continued to work in agri-culture, and enjoyed leisure activities when idle. Initially,owners attempted to retain as many aspects of the former

Source: Ransom and Sutch (1977).

structural change in wages and capital prices brought aboutby the War itself.

3.1. Civil War effects

The Civil War ultimately created a major structural shift,one that transformed the economic arrangements that hadallowed the South to enjoy economic success up to thatpoint. The most fundamental and important transforma-tion that resulted from the war was the abolition of slavery,and the post-bellum South had to endure years of hard-ship to recover from both the tangible and intangible theravages of war. In 1944, the Swedish economist GunnarMyrdal put forth his analysis of the post-bellum U.S. andcalled it the ‘American Dilemma’:

In certain respects the surviving caste system showseven more resistance to change than did slavery. Themain economic significance of slavery was that theemployer really owned his labor. . .Before Emancipa-tion it was in the interest of the slave owners to useNegro slavery wherever it was profitable in handicraftand manufacture. After Emancipation no such propri-etary interests protected Negro laborers from the desireof white workers to squeeze them out of skilled employ-ment. They were gradually driven out and pusheddown in the ‘Negro jobs,’ a category which has beenmore and more narrowly defined. There is no doubtthat, compared with the contemporary caste system,slavery showed a superior capacity to effectuate eco-nomic adjustment, even if the slave owners and notthe slave reaped the profits. Even to many Negroesthemselves slavery, again in certain limited respects,was a more advantageous economic arrangement thanthe precarious caste status which they were thrown byEmancipation.23

Although the South had a strong economy prior to thewar, the fourth largest in the world if viewed as its ownentity in 1860, most of the region’s wealth was intimately

linked to slavery; in fact, most of the South’s capital wasutilized to secure slave labor.24 Virtually overnight, south-ern wealth was transferred from the highly valuable andmoveable assets of slave labor to the immoveable and

23 Myrdal (1944): 222.24 Engerman and Fogel (1974): 249.

Fig. 1. Average Acreage Per Farm, 1850-1900.(Source: Dodd, 1993).

relatively low value of land.25 Southern plantation ownerswho had previously been ‘laborlords’ came to be ‘landlords.’The relationship between the factors of production hadchanged and the transition proved to be quite difficult.26

The large slave plantations that had been the backbone ofthe ante-bellum southern economy were forced to breakup, thus reducing farm sizes and eliminating the economiesof scale enjoyed before the war (Table 1, Fig. 1).

In addition, ex-slaves flooded the agricultural labormarket with competition, thus depressing southern wagerates, and it was in the cotton states of the Deep Souththat these effects were most severe.27 Most of the war’sfighting took place in the southern states, and it is truethat the adverse effects on land and physical capital werenotable. However, if land and capital destruction had beenthe biggest problem plaguing the South, it is reasonableto assume that the region could have recovered relativelyquickly from the damages inflicted by the war; it has beenargued that by 1870 the adverse effects from the wardamages had been sufficiently overcome.28 Unfortunately,land destruction was only one of the setbacks, and whencompared to the other structural realignments and orga-nizational adjustments, the effects of the war on the landitself were relatively minor.

Economic theory suggests that a large increase in thesupply of labor would follow emancipation, raising com-petition for scarce jobs and driving down wages. Withdepressed wages and intense competition in labor mar-kets, standard economic theory would further suggest thatthere would be a rapid outflow of labor from the over-saturated southern agricultural sector into another region.However, there was no great migration of ex-slaves outof the region during or immediately after the war; most

25 The value of land was further decreased in the South by the destructioncaused by the Civil War. As Sellers (1927) notes, farm real estate fell invalue by approximately 50%.

26 Wright (1986): 18.27 Interestingly, Mandle (1974) shows that the southern states that

relied least on the slave system, those with the fewest cotton plantations,showed the best record of growth and development in the post-bellumperiod.

28 Atack and Passell (1994): 378.

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lave system as possible by employing ex-slaves as annualaborers, but the legacy of slavery—the lack of a uniform,exible wage system—and the freedmen’s reactions pre-ented the former owners from fully implementing thisystem. Thus, one immediate result of emancipation washe appearance of a labor “shortage” in southern agricul-ure. While presumably intentional on the part of freedlaves, the apparent “shortage” was actually the result ofhe collapse of the antebellum productive structure whereabor could be treated as capital—forced to work extra days,ong hours, and above a level of productivity they wouldave obtained under a free labor market.

Replacing the dominant plantation structure was aystem of share-cropping. Tenant-farming became theominant means by which blacks found employment, and

n order to ensure a level of security, most tenant-farmersad to rely on the crop lien. The crop lien called for those

arming the land to put up a portion of their crops pre-arvest as the collateral required to obtain the meanso farm the land in the first place. Under this systemamilies prospered or failed based entirely on the rev-nue generated from the sale of agricultural output. Thus,ages for an individual farmer were based on their aver-

ge product. If family size grew, agricultural prices fell, orhe land became less fertile, average product (wages) waseduced.

The crop lien and tenant-farming quickly becameexploitive devices that held blacks in a form of debteonage that effectively blocked any hopes of economicdvancement by the ex-slaves.”29 The only way for aenant-farmer living on the edge of subsistence to advanceas by producing the most valuable crop, cotton. How-

ver, the apex of King Cotton had come and gone; theotton crops produced in the two years preceding the Civil

ar were the largest and most profitable the nation wouldver see. Coupled with the South’s cotton embargo in thearly years of the war in its unsuccessful attempt to applyconomic pressures to obtain British support, the worldemand that was so crucial to the export dependent cottonroduction of the South had changed. In many respects, thepecialization in cotton production left the South unpre-ared to meet changing world conditions.30

Ransom (1989) concludes that “the real economic fail-re of the post-war South was the unwillingness or inabilityf farmers to adjust to changing agricultural markets.his was a micro problem.”31 When the large plantationsere broken up and individuals were given more con-

rol over production, each aimed to act in his own bestnterest; this created even greater specialization, ratherhan diversification, since most farmers sought to produceotton. With most farmers specializing in the productionf the same good, the once highly valuable cotton pro-uced in the South began to face declining prices in the

arketplace.In a way, all Southerners had become a part of a

new class” brought about as a result of the Civil War

29 Ransom (1989): 246.30 Atack and Passell (1994): 322.31 Ransom (1989): 242.

Economic Dynamics 31 (2014) 112–123 117

since the interests associated with property rights hadchanged.32 The definitive feature of the post-bellumsouthern economy was that it had a separate, regionallabor market outside the scope of national and interna-tional labor markets, and by the 1870s the South hadbecome a low wage region in a high wage country.33

Ransom notes that what “crippled southern develop-ment was the legacy of 250 years of racial slavery—alegacy that was to poison both the economic andsocial climates of the region for another century.”34

Agricultural diversification, education, and industrializa-tion were three principal factors of growth that hadbeen largely absent from the South, and were sorelyneeded if the region hoped to modernize and advanceeconomically; however, these and other vital changes wereterribly slow in coming about.

3.2. Post-war industrialization

Agriculture continued to lead the U.S. economy untilthe 1880s, but even before manufacturing took the lead inAmerica the prospects for the country’s future were fairlyclear. Between 1850 and 1900, the United States’ compara-tive advantage was shifting from agriculture to industry. By1860, American manufacturing ranked second in the worldbehind only Great Britain, and by the mid-1890s the U.S.took the lead. By 1910, the country was producing almosttwice as many manufactured products as Britain, and by1913 the U.S. accounted for roughly one-third of the world’smanufactures.35

Mass production and scientific management techniqueswere utilized more often in the U.S. after the Civil War,and improvements in organizational management allowedenterprises to overcome the obstacles presented by thechanging business structure. By and large, most manu-facturing establishments could be found in the AmericanNortheast. The lands in the Northeast were not as agricul-turally productive as lands in the South and Midwest, andthe growing urban population played a large role in thedevelopment of northern industry. Land, labor, and capi-tal are the basic factors of production, and since labor andcapital can be employed anywhere, it is not surprising thatindustry found its home in the comparatively infertile landsof the North and not in the fertile lands of the South.36

Initially, urban centers emerged as a result of new traderoutes created by transportation improvements, but as thecentury progressed there came to be more and more oppor-tunities for American workers in the manufacturing sector,which helped to stimulate urban development.

Sidney Pollard offers his explanation of what industri-alization entails:

tion’ is a major economic change, affecting ultimately allsectors of the economy, in which output is increased,

32 Wright (1986): 48.33 Wright (1986): 12.34 Ransom (1989): 285.35 Rockoff and Walton (2002): 361.36 Atack and Passell (1994): 175.

