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Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy

Reviewer(s):Bodenhorn, Howard

Published by EH.Net (August 2013)

Dora L. Costa and Naomi R. Lamoreaux, editors, Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy. Chicago: University of Chicago Press, 2011. x + 390 pp. $110 (hardcover), ISBN: 978-0-226-11634-1.

Reviewed for EH.Net by Howard Bodenhorn, Department of Economics, Clemson University.

Economic history lost one of its best and brightest with Ken Sokoloff?s death in May 2007. To celebrate and commemorate his contributions to economics, Dora Costa and Naomi Lamoreaux collected an impressive and diverse group of essays contributed by Ken?s friends, colleagues, coauthors, and classmates. Ken?s interests were wide-ranging ? he wrote on early industrialization and heights and health, but his signal contributions concerned invention and innovation, as well as the complex connections between geography, institutions and long-run economic growth. Fittingly, the essays are equally wide ranging.

The first article is an essay Ken was working on with Stan Engerman and advances the initial conditions-geography-institutions approach explored in their earlier research. The central argument is that differences in initial conditions between North America and Central and South America set those regions on markedly different social, economic and political trajectories. With its relative shortage of indigenous labor, early settlers recognized that North America would prosper only through European settlement and they adopted institutions in which new arrivals were welcomed (eventually) into the polity and might, with good fortune and hard work, rise in society. Blessed with an abundance of indigenous workers, the earliest settlers in South and Central America adopted institutions that discouraged European immigration by restricting economic and political privilege. Moreover, the nature of staple crop production pushed the returns to unskilled labor so low that few Europeans came. The argument, briefly stated, is that early inequality begat later inequality through endogenously arising institutions that favored the few, the elite.

Sokoloff and Engerman?s research raises fundamental questions: Are institutions exogenously determined by idiosyncratic events, such as the arrival of British rather than Spanish colonizers, as the legal origins approach posits?[1]? Are institutions, once established, persistent, as the colonial origins approach contends?[2]? Or, are institutions endogenous to geographies as societies struggle with how best to deal with the challenges of environments, technologies, and factor endowments? Sokoloff and Engerman are clearly in the endogenous institutions camp.

It is fitting, then, that the next two articles take on the exogeneity/endogeneity debate from alternative perspectives. Camilo Garcia-Jimeno and James A. Robinson explore the long-run implications of Frederick Jackson Turner?s thesis that the American frontier shaped its egalitarian representative democracy. Garcia-Jimeno and Robinson recognize that the U.S. was not the only New World country with a frontier and offer the ?conditional frontier hypothesis,? which posits that the consequences of the frontier are conditional on the existing political equilibrium when settlement of the frontier commences. They consider 21 New World countries and, from a series of regressions, conclude that if political institutions were bad at the outset (which they define as 1850) the existence of a frontier may have made them worse. The oligarchs divvied up the frontier among themselves, which further entrenched their economic and political power. Exogenous institutions rule.

Or do they? Stephen Haber next explores banking and finance in three countries ? the U.S., Mexico and Brazil ? but starts from a very different, very Sokoloff-ian (if I may) perspective. For Haber, as for Sokoloff, the task facing the economic historian interested in institutions involves tracing the many and complex ways in which economic and political power becomes embedded in institutions, how those institutions influence the formation of competing coalitions, and how competition between them either entrenches or alters the original institutions. Pursuing these connections is, Haber (p. 90) argues, ?a task better suited to historical narratives than to econometric hypothesis testing.? What connects banking in these three countries is that the elite used their existing power to rent seek ? to elicit government sanction of limited entry and privileged monopoly. What separated the three countries was that rent seeking efforts largely failed in the U.S. If Jackson?s war on the Second Bank was emblematic of anything it was that U.S. populists had little tolerance for government-sanctioned economic privilege. Haber doesn?t, and I doubt that Ken would, attribute the Jacksonian attitude to an accident of history. It was organically, indelibly American.

Joel Mokyr summarizes Ken?s approach to his other great intellectual passion: invention and innovation. Innovation was the consequence of purposive, rational behavior. Inventors, at least at some level, were motivated and directed by costs and benefits. Ken also recognized that inventive activity was sensitive to the institutions that generated markets that defined the rewards for innovation. Zorina Khan takes these issues head on in her analysis of patents versus prizes. At the risk of gross oversimplification, the English and the French preferred prizes for inventions believing that what motivated inventive genius was the esteem of one?s peers. Americans proceeded under the pragmatic and republican belief that profits motivated and markets would ?allow society to better realize its potential? (p. 207). Prizes were subject to momentary whims, were idiosyncratic, difficult to predict, and therefore less useful in pushing out the frontiers of useful knowledge. Markets elicited more innovation, at least as markets were organized in America.

The second article in the volume to which Ken directly contributed is coauthored with Naomi Lamoreaux and Dhanoos Sutthiphisal. They, too, explore the connection between markets and inventions in the ?new economy? of the 1920s. They argue that the rapid expansion of equity markets afforded many small enterprises on the technological frontier access to finance that was unavailable a generation earlier. Big firms dominated patenting in the Northeast. In what became the Rust Belt, small, entrepreneurial firms with new products or processes issued equities or attracted the venture capital necessary for them to bring their products to market. Markets influence innovation in all kinds of direct and indirect ways.

The constraints of a book review, unfortunately, preclude a discussion of the many other very good essays in the volume but which venture so far afield that they are not readily condensed. They are all worth reading; I was particularly fascinated by Dan Bogart and John Majewski?s article comparing the British and American transportation revolutions, and touched by Manuel Trajtenberg?s reflections on Ken as scholar and friend.

On a personal note, I am a beneficiary of Ken?s gentle but firm guidance. It was inadvertently revealed to me that Ken was one of the anonymous reviewers of my State Banking in Early America (2003). While the manuscript was well outside his research interests, he offered several insightful comments, one of which forced me to think more deeply about a central idea. My book is better for Ken?s advice. Many of the chapters included in this volume are undoubtedly better for Ken?s prodding, pushing and provocation. He is missed.

Notes:
1. See, for example, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny.? 1998. ?Law and Finance.? Journal of Political Economy 106(6).

2. See, for example, Daron Acemoglu, Simon Johnson and James A. Robinson. 2001. ?The Colonial Origins of Comparative Development.? American Economic Review 91(4).

Howard Bodenhorn is currently studying early corporate governance in the United States.???

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Subject(s):Economic Development, Growth, and Aggregate Productivity
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Historical Demography, including Migration
Historical Geography
History of Technology, including Technological Change
Urban and Regional History
Geographic Area(s):General, International, or Comparative
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII