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Organizations, Civil Society, and the Roots of Development

Editor(s):Lamoreaux, Naomi R.
Wallis, John Joseph
Reviewer(s):Troesken, Werner

Published by EH.Net (July 2018)

Naomi R. Lamoreaux and John Joseph Wallis, editors, Organizations, Civil Society, and the Roots of Development. Chicago: University of Chicago Press, 2017. ix + 380 pp. $130 (cloth), ISBN: 978-0-226-42636-5.

Reviewed for EH.Net by Werner Troesken, Department of Economics, University of Pittsburgh.

 
Freedom of association has long been viewed as a tenet of individual liberty, and a prerequisite of any well-functioning social order. In this way, institutional rules protecting the individual’s right to voluntarily organize with others around friendship, shared beliefs, and economic goals, are not only bulwarks against political oppression but also sources of community, religious and creative expression, social and political change, and economic progress. Growing literatures among development economists and economic historians suggest the connection between freedom of association and economic progress is particularly relevant to economists. Perhaps the simplest way to appreciate this connection is to note the obvious: a state that suppresses the ability of economic agents to organize new business arrangements is also a state that is likely beholden to entrenched monopolistic interests hostile to innovations that would otherwise enhance consumer welfare and long-term growth prospects.

The history of freedom of association, and its relationship to political economy, runs throughout Organizations, Civil Society, and the Roots of Development, an NBER conference volume edited by Naomi Lamoreaux and John Wallis. In organizing the conferences and volume, the editors appear to have drawn much of their motivation from North, Weingast, and Wallis (2009). Consistent with this motivation, the editors write that “the central question of this volume is how societies transition to open access” (p. 10). Or more precisely, how do societies transition from closed (natural-order) states that limit access to markets and the political system to open-access orders that allow a broad range of individuals and groups to engage in market activities and organize politically to influence the state?

For much of history, states undermined the ability to freely associate and form voluntary organizations by refusing to formally incorporate groups that could potentially threaten the existing social order. This, in turn, hampered the ability of these groups to engage in collective action and affect change, whether political or economic. At the same time, the groups most likely to enjoy the protections and benefits of incorporation were those favored by the state, which helped to protect and perpetuate the status quo and suppress changes that were potentially welfare improving. It is unsurprising, therefore, that many of the essays in this volume use the history of incorporation law as a setting in which to explore the transition from natural states to open-access orders. Yet the assumption that state recognition of voluntary associations through formal incorporation is a defining feature of an open access order, might also have been worthy of circumspection.

In the first essay, Dan Bogart uses the decline of the East India Company to explore England’s transition to open access. Before 1750, the East India Company “was a privileged company with monopoly over all trade between England and Asia,” and as such, is an “excellent example of limited access.” First granted its charter in 1600, the company shared its rents with the monarch in return for special protections and privileges. A key move to open access occurred in 1813 when Parliament passed the Charter Act, revoking the company’s monopoly and allowing others to freely engage in Indian trade. Bogart suggests this move toward open access stemmed from a growing ideological commitment to free trade, the declining revenues and relevance of the East India Company, and the assassination of Prime Minister Perceval. Perhaps the central historical message to emerge from Bogart’s essay is that the fortunes of the East India Company waxed and waned with the company’s political influence, which is precisely what you would expect under a limited access order.

In the volume’s second essay, Barry Weingast recasts Adam Smith’s arguments about the centrality of violence in deterring economic growth. Liberally quoting Smith, Weingast explains that “given the risk of violence, rational investors will not” save or accumulate capital. The state has the potential to protect potential capitalists from plunder, but enforcing property rights itself requires a requisite level of growth and resources without which the state cannot act effectively. In this way, societies get caught in a violence trap: because there are no resources for the state to control violence and protect private property rights, there is no investment or growth, and because there is no investment and growth, there are no resources for the state protect private property. Escaping this trap requires a non-incremental change in either resources or in the relative capacity to do violence across players: once one player gains an advantage in violence it can prevent others from plundering the resources of the industrious while at the same charging (taxing) the industrious to provide such protection. On the heels of such a change, sustained growth can follow.

To highlight how the escape from the violence trap might proceed, Weingast follows Smith’s history of feudalism. Under feudalism, there was constant fighting among the feudal lords and little growth. Only when the King combined forces with local governments and merchants did these groups gain the upper hand, and replace the violence of feudalism with inter-city trade and long-term economic progress. The history Weingast and Smith recount brings to life Mancur Olson’s classic essay on roving and stationary bandits — the competition and fighting among feudal lords seems reminiscent of a world with roving bandits, while the alliance among the monarchy, municipal burghers, and merchants seems akin to world with a single bandit.

Two of the essays use the origins of general incorporation laws in the United States as a laboratory in which to explore the transition from closed to open access. Before general incorporation, businesses could only incorporate after lobbying for, and securing, a corporate charter from the state legislature. Corporate charters in this setting were most likely to have been granted to businesses with close political connections and firms without such connections would not have been able to incorporate. Because incorporation promotes access to capital markets, limiting access to corporate charters likely would have deterred market entry and economic growth. In “Corporation Law and the Shift toward Open Access in the Antebellum United States,” Eric Hilt gathers data on twenty-nine states and shows that states with large agricultural and commercial sectors were slower to adopt general incorporation. He also presents evidence that the introduction of general incorporation laws was often more a change in degree than in kind; the exact construction of general incorporation laws varied across states; and some states adopted general incorporation earlier than is often thought.

Similar to Hilt, Qian Lu and John Wallis explore the transition to open access in the chartering of banks in Massachusetts. Before 1812, banking and politics exhibited a close and unhealthy relationship, with more than 70 percent of all bankers in the state having been a legislator at some point in their lives. During this period, the Federalists in Massachusetts dominated banking in state. Critics complained that this domination was not only contrary to American values, but given the importance of credit to industry and commerce, also a burden on economic development. This domination broke down when a competing political party (the Democrat-Republican) gained control of the legislature and implemented reforms allowing for free entry into banking in the state. Although these reforms were not wholly successful in eliminating the connection between politics and entry into banking (as late as 1860 roughly 40 percent of the bankers in the state had been legislators at some point), non-elite banks without political connections were growing increasingly common.

In their essay, Victoria Johnson and Walter W. Powell use the concept of “poisedness” to explain when and why new organizations emerge, persist, and spread. Poisedness, they write, refers to “the availability or vulnerability of a social and historical context to the reception of an innovation and subsequent reconfiguration by it.” Their analysis then focuses on the history of botanical gardens in New York City during the nineteenth century.

One of the most compelling and important contributions to this volume is the Ruth Bloch and Naomi Lamoreaux chapter, “Voluntary Associations, Corporate Rights, and the State.” Challenging a large body of Tocqueville scholarship, they “contend that the voluntary associations so admired by Tocqueville never really operated independently of the state. Instead, nineteenth-century lawmakers systematically discriminated against certain groups by constraining their access to valuable entity and personhood rights” (p. 235). To make their case, Bloch and Lamoreaux show how throughout the early nineteenth century, state legislatures restricted access to corporate charters for groups that might threaten the status quo, such as antislavery organizations, labor groups, and women’s charitable groups.

In “The Right to Associate and the Rights of Associations: Civil-Society Organizations in Prussia,” Richard Brooks and Timothy Guinnane extend Bloch and Lamoreaux. They begin by noting that a 2012 survey of all the constitutions in the world found that 93 percent included a right to assembly and 94 percent a right of free association. Focusing mainly on Prussia but drawing many comparisons to the United States and other countries in Western Europe, they argue that it is a mistake to think that the West always had open access and protections for freedom of association. Much as Bloch and Lamoreaux, they suggest Western governments were reluctant to formally recognize associations that might pose a threat to existing political elites, even when the threat seems minor to historical observers. In the case of the United States, they uncover a South Carolina law that discouraged free blacks from associating with slaves during antebellum period, and show that even when African American citizens sought to organize for something as innocuous a park they could engender opposition from the state. They also suggest, however, that at least in Prussia the state was most concerned about social and political unrest and seems to have shown more openness in relation to business organizations.

Equally compelling is Jacob Levy’s “Pluralism without Privilege.” Social observers have long seen federalism and the devolution of power to state and municipal governments as a source of individual liberty and a check on the power of the state. Such a structure promotes competition across competing jurisdictions and the sort of oppositional politics that discourage agglomerations of economic and political power. This idea has been expressed and re-expressed in a myriad ways by scholars across the social sciences. Recent examples include the highly cited work of North, Wallis, and Weingast (2009) and Barnett’s (2013) notion that polycentrism might secure the consent of the governed. Levy is skeptical and suggests that jurisdictional competition by itself might by insufficient and that free societies can draw sustenance from privilege and entrenched institutional arrangements that exist outside the state. He begins by quoting Montesquieu’s argument that without the nobility, monarchy descends into despotism. He then turns to Smith, Constant, and Tocqueville. The central theme here is that while elites and privileged groups are odious in themselves, they can also help forestall more despotic regimes.