118 G.M. Dempster, J.P. Isaacs / Structural Change and Economic Dynamics 31 (2014) 112–123

Table 2Shares of capital formation in GNP, 1860 prices.

Decades GNP I GNP II GNP* GNP* II

1834–43 9% 16% 10% 16%1839–48 11% 14% 11% 14%1844–53 13% 14% 13% 15%1849–58 14% 16% 15% 17%1854–631859–681864–731869–78 22% 24% 23% 24%1874–83 21% 22% 21% 22%1879–88 22% 23% 23% 24%1884–93 26% 26% 27% 27%1889–98 28% 28% 28% 28%1894–1903 27% 27% 26% 26%

Fig. 2. Average and Marginal Product of Labor, 1850-1900.

(Source: Russell, 2001).

efficiency raised and new products are being pro-duced, by methods involving new technologies and theenlarged use of capital. These, in turn, also necessarilyinvolve improved means of transport, of communi-cation and trading, the application of science, thetransformation of relations between employer andemployed, the building of factories and other large unitsof production such as mines and shipyards, a minimumstandard of literacy, the adaptation of the legal systemto strengthen the security of private property, or spec-ifying the limits of public property, and other relatedfeatures.37

With the components required for industrialization totake off already firmly in place, it is evident that the Northwas in a far better position than the South to adopt moderntechniques. The most notable barriers to southern industri-alization, according to Wright (1986), were the “late start”industrialization got off to in the South, the absence of alarge indigenous technological community, and the iso-lation of southern labor markets.38 In addition, potentialinvestors were hampered by economic, legal, and politi-cal obstacles as well as cultural and social barriers. TheSouth could not fully realize the numerous external ben-efits that accompany industrialization, and so was leftlagging behind the rest of the country.

4. Economic model

In this model, it is assumed that the nineteenth centuryAmerican economy was comprised of two sectors: agricul-ture, A, and manufacturing, M; and aggregate production iscomputed by summing the total product of these two sec-tors. A closed economy is assumed, so national income isequal to total output, Y = YA + YM, where both YA and YM arefunctions of capital and labor employed within the sector.Following the assumptions outlined in the Lewis theory ofdevelopment, labor can freely move in and out of each sec-tor, and labor markets are taken to be competitive. Given

this, the factor prices in both sectors are determined by themarginal productivity of the inputs.

37 Pollard (1996): 1.38 Wright (1986): 172.

1899–1908 28% 28% 27% 28%

Source: Gallman (1960).

The Lewis model makes two general assumptionsregarding the agricultural sector: there exists surpluslabor within the agricultural sector necessitating that themarginal product of labor in agriculture is near zero, andall workers within agriculture share equally in the output,which links the agricultural wage to the average productand not the marginal product of labor.

As depicted in Fig. 2 above, the marginal product of laborfell below the average product of labor for the southernstates examined in 1868–1879, providing one piece of evi-dence to support the existence of a Lewis-type structuralshift occurring in the U.S. Although, in the long-run, realwages in the agricultural and manufacturing sectors shouldbe equal, there will be short-run discrepancies in the wagerates between the two sectors in as labor flows gravitatetoward the manufacturing sector that possesses the higherwage rate. Over time, the wage rate differentials betweenagriculture and manufacturing should converge until theyare equal to one another.39

As labor shifts into the manufacturing sector, it isrequired that more manufacturing capital be employed inorder to support the additional laborers (Solow, 1956). Theabove table found in Gallman (1960) illustrates this point(Table 2).

The speed by which this shift toward manufacturingwill occur will be largely determined by changes in themarginal rate of technical substitution and capital-laborratio. In order for there to be a change in the marginal rate oftechnical substitution, there must be an exogenous shockto the industry that changes the relative productivity of theinputs.

The Civil War undoubtedly brought about a majorchange in the United States labor market. In the ante-bellum period, investments in slave labor were regardedas investments in agricultural capital, rather than invest-ments in labor, and were treated accordingly for purposesof equating the marginal products of capital and labor and

achieving the appropriate input structure. With the endof the Civil War and the implementation of the Emanci-pation, slaves came to be considered laborers as modern

39 Mankiw (2003): 221.

nge and Economic Dynamics 31 (2014) 112–123 119

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G.M. Dempster, J.P. Isaacs / Structural Cha

efinitions would apply, thereby precipitously increasinghe number of people available to compete in the free labor

arket.The South was heavily dependent on labor-intensive

ethods of production in the agricultural sector, whichould cause measured levels of capital to be small,

lthough this is misleading due to the fact that slave laborctually had characteristics of capital input. Farms, behav-ng as profit-maximizing firms, would choose to adopt

mix of factor inputs where MPL/MPK = K/L in order toaximize output. Large plantations that were able to take

dvantage of economies of scale in capital inputs accountedor the largest share of production and encouraged small

easured capital-to-labor ratios (K/L) in the South. Withouthern enterprises employing slave labor as agriculturalcapital,” small measured capital-labor ratios would bexpected.

If the Civil War provided an impetus for a large-scale,ewis-type structural change to take place, it would bevidenced in the South by rising capital-labor ratios, ashe new circumstances would require the treatment oformer capital goods (slaves) as labor, thus altering the cal-ulation of marginal products of capital and labor and theorresponding input structure. The flows of labor from agri-ulture to manufacturing should be evident as well, withmancipation leading to lower wages and a change in agri-ultural capital-labor ratios in favor of more capital (i.e.abor outflows).

Thus, our model represents an attempt to determinehether a Lewis structural change model can be applied

o the post-bellum U.S. labor markets. It follows, fromewis and Chenery, et al., that emancipation, as a struc-ural event, would provide the impetus for capital-laboratios to decrease (or remain constant) in manufacturinghile increasing in agriculture. This corresponds to a rise

n the number of persons employed within the manufactur-ng sector (with nearly proportional capital accumulationollowing) and decreasing in labor intensity in the Southver time, resulting in an increase in overall value in bothectors due to the efficiency gains of employing surplusabor. By contrast, technical change models assume thathe accumulation of capital relative to labor (i.e. a higherapital-to-asset ratio) in manufacturing is the impetus forndustrial growth. Thus, we can set up our empirical studyn terms of two alternative, but not necessarily mutuallyxclusive, hypotheses:

ypotheses :

{H1 = If

(K/L

)A

↑ then YA ↑H2 = If

(K/L

)M

↑ then YM ↑

If this model exhibits the characteristics of a Lewis-typetructural change (H1) as the driving force behind eco-omic growth and development, then it might be possibleo evaluate the Beard–Hacker thesis in a new context. Bothtructural change and technical change models suggesthat growth is dependent on movement in capital-laboratios, but the hypothesized movements are in different

ectors. Our first hypothesis is consistent with the Lewisodel prediction that the excess labor created by the addi-

ion of slaves to the labor force made it efficient for laboro move into the manufacturing sector following the Civil

Fig. 3. Declining Land to Labor Ratios in the Southern States, 1850-1900.(Source: Dodd, 1993).

War, thus contributing to an already gradual industrial-ization. The second one proposes that the war merelychanged the competitive balance of labor-intensive versuscapital-intensive industry in favor of the latter, spurringthe creation of more capital in manufacturing sector. Thissecond hypothesis is firmly in accordance with the logicbehind the Beard–Hacker thesis. Although these hypothe-ses emphasize different theoretical impacts, they are not,strictly speaking, null and alternative—it is possible for bothto be valid simultaneously. Furthermore, both hypothesesabstract from demand-side characteristics that also couldhave contributed to the post-war growth process. Althoughwe attempt to control for these and other factors via a fixedeffects model (see below), we acknowledge that our studyonly directly addresses the supply-side characteristics ofgrowth inherent in the structural and technical changeexplanations for the post-war growth pattern in the Northand South.

5. Results

The data was gathered from the US Bureau of the Census(1989), a two volume publication Historical Statistics of theUnited States: Colonial Times to 1970; Dodd’s (1993) His-torical Statistics of the States of the United States; and thecollaborative effort by Dodd and Dodd (1973), HistoricalStatistics of the South, 1790–1970. The Dodd publicationsprovide state-level data, which was employed only forstates that had sufficient data compiled for the period1850–1900 and had been granted full statehood prior to1890. The states that fit these criteria are Alabama (AL),Arkansas (AR), California (CA), Connecticut (CT), Delaware(DE), Florida (FL), Georgia (GA), Illinois (IL), Indiana (IN),Iowa (IA), Kentucky (KY), Louisiana (LA), Maine (ME), Mary-land (MD), Massachusetts (MA), Michigan (MI), Minnesota(MN), Mississippi (MS), Missouri (MO), New Hampshire(NH), New Jersey (NJ), New York (NY), North Carolina(NC), Ohio (OH), Oregon (OR), Pennsylvania (PA), RhodeIsland (RI), South Carolina (SC), Tennessee (TN), Texas (TX),

Utah (UT), Vermont (VT), Virginia (VA), and Wisconsin(WI).

The dependent and independent variables that are usedto examine our hypotheses include output measures (farm

120 G.M. Dempster, J.P. Isaacs / Structural Change and Economic Dynamics 31 (2014) 112–123

Table 3Fixed effects regression of farm value on capital-labor ratio, 1850-1900.

Dependent variable: farm value (FV)Cross-sections included: 34Total pool (balanced) observations: 170Variable Coefficient Std. Error t-Statistic Prob.

KA/LA −651.8724 465.2165 −1.401224 0.1635(KA/LA) * CW 3293.627 870.6036 3.783154 0.0002FV(−1) 0.918508 0.048648 18.88065 0.0000C AL 25,534,669 38,497,906 0.663274 0.5083C AR 30,756,941 38,427,057 0.800398 0.4249C CA 1.62E + 08 39,946,963 4.047925 0.0001C CT 26,429,472 38,952,303 0.678509 0.4986C DE 14,633,650 39,352,299 0.371863 0.7106C FL 8,262,486. 38,296,904 0.215748 0.8295C GA 20,708,752 38,678,201 0.535411 0.5933C IL 3.77E + 08 50,700,283 7.426334 0.0000C IN 1.77E + 08 44,728,422 3.964771 0.0001C IA 2.75E + 08 43,153,619 6.361449 0.0000C KY 61,328,208 40,411,218 1.517604 0.1315C LA 48,456,726 39,654,042 1.221987 0.2239C ME 14,185,669 38,489,714 0.368557 0.7130C MD 33,227,365 39,212,029 0.847377 0.3983C MA 20,879,634 38,711,805 0.539361 0.5905C MI 1.36E + 08 41,449,496 3.284144 0.0013C MN 1.46E + 08 38,815,646 3.772697 0.0002C MS 34,354,654 38,748,684 0.886602 0.3769C MO 1.79E + 08 41,278,314 4.346341 0.0000C NH 7,481,557. 38,443,787 0.194610 0.8460C NJ 8,055,051. 41,623,049 0.193524 0.8468C NY 1.32E + 08 57,921,231 2.270960 0.0248C NC 35,018,548 38,736,091 0.904029 0.3676C OH 1.99E + 08 55,274,139 3.593333 0.0005C OR 29,632,460 38,336,507 0.772957 0.4409C PA 1.56E + 08 53,414,524 2.924798 0.0041C RI 20,428,230 38,618,438 0.528976 0.5977C SC 16,225,915 38,494,465 0.421513 0.6741C TN 40,174,844 39,779,058 1.009950 0.3144C TX 1.47E + 08 38,930,427 3.786208 0.0002C UT 10,489,875 38,281,865 0.274017 0.7845C VT 14,247,764 38,592,237 0.369187 0.7126C VA 29,372,047 40,093,253 0.732593 0.4651C WI 1.69E + 08 40,839,694 4.126385 0.0001

R-squared 0.947198 Mean of dependent var 2.90E + 08

Adjusted R-squared 0.932906

S.E. of regression 85,594,584

Sum squared residuals 9.74E + 17

values, total product of manufactured goods)40 and inputmeasures (capital in agriculture, capital in manufacturing,labor in agriculture, wage earners in manufacturing):

FV = Farm valueTP = Total product of manufacturingKA = Capital in agriculture

KM = Capital in manufacturingLA = Labor in agricultureLM = Wage earners in manufacturing.

40 It would be preferable to have an agricultural output measure thatmore closely matches our total product measure for manufacturing (i.e.an annual flow variable rather than a value measure). However, since farmvalues are likely to be affected only by changes in the expected presentvalue of future cash flows to agriculture for the immediate post-bellumperiod—the supply of farm land being relatively fixed—we are confidentthat our results reflect the appropriate flows for this time period.

S.D. of dependent var 3.30E + 08F-statistic 66.27395Prob(F-statistic) 0.000000

A fixed effects model is employed, because it is assumedthat differences among the states can be attributed toidiosyncratic factors, thus allowing the slope coefficientsof our independent variables to remain the same acrossstates. In essence, the fixed effects model is a special type ofordinary least squares with dummy variables used as con-trols in a pooled cross-sectional time-series.41 In most fixedeffects models, the goodness of fit (R2) term is quite highdue to the fact that the dummy variables detect numerousdifferences among the cross-sectional entities, but thesedummy variables provide no explanation as to why thedifferences occur. Thus, the high R2 value could lead one

to infer more about the model’s results than is truly jus-tified. However, as long as the characteristics of the fixed

41 Halcoussis (2005): 186.

G.M. Dempster, J.P. Isaacs / Structural Change and Economic Dynamics 31 (2014) 112–123 121

Table 4Fixed effects regression of total manufacturing product on capital-labor ratio, 1850-1900.

Dependent variable: total product of manufacturing (TP)Cross-sections included: 34Total pool (balanced) observations: 136Variable Coefficient Std. Error t-Statistic Prob.

KM/LM 69,943.66 32,313.37 2.164542 0.0328(KM/LM) * CW 12,491.08 15,458.45 0.808042 0.4210TP(−1) 1.229295 0.071098 17.29024 0.0000C AL −75,574,532 42,891,854 −1.761979 0.0812C AR −54,215,954 37,775,503 −1.435215 0.1544C CA −75,570,956 46,266,745 −1.633375 0.1056C CT −66,552,458 42,003,949 −1.584433 0.1163C DE −92,034,695 44,897,551 −2.049882 0.0430C FL −51,799,647 37,328,781 −1.387660 0.1684C GA −61,868,765 40,018,995 −1.545985 0.1253C IL 81,850,503 44,928,074 1.821812 0.0715C IN −43,608,455 40,298,127 −1.082146 0.2818C IA −71,908,689 44,477,588 −1.616740 0.1091C KY −75,429,321 43,196,442 −1.746193 0.0839C LA −62,731,907 39,796,366 −1.576322 0.1181C ME −65,794,949 39,042,038 −1.685233 0.0951C MD −51,958,012 39,393,522 −1.318948 0.1902C MA 16,407,821 43,789,023 0.374702 0.7087C MI −53,469,714 45,293,889 −1.180506 0.2406C MN −67,231,085 47,719,038 −1.408894 0.1620C MS −67,110,952 39,779,265 −1.687084 0.0947C MO −47,942,696 44,141,979 −1.086102 0.2801C NH −75,714,127 40,705,528 −1.860045 0.0658C NJ 16,264,530 40,576,815 0.400833 0.6894C NY 1.41E + 08 53,311,952 2.638284 0.0097C NC −55,059,183 37,640,151 −1.462778 0.1467C OH 14,642,972 41,267,153 0.354834 0.7235C OR −1.24E + 08 53,798,997 −2.298556 0.0236C PA 82,883,020 49,338,936 1.679870 0.0961C RI −83,594,505 44,016,399 −1.899167 0.0605C SC −68,316,915 40,260,723 −1.696863 0.0929C TN −73,466,037 42,402,735 −1.732578 0.0863C TX −58,703,733 40,496,332 −1.449606 0.1503C UT −90,063,500 44,399,344 −2.028487 0.0452C VT −93,636,397 44,591,273 −2.099882 0.0383C VA −60,453,678 38,418,850 −1.573542 0.1188C WI −60,731,510 46,434,803 −1.307888 0.1939

R-squared 0.954962 Mean dependent var 1.51E + 08

eb

Y

ws

vaavdaT

Adjusted R-squared 0.938585

S.E. of regression 64,943,858

Sum squared residuals 4.18E + 17

ffects model are properly understood, an observer shoulde able to draw valuable conclusions.42

Models 1 and 2 were run using the following equation:

it = ˛0is + ˛1i(Kit/Lit) + ˛2i(Kit/Lit) ∗ CWt + ˛3iYit−1

here i = agriculture or manufacturing, t = time, and = state.

In the model for agriculture (Model 1), the dependentariable is farm value, FV, and the independent variablesre the capital-labor ratio in agriculture, KA/LA; an inter-ctive term between the capital-labor ratio and a dummyariable, CW, for years following the Civil War; fixed effects

ummy variables; and the previous period’s output todjust for autocorrelation. The results are presented inable 3.

42 Halcoussis (2005): 197.

S.D. dependent var 2.62E + 08F-statistic 58.30979Prob(F-statistic) 0.000000

The relationship between output and the capital-labor ratio in agriculture is positive following the war,and the results are significant at the 1% level. Thissuggests that, as surplus labor shifted out of the agri-cultural sector, there were dramatic increases in farmvalues. These results fit well with Lewis’s argumentthat efficient industrialization involves movement ofsurplus labor out of agriculture into manufacturing. Fol-lowing Temin’s (1976) claim that the levels of capitalemployed in agriculture remained relatively constant inthe post-bellum period, the lack of a post-war recoveryin southern agricultural laborers can be contributed tothe new optimal agricultural capital-labor ratio, whichimmediately decreased southern farm values and madelabor movement away from southern farms optimal(Fig. 3).

Furthermore, since circumstances in the Northwere most favorable to manufacturing, any move-ment out of that region’s agricultural sector into

nge and

122 G.M. Dempster, J.P. Isaacs / Structural Cha

manufacturing probably also increased farm values in theNorth.

Note that, according to the Lewis hypothesis, thereshould be no corresponding change in the relationship ofmanufacturing output to the capital-labor ratio in manu-facturing, since the inflow of excess labor from agriculturewill spur efficient capital formation in response. On theother hand, the Beard–Hacker thesis would predict thattechnical change causes an increase in the level of outputobtainable given any level of capital relative to labor. Model2 assesses the effects of changes in capital-labor ratios inmanufacturing on the total product of manufacturing. Thedependent variable is total product of manufacturing, TP,and the independent variables are the capital-labor ratioin manufacturing, KM/LM; an interaction term between thisratio and a dummy variable for the Civil War; and one lagof total manufacturing product to adjust for autocorrela-tion. Fixed effects dummies are also included to account fordifferences among state-level characteristics. The resultsare presented in Table 4.

The capital-labor ratio, KM/LM, in manufacturing had apositive relationship with total product, indicating the gen-eral benefits of capital accumulation for industry, and wassignificant at the 5% level for the entire sample; for everyunit of capital added to manufacturing relative to labor,there was almost a $70,000 increase in total manufactur-ing product. The results for the post-bellum period (CW),however, are not significant, indicating that the war didnot alter this relationship between output and capital-laborratios in manufacturing. The lack of any measurable post-war effect is in accordance with the Lewis theory predictionthat capital flows accompanied post-war labor movementsinto manufacturing, resulting in greater total output, andis not supportive of the Beard–Hacker thesis of technicalchange in the relation of capital to output. These resultssuggest that, as labor declined in agriculture and shiftedinto manufacturing, the increases in manufacturing laborrequired more capital to efficiently expand manufacturingenterprises.

It should also be noted that our results are consistentwith the patterns of development hypothesis that theremust be adequate levels of capital accumulation in themanufacturing sector prior to the movement of labor outof the agricultural sector. On the other hand, without theexogenous shock to the agricultural labor markets of theSouth that resulted from the Civil War, the Lewis-typeprocess of development would have undoubtedly been aslower one.

6. Conclusion

Our results appear to support the Lewis model’s predic-tion that labor will gravitate toward the under-developedmanufacturing sector following a structural shift thatproduces surplus labor. The pooled regression models arespecified to set up the labor-movement (Lewis) hypothesisas an alternative to the technical change (Beard–Hacker)

hypothesis. Our results thus indicate that, though the CivilWar did serve as a major structural event in the UnitedStates’ development that falls in line with the conclu-sions of Wright (1982), Calomiris and Hanes (1994), and

Economic Dynamics 31 (2014) 112–123

Huthcinson and Margo (2006), the process of growth afterthe war was not in the manner claimed by Beard andHacker. Rather, the war served as an impetus to industrialgrowth by creating a fundamental structural shift in therelationships among competing laborers and their sourcesof employment. Without the Civil War, the structural shiftwould have been even more gradual and, perhaps, lessdiscernable. Thus, our results should be interpreted moreprecisely as a confirmation of certain aspects of the Lewishypothesis, rather than as a wholesale rejection of theBeard–Hacker thesis per se.

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