Absent Levy’s essay, nearly all the essays assume that free association is desirable because it promotes access to the state and the desirability of state access increases in a non-monotonic way: more is always better and unfettered populism is political bliss. Factions, the tyranny of the majority, and rent seeking are forgotten or secondary. While he never invokes rent seeking and only briefly mentions the Federalist, Levy’s suggestion that elite extra-legal institutions might help constrain the state, democratic or otherwise, serves to counter-balance the unqualified embrace of open access. More generally, throughout nearly all of the volume there is a quiet celebration of giving all comers equal access to the levers of state power. Amidst that celebration it would have been useful to at least consider the possibility that administrative independence, whether in the context of the judiciary, central banking, or scientific agencies, might serve to protect individual liberties and/or promote human welfare.

The final essay is “Opening Access, Ending the Violence Trap: Labor, Business, Government, and the National Labor Relations Act” by Margaret Levi, Tania Melo, Barry Weingast, and Frances Zlotnick. Here, Levi et al. argue that before the passage of the NLRA in 1935, the United States failed “two critical conditions” of a true open access order: the denial of access to labor (a variety of legal institutions inhibited the formation of labor unions), and the use of violence to suppress labor. In this setting, violence frequently emerged because it was impossible for all parties (labor, business, and government) to commit to non-violence. After the NLRA and the creation of the National Labor Relations Board, however, the law constrained actions and made it costly for any one of the players to engage in violence. According to Levi et al., with the passage of the NLRA and creation of the National Labor Relations Board, government became an impartial arbiter of the law, rather than an advocate and enforcer for business interests.

It is not clear me, however, that the state’s hostility to unions in the pre-NLRA era stemmed from an unholy alliance between business and the state as Levi et al. and others in this volume suggest. The common law had always been hostile to combinations that had the potential to restrain trade, and that hostility was not unique to unions (Hovenkamp 1991). Indeed, corporate charters frequently included provisions that if the chartered firms engaged in restraints of trade or otherwise acted monopolistically the state had the authority to revoke those charters, which states sometimes did through quo warranto proceedings (Troesken 1995). Moreover, during the late nineteenth and early twentieth century, state antitrust laws were unconstitutional if they exempted labor and agriculture from antitrust prosecution (Connolly v. Union Sewer Pipe Co., 184 U.S. 540 1902). The courts saw such exemptions as evidence of unequal treatment under the law (capital was being treated differently than labor) and a violation of the Fourteenth Amendment. One, of course, can challenge the underlying premise here and reject the idea that there is no fundamental difference between firms organizing than workers (Cox 1955). However, if one is willing to at least entertain the logic of nineteenth century courts, the reluctance of state governments to recognize unions appears similar (though not identical in terms of violence) to their reluctance to incorporate potentially monopolistic enterprises.

Despite these criticisms, my overall assessment is positive and enthusiastic. This well-done volume merits a wide ridership among economic historians and other readers that find North, Wallis, and Weingast (2009) a relevant framework. I found the contributions by Bloch and Lamoreaux, Levy, and Weingast especially important and thought provoking, independent of any connection to debates about open access and the origins of economic development.

References:

Barnett, Randy E. Restoring the Lost Constitution: The Presumption of Liberty. Princeton University Press, 2013.

Cox, Archibald. “Labor and the Antitrust Laws. A Preliminary Analysis.” University of Pennsylvania Law Review 104.2 (1955): 252-284.

Hovenkamp, Herbert. Enterprise and American Law, 1836-1937. Harvard University Press, 1991.

North, Douglass C., John Joseph Wallis, and Barry R. Weingast. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Cambridge University Press, 2009.

Troesken, Werner. “Antitrust Regulation before the Sherman Act: The Break-up of the Chicago Gas Trust Company.” Explorations in Economic History 32.1 (1995): 109-136.
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Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
History of Economic Thought; Methodology
Labor and Employment History
Geographic Area(s):Europe
North America
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII