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Taxing the Rich: A History of Fiscal Fairness in the United States and Europe

Author(s):Scheve, Kenneth
Stasavage, David
Reviewer(s):Poulson, Barry W.

Published by EH.Net (December 2016)

Kenneth Scheve and David Stasavage, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe. Princeton: Princeton University Press, 2016.  xv + 266 pp. $30 (hardcover), ISBN: 978-0-691-16545-5.

Reviewed for EH.Net by Barry W. Poulson, Department of Economics, University of Colorado.

In this study Kenneth Scheve (Professor of Political Science at Stanford University) and David Stasavage (Professor of Politics at New York University) address an important question:  given evidence of increasing inequality in recent years, why is there not greater effort to tax the rich? To answer this question they survey the history of progressive taxation in twenty countries over the past two centuries, and the literature on taxation and the distribution of income and wealth.

Their evidence reveals an inverted-U curve for the average top marginal rates of income taxation in these countries in the twentieth century. Using evidence for the income share going to the top 0.01 percent of the income distribution, their evidence suggests an inverse relationship between the top rate of income taxation and the share of income received by the top income group.  They also find evidence of an inverted-U for average top rates of inheritance taxation in the twentieth century. Using evidence for the share of wealth owned by the top 1 percent of wealth holders, their evidence suggests an inverse relationship between the top rate of inheritance taxes and the share of wealth held by this wealthy group.

The authors maintain that higher tax rates on the rich were a form of compensatory taxation. Mass conscription during World War I and World War II imposed a heavy burden on citizens. The rich, as owners of most of the capital, captured extraordinary profits during these war years. Higher marginal tax rates on the rich compensated for this privileged position they enjoyed during the war, and the differential burdens imposed on citizens by mass conscription.

Their explanation for declining tax rates on the rich in the post-World War II period is the converse of this argument. Technological changes eliminated the requirement for massive conscription of citizens into the military. As countries relied on a voluntary army, this argument for compensatory taxation of the rich no longer held. Further, they find that other arguments for compensatory taxation of the rich based upon privilege or rent seeking are not persuasive. The authors conclude that current economic and political conditions are such that the compensatory compensation argument for taxing the rich is no longer valid.   The authors agree with Thomas Piketty that taxation of the rich and income inequality in the twentieth century were linked to war; but, they do not agree that this was a random process (Piketty 2014, Piketty and Saez 2007). They argue that taxation of the rich and trends in income inequality were driven by long-run trends involving international rivalries and technologies available for waging war.

My major concern with this study is that their analysis ignores fundamental issues in this debate, especially as it relates to tax and fiscal policy in the U.S. Their analysis is based on the ‘public interest theory’ of government; the assumption is that progressive taxation satisfies a norm of fairness or equality. The public choice literature provides an alternative explanation for the differential tax burdens imposed on the rich relative to the non-rich. If the preferences of elected officials differ from those of their constituents, self-interested politicians will attempt to minimize the political costs associated with raising a given budget or revenue, where political costs result from opposition to taxes by taxpayer interest groups. Politicians can minimize these costs by shifting the tax burden to citizen groups that are less sensitive or effective in influencing tax policy. The use of a specific tax or marginal tax rate will then depend upon this tax price defined in terms of political costs. Allan Meltzer and Scott Richard use this model to show why preferences of voters for taxes are ranked by income, and how extension of the franchise could lead to higher taxation and redistribution of income from rich to poor (Meltzer and Richard 1981). (Scheve and Stasavage refer to this literature in a footnote on page 220, but argue that there is no general theory supporting the argument.)

The public choice literature reveals a systematic bias toward increased spending and deficits. From this perspective, the challenge in democratic societies is to design fiscal rules and institutions to constrain the growth of government, and to allow the preferences of citizens to dominate those of their elected representatives. Progressive tax systems are analyzed within the context of these fiscal rules and institutions (Merrifield and Poulson 2016b).

After World War II, under the leadership of the U.S., industrialized countries successfully removed barriers to international trade and capital flows. This so called “Pax Americana” set the stage for rapid growth in international trade and the global economy. To compete in this new global economy countries significantly reduced tax burdens.

As Chris Edwards and Daniel Mitchell document, the tax reforms enacted in major competitors have left the U.S. behind (Edwards and Mitchell 2008). While the U.S. retains certain tax advantages, there are a growing number of disadvantages. Its top individual income tax rate is now about average compared to other OECD countries, although it kicks in at a higher income level than most countries, and thus penalizes fewer people. However, U.S. businesses are increasingly at a competitive disadvantage with respect to tax burdens when compared to businesses in other OECD countries. The U.S. now has the second highest corporate income tax rate, at 40 percent when calculating federal and state corporate income taxes. U.S. businesses face high business tax and compliance costs. American businesses face a tax penalty when they repatriate profits earned by their foreign subsidiaries. The U.S. has the eighth highest dividend tax rate, and the highest estate and inheritance tax rate among OECD countries. Finally, the U.S. has one of the highest tax rates in the world on corporate capital gains. Much of this tax burden on business is borne by workers in the form of lower wages and employment opportunities.

In contrast, the most successful OECD countries have enacted new fiscal rules to constrain the growth in government spending. John Merrifield and I document how new fiscal rules have enabled these countries to reduce taxes and borrowing. By the end of the twentieth century Switzerland and the Scandinavian countries imposed the lowest top income tax rates compared to other OECD countries; and these countries are successfully addressing unfunded liabilities in their entitlement programs (Merrifield and Poulson 2016a).

Fiscal rules in the U.S. have been relatively ineffective in constraining the growth in federal spending. For half a century rapid growth in federal spending has been accompanied by deficits and debt accumulation. With total debt now in excess of 20 trillion dollars, the U.S. is one of the most indebted countries in the OECD. The total debt burden as a share of GDP exceeds 100 percent, and is projected to grow even higher in coming decades under current law. Growing unfunded liabilities threaten the viability of federal entitlement programs. These flaws in tax and fiscal policy are causing a massive redistribution of income and wealth in the U.S (Merrifield and Poulson 2016b).

References:

Chris Edwards and Daniel Mitchell. 2008. Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It. Cato Institute, Washington D.C.

Allan H. Meltzer and Scott F. Richard. 1981. “A Rational Theory of the Size of Government,” Journal of Political Economy 81: 914-927.

John Merrifield and Barry Poulson. 2016a. “Swedish and Swiss Fiscal Rule Outcomes Contain Key Lessons for the United States,” The Independent Review 21: 251-74.

John Merrifield and Barry Poulson. 2016b. Can the Debt Growth be Stopped? Rules Based Policy Options for Addressing the Federal Fiscal Crisis. New York, Lexington Books.

Thomas Piketty. 2014. Capital in the Twenty-First Century. Cambridge: Harvard University Press.

Thomas Piketty and Emmanuel Saez. 2007. “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective,” Journal of Economic Perspectives 21: 3-24.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (December 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Cambridge Economic History of Australia

Editor(s):Ville, Simon
Withers, Glenn
Reviewer(s):Harper, Ian

Published by EH.Net (August 2016)

Simon Ville and Glenn Withers, editors, The Cambridge Economic History of Australia. Port Melbourne: Cambridge University Press, 2015. xxi + 668 pp. £120/$180 (cloth), ISBN: 978-1-107-02949-1.

Reviewed for EH.Net by Ian Harper, Deloitte Access Economics.

Hot on the heels of Ian McLean’s magisterial Why Australia Prospered (2013) comes this edited volume of twenty-four chapters, each focused on different aspects of Australia’s remarkable economic history.  The 30-strong list of contributors contains the names of some of Australia’s most prominent economic historians and economists, as well as one or two scholars from abroad whose research interests include Australian economic history.

The chapters are grouped into six parts, ordered chronologically. Part 1 deals with the “framework” of Australian economic history, with chapters devoted to historiography, the drivers of economic growth since European settlement, and the analytical methods employed in Australian economic-historical research.

Part 2 contains a chapter each on the Aboriginal legacy and the convict economy. A distinctive and timely feature of this book is the attention given to the economic circumstances, experience and prospects of Australia’s Aboriginal people.  The economic contribution of the Australian Aborigines and their descendants was essentially ignored from European settlement in 1788 until the national census of 1971.  (The Constitutional amendment following the referendum of 1967 allowed Aborigines to be included for the first time.)  As a result, historical statistics on the level and growth of Australia’s population and GDP are distorted, most seriously before 1830, when the Indigenous population was many times larger than the European population by any sensible measure.

Part 3 covers the economic expansion of the Australian colonies from the early decades of the nineteenth century through to Federation in 1901.  Six chapters deal thematically with key dimensions of economic development, including technological change, skills development and migration, enterprise, infrastructure, urbanization and Australia’s peculiar experience of government-led economic development, so-called “colonial socialism.”

Part 4 deals with the emergence of a national economy following federation of the six former colonies at the turn of the twentieth century.  Again six chapters follow particular threads, including the development of national capital markets, the rise of manufacturing to counter the long quiescence of mining until the 1960s, the emergence of big business, the evolution of public policy, and the increasing dominance of the service sector as a share of national output and employment.

Part 5 focuses on the development of the “modern” Australian economy, essentially since 1945.  Three chapters deal, respectively, with the reorientation of Australia’s trade, investment and migration, first away from Great Britain towards the United States and more recently towards Asia, especially China; the microeconomic reform agenda of the 1980s and 1990s; and Australian macroeconomic policy since World War II.

The final part looks “backwards and to the future.” Chapter 21 (together with its Statistical Appendix) presents the longest consistent time series of economic data that are available on the Australian economy and cover the period 1800-2010.  The data relate to four broad themes of Australian economic development: scale of settlement, living standards, economic structure, and openness to the international economy.  Simple line graphs reveal important features of Australia’s economic experience over the long run that are easily overlooked or forgotten, including the remarkable consistency of Australia’s economic growth over time, including GDP per capita, and the marked reduction in economic volatility in the later decades of the twentieth century and into the twenty-first century compared with earlier times.

The three remaining chapters of Part 6 deal with Australia’s longstanding emphasis on egalitarian outcomes in the distribution of income and, to a lesser extent, wealth; the long-term environmental impact of Australia’s extractive primary industries, especially mining and pastoral agriculture; and the prospects for “closing the gap” between the currently divergent economic outcomes experienced by Australia’s Indigenous and non-Indigenous populations.  Chapter 24, which deals with this last topic, presents some remarkable evidence on the impact of recognizing native title to unalienated land following the passage of the Native Title Act 1993.  As the authors note (p. 549): “In aggregate it is possible that some form of land rights or native title might be recognised in more than 70 per cent of Australia, where more than 40 per cent of the Indigenous population currently resides. … This is an extraordinary turnaround from the mid-1960s when there was no recognition of land rights under Australian law.” Furthermore, they conclude that “the demographic survival of Indigenous people is more certain today than at any other time since 1788” (p. 554).

Edited collections are often of uneven quality and it can be difficult to sustain a consistent narrative.  In this case the editors are to be commended on both counts: the chapters are uniformly readable, informative and well documented; and while alternative perspectives are acknowledged in individual chapters, no two chapters jar in their interpretation of major developments or identification of dominant themes.  There is a consistent narrative which sustains the reader’s interest if the volume is read, as this reviewer did, from cover to cover.  Yet individual chapters stand alone and can be read profitably in any order according to interest.

One helpful feature is the conclusion provided at the end of each chapter summarizing the foregoing argument and evidence.  This serves as a ready means of grasping the key points or as an aid to recall when returning to particular chapters.  There are useful tables, charts and maps included throughout the volume in addition to the Statistical Appendix, and there are two indexes, one covering subjects and the other companies, as well as a comprehensive bibliography.

The publisher’s claim that this book represents “the definitive study of Australia’s economic past and present” may be a touch grandiose but there is no doubt that it is a work of formidable scholarship and an essential addition to the professional library of any economist with a serious interest in Australia’s economic development and prospects.

Ian Harper is Professor Emeritus of the University of Melbourne and a Senior Advisor to Deloitte Access Economics Pty Ltd. He recently co-wrote a report on the future of Australia’s cities and regions entitled, “The Purpose of Place: Reconsidered” (www.buildingtheluckycountry.com.au). Email: iaharper@deloitte.com.au.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Economic History of Mexico

The Economic History of Mexico

Richard Salvucci, Trinity University

 

Preface[1]

This article is a brief interpretive survey of some of the major features of the economic history of Mexico from pre-conquest to the present. I begin with the pre-capitalist economy of Mesoamerica. The colonial period is divided into the Habsburg and Bourbon regimes, although the focus is not really political: the emphasis is instead on the consequences of demographic and fiscal changes that colonialism brought.  Next I analyze the economic impact of independence and its accompanying conflict. A tentative effort to reconstruct secular patterns of growth in the nineteenth century follows, as well as an account of the effects of foreign intervention, war, and the so-called “dictatorship” of Porfirio Diaz.  I then examine the economic consequences of the Mexican Revolution down through the presidency of Lázaro Cárdenas, before considering the effects of the Great Depression and World War II. This is followed by an examination of the so-called Mexican Miracle, the period of import-substitution industrialization after World War II. The end of the “miracle” and the rise of economic instability in the 1970s and 1980s are discussed in some detail. I conclude with structural reforms in the 1990s, the North American Free Trade Agreement (NAFTA), and slow growth in Mexico since then. It is impossible to be comprehensive and the references appearing in the citations are highly selective and biased (where possible) in favor of English-language works, although Spanish is a must for getting beyond the basics. This is especially true in economic history, where some of the most innovative and revisionist work is being done, as it should be, by historians and economists in Mexico.[2]

 

Where (and What) is Mexico?

For most of its long history, Mexico’s boundaries have been shifting, albeit broadly stable. Colonial Mexico basically stretched from Guatemala, across what is now California and the Southwestern United States, and vaguely into the Pacific Northwest.  There matters stood for more than three centuries[3]. The big shock came at the end of the War of 1847 (“the Mexican-American War” in U.S. history). The Treaty of Guadalupe Hidalgo (1848) ended the war, but in so doing, ceded half of Mexico’s former territory to the United States—recall Texas had been lost in 1836. The northern boundary now ran on a line beginning with the Rio Grande to El Paso, and thence more or less west to the Pacific Ocean south of San Diego. With one major adjustment in 1853 (the Gadsden Purchase or Treaty of the Mesilla) and minor ones thereafter, because of the shifting of the Rio Grande, there it has remained.

Prior to the arrival of the Europeans, Mexico was a congeries of ethnic and city states whose own boundaries were unstable. Prior to the emergence of the most powerful of these states in the fifteenth century, the so-called Triple Alliance (popularly “Aztec Empire”), Mesoamerica consisted of cultural regions determined by political elites and spheres of influence that were dominated by large ceremonial centers such as La Venta, Teotihuacán, and Tula.

While such regions may have been dominant at different times, they were never “economically” independent of one another. At Teotihuacan, there were living quarters given over to Olmec residents from the Veracruz region, presumably merchants. Mesoamerica was connected, if not unified, by an ongoing trade in luxury goods and valuable stones such as jade, turquoise and precious feathers. This was not, however, trade driven primarily by factor endowments and relative costs. Climate and resource endowments did differ significantly over the widely diverse regions and microclimates of Mesoamerica. Yet trade was also political and ritualized in religious belief. For example, calling the shipment of turquoise from the (U.S.) Southwest to Central Mexico the outcome of market activity is an anachronism. In the very long run, such prehistorical exchange facilitated the later emergence of trade routes, roads, and more technologically advanced forms of transport. But arbitrage does not appear to have figured importantly in it.[4]

In sum, what we call “Mexico” in a modern sense is not of much use to the economic historian with an interest in the country before 1870, which is to say, the great bulk of its history. In these years, specificity of time and place, sometimes reaching to the village level, is an indispensable prerequisite for meaningful discussion. At the very least, it is usually advisable to be aware of substantial regional differences which reflect the ethnic and linguistic diversity of the country both before and after the arrival of the Europeans. There are fully ten language families in Mexico, and two of them, Nahuatl and Quiché, number over a million speakers each.[5]

 

Trade and Tribute before the Europeans

In the codices or deerskin folded paintings the Europeans examined (or actually commissioned), they soon became aware of a prominent form of Mesoamerican economic activity: tribute, or taxation in kind, or even labor services. In the absence of anything that served as money, tribute was forced exchange. Tribute has been interpreted as a means of redistribution in a nonmonetary economy. Social and political units formed a basis for assessment, and the goods collected included maize, beans, chile and cotton cloth. It was through the tribute the indigenous “empires” mobilized labor and resources. There is little or no evidence for the existence of labor or land markets to do so, for these were a European import, although marketplaces for goods existed in profusion.

To an extent, the preconquest reliance on barter economies and the absence of money largely accounts for the ubiquity of tribute. The absence of money is much more difficult to explain and was surely an obstacle to the growth of productivity in the indigenous economies.

The tribute was a near-universal attribute of Mesoamerican ceremonial centers and political empires. The city of Teotihuacan (ca. 600 CE, with a population of 125,000 or more) in central Mexico depended on tribute to support an upper stratum of priests and nobles while the tributary population itself lived at subsistence. Tlatelolco (ca 1520, with a population ranging from 50 to 100 thousand) drew maize, cotton, cacao, beans and precious feathers from a wide swath of territory that broadly extended from the Pacific to Gulf coasts that supported an upper stratum of priests, warriors, nobles, and merchants. It was this urban complex that sat atop the lagoons that filled the Valley of Mexico that so awed the arriving conquerors.

While the characterization of tribute as both a corvée and a tax in kind to support nonproductive populations is surely correct, its persistence in altered (i.e., monetized) form under colonial rule does suggest an important question. The tributary area of the Mexica (“Aztec” is a political term, not an ethnic one) broadly comprised a Pacific slope, a central valley, and a Gulf slope. These embrace a wide range of geographic features ranging from rugged volcanic highlands (and even higher snow-capped volcanoes) to marshy, humid coastal plains. Even today, travel through these regions is challenging. Lacking both the wheel and draught animals, the indigenous peoples relied on human transport, or, where possible, waterborne exchange. However we measure the costs of transportation, they were high. In the colonial period, they typically circumscribed the subsistence radius of markets to 25 to 35 miles. Under the circumstances, it is not easy to imagine that voluntary exchange, particularly between the coastal lowlands and the temperate to cold highlands and mountains, would be profitable for all but the most highly valued goods. In some parts of Mexico–as in the Andean region—linkages of family and kinship bound different regions together in a cult of reciprocal economic obligations. Yet absent such connections, it is not hard to imagine, for example, transporting woven cottons from the coastal lowlands to the population centers of the highlands could become a political obligation rather than a matter of profitable, voluntary exchange. The relatively ambiguous role of markets in both labor and goods that persisted into the nineteenth century may perhaps derive from just this combination of climatic and geographical characteristics. It is what made voluntary exchange under capitalistic markets such a puzzlingly problematic answer to the ordinary demands of economic activity.

 

[See the relief map below for the principal physical features of Mexico.]

image1

http://www.igeograf.unam.mx/sigg/publicaciones/atlas/anm-2007/muestra_mapa.php?cual_mapa=MG_I_1.jpg

[See the political map below for Mexican states and state capitals.]

image2

 

 

Used by permission of the University of Texas Libraries, The University of Texas at Austin.

 

“New Spain” or Colonial Mexico: The First Phase

Mexico was established by military conquest and civil war. In the process, a civilization with its own institutions and complex culture was profoundly modified and altered, if not precisely destroyed, by the European invaders. The catastrophic elements of conquest, including the sharp decline of the existing indigenous population, from perhaps 25 million to fewer than a million within a century due to warfare, disease, social disorganization and the imposition of demands for labor and resources should nevertheless not preclude some assessment, however tentative, of its economic level in 1519, when the Europeans arrived.[6]

Recent thinking suggests that Spain was far from poor when it began its overseas expansion. If this were so, the implications of the Europeans’ reactions to what they found on the mainland of Mexico (not, significantly in the Caribbean, and, especially, in Cuba, where they were first established) is important. We have several accounts of the conquest of Mexico by the European participants, of which Bernal Díaz del Castillo is the best known, but not the only one. The reaction of the Europeans was almost uniformly astonishment by the apparent material wealth of Tenochtitlan. The public buildings, spacious residences of the temple precinct, the causeways linking the island to the shore, and the fantastic array of goods available in the marketplace evoked comparisons to Venice, Constantinople, and other wealthy centers of European civilization. While it is true that this was a view of the indigenous elite, the beneficiaries of the wealth accumulated from numerous tributaries, it hardly suggests anything other than a kind of storied opulence. Of course, the peasant commoners lived at subsistence and enjoyed no such privileges, but then so did the peasants of the society from which Bernal Díaz, Cortés, Pedro de Alvarado and the other conquerors were drawn. It is hard to imagine that the average standard of living in Mexico was any lower than that of the Iberian Peninsula. The conquerors remarked on the physical size and apparent robust health of the people whom they met, and from this, scholars such as Woodrow Borah and Sherburne Cook concluded that the physical size of the Europeans and the Mexicans was about the same. Borah and Cook surmised that caloric intake per individual in Central Mexico was around 1,900 calories per day, which certainly seems comparable to European levels.[7]

Certainly, the technological differences with Europe hampered commercial exchange, such as the absence of the wheel for transportation, metallurgy that did not include iron, and the exclusive reliance on pictographic writing systems. Yet by the same token, Mesoamerican agricultural technology was richly diverse and especially oriented toward labor-intensive techniques, well suited to pre-conquest Mexico’s factor endowments. As Gene Wilken points out, Bernardino de Sahagún explained in his General History of the Things of New Spain that the Nahua farmer recognized two dozen soil types related to origin, source, color, texture, smell, consistency and organic content.  They were expert at soil management.[8] So it is possible not only to misspecify, but to mistake the technological “backwardness” of Mesoamerica relative to Europe, and historians routinely have.

The essentially political and clan-based nature of economic activity made the distribution of output somewhat different from standard neoclassical models. Although no one seriously maintains that indigenous civilization did not include private property and, in fact, property rights in humans, the distribution of product tended to emphasize average rather than marginal product. If responsibility for tribute was collective, it is logical to suppose that there was some element of redistribution and collective claim on output by the basic social groups of indigenous society, the clans or calpulli.[9] Whatever the case, it seems clear that viewing indigenous society and economy as strained by population growth to the point of collapse, as the so-called “Berkeley school” did in the 1950s, is no longer tenable. It is more likely that the tensions exploited by the Europeans to divide and conquer their native hosts and so erect a colonial state on pre-existing native entities were mainly political rather than socioeconomic. It was through the assistance of native allies such as the Tlaxcalans, as well as with the help of previously unknown diseases such as smallpox that ravaged the indigenous peoples, that the Europeans were able to place a weakened Tenochtitlan under siege and finally defeat it.

 

Colonialism and Economic Adjustment to Population Decline

With the subjection first of Tenochtitlan and Tlatelolco and then of other polities and peoples, a process that would ultimately stretch well into the nineteenth century and was never really completed, the Europeans turned their attention to making colonialism pay. The process had several components: the modification or introduction of institutions of rule and appropriation; the introduction of new flora and fauna that could be turned to economic use; the reorientation of a previously autarkic and precapitalist economy to the demands of trade and commercial exploitation; and the implementation of European fiscal sovereignty. These processes were complex, required much time, and were, in many cases, only partly successful. There is considerable speculation regarding how long it took before Spain (arguably a relevant term by the mid-sixteenth century) made colonialism pay. The best we can do is present a schematic view of what occurred. Regional variations were enormous: a “typical” outcome or institution of colonialism may well have been an outcome visible in central Mexico. Moreover, all generalizations are fragile, rest on limited quantitative evidence, and will no doubt be substantially modified eventually. The message is simple: proceed with caution.

The Europeans did not seek to take Mesoamerica as a tabula rasa. In some ways, they would have been happy to simply become the latest in a long line of ruling dynasties established by decapitating native elites and assuming control. The initial demand of the conquerors for access to native labor in the so-called encomienda was precisely that, with the actual task of governing be left to the surviving and collaborating elite: the principle of “indirect rule.”[10] There were two problems with this strategy: the natives resisted and the natives died. They died in such large numbers as to make the original strategy impracticable.

The number of people who lived in Mesoamerica has long been a subject of controversy, but there is no point in spelling it out once again. The numbers are unknowable and, in an economic sense, not really important. The population of Tenochtitlan has been variously estimated between 50 and 200 thousand individuals, depending on the instruments of estimation.  As previously mentioned, some estimates of the Central Mexican population range as high as 25 million on the eve of the European conquest, and virtually no serious student accepts the small population estimates based on the work of Angel Rosenblatt. The point is that labor was abundant relative to land, and that the small surpluses of a large tributary population must have supported the opulent elite that Bernal Díaz and his companions described.

By 1620, or thereabouts, the indigenous population had fallen to less than a million according to Cook and Borah. This is not just the quantitative speculation of modern historical demographers. Contemporaries such as Jerónimo de Mendieta in his Historia eclesiástica Indiana (1596) spoke of towns formerly densely populated now witness to “the palaces of those former Lords ruined or on the verge of. The homes of the commoners mostly empty, roads and streets deserted, churches empty on feast days, the few Indians who populate the towns in Spanish farms and factories.” Mendieta was an eyewitness to the catastrophic toll that European microbes and warfare took on the native population. There was a smallpox epidemic in 1519-20 when 5 to 8 million died. The epidemic of hemorrhagic fever in 1545 to 1548 was one of the worst demographic catastrophes in human history, killing 5 to 15 million people. And then again in 1576 to 1578, when 2 to 2.5 million people died, we have clear evidence that land prices in the Valley of Mexico (Coyoacán, a village outside Mexico City, as the reconstructed Tenochtitlán was called) collapsed. The death toll was staggering. Lesser outbreaks were registered in 1559, 1566, 1587, 1592, 1601, 1604, 1606, 1613, 1624, and 1642. The larger point is that the intensive use of native labor, such as the encomienda, had to come to an end, whatever its legal status had become by virtue of the New Laws (1542). The encomienda or the simple exploitation of massive numbers of indigenous workers was no longer possible. There were too few “Indians” by the end of the sixteenth century.[11]

As a result, the institutions and methods of economic appropriation were forced to change. The Europeans introduced pastoral agriculture – the herding of cattle and sheep – and the use of now abundant land and scarce labor in the form of the hacienda while the remaining natives were brought together in “villages” whose origins were not essentially pre- but post-conquest, the so-called congregaciones, at the same time that the titles to now-vacant lands were created, regularized and “composed.”[12] (Land titles were a European innovation as well). Sheep and cattle, which the Europeans introduced, became part of the new institutional backbone of the colony. The natives would continue to rely on maize for the better part of their subsistence, but the Europeans introduced wheat, olives (oil), grapes (wine) and even chickens, which the natives rapidly adopted. On the whole, the results of these alterations were complex. Some scholars argue that the native diet improved even in the face of their diminishing numbers, a consequence of increased land per person and of greater variety of foodstuffs, and that the agricultural potential of the colony now called New Spain was enhanced. By the beginning of the seventeenth century, the combined indigenous, European immigrant, and new mixed blood populations could largely survive on the basis of their own production. The introduction of sheep lead to the introduction and manufacture of woolens in what were called obrajes or manufactories in Puebla, Querétaro, and Coyoacán. The native peoples continued to produce cottons (a domestic crop) under the stimulus of European organization, lending, and marketing. Extensive pastoralism, the cultivation of cereals and even the incorporation of native labor then characterized the emergence of the great estates or haciendas, which became a characteristic rural institution through the twentieth century, when the Mexican Revolution put an end to many of them. Thus the colony of New Spain continued to feed, clothe and house itself independent of metropolitan Spain’s direction. Certainly, Mexico before the Conquest was self-sufficient. The extent to which the immigrant and American Spaniard or creole population depended on imports of wine, oil and other foodstuffs and textiles in the decades immediately following the conquest is much less clear.

At the same time, other profound changes accompanied the introduction of Europeans, their crops and their diseases into what they termed the “kingdom” (not colony, for constitutional reasons) of New Spain.[13] Prior to the conquest, land and labor had been commoditized, but not to any significant extent, although there was a distinction recognized between possession and ownership.  Scholars who have closely examined the emergence of land markets after the conquest—mainly in the Valley of Mexico—are virtually unanimous in this conclusion. To the extent that markets in labor and commodities had emerged, it took until the 1630s (and later elsewhere in New Spain) for the development to reach maturity. Even older mechanisms of allocation of labor by administrative means (repartimiento) or by outright coercion persisted. Purely economic incentives in the form of money wages and prices never seemed adequate to the job of mobilizing resources and those with access to political power were reluctant to pay a competitive wage. In New Spain, the use of some sort of political power or rent-seeking nearly always accompanied labor recruitment. It was, quite simply, an attempt to evade the implications of relative scarcity, and renders the entire notion of “capitalism” as a driving economic force in colonial Mexico quite inexact.

 

Why the Settlers Resisted the Implications of Scarce Labor

The reasons behind this development are complex and varied. The evidence we have for the Valley of Mexico demonstrates that the relative price of labor rose while the relative price of land fell even when nominal movements of one or the other remained fairly limited. For instance, the table constructed below demonstrates that from 1570-75 through 1591-1606, the price of unskilled labor in the Valley of Mexico nearly tripled while the price of land in the Valley (Coyoacán) fell by nearly two thirds. On the whole, the price of labor relative to land increased by nearly 800 percent. The evolution of relative prices would have inevitably worked against the demanders of labor (Europeans and increasingly, creoles or Americans of largely European ancestry) and in favor of the supplier (native labor, or people of mixed race generically termed mestizo). This was not of course what the Europeans had in mind and by capture of legal institutions (local magistrates, in particularly), frequently sought to substitute compulsion for what would have been costly “free labor.” What has been termed the “depression” of the seventeenth century may well represent one of the consequences of this evolution: an abundance of land, a scarcity of labor, and the attempt of the new rulers to adjust to changing relative prices. There were repeated royal prohibitions on the use of forced indigenous labor in both public and private works, and thus a reduction in the supply of labor. All highly speculative, no doubt, but the adjustment came during the central decades of the seventeenth century, when New Spain increasingly produced its own woolens and cottons, and largely assumed the tasks of providing itself with foodstuffs and was thus required to save and invest more.  No doubt, the new rulers felt the strain of trying to do more with less.[14]

 

Years Land Price Index Labor Price Index (Labor/Land) Index
1570-1575 100 100 100
1576-1590 50 143 286
1591-1606 33 286 867

 

Source: Calculated from Rebecca Horn, Postconquest Coyoacan: Nahua-Spanish Relations in Central Mexico, 1519-1650 (Stanford: Stanford University Press, 1997), p. 208 and José Ignacio Urquiola Permisan, “Salarios y precios en la industria manufacturer textile de la lana en Nueva España, 1570-1635,” in Virginia García Acosta, (ed.), Los precios de alimentos y manufacturas novohispanos (México, DF: CIESAS, 1995), p. 206.

 

The overall role of Mexico within the Hapsburg Empire was in flux as well. Nothing signals the change as much as the emergence of silver mining as the principal source of Mexican exportables in the second half of the sixteenth century. While Mexico would soon be eclipsed by Peru as the most productive center of silver mining—at least until the eighteenth century—the discovery of significant silver mines in Zacatecas in the 1540s transformed the economy of the Spanish empire and the character of New Spain’s as well.

 

 

 

Silver Mining

While silver mining and smelting was practiced before the conquest, it was never a focal point of indigenous activity. But for the Europeans, Mexico was largely about silver mining. From the mid- sixteenth century onward, it was explicitly understood by the viceroys that they were to do all in their power to “favor the mines,” as one memorable royal instruction enjoined. Again, there has been much controversy of the precise amounts of silver that Mexico sent to the Iberian Peninsula. What we do know certainly is that Mexico (and the Spanish Empire) became the leading source of silver, monetary reserves, and thus, of high-powered money. Over the course of the colonial period, most sources agree that Mexico provided nearly 2 billion pesos (dollars) or roughly 1.6 billion troy ounces to the world economy. The graph below provides a picture of the remissions of all Mexican silver to both Spain and to the Philippines taken from the work of John TePaske.[15]

page16

Since the population of Mexico under Spanish rule was at most 6 million people by the end of the colonial period, the kingdom’s silver output could only be considered astronomical.

This production has to be considered in both its domestic and international dimensions. From a domestic perspective, the mines were what a later generation of economists would call “growth poles.” They were markets in which inputs were transformed into tradable outputs at a much higher rate of productivity (because of mining’s relatively advanced technology) than Mexico’s other activities. Silver thus became Mexico’s principal exportable good, and remained so well into the late nineteenth century.  The residual claimants on silver production were many and varied.  There were, of course the silver miners themselves in Mexico and their merchant financiers and suppliers. They ranged from some of the wealthiest people in the world at the time, such as the Count of Regla (1710-1781), who donated warships to Spain in the eighteenth century, to individual natives in Zacatecas smelting their own stocks of silver ore.[16] While the conditions of labor in Mexico’s silver mines were almost uniformly bad, the compensation ranged from above market wages paid to free labor in the prosperous larger mines  of the Bajío and the North to the use of forced village  labor drafts in more marginal (and presumably less profitable) sites such as Taxco. In the Iberian Peninsula, income from American silver mines ultimately supported not only a class of merchant entrepreneurs in the large port cities, but virtually the core of the Spanish political nation, including monarchs, royal officials, churchmen, the military and more. And finally, silver flowed to those who valued it most highly throughout the world. It is generally estimated that 40 percent of Spain’s American (not just Mexican, but Peruvian as well) silver production ended up in hoards in China.

Within New Spain, mining centers such as Guanajuato, San Luis Potosí, and Zacatecas became places where economic growth took place rapidly, in which labor markets more readily evolved, and in which the standard of living became obviously higher than in neighboring regions. Mining centers tended to crowd out growth elsewhere because the rate of return for successful mines exceeded what could be gotten in commerce, agriculture and manufacturing. Because silver was the numeraire for Mexican prices—Mexico was effectively on a silver standard—variations in silver production could and did have substantial effects on real economic activity elsewhere in New Spain. There is considerable evidence that silver mining saddled Mexico with an early case of “Dutch disease” in which irreducible costs imposed by the silver standard ultimately rendered manufacturing and the production of other tradable goods in New Spain uncompetitive. For this reason, the expansion of Mexican silver production in the years after 1750 was never unambiguously accompanied by overall, as opposed to localized prosperity. Silver mining tended to absorb a disproportional quantity of resources and to keep New Spain’s price level high, even when the business cycle slowed down—a fact that was to impress visitors to Mexico well into the nineteenth century. Mexican silver accounted for well over three-quarters of exports by value into the nineteenth century as well. The estimates vary widely, for silver was by no means the only, or even the most important source of revenue to the Crown, but by the end of the colonial era, the Kingdom of New Spain probably accounted for 25 percent of the Crown’s imperial income.[17] That is why reformist proposals circulating in governing circles in Madrid in the late eighteenth century fixed on Mexico. If there was any threat to the American Empire, royal officials thought that Mexico, and increasingly, Cuba, were worth holding on to. From a fiscal standpoint, Mexico had become just that important.[18]

 

“New Spain”: The Second Phase                of the Bourbon “Reforms”

In 1700, the last of the Spanish Hapsburgs died and a disputed succession followed. The ensuring conflict, known as the War of Spanish Succession, came to an end in 1714. The grandson of French king Louis XIV came to the Spanish throne as King Philip V. The dynasty he represented was known as the Bourbons. For the next century of so, they were to determine the fortunes of New Spain. Traditionally, the Bourbons, especially the later ones, have been associated with an effort to “renationalize” the Spanish empire in America after it had been thoroughly penetrated by French, Dutch, and lastly, British commercial interests.[19]

There were at least two areas in which the Bourbon dynasty, “reformist” or no, affected the Mexican economy. One of them dealt with raising revenue and the other was the international position of the imperial economy, specifically, the volume and value of trade. A series of statistics calculated by Richard Garner shows that the share of Mexican output or estimated GDP taken by taxes grew by 167 percent between 1700 and 1800. The number of taxes collected by the Royal Treasury increased from 34 to 112 between 1760 and 1810. This increase, sometimes labelled as a Bourbon “reconquest” of Mexico after a century and a half of drift under the Hapsburgs, occurred because of Spain’s need to finance increasingly frequent and costly wars of empire in the eighteenth century. An entire array of new taxes and fiscal placemen came to Mexico. They affected (and alienated) everyone, from the wealthiest merchant to the humblest villager. If they did nothing else, the Bourbons proved to be expert tax collectors.[20]

The second and equally consequential change in imperial management lay in the revision and “deregulation” of New Spain’s international trade, or the evolution from a “fleet” system to a regime of independent sailings, and then, finally, of voyages to and from a far larger variety of metropolitan and colonial ports. From the mid-sixteenth century onwards, ocean-going trade between Spain and the Americas was, in theory, at least, closely regulated and supervised. Ships in convoy (flota) sailed together annually under license from the monarchy and returned together as well. Since so much silver specie was carried, the system made sense, even if the flotas made a tempting target and the problem of contraband was immense. The point of departure was Seville and later, Cadiz. Under pressure from other outports in the late eighteenth century, the system was finally relaxed. As a consequence, the volume and value of trade to Mexico increased as the price of importables fell. Import-competing industries in Mexico, especially textiles, suffered under competition and established merchants complained that the new system of trade was too loose. But to no avail. There is no measure of the barter terms of trade for the eighteenth century, but anecdotal evidence suggests they improved for Mexico. Nevertheless, it is doubtful that these gains could have come anywhere close to offsetting the financial cost of Spain’s “reconquest” of Mexico.[21]

On the other hand, the few accounts of per capita real income growth in the eighteenth century that exist suggest little more than stagnation, the result of population growth and a rising price level. Admittedly, looking for modern economic growth in Mexico in the eighteenth century is an anachronism, although there is at least anecdotal evidence of technological change in silver mining, especially in the use of gunpowder for blasting and excavating, and of some productivity increase in silver mining. So even though the share of international trade outside of goods such as cochineal and silver was quite small, at the margin, changes in the trade regime were important. There is also some indication that asset income rose and labor income fell, which fueled growing social tensions in New Spain. In the last analysis, the growing fiscal pressure of the Spanish empire came when the standard of living for most people in Mexico—the native and mixed blood population—was stagnating. During periodic subsistence crisis, especially those propagated by drought and epidemic disease, and mostly in the 1780s, living standards fell. Many historians think of late colonial Mexico as something of a powder keg waiting to explode. When it did, in 1810, the explosion was the result of a political crisis at home and a dynastic failure abroad. What New Spain had negotiated during the Wars of Spanish Succession—regime change– provide impossible to surmount during the Napoleonic Wars (1794-1815). This may well be the most sensitive indicator of how economic conditions changed in New Spain under the heavy, not to say clumsy hand, of the Bourbon “reforms.”[22]

 

The War for Independence, the Insurgency, and Their Legacy

The abdication of the Bourbon monarchy to Napoleon Bonaparte in 1808 produced a series of events that ultimately resulted in the independence of New Spain. The rupture was accompanied by a violent peasant rebellion headed by the clerics Miguel Hidalgo and José Morelos that, one way or another, carried off 10 percent of the population between 1810 and 1820. Internal commerce was largely paralyzed. Silver mining essentially collapsed between 1810 and 1812 and a full recovery of mining output was delayed until the 1840s. The mines located in zones of heavy combat, such as Guanajuato and Querétaro, were abandoned by fleeing workers. Thus neglected, they quickly flooded.

At the same time, the fiscal and human costs of this period, the Insurgency, were even greater.[23] The heavy borrowings in which the Bourbons engaged to finance their military alliances left Mexico with a considerable legacy of internal debt, estimated at £16 million at Independence. The damage to the fiscal, bureaucratic and administrative structure of New Spain in the face of the continuing threat of Spanish reinvasion (Spain did not recognize the Independence of Mexico (1821)) in the 1820s drove the independent governments into foreign borrowing on the London market to the tune of £6.4 million in order to finance continuing heavy military outlays. With a reduced fiscal capacity, in part the legacy of the Insurgency and in part the deliberate effort of Mexican elites to resist any repetition Bourbon-style taxation, Mexico defaulted on its foreign debt in 1827. For the next sixty years, through a serpentine history of moratoria, restructuring and repudiation (1867), it took until 1884 for the government to regain access to international capital markets, at what cost can only be imagined. Private sector borrowing and lending continued, although to what extent is currently unknown. What is clear is that the total (internal plus external) indebtedness of Mexico relative to late colonial GDP was somewhere in the range of 47 to 56 percent.[24]

This was, perhaps, not an insubstantial amount for a country whose mechanisms of public finance were in what could be mildly termed chaotic condition in the 1820s and 1830s as the form, philosophy, and mechanics of government oscillated from federalist to centralist and back into the 1850s.  Leaving aside simple questions of uncertainty, there is the very real matter that the national government—whatever the state of private wealth—lacked the capacity to service debt because national and regional elites denied it the means to do so. This issue would bedevil successive regimes into the late nineteenth century, and, indeed, into the twentieth.[25]

At the same time, the demographic effects of the Insurgency exacted a cost in terms of lost output from the 1810s through the 1840s. Gaping holes in the labor force emerged, especially in the fertile agricultural plains of the Bajío that created further obstacles to the growth of output. It is simply impossible to generalize about the fortunes of the Mexican economy in this period because of the dramatic regional variations in the Republic’s economy. A rough estimate of output per head in the late colonial period was perhaps 40 pesos (dollars).[26] After a sharp contraction in the 1810s, income remained in that neighborhood well into the 1840s, at least until the eve of the war with the United States in 1846. By the time United States troops crossed the Rio Grande, a recovery had been under way, but the war arrested it. Further political turmoil and civil war in the 1850s and 1860s represented setbacks as well. In this way, a half century or so of potential economic growth was sacrificed from the 1810s through the 1870s. This was not an uncommon experience in Latin America in the nineteenth century, and the period has even been called The Stage of the Great Delay.[27] Whatever the exact rate of real per capita income growth was, it is hard to imagine it ever exceeded two percent, if indeed it reached much more than half that.

 

Agricultural Recovery and War

On the other hand, it is clear that there was a recovery in agriculture in the central regions of the country, most notably in the staple maize crop and in wheat. The famines of the late colonial era, especially of 1785-86, when massive numbers perished, were not repeated. There were years of scarcity and periodic corresponding outbreaks of epidemic disease—the cholera epidemic of 1832 affected Mexico as it did so many other places—but by and large, the dramatic human wastage of the colonial period ceased, and the death rate does appear to have begun to fall. Very good series on wheat deliveries and retail sales taxes for the city of Puebla southeast of Mexico City show a similarly strong recovery in the 1830s and early 1840s, punctuated only by the cholera epidemic whose effects were felt everywhere.[28]

Ironically, while the Panic of 1837 appears to have at least hit the financial economy in Mexico hard with a dramatic fall in public borrowing (and private lending), especially in the capital,[29] an incipient recovery of the real economy was ended by war with the United States. It is not possible to put numbers on the cost of the war to Mexico, which lasted intermittently from 1846 to 1848, but the loss of what had been the Southwest under Mexico is most often emphasized. This may or may not be accurate. Certainly, the loss of California, where gold was discovered in January 1848, weighs heavily on the historical imaginations of modern Mexicans. There is also the sense that the indemnity paid by the United States–$15 million—was wholly inadequate, which seems at least understandable when one considers that Andrew Jackson offered $5 million to purchase Texas alone in 1829.

It has been estimated that the agricultural output of the Mexican “cession” as it was called in 1900, was nearly $64 million, and that the value of livestock in the territory was over $100 million. The value of gold and silver produced was about $35 million. Whether it is reasonable to employ the numbers in estimating the present value of output relative to the indemnity paid is at least debatable as a counterfactual, unless one chooses to regard this as the annuitized value on a perpetuity “purchased” from Mexico at gunpoint, which seems more like robbery than exchange.  In the long run, the loss may have been staggering, but in the short run, much less so. The northern territories Mexico lost had really yielded very little up until the War. In fact, the balance of costs and revenues to the Mexican government may well have been negative.[30]

Whatever the case, the decades following the war with the United States until the beginning of the administration of Porfirio Díaz (1876) are typically regarded as a step backward. The reasons are several. In 1850, the government essentially went broke. While it is true that its financial position had disintegrated since the mid-1830s, 1850 marked a turning point. The entire indemnity payment from the United States was consumed in debt service, but this made no appreciable dent in the outstanding principal, which hovered around 50 million pesos (dollars).  The limits of debt sustainability had been reached: governing was turned into a wild search for resources, which proved fruitless. Mexico continued to sell of parts of its territory, such as the Treaty of the Mesilla (1853), or Gadsden Purchase, whose proceeds largely ended up in the hands of domestic financiers rather than foreign creditors’.[31] Political divisions, if anything, terrible before the war with the United States, turned catastrophic. A series of internal revolts, uprisings and military pronouncements segued into yet another violent civil war between liberals and conservatives—now a formal party—the so-called Three Years’ War (1856-58). In 1862, frustrated by Mexico’s suspension of foreign debt service, Great Britain, Spain and France seized Veracruz. A Hapsburg prince, Maximilian, was installed as Mexico’s second “emperor.” (Agustín de Iturbide was the first). While only the French actively prosecuted the war within Mexico, and while they never controlled more than a very small part of the country, the disruption was substantial. By 1867, with Maximillian deposed and the French army withdrawn, the country required serious reconstruction. [32]

 

Juárez, Díaz and the Porfiriato: authoritarian development.

To be sure, the origins of authoritarian development in nineteenth century Mexico were not with Porfirio Díaz, as is often asserted. Their beginnings actually went back several decades earlier, to the last presidency of Santa Anna, generally known as the Dictatorship (1853-54). But Santa Anna was overthrown too quickly, and now for the last time, for much to have actually occurred. A ministry for development (Fomento) had been created, but the Liberal revolution of Ayutla swept Santa Anna and his clique away for good. Serious reform seems to have begun around 1870, when the Finance Minister was Matías Romero. Romero was intent on providing Mexico with a modern Treasury, and on ending the hand-to- mouth financing that had mostly characterized the country’s government since Independence, or at least since the mid-1830s. So it is appropriate to pick up with the story here. Where did Mexico stand in 1870?[33]

The most revealing data that we have on the state of economic development come from various anthropometric and cost of living studies by Amilcar Challu, Aurora Gómez Galvarriato, and Moramay López Alonso.[34] Their research overlaps in part, and gives a fascinating picture of Mexico in the long run, from 1735 to 1940. For the moment, let us look at the period leading up to 1867, when the French withdrew from Mexico. If we look at the heights of the “literate” population, Challu’s research suggests that the standard of living stagnated between 1750 and 1840. If we look at the “illiterate” population, there was a consistent decline until 1850. Since the share of the illiterate population was clearly larger, we might infer that living standards for most Mexicans declined after 1750, however we interpret other quantitative and anecdotal evidence.

López Alonso confines her work to the period after the 1840s. From 1850 through 1890, her work generally corroborates Challu’s. The period after the Mexican War was clearly a difficult one for most Mexicans, and the challenge that both Juárez and Díaz faced was a macroeconomy in frank contraction after 1850. The regimes after 1867 were faced with stagnation.

The real wage study of by Amilcar Challu and Aurora Gómez Galvarriato, when combined with the existing anthropometric work, offers a pretty clear correlation between movements in real wages (down) and height (falling). [35]

It would then appear growth from the 1850s through the 1870s was slow—if there was any at all—and perhaps inferior to what had come between the 1820s and the 1840s. Given the growth of import substitution during the Napoleonic Wars, roughly 1790-1810, coupled with the commercial opening brought by the Bourbons’   post-1789 extension of “free trade” to Mexico, we might well see a pattern of mixed performance (1790-1810), sharp contraction (the 1810s), rebound and recovery, with a sharp financial shocks coming in the mid-1820s and mid -1830s (1820s-1840s), and stagnation once more (1850s-1870s). Real per capita output oscillated, sometimes sharply, around an underlying growth rate of perhaps one percent; changes in the distribution of income and wealth are more or less impossible to identify consistently, because studies conflict.

Far less speculative is that the foundations for modern economic growth were laid down in Mexico during the era of Benito Juárez. Its key elements were the creation of a secular, bourgeois state and secular institutions embedded in the Constitution of 1857. The titanic ideological struggles between liberals and conservatives were ultimately resolved in favor of a liberal, but nevertheless centralizing form of government under Porfirio Diáz. This was the beginning of the end of the Ancien Regime. Under Juárez, corporate lands of the Church and native villages were privatized in favor of individual holdings and their former owners compensated in bonds. This was effectively the largest transfer of land title since the late sixteenth century (not including the war with the United States) and it cemented the idea of individual property rights. With the expulsion of the French and the outright repudiation of the French debt, the Treasury was reorganized along more modern lines. The country got additional breathing room by the suspension of debt service to Great Britain until the terms of the 1825 loans were renegotiated under the Dublán Convention (1884). Equally, if not more important, Mexico now entered the railroad age in 1876, nearly forty years after the first tracks were laid in Cuba in 1837. The educational system was expanded in an attempt to create at least a core of literate citizens who could adopt the tools of modern finance and technology. Literacy still remained in the neighborhood of 20 percent, and life expectancy at birth scarcely reached 40 years of age, if that. Yet by the end of the Restored Republic (1876), Mexico had turned a corner. There would be regressions, but the nineteenth century had finally arrived, aptly if brutally signified by Juárez’ execution of Maximilian in Querétaro in 1867.[36]

Porfirian Mexico

Yet when Díaz came to power, Mexico was, in many ways, much as it had been a century earlier. It was a rural, agrarian nation whose primary agricultural output per person was maize, followed by wheat and beans. These were produced on haciendas and ranchos in Jalisco, Guanajuato, Michoacán, Mexico, Puebla as well as Oaxaca, Veracruz, Aguascalientes, Chihuahua and Sonora. Cotton, which with great difficulty had begun to supply a mechanized factory regime (first in spinning, then weaving) was produced in Oaxaca, Yucatán, Guerrero and Chiapas as well as in parts of Durango and Coahuila. Domestic production of raw cotton rarely sufficed to supply factories in Michoacán, Querétaro, Puebla and Veracruz, so imports from the Southern United States were common. For the most part, the indigenous population lived on maize, beans, and chile, producing its own subsistence on small, scattered plots known as milpas. Perhaps 75 percent of the population was rural, with the remainder to be found in cities like Mexico, Guadalajara, San Luis Potosí, and later, Monterrey. Population growth in the Southern and Eastern parts of the country had been relatively slow in the nineteenth century. The North and the center North grew more rapidly.  The Center of the country, less so. Immigration from abroad had been of no consequence.[37]

It is a commonplace to see the presidency of Porfirio Díaz (1876-1910) as a critical juncture in Mexican history, and this would be no less true of economic or commercial history as well. By 1910, when the Díaz government fell and Mexico descended into two decades of revolution, the first one extremely violent, the face of the country had been changed for good. The nature and effect of these changes remain not only controversial, but essential for understanding the subsequent evolution of the country, so we should pause here to consider some of their essential features.

While mining and especially, silver mining, had long held a privileged place in the economy, the nineteenth century had witnessed a number of significant changes. Until about 1889, the coinage of gold, silver, and copper—a very rough proxy for production given how much silver had been illegally exported—continued on a steadily upward track. In 1822, coinage was about 10 million pesos. By 1846, it had reached roughly 15 million pesos. There was something of a structural break after the war with the United States (its origins are unclear), and coinage continued upward to about 25 million pesos in 1888. Then, the falling international price of silver, brought on by large increases in supply elsewhere, drove the trend after 1889 sharply downward. By 1909-10, coinage had collapsed to levels previously unrecorded since the 1820s, although in 1904 and 1905, it had skyrocketed to nearly 45 million pesos.[38]

It comes as no surprise that these variations in production corresponded to sharp changes in international relative prices. For example, the market price of silver declined sharply relative to lead, which in turn encountered a large increase in Mexican production and a diversification into other metals including zinc, antinomy, and copper. Mexico left the silver standard (for international transactions, but continued to use silver domestically) in 1905, which contributed to the eclipse of this one crucial industry, which would never again have the status it had when Díaz became president in 1876, when precious metals represented 75 percent of Mexican exports by value. By the time he had decamped in exile to Paris, precious metals accounted for less than half of all exports.

The reason for this relative decline was the diversification of agricultural exports that had been slowly occurring since the 1870s. Coffee, cotton, sugar, sisal and vanilla were the principal crops, and some regions of the country such as Yucatán (henequen) and Durango and Tamaulipas (cotton) supplied new export crops.

 

Railroads and Infrastructure

None of be of this would have occurred without the massive changes in land tenure that had begun in the 1850s, but most of all, without the construction of railroads financed by the migration of foreign capital to Mexico under Díaz. At one level, it is a well-known story of social savings, which were substantial in Mexico because the terrain was difficult and the alternative modes of carriage few. One way or another, transportation has always been viewed as an “obstacle” to Mexican economic development. That must be true at some level, although recent studies (especially by Sandra Kuntz) have raised important qualifications. Railroads may not have been gateways to foreign dependency, as historians once argued, but there were limits to their ability to effect economic change, even internally. They tended to enlarge the internal market for some commodities more than others. The peculiarities of rate-making produced other distortions, while markets for some commodities were inevitably concentrated in major cities or transshipment points which afforded some monopoly power to distributors even as a national market in basic commodities became more of a reality. Yet, in general, the changes were far reaching.[39]

Conventional figures confirm conventional wisdom. When Díaz assumed the presidency, there were 660 km (410 miles) of track. In 1910, there were 19,280 km (about 12,000 miles). Seven major lines linked the cities of Mexico, Veracruz, Acapulco, Juárez, Laredo, Puebla, Oaxaca. Monterrey and Tampico in 1892. The lines were built by foreign capital (e.g., the Central Mexicano was built by the Atchison, Topeka and Santa Fe), which is why resolving the long-standing questions of foreign debt service were critical. Large government subsidies on the order of 3,500 to 8,000 pesos per km were granted, and financing the subsidies amounted to over 30 million pesos by 1890. While the railroads were successful in creating more of a national market, especially in the North, their finances were badly affected by the depreciation of the silver peso, given that foreign liabilities had to be liquidated in gold.

As a result, the government nationalized the railroads in 1903. At the same time, it undertook an enormous effort to construct infrastructure such as drainage and ports, virtually all of which were financed by British capital and managed by “Don Porfirio’s contactor,” Sir Weetman Pearson.  Between railroads, ports, drainage works and irrigation facilities, the Mexican government borrowed 157 million pesos to finance costs.[40]

The expansion of the railroads, the build-out of infrastructure and the expansion of trade would have normally increased output per capita. Any data we have prior to 1930 are problematic, and before 1895, strictly speaking, we have no official measures of output per capita at all. Most scholars shy away from using levels of GDP in any form, other than for illustrative purposes.  Aside from the usual problems attending national income accounting, Mexico presents a few exceptional challenges. In peasant families, where women were entrusted with converting maize into tortilla, no small job, the omission of their value added from GDP must constitute a sizeable defect in measured output. Moreover, as the commercial radius of Mexican agriculture expanded rapidly as railroads, roads, and later, highways spread extensively, growth rates represented increased commercialization rather than increased growth. We have no idea how important this phenomenon was, but it is worth keeping in mind when we look at very rapid growth rates after 1940.

There are various measures of cumulative growth during the Porfiriato. By and large, the figure from 1900 through 1910 is around 23 percent, which is certainly higher than rates achieved during the nineteenth century, but nothing like what was recorded after 1940. In light of declining real wages, one can only assume that the bulk of “progress” flowed to the recipients of property income. This may well have represented a reversal of trends in the nineteenth century, when some argue that property income contracted in the wake of the Insurgency[41].

There was also significant industrialization in Mexico during the Porfiriato. Some industry, especially textiles, had its origins in the 1840s, but its size, scale and location altered dramatically by the end of the nineteenth century. For example, the cotton textile industry saw the number of workers, spindles and looms more than double from the late 1870s to the first decade of the nineteenth century. Brewing and its associated industry, glassmaking, became well established in Monterrey during the 1890s. The country’s first iron and steel mill, Fundidora Monterrey, was established there as well in 1903. Other industries, such as papermaking and cigarettes followed suit. By the end of the Porfiriato, over 10 percent of Mexico’s output was certainly industrial.[42]

 

From Revolution to “Miracle”

The Mexican Revolution (1910-1940) began as a political upheaval provoked by a crisis in the presidential succession when Porfirio Díaz refused to leave office in the wake of electoral defeat after signaling his willingness to do so in a famous pubic interview of 1908.[43] It was also the result of an agrarian uprising and the insistent demand of Mexico’s growing industrial proletariat for a share of political power. Finally, there was a small (fewer than 10 percent of all households) but upwardly mobile urban middle class created by economic development under Díaz whose access to political power had been effectively blocked by the regime’s mechanics of political control. Precisely how “revolutionary” were the results of the armed revolt—which persisted largely through the 1910s and peaked in a civil war in 1914-1915—has long been contentious, but is only tangentially relevant as a matter of economic history. The Mexican Revolution was no Bolshevik movement (of course, it predated Bolshevism by seven years) but it was not a purely bourgeois constitutional movement either, although it did contain substantial elements of both.

From a macroeconomic standpoint, it has become fashionable to argue that the Revolution had few, if any, profound economic consequences. It seems as if the principal reason was that revolutionary factions were interested in appropriating rather than destroying the means of production. For example, the production of crude oil peaked in Mexico in 1915—at the height of the Revolution—because crude oil could be used as a source of income to the group controlling the wells in Veracruz state. This was a powerful consideration.[44]

Yet in another sense, the conclusion that the Revolution had slight economic effects is not only facile, but obviously wrong. As the demographic historian Robert McCaa showed, the excess mortality occasioned by the Revolution was larger than any similar event in Mexican history other than the conquest in the sixteenth century. There has been no attempt made to measure the output lost by the demographic wastage (including births that never occurred), yet even the effect on the population cohort born between 1910 and 1920 is plain to see in later demographic studies.  [45]

There is also a subtler question that some scholars have raised. The Revolution increased labor mobility and the labor supply by abolishing constraints on the rural population such as debt peonage and even outright slavery. Moreover, the Revolution, by encouraging and ultimately setting into motion a massive redistribution of previously privatized land, contributed to an enlarged supply of that factor of production as well. The true impact of these developments was realized in the 1940s and 1950s, when rapid economic growth began, the so-called Mexican Miracle, which was characterized by rates of real growth of as much as 6 percent per year (1955-1966). Whatever the connection between the Revolution and the Miracle, it will require a serious examination on empirical grounds and not simply a dogmatic dismissal of what is now regarded as unfashionable development thinking: import substitution and inward-oriented growth.[46]

The other major consequence of the Revolution, the agrarian reform and the creation of the ejido, or land granted by the Mexican state to rural population under the authority provided it by the revolutionary Constitution on 1917 took considerable time to coalesce, and were arguably not even high on one of the Revolution’s principal instigators, Francisco Madero’s, list of priorities. The redistribution of land to the peasantry in the form of possession if not ownership – a kind of return to real or fictitious preconquest and colonial forms of land tenure – did peak during the avowedly reformist, and even modestly radical presidency of Lázaro Cárdenas (1934-1940) after making only halting progress under his predecessors since the 1920s. From 1940 to 1965, the cultivated area in Mexico grew at 3.7 percent per year and the rise in productivity in basic food crops was 2.8 percent per year.

Nevertheless, the long-run effects of the agrarian reform and land redistribution have been predictably controversial. Under the presidency of Carlos Salinas (1988-1994) the reform was officially declared over, with no further land redistribution to be undertaken and the legal status of the ejido definitively changed. The principal criticism of the ejido was that, in the long run, it encouraged inefficiently small landholding per farmer and, by virtue of its limitations on property rights, made agricultural credit difficult for peasants to obtain.[47]

There is no doubt these are justifiable criticisms, but they have to be placed in context. Cárdenas’ predecessors in office, Alvaro Obregón (1924-1928) and Plutarco Elías Calles (1928-1932) may well have preferred a more commercial model of agriculture with larger, irrigated holdings. But it is worth recalling that one of the original agrarian leaders of the Revolution, Emiliano Zapata, had an uneasy relationship with Madero, who saw the Revolution in mostly political terms, from the start and quickly rejected Madero’s leadership in favor of restoring peasant lands in his native state of Morelos.  Cárdenas, who was in the midst of several major maneuvers that would require widespread popular support—such as the expropriation of foreign oil companies operating in Mexico in March 1938—was undoubtedly sensitive to the need to mobilize the peasantry on his behalf. The agrarian reform of his presidency, which surpassed that of any other, needs to be considered in those terms as well as in terms of economic efficiency.[48]

Cárdenas’ presidency also coincided with the continuation of the Great Depression. Like other countries in Latin America, Mexico was hard hit by the Great Depression, at least through the early 1930s.  All sorts of consumer goods became scarcer, and the depreciation of the peso raised the relative price of imports. As had happened previously in Mexican history (1790-1810, during the Napoleonic Wars and the disruption of the Atlantic trade), in the medium term domestic industry was nevertheless given a stimulus and import substitution, the subsequent core of Mexico’s industrialization program after World War II, was given a decisive boost. On the other hand, Mexico also experienced the forced “repatriation” of people of Mexican descent, mostly from California, of whom 60 percent were United States citizens. The effects of this movement—the emigration of the Revolution in reverse—has never been properly analyzed. The general consensus is that World War II helped Mexico to prosper. Demand for labor and materials from the United States, to which Mexico was allied, raised real wages and incomes, and thus boosted aggregate demand. From 1939 through 1946, real output in Mexico grew by approximately 50 percent. The growth in population accelerated as well as the country began to move into the later stages of the demographic transition, with a falling death rate, while birth rates remained high.[49]

 

From Miracle to Meltdown: 1950-1982  

The history of import substitution manufacturing did not begin with postwar Mexico, but few countries (especially in Latin America) became as identified with the policy in the 1950s, and with what Mexicans termed the emergence of “stabilizing development.” There was never anything resembling a formal policy announcement, although Raúl Prebisch’s 1949 manifesto, “The Economic Development of Latin America and its Principal Problems” might be regarded as supplying one. Prebisch’s argument, that a directed change in the composition of imports toward capital goods to facilitate domestic industrialization was, in essence, the basis of the policy that Mexico followed. Mexico stabilized the nominal exchange rate at 12.5 pesos to the dollar in 1954, but further movement in the real exchange rate (until the 1970s) were unimportant. The substantive bias of import substitution in Mexico was a high effective rate of protection to both capital and consumer goods. Jaime Ros has calculated these rates in 1960 ranged between 47 and 85 percent, and between 33 and 109 percent in 1980. The result, in the short to intermediate run, was very rapid rates of economic growth, averaging 6.5 percent in 1950 through 1973. Other than Brazil, which also followed an import substitution regime, no country in Latin America experienced higher rates of growth. Mexico’s was substantially above the regional average. [50]

[See the historical graph of population growth in Mexico through 2000 below]

page39

Source: Essentially, Estadísticas Históricas de México (various editions since 1999; the most recent is 2014)

http://dgcnesyp.inegi.org.mx/ehm/ehm.htm (Accessed July 20, 2016)

 

But there were unexpected results as well. The contribution of labor to GDP growth was 14 percent. Capital’s contribution was 53 percent, and the remainder, total factor productivity (TFP) 28 percent.[51] As a consequence, while Mexico’s growth occurred through the accumulation of capital, the distribution of income became extremely skewed. The ratio of the top 10 percent of household income to the bottom 40 percent was 7 in 1960, and 6 in 1968. Even supporters of Mexico’s development program, such as Carlos Tello, conceded that it probable that it was the organized peasants and workers experienced an effective improvement of their relative position. The fruits of the Revolution were unevenly distributed, even among the working class.[52]

By “organized” one means such groups as the most important labor union in the country, the CTM (Confederation of Mexican Workers) or the nationally recognized peasant union, the CNC, both of which formed two of the three organized sectors of the official government party, the PRI, or Party of the Institutional Revolution that was organized in 1946. The CTM in particular was instrumental in supporting the official policy of import substitution, and thus benefited from government wage setting and political support. The leaders of these organizations became important political figures in their own right. One, Fidel Velázquez, as both a federal senator and the head of the CTM from 1941 to his death in 1997. The incorporation of these labor and peasant groups into the political system offered the government both a means of control and a guarantee of electoral support. They became pillars of what the Peruvian writer Mario Vargas Llosa famously called “the perfect dictatorship” of the PRI from 1946 to 2000, during which the PRI held a monopoly of the presidency and the important offices of state. In a sense, import substitution was the economic ideology of the PRI.[53]

Labor and economic development during the years of rapid growth is, like many others, a debated subject. While some have found strong wage growth, others, looking mostly at Mexico City, have found declining real wages. Beyond that, there is the question of informality and a segmented labor market. Were workers in the CTM the real beneficiaries of economic growth, while others in the informal sector (defined as receiving no social security payments, meaning roughly two-thirds of Mexican workers) did far less well? Obviously, the attraction of a segmented labor market model can address one obvious puzzle: why would industry substitute capital for labor, as it obviously did, if real wages were not rising? Postulating an informal sector that absorbed the rapid influx of rural migrants and thus held nominal wages steady while organized labor in the CTM got the benefit of higher negotiated wages, but in so doing, limited their employment is an attractive hypothesis, but would not command universal agreement. Nothing has been resolved, at least for the period of the “Miracle.” After Mexico entered a prolonged series of economic crises in the 1980s—here labelled as “meltdown”—the discussion must change, because many hold that the key to relative political stability and the failure of open unemployment to rise sharply can be explained by falling real wages.

The fiscal basis on which the years of the Miracle were constructed was conventional, not to say conservative.[54] A stable nominal exchange rate, balanced budgets, limited public borrowing, and a predictable monetary policy were all predicated on the notion that the private sector would react positively to favorable incentives. By and large, it did. Until the late 1960s, foreign borrowing was considered inconsequential, even if there was some concern on the horizon that it was starting to rise. No one foresaw serious macroeconomic instability. It is worth consulting a brief memorandum from Secretary of State Dean Rusk to President Lyndon Johnson (Washington, December 11, 1968) –to get some insight into how informed contemporaries viewed Mexico. The instability that existed was seen as a consequence of heavy-handedness on the part of the PRI and overreaction in the security forces. Informed observers did not view Mexico’s embrace of import-substitution industrialization as a train wreck waiting to happen. Historical actors are rarely so prescient.[55]

 

Slowing of the Miracle and Echeverría

The most obvious problems in Mexico were political. They stemmed from the increasing awareness that the limits of the “institutional revolution” had been reached, particularly regarding the growing democratic demands of the urban middle classes. The economic problem, which was far from obvious, was that import substitution had concentrated income in the upper 10 per cent of the population, so that domestic demand had begun to stagnate. Initially at least, public sector borrowing could support a variety of consumption subsidies to the population, and there were also efforts to transfer resources out of agriculture via domestic prices for staples such as maize. Yet Mexico’s population was also growing at the rate of nearly 3 percent per year, so that the long term prospects for any of these measures were cloudy.

At the same time, growing political pressures on the PRI, mostly dramatically manifest in the army’s violent repression of student demonstrators at Tlatelolco in 1968 just prior to the Olympics, had convinced some elements in the PRI, people like Carlos Madrazo, to argue for more radical change. The emergence of an incipient guerilla movement in the state of Guerrero had much the same effect. The new president, Luis Echeverría (1970-76), openly pushed for changes in the distribution of income and wealth, incited agrarian discontent for political purposes, dramatically increased government spending and borrowing, and alienated what had typically been a complaisant, if not especially friendly private sector.

The country’s macroeconomic performance began to deteriorate dramatically. Inflation, normally in the range of about 5 percent, rose into the low 20 percent range in the early 1970s. The public sector deficit, fueled by increasing social spending, rose from 2 to 7 percent of GDP. Money supply growth now averaged about 14 percent per year. Real GDP growth had begun to slip after 1968 and in the early 1970s, in deteriorated more, if unevenly. There had been clear convergence of regional economies in Mexico between 1930 and 1980 because of changing patterns of industrialization in the northern and central regions of the country.  After 1980, that process stalled and regional inequality again widened. [56]

While there is a tendency to blame Luis Echeverria for all or most of these developments, this forgets that his administration coincided with the First OPEC oil shock (1973) and rapidly deteriorating external conditions. Mexico had, as yet, not discovered the oil reserves (1978) that were to provide a temporary respite from economic adjustment after the shock of the peso devaluation of 1976—the first change in its value in over 20 years. At the same time, external demand fell, principally transmitted from the United States, Mexico’s largest trading partner, where the economy had fallen into recession in late 1973. Yet it seems reasonable to conclude that the difficult international environment, while important in bring Mexico’s “miracle” period to a close, was not helped by Echeverría’s propensity for demagoguery, of the loss of fiscal discipline that had long characterized government policy, at least since the 1950s. The only question to be resolved was to what sort of conclusion the period would come. The answer, unfortunately, was disastrous.[57]

 

Meltdown: The Debt Crisis, the Lost Decade and After

In contemporary parlance, Mexico had passed from “stabilizing” to “shared” development under Echeverría. But the devaluation of 1976 from 12.5 to 20.5 pesos to the dollar suggested that something had gone awry. One might suppose that some adjustment in course, especially in public spending and borrowing, would have occurred. But precisely the opposite occurred. Between 1976 and 1979, nominal federal spending doubled. The budget deficit increased by a factor of 15. The reason for this odd performance was the discovery of crude oil in the Gulf of Mexico, perhaps unsurprising in light of the spiking prices of the 1970s (the oil shocks of 1973-74, 1978-79), but nevertheless of considerable magnitude. In 1975, Mexico’s proven reserves were 6 billion barrels of oil. By 1978, they had increased to 40 billion. President López Portillo set himself to the task of “administering abundance” and Mexican analysts confidently predicted crude oil at $100 a barrel (when it stood at $37 in current prices in 1980). The scope of the miscalculation was catastrophic. At the same time, encouraged by bank loan pushing and effectively negative real rates of interest, Mexico borrowed abroad. Consumption subsidies, while vital in the face of slowing import substitution, were also costly, and when supported by foreign borrowing, unsustainable, but foreign indebtedness doubled between 1976 and 1979, and even further thereafter.

Matters came to a head in 1982. By then, Mexico’s foreign indebtedness was estimated at over $80 billion dollars, an increase from less than $20 billion in 1975. Real interest rates had begun to rise in the United States in mid-1981, and with Mexican borrowing tied to international rates, debt service rapidly increased. Oil revenue, which had come to constitute the great bulk of foreign exchange, followed international crude prices downward, driven in large part by a recession that had begun in the United States in mid-1981. Within six months, Mexico, too, had fallen into recession. Real per capital output was to decline by 8 percent in 1982.  Forced to sharply devalue, the real exchange rate fell by 50 percent in 1982 and inflation approached 100 percent. By the late summer, Finance Minister Jesus Silva Herzog admitted that the country could not meet an upcoming payment obligation, and was forced to turn to the US Federal Reserve, to the IMF, and to a committee of bank creditors for assistance. In late August, in a remarkable display of intemperance, President López Portillo nationalized the banking system. By December 20, 1982, Mexico’s incoming President, Miguel de la Madrid (1982-88) appeared, beleaguered, on the cover of Time Magazine framed by the caption, “We are in an Emergency.”  It was, as the saying goes, a perfect storm, and with it, the Debt Crisis and the “Lost Decade” in Mexico had begun. It would be years before anything resembling stability, let alone prosperity, was restored. Even then, what growth there was a pale imitation of what had occurred during the decades of the “Miracle.”

 

The 1980s

The 1980s were a difficult decade.[58]  After 1981, annual real per capita growth would not reach 4 percent again until 1989, and in 1986, it fell by 6 percent. In 1987, inflation reached 159 percent. The nominal exchange rate fell by 139 percent in 1986-1987. By the standards of the years of stabilizing development, the record of the 1980s was disastrous. To complete the devastation, on September 19, 1985, the worst earthquake in Mexican history, 7.8 on the Richter Scale, devastated large parts of central Mexico City and killed 5 thousand (some estimates run as high as 25 thousand), many of whom were simply buried in mass graves. It was as if a plague of biblical proportions had struck the country.

Massive indebtedness produced a dramatic decline in the standard of living as structural adjustment occurred. Servicing the debt required the production of an export surplus in non-oil exports, which in turn, required a reduction in domestic consumption. In an effort to surmount the crisis, the government implemented an agreement between organized labor, the private sector, and agricultural producers called the Economic Solidarity Pact (PSE). The PSE combined an incomes policy with fiscal austerity, trade and financial liberalization, generally tight monetary policy, and debt renegotiation and reduction. The centerpiece of the “remaking” of the previously inward orientation of the domestic economy was the North American Free Trade Agreement (NAFTA, 1993) linking Mexico, the United States, and Canada. While average tariff rates in Mexico had fallen from 34 percent in 1985 to 4 percent in 1992—even before NAFTA was signed—the agreement was generally seen as creating the institutional and legal framework whereby the reforms of Miguel de la Madrid and Carlos Salinas (1988-1994) would be preserved. Most economists thought its effects would be relatively larger in Mexico than in the United States, which generally appears to have been the case. Nevertheless, NAFTA has been predictably controversial, as trade agreements are wont to be. The political furor (and, in some places, euphoria) surrounding the agreement have faded, but never entirely disappeared. In the United States in particular, NAFTA is blamed for deindustrialization, although pressure on manufacturing, like trade liberalization itself, was underway long before NAFTA was negotiated. In Mexico, there has been much hand wringing over the fate of agriculture and small maize producers in particular. While none of this is likely to cease, it is nevertheless the case that there has been a large increase in the volume of trade between the NAFTA partners. To dismiss this is, quite plainly, misguided, even where sensitive and well organized political constituencies are concerned. But the legacy of NAFTA, like most everything in Mexican economic history, remains unsettled.  As a result, the agreement was subject to a controversial renegotiation in 2018, largely fueled by protectionist sentiment in the Trump administration. While the intent was to increase costs in the Mexican automobile industry so as to price labor in the United Stats back into the industry, the long
term effect of the measure—not to say its ratification—remains to be seen.

 

Post Crisis: No Miracles

Still, while some prosperity was restored to Mexico by the reforms of the 1980s and 1990s, the general macroeconomic results have been disappointing, not to say mediocre. The average real compensation per person in manufacturing in 2008 was virtually unchanged from 1993 according to the Instituto Nacional De Estadística  Geografía e Informática, and there is little reason to think the compensation has improved at all since then. It is generally conceded that per capita GDP growth has probably averaged not much more than 1 percent a year. Real GDP growth since NAFTA according to the OECD has rarely reached 5 percent and since 2010, it has been well below that.

 

 

Source: http://www.worldbank.org/en/country/mexico (Accessed July 21, 2016). The vertical scale cuts the horizontal axis at 1982

 

For virtually everyone in Mexico, the question is why, and the answers proposed include virtually any plausible factor: the breakdown of the political system after the PRI’s historic loss of presidential power in 2000; the rise of China as a competitor to Mexico in international markets; the explosive spread of narcoviolence in recent years, albeit concentrated in the states of Sonora, Sinaloa, Tamaulipas, Nuevo León and Veracruz; the results of NAFTA itself; the failure of the political system to undertake further structural economic reforms and privatizations after the initial changes of the 1980s, especially regarding the national oil monopoly, Petroleos Mexicanos (PEMEX); the failure of the border industrialization program (maquiladoras) to develop substantive backward linkages to the rest of the economy. This is by no means an exhaustive list of the candidates for poor economic performance. The choice of a cause tends to reflect the ideology of the critic.[59]

Yet it seems that, at the end of the day, the reason why post-NAFTA Mexico has failed to grow comes down to something much more fundamental: a fear of growing, embedded in the belief that the collapse of the 1980s and early 1990s (including the devastating “Tequila Crisis” of 1994-1995, which resulted in a another enormous devaluation of the peso after an initial attempt to contain the crisis was bungled)  was so traumatic and costly as to render event modest efforts to promote growth, let alone the dirigisme of times past, as essentially unwarranted. The central bank, the Banco de México (Banxico) rules out the promotion of economic growth as part of its remit—even as a theoretical proposition, let alone as a goal of macroeconomic policy– and concerns itself only with price stability. The language of its formulation is striking. “During the 1970s, there was a debate as to whether it was possible to stimulate economic growth via monetary policy.  As a result, some governments and central banks tried to reduce unemployment through expansive monetary policy.  Both economic theory and the experience of economies that tried this prescription demonstrated that it lacked validity. Thus, it became clear that monetary policy could not actively and directly stimulate economic activity and employment. For that reason, modern central banks have as their primary goal the promotion of price stability” (translation mine). Banxico is not the Fed: there is no dual mandate in Mexico.[60]  This may well change during the new presidential administration of Andrés Manuel López Obrador (known colloquially in Mexico as AMLO).

The Mexican banking system has scarcely made things easier. Private credit stands at only about a third of GDP. In recent years, the increase in private sector savings has been largely channeled to government bonds, but until quite recently, public sector deficits were very small, which is to say, fiscal policy has not been expansionary. If monetary and fiscal policy are both relatively tight, if private credit is not easy to come by, and if growth is typically presumed to be an inevitable concomitant to economic stability for which no actor (other than the private sector) is deemed responsible, it should come as no surprise that economic growth over the past two decades has been lackluster.  In the long run, aggregate supply determines real GDP, but in the short run, nominal demand matters: there is no point in creating productive capacity to satisfy demand that does not exist. And, unlike during the period of the Miracle and Stabilizing Development, attention to demand since 1982 has been limited, not to say off the table completely. It may be understandable, but Mexico’s fiscal and monetary authorities seem to suffer from what could be termed, “Fear of Growth.” For better or worse, the results are now on display. After its current (2016) return to a relatively austere budget, it remains to be seen how the economic and political system in contemporary Mexico handles slow economic growth.

The response of the Mexican public to a generation of stagnation in living standards, as well as to rising insecurity and the perception of widespread public corruption, was the victory of AMLO in the presidential election of July 2018.

AMLO had previously run for President with a different party. After two unsuccessful attempts, he started a new one, called MORENA. He then proceeded to win 53 percent of the vote, virtually obliterating the opposition parties, the incumbent PRI, and the PAN. MORENA also won majorities in both houses of Congress. To most observers, this signified that AMLO would be a potentially strong president, assuming his congressional party remained loyal to him. His somewhat checkered “leftist” past guaranteed that not everyone was thrilled at the prospect of a strong AMLO presidency.

Expectations for AMLO’s presidency are thus high, perhaps unrealistically so. While his initial budget has been generally well received by the financial markets, there is little question as to where AMLO’s priorities lie. He has advocated increases in spending on infrastructure, has moved to restore the real minimum wage to its level in 1994, and pledged to revitalize domestic agriculture. Whether these and a number of other reforms that AMLO has somewhat paradoxically labelled “Republican Austerity” will restore the country to its pre-1982 growth path now constitutes one of the most watched economic experiments in Latin America. [61]

[1] I am grateful to Ivan Escamilla and Robert Whaples for their careful readings and thoughtful criticisms.

[2] The standard reference work is Sandra Kuntz Ficker, (ed), Historia económica general de México. De la Colonia a nuestros días (México, DF: El Colegio de Mexico, 2010).

[3] Oscar Martinez, Troublesome Border (rev. ed., University of Arizona Press: Tucson, AZ, 2006) is the most helpful general account in English.

[4] There are literally dozens of general accounts of the pre-conquest world. A good starting point is Richard E.W. Adams, Prehistoric Mesoamerica (3d ed., University of Oklahoma Press: Norman, OK, 2005). More advanced is Richard E.W. Adams and Murdo J. Macleod, The Cambridge History of the Mesoamerican Peoples: Mesoamerica. (2 parts, New York: Cambridge University Press, 2000).

[5] Nora C. England and Roberto Zavala Maldonado, “Mesoamerican Languages” Oxford Bibliographies http://www.oxfordbibliographies.com/view/document/obo-9780199772810/obo-9780199772810-0080.xml

(Accessed July 10, 2016)

[6] For an introduction to the nearly endless controversy over the pre- and post-contact population of the Americas, see William M. Denevan (ed.), The Native Population of the Americas in 1492 (2d rev ed., Madison: University of Wisconsin Press, 1992).

[7] Sherburne F Cook and Woodrow Borah, Essays in Population History: Mexico and California (Berkeley, CA: University of California Press, 1979), p. 159.

[8]Gene C. Wilken, Good Farmers Traditional Agricultural Resource Management in Mexico and Central America (Berkeley: University of California Press, 1987), p. 24.

[9] Bernard Ortiz de Montellano, Aztec Medicine Health and Nutrition (New Brunswick, NJ: Rutgers University Press, 1990).

[10] Bernardo García Martínez, “Encomenderos españoles y British residents: El sistema de dominio indirecto desde la perspectiva novohispana”, in Historia Mexicana, LX: 4 [140] (abr-jun 2011), pp. 1915-1978.

[11] These epidemics are extensively and exceedingly well documented. One of the most recent examinations is Rodofo Acuna-Soto, David W. Stahle, Matthew D. Therrell , Richard D. Griffin,  and Malcolm K. Cleaveland, “When Half of the Population Died: The Epidemic of Hemorrhagic Fevers of 1576 in Mexico,” FEMS Microbiology Letters 240 (2004) 1–5. (http:// femsle.oxfordjournals.org/content/femsle/240/1/1.full.pdf, accessed July 10, 2016.) See in particular the exceptional map and table on pp. 2-3.

[12] See in particular, Bernardo García Martínez. Los pueblos de la Sierrael poder y el espacio entre los indios del norte de Puebla hasta 1700 (Mexico, DF: El Colegio de México, 1987) and Elinor G.K. Melville, A Plague of Sheep: Environmental Consequences of the Conquest of Mexico (New York: Cambridge University Press, 1997).

[13] J. H. Elliott, “A Europe of Composite Monarchies,” Past & Present 137 (The Cultural and Political Construction of Europe): 48–71; Guadalupe Jiménez Codinach, “De Alta Lealtad: Ignacio Allende y los sucesos de 1808-1811,” in Marta Terán and José Antonio Serrano Ortega, eds., Las guerras de independencia en la América Española (La Piedad, Michoacán, MX: El Colegio de Michoacán, 2002), p. 68.

[14] Richard Salvucci, “Capitalism and Dependency in Latin America,” in Larry Neal and Jeffrey G. Williamson, eds., The Cambridge History of Capitalism (2 vols.), New York: Cambridge University Press, 2014), 1: pp. 403-408.

[15] Source: TePaske Page, http://www.insidemydesk.com/hdd.html (Accessed July 19, 2016)

[16]  Edith Boorstein Couturier, The Silver King: The Remarkable Life of the Count of Regla in Colonial Mexico (Albuquerque, NM: University of New Mexico Press, 2003).  Dana Velasco Murillo, Urban Indians in a Silver City: Zacatecas, Mexico, 1546-1810 (Stanford, CA: Stanford University Press, 2015), p. 43. The standard work on the subject is David Brading, Miners and Merchants in Bourbon Mexico, 1763-1810 (New York: Cambridge University Press, 1971) But also see Robert Haskett, “Our Suffering with the Taxco Tribute: Involuntary Mine Labor and Indigenous Society in Central New Spain,” Hispanic American Historical Review, 71:3 (1991), pp. 447-475. For silver in China see http://afe.easia.columbia.edu/chinawh/web/s5/s5_4.html (accessed July 13, 2016). For the rents of empire question, see Michael Costeloe, Response to Revolution: Imperial Spain and the Spanish American Revolutions, 1810-1840 (New York: Cambridge University Press, 1986).

[17] This is an estimate. David Ringrose concluded that in the 1780s, the colonies accounted for 45 percent of Crown income, and one would suppose that Mexico would account for at least about half of that. See David R. Ringrose, Spain, Europe and the ‘Spanish Miracle’, 1700-1900 (New York: Cambridge University Press, 1996), p. 93; Mauricio Drelichman, “The Curse of Moctezuma: American Silver and the Dutch Disease,” Explorations in Economic History 42:3 (2005), pp. 349-380.

[18] José Antonio Escudero, El supuesto memorial del Conde de Aranda sobre la Independencia de América) México, DF: Universidad Nacional Autónoma de México, 2014) (http://bibliohistorico.juridicas.unam.mx/libros/libro.htm?l=3637, accessed July 13, 2016)

[19] Allan J. Kuethe and Kenneth J. Andrien, The Spanish Atlantic World in the Eighteenth Century. War and the Bourbon Reforms, 1713-1796 (New York: Cambridge University Press, 2014) is the most recent account of this period.

[20] Richard J. Salvucci, “Economic Growth and Change in Bourbon Mexico: A Review Essay,” The Americas, 51:2 (1994), pp. 219-231; William B Taylor, Magistrates of the Sacred: Priests and Parishioners in Eighteenth Century Mexico (Palo Alto: Stanford University Press, 1996), p. 24; Luis Jáuregui, La Real Hacienda de Nueva España. Su Administración en la Época de los Intendentes, 1786-1821 (México, DF: UNAM, 1999), p. 157.

[21] Jeremy Baskes, Staying AfloatRisk and Uncertainty in Spanish Atlantic World Trade, 1760-1820 (Stanford, CA: Stanford University Press, 2013); Xabier Lamikiz, Trade and Trust in the Eighteenth-century Atlantic World: Spanish Merchants and their Overseas Networks (Suffolk, UK: The Boydell Press., 2013). The starting point of all these studies is Clarence Haring, Trade and Navigation between Spain and the Indies in the Time of the Hapsburgs (Cambridge, MA: Harvard University Press, 1918).

[22] The best, and indeed, virtually unique starting point for considering these changes in their broadest dimensions   are the joint works of Stanley and Barbara Stein: Silver, Trade, and War (2003); Apogee of Empire (2004), and Edge of Crisis (2010), All were published by Johns Hopkins University Press and do for the Spanish Empire what Laurence Henry Gipson did for the First British Empire.

[23] The key work is María Eugenia Romero Sotelo, Minería y Guerra. La economía de Nueva España, 1810-1821 (México, DF: UNAM, 1997)

[24] Calculated from José María Luis Mora, Crédito Público ([1837] México, DF: Miguel Angel Porrúa, 1986), pp. 413-460. Also see Richard J. Salvucci, Politics, Markets, and Mexico’s “London Debt,” 1823-1887 (NY: Cambridge University Press, 2009).

[25] Jesús Hernández Jaimes, La Formación de la Hacienda Pública Mexicana y las Tensiones Centro -Periferia, 1821-1835  (México, DF: El Colegio de México, 2013). Javier Torres Medina, Centralismo y Reorganización. La Hacienda Pública Durante la Primera República Central de México, 1835-1842 (México, DF: Instituto Mora, 2013). The only treatment in English is Michael P. Costeloe, The Central Republic in Mexico, 1835-1846 (New York: Cambridge University Press, 1993).

[26] An agricultural worker who worked full time, 6 days a week, for the entire year (a strong assumption), in Central Mexico could have expected cash income of perhaps 24 pesos. If food, such as beans and tortilla were added, the whole pay might reach 30. The figure of 40 pesos comes from considerably richer agricultural lands around the city of Querétaro, and includes as an average income from nonagricultural employment as well, which was higher.  Measuring Worth would put the relative historic standard of living value in 2010 prices at $1.040, with the caveat that this is relative to a bundle of goods purchased in the United States. (https://www.measuringworth.com/uscompare/relativevalue.php).

[27]The phrase comes from Guido di Tella and Manuel Zymelman. See Colin Lewis, “Explaining Economic Decline: A review of recent debates in the economic and social history literature on the Argentine,” European Review of Latin American and Caribbean Studies, 64 (1998), pp. 49-68.

[28] Francisco Téllez Guerrero, De reales y granos. Las finanzas y el abasto de la Puebla de los Angeles, 1820-1840 (Puebla, MX: CIHS, 1986). Pp. 47-79.

[29]This is based on an analysis of government lending contracts. See Rosa María Meyer and Richard Salvucci, “The Panic of 1837 in Mexico: Evidence from Government Contracts” (in progress).

[30] There is an interesting summary of this data in U.S Govt., 57th Cong., 1 st sess., House, Monthly Summary of Commerce and Finance of the United States (September 1901) (Washington, DC: GPO, 1901), pp. 984-986.

[31] Salvucci, Politics and Markets, pp. 201-221.

[32] Miguel Galindo y Galindo, La Gran Década Nacional o Relación Histórica de la Guerra de Reforma, Intervención Extranjera, y gobierno del archiduque Maximiliano, 1857-1867 ([1902], 3 vols., México, DF: Fondo de Cultura Económica, 1987).

[33] Carmen Vázquez Mantecón, Santa Anna y la encrucijada del Estado. La dictadura, 1853-1855 (México, DF: Fondo de Cultura Económica, 1986).

[34] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950 (Stanford, CA: Stanford University Press, 2012);  Amilcar Challú and Auroro Gómez Galvarriato, “Mexico’s Real Wages in the Age of the Great Divergence, 1730-1930,” Revista de Historia Económica 33:1 (2015), pp. 123-152; Amílcar E. Challú, “The Great Decline: Biological Well-Being and Living Standards in Mexico, 1730-1840,” in Ricardo Salvatore, John H. Coatsworth, and Amilcar E. Challú, Living Standards in Latin American History: Height, Welfare, and Development, 1750-2000 (Cambridge, MA: Harvard University Press, 2010), pp. 23-67.

[35]See Challú and Gómez Galvarriato, “Real Wages,” Figure 5, p. 101.

[36] Luis González et al, La economía mexicana durante la época de Juárez (México, DF: 1976).

[37] Teresa Rojas Rabiela and Ignacio Gutiérrez Ruvalcaba, Cien ventanas a los países de antaño: fotografías del campo mexicano de hace un siglo) (México, DF: CONACYT, 2013), pp. 18-65.

[38] Alma Parra, “La Plata en la Estructura Económica Mexicana al Inicio del Siglo XX,” El Mercado de Valores 49:11 (1999), p. 14.

[39] Sandra Kuntz Ficker, Empresa Extranjera y Mercado Interno: El Ferrocarril Central Mexicano (1880-1907) (México, DF: El Colegio de México, 1995).

[40] Priscilla Connolly, El Contratista de Don Porfirio. Obras públicas, deuda y desarrollo desigual (México, DF: Fondo de Cultura Económica, 1997).

[41] Most notably John Tutino, From Insurrection to Revolution in Mexico: Social Bases of Agrarian Violence, 1750-1940 (Princeton, NJ: Princeton University Press, 1986). p. 229. My growth figures are based on the INEGI, Estadísticas Historicas de México, 2014) (http://dgcnesyp.inegi.org.mx/cgi-win/ehm2014.exe/CI080010, Accessed July 15, 2016).

[42] Stephen H. Haber, Industry and Underdevelopment: The Industrialization of Mexico, 1890-1940 (Stanford, CA: Stanford University Press, 1989); Aurora Gómez-Galvarriato, Industry and Revolution: Social and Economic Change in the Orizaba Valley (Cambridge, MA: Harvard University Press, 2013).

[43] There are literally dozens of accounts of the Revolution. The usual starting point, in English, is Alan Knight, The Mexican Revolution (reprint ed., 2 vols., Lincoln, NE: 1990).

[44] This argument has been made most insistently in Armando Razo and Stephen Haber, “The Rate of Growth of Productivity in Mexico, 1850-1933: Evidence from the Cotton Textile Industry,” Journal of Latin American Studies 30:3 (1998), pp. 481-517.

[45]Robert McCaa, “Missing Millions: The Demographic Cost of the Mexican revolution,” Mexican Studies/Estudios Mexicanos 19:2 (Summer 2003): 367-400; Virgilio Partida-Bush, “Demographic Transition, Demographic Bonus, and Ageing in Mexico, “ Proceedings of the United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures. (http://www.un.org/esa/population/meetings/Proceedings_EGM_Mex_2005/partida.pdf) (Accessed July 15, 2016), pp. 287-290.

[46] An implication of the studies of Alan Knight, and of Clark Reynolds, The Mexican Economy: Twentieth Century Structure and Growth (New Haven, CT: Yale University Press, 1971).

[47] An interesting summary of revisionist thinking on the nature and history of the ejido appears in Emilio Kuri, “La invención del ejido, Nexos, January 2015.

[48]Alan Knight, “Cardenismo: Juggernaut or Jalopy?” Journal of Latin American Studies, 26:1 (1994), pp. 73-107.

[49] Stephen Haber, “The Political Economy of Industrialization,” in Victor Bulmer-Thomas, John Coatsworth, and Roberto Cortes-Conde, eds., The Cambridge Economic History of Latin America (2 vols., New York: Cambridge University Press, 2006), 2:  537-584.

[50]Again, there are dozens of studies of the Mexican economy in this period. Ros’ figures come from “Mexico’s Trade and Industrialization Experience Since 1960: A Reconsideration of Past Policies and Assessment of Current Reforms,” Kellogg Institute (Working Paper 186, January 1993). For a more general study, see Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Me3xican Economy. A Historical Perspective (New York: Oxford University Press, 2009). A recent Spanish language treatment is Enrique Cárdenas Sánchez, El largo curso de la economía mexicana. De 1780 a nuestros días (México, DF: Fondo de Cultura Económica, 2015). A view from a different perspective is Carlos Tello, Estado y desarrollo económico. México 1920-2006 (México, DF, UNAM, 2007).

[51]André A. Hoffman, Long Run Economic Development in Latin America in a Comparative Perspective: Proximate and Ultimate Causes (Santiago, Chile: CEPAL, 2001), p. 19.

[52]Tello, Estado y desarrollo, pp. 501-505.

[53] Mario Vargas Llosa, “Mexico: The Perfect Dictatorship,” New Perspectives Quarterly 8 (1991), pp. 23-24.

[54] Rafael Izquierdo, Política Hacendario del Desarrollo Estabilizador, 1958-1970 (México, DF: Fondo de Cultura Económica, 1995. The term stabilizing development was itself termed by Izquierdo as a government minister.

[55]See Foreign Relations of the United States, 1964-1968. Mexico and Central America http://2001-2009.state.gov/r/pa/ho/frus/johnsonlb/xxxi/36313.htm (Accessed July 15, 2016).

[56] José Aguilar Retureta, “The GDP Per Capita of the Mexican Regions (1895:1930): New Estimates, Revista de Historia Económica, 33: 3 (2015), pp. 387-423.

[57] For a contemporary account with a sense of the immediacy of the end of the Echeverría regime, see “Así se devaluó el peso,” Proceso, November 13, 1976.

[58] The standard account is Stephen Haber, Herbert Klein, Noel Maurer, and Kevin Middlebrook, Mexico since 1980 (New York: Cambridge University Press, 2008). A particularly astute economic account is Nora Lustig, Mexico: The Remaking of an Economy (2d ed., Washington, DC: The Brookings Institution, 1998).  But also Louise E. Walker, Waking from the Dream. Mexico’s Middle Classes After 1968 (Stanford, CA: Stanford University Press, 2013).

[59] See, for example, Jaime Ros Bosch, Algunas tesis equivocadas sobre el estancamiento económico de México (México, DF: El Colegio de México, 2013).

[60] La Banca Central y la Importancia de la Estabilidad Económica  June 16, 2008.  (http://www.banxico.org.mx/politica-monetaria-e-inflacion/material-de-referencia/intermedio/politica-monetaria/%7B3C1A08B1-FD93-0931-44F8-96F5950FC926%7D.pdf, Accessed July 15, 2016.). Also see Brian Winter, “This Man is Brilliant: So Why Doesn’t Mexico’s Economy Grow Faster?” Americas Quarterly (http://americasquarterly.org/content/man-brilliant-so-why-doesnt-mexicos-economy-grow-faster) (Accessed July 21, 2016)

[61]   For AMLO in his own words, see his A New Hope For Mexico: Saying No to Corruption, Violence, and Trump’s Wall. Translated by Natascha Uhlman (New York: O/R Books, 2018).

Citation: Salvucci, Richard . “Mexico: Economic History” EH.Net Encyclopedia, edited by Robert Whaples. December 27, 2018. URL http://eh.net/encyclopedia/the-economic-history-of-mexico/

 

Andrew Carnegie: An Economic Biography

Author(s):Bostaph, Samuel
Reviewer(s):Rogers, Robert P.

Published by EH.Net (June 2016)

Samuel Bostaph, Andrew Carnegie: An Economic Biography. Lanham, MD: Lexington Books, 2015. xii + 125 pp. $75 (hardcover), ISBN: 978-0-7391-8983-2.

Reviewed for EH.Net by Robert P. Rogers, College of Business and Economics, Ashland University.

This book, a concise biography of Andrew Carnegie, focuses on some important issues concerning his business and philanthropy.

Carnegie’ life was a rags-to-riches Horatio Alger story but with an interesting twist.  While he was born a poor Scot, his family was well-read and knowledgeable about their surroundings.  Carnegie used a succession of seemingly prosaic but strategically placed jobs to become a major executive with the Pennsylvania Railroad.  He employed his connections there to start several businesses supplying the railroad with important inputs such as bridges and rails.  Eventually he built a steel rail firm using the Bessemer process.

His ability to obtain financing and find competent executives and engineers enabled Carnegie to develop a large efficient steel firm.  Among the people he attracted to the firm were Henry Frick and Alexander Holley.  Frick and Holley were pioneers in the development of, respectively, coke ovens and Bessemer furnaces.  Not only did the firm capitalize on the demand for rails, but it also became the leading firm in construction steel.  To do this, the firm employed another new steel furnace, the open hearth.  By the 1890s, Carnegie’s company had become the leading steel firm in the world.

Given its brevity and its focus on the issues of government intervention, firm governance, and property rights, this is the biography that I would recommend to a generalist wanting to understand Carnegie.

On three issues, however, I see problems with the analysis.  They concern tariffs, railroads, and the intertwined issues of property rights and governance.  Ironically, it is on the latter two issues that Bostaph breaks new ground, but there are still questions.

Bostaph overstates the role of tariffs in Carnegie’s success.  Fogel (1964) and Temin (1964) have ascertained that protection had some positive effect on the success of the American steel industry.  Nevertheless, it seems unlikely that absent tariffs a country as well endowed with coal, iron ore, and human capital as the United States would not have developed a large domestic steel industry.  Had a free trade regime existed in the United States, Maine might have had ten Carnegie libraries instead of fifteen.  Carnegie might have been rich anyway but not as rich.

My second quibble with Bostaph is the relationship of railroads to steel.  Many writers have correctly posited that through subsidies the government unnecessarily encouraged railroads.  Yet, it is likely that the United States would have developed a large railroad system without this government help.

I have intimated that Bostaph’s major contribution concerns firm governance and property rights.  The major issues were the Carnegie firm’s relationships between two of its human inputs — factory workers and firm executives.

Most interesting is Bostaph’s analysis of the Homestead strike.  Many workers viewed their jobs as a property right.  This idea was based on the labor theory of value that asserts that the value in an item arises from the work put into making it.  Bostaph rightly argues that this theory is wrong citing the nineteenth century marginalist economist, Karl Menger.  The marginalists posit that the value of an item arises from the utility that it gives to the user who pays for it.  Pieces of iron ore do not have any value until they are metamorphosed into items that can be used such as rails or beams.  Entrepreneurs like Carnegie figured out how to combine capital and labor to produce the items that users will buy.

Given Bostaph’s analysis, still, Carnegie might have developed an efficient job property rights system for factory jobs.  Law and accounting firms are so organized.  Other steel firms have developed with the factory job as a property right.  The above contention, however, cannot be confirmed or refuted.

Nevertheless, Carnegie did give property rights to some of his labor — managers.  By making them partners in the enterprise, he gave them a stake in the enterprise, i.e. a property right.  Until the middle 1890s, the Carnegie firm was a large complicated partnership.   It is not clear how well it worked.  Through much of the firm’s history, however, there existed extensive conflicts between the various manager-partners.  From reading Bostaph’s account of the firm in the 1890s, one has to wonder how steel got made given all the squabbling.

While this system was efficient to a degree, a better system might have been developed.  A piece of evidence is the attitude of W. J. Jones, the illustrious manager of the Homestead works (some time before the strike).  Refusing a partnership, he demanded and got a high salary (equal to the President of the United States).  Might he have seen the problems with a partnership with Carnegie?

Furthermore, there were large firms that ran more smoothly and efficiently at that time.  Among them was John D. Rockefeller’s Standard Oil.  Rockefeller has been subject to much criticism, but most scholars compliment his internal management.

Interestingly, while Bostaph does a good job describing the conflicts between Carnegie and his partners, I am not sure he understands its possible implications.  U.S. Steel, the Carnegie successor firm, was noted for lackluster management.  Many scholars have attributed it to x-inefficiency and management’s emphasis on getting along with the government (Rogers, 2009).  Perhaps, the competitive problems with the American steel industry had their start with Carnegie’s inability to develop an efficient managerial system.

I got this admittedly tentative insight from Bostaph’s book.  By putting the firm’s history into an alternative economic context, this book reveals much about Carnegie and the steel industry — maybe more than the author realizes.  I hope to see similar works from him on other historical figures.

References:

Robert W. Fogel. 1964. Railroads and American Economic Growth: Essays in Econometric History, Baltimore: Johns Hopkins Press.

Robert P. Rogers. 2009. An Economic History of the American Steel Industry, London: Routledge.

Peter Temin. 1964. Iron and Steel in Nineteenth Century America: An Economic Inquiry, Cambridge, MA: MIT Press.

Robert P. Rogers is (rrogers1@ashland.edu) is a Professor Emeritus of Economics, Ashland University.  He has published An Economic History of the American Steel Industry (Routledge, 2009) and a number of articles on the steel industry.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Business History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII

Economic Thought: A Brief History

Author(s):Kurz, Heinz D.
Reviewer(s):Hébert, Robert F.

Published by EH.Net (June 2016)

Heinz D. Kurz, Economic Thought: A Brief History (translated by Jeremiah Riemer). New York: Columbia University Press, 2016.  ix + 208 pp. $27 (cloth), ISBN: 978-0-231-17258-5.

Reviewed for EH.Net by Robert F. Hébert, Department of Economics, Auburn University.

Writing a brief history of any subject requires its author to be organized and selective.  The former requires skill; the latter judgment.  Heinz Kurz, professor of economics at the University of Graz in Austria, displays his literary skill in this volume, a survey of economic thought from ancient times to the present, in less than 200 pages.  The author does a good job of linking various ideas scattered through time and space, weaving an abstruse narrative into a cohesive fabric.  This is no mean feat, and its accomplishment contributes in great measure to the readability of the present work.  His judgment, however, is more likely to be in the critics’ crosshairs, which is, not surprisingly the case here.

In Kurz’s literary time machine the reader reaches the sixteenth century after seven pages, and arrives at the eighteenth after another fifteen pages.  Kurz resists the temptation to anoint Adam Smith the “father of economics,” opting for the more defensible claim that “Smith permanently shaped the new field of political economy, both thematically and methodologically, and won it an important place in the circle of the venerable sciences” (p. 28).  Although he had numerous precursors, the long train of economic analysis that left the Smith station followed mainly the tracks he laid down.  Kurz takes us down those tracks in successive chapters on Marx, marginalism, Marshall, utilitarianism, welfare theory, imperfect competition, Schumpeter, Keynes, reactions to Keynes, general equilibrium and welfare theory, and developments in selected fields.

Clearly, publishing forces a tradeoff between brevity and depth.  Some things must be sacrificed in order to keep the narrative (and costs) within bounds.  Kurz provides a good compass for navigating the journey before us, but reviewers are duty-bound to pay attention to what is excluded as well as included.  I don’t quite know what to make of the statement (p. 7) that the difficulty of evading taxes on invisible wealth (e.g., money or interest) was a probable source of the long-lasting opposition to credit and interest by the Roman Catholic Church.  A more nuanced view is that the medieval Church’s outward opposition to credit and interest was curious and one-sided, i.e., the Vatican operated on both sides of the loan market, borrowing freely from its own merchant bankers while quietly making usurious loans to its prelates, all the while outwardly denouncing usury as a sin.[1]

The author’s interpretation of Mercantilism and Cameralism, a part of what Mark Blaug called “pre-Adamite” economics, follows tradition while either ignoring or rejecting the alternative interpretation based on public-choice theory[2], for which no explanation is given.  The spare mention of Richard Cantillon in mere passing (p. 17) can easily be overlooked, also in passing, and might be judged an opportunity lost, especially in light of Cantillon’s seminal influence on the theory and method of many economic thinkers who followed.  Karl Marx gets appropriate attention as the premier architect of a socialist system, but Kurz’s discussion of Marx’s impact stops at the twentieth century, which is a shame because so much of contemporary cultural politics in Europe and America has a distinctly Marxian odor.

Henry George is much misunderstood by historians of economics, and Kurz perpetuates the popular myth by unqualifiedly lumping George among the proponents of land nationalization (p. 43).  George in fact advocated a nuanced view of land value taxation not far removed from Alfred Marshall, who took George more seriously than other economists.[3]   Both George and Marshall recognized that taxing the “public value” of land did not require public ownership, which Marshall, not George, nevertheless qualifiedly endorsed (after a hundred years) in his lectures on George’s Progress and Poverty.[4]   It has somehow escaped historians of economics that by his own (public) admission Marshall would have been a de facto socialist after 1983!

Thünen, Rau and Gossen (Chapter 4) are appropriately singled out as forerunners of marginalism, but Kurz doesn’t explain how to reconcile his claim for Rau’s primacy “in substance (not verbatim) [regarding] the concept of marginal utility” (p. 67) with Rectenwald’s judgment that Rau “was not an original thinker.”[5]   Despite better coverage of some German predecessors, the story Kurz tells about early marginalism is incomplete, especially in regards to France.  By now Kurz should be aware of the peculiar institutional and cultural dimensions of French society that gave us Dupuit and his pioneering band of ponts engineers attached to the École des ponts et chaussées.  To be sure, Cournot formulated the demand curve, a succinct treatment of monopoly and duopoly, and the neoclassical theory of profit maximization, but Dupuit gave us a neoclassical concept of surplus (later retro-fitted by Marshall), a thorough treatment of utility and demand, novel concepts of monopoly and competition, price and product differentiation, and a clear explication of the relationship between property rights and economic welfare.[6] Continuing to ignore Dupuit and his contributions to economic science merely furthers what Jevons called “the noxious influence of authority.”

Having passed through marginalism and Marshall’s “neoclassical synthesis” Kurz capably guides us next through imperfect competition, Schumpeter and Keynes, general equilibrium theory and welfare economics, concluding with developments in the selected fields of game theory, capital theory, growth theory, spatial and urban economics, development economics and the new economic geography, behavioral and experimental economics, new institutional economics, and financial market theory.  Adequately covering the significance and impact of so many selected fields in less than twenty pages is a monumental challenge, and hence, some fields get very short shrift.  For example, public choice theory and new institutional economics are each encapsulated within a single paragraph; whereas behavioral/experimental economics and financial markets theory each get three paragraphs.  Whether this tells us something about the author’s evaluative priorities or not is left for the reader to guess.

This brief history concludes with the lofty hope that knowing the history of economics should help us resist superstition, hysteria and exuberance in economic and social questions; as well as immunize us against the naive idea that it is the privilege of living economists to articulate only correct ideas (“A Final Word,” p. 185).  If it were only that easy, perhaps courses in the history of economics would not be disappearing from university curricula at such a rapid rate.

Since the author is a seasoned scholar undoubtedly aware of the tradeoff between brevity and depth, fairness dictates that this book be evaluated primarily for what it does rather than what it does not do.  As long as the limitations of books like this are understood, there is a place for them in the field of economics.  Economics is not the dismal science claimed by historian Thomas Carlyle, unless one has little understanding of and appreciation for its complexity and relevance, which can, in large measure, be gained only from a study of its history.  For those untutored in the history of economics, this little book is not a bad place to start.

Notes:

1. See Robert B. Ekelund, Jr., et al., Sacred Trust: The Medieval Church as an Economic Firm (New York: Oxford University Press, 1996), p. 120.

2. Cf., Robert B. Ekelund, Jr. and Robert D. Tollison, Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective (College Station: Texas A&M University Press, 1981); and same authors, Politicized Economies: Monarchy, Monopoly and Mercantilism (College Station: Texas A&M University Press, 1997).

3.  Robert F. Hébert, “Marshall:  A Professional Economist Guards the Purity of His Discipline,” in Critics of Henry George, ed. R. V. Andelson (London: Associated University Press, 1979), pp. 47-71.

4. Ronald Coase, “Three Lectures on Progress and Poverty by Alfred Marshall,” Journal of Law and Economics, 12 (April 1969), 184-226.

5. H.C. Rectenwald, “Rau, Karl Heinrich,” in The New Palgrave: A Dictionary of Economics, ed. J. Eatwell, M. Milgate, and P. Newman (London: Macmillan Press, 1987), IV: 96.

6. See Robert B. Ekelund, Jr. and Robert F. Hébert, Secret Origins of Modern Microeconomics: Dupuit and the Engineers (Chicago: University of Chicago Press, 1999).

Robert F. Hébert is Emeritus Russell Foundation Professor of Entrepreneurship at Auburn University.  With Robert B. Ekelund, Jr., he is the author of A History of Economic Theory and Method, sixth edition, and several other books.  rfhebert@cox.net.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Capitalism: A Short History

Author(s):Kocka, Jürgen
Reviewer(s):Hohenberg, Paul M.

Published by EH.Net (April 2016)

Jürgen Kocka, Capitalism: A Short History. Princeton, NJ: Princeton University Press, 2016. viii + 198 pp. $27 (cloth), ISBN: 978-0-691-16522-6.

Reviewed for EH.Net by Paul M. Hohenberg, Department of Economics, Rensselaer Polytechnic Institute.

A joke from the days when stereotypes were more acceptable than they are today concerned a group of people tasked with writing about the elephant.  The Frenchman wrote about the elephant’s love life, the Englishman about hunting the elephant, etc.  As to the German, he (always he) contributed “a short introduction to the elephant” … in fifteen volumes.  Well, things change.  Just as two Americans edit a collection of essays on the history of capitalism … in 1200 pages (Neal and Williamson 2014), a German scholar produces “A Short History” of capitalism in under two hundred (smaller) pages.  Moreover, Jürgen Kocka views his subject rather more broadly than the Cambridge authors, who, a reviewer alleges, focus rather narrowly on the economic dimension (Coclanis 2016).

Short this volume by Jürgen Kocka may be, but compact writing does not necessarily make for quick reading.  The feeling of density in the text is enhanced by the language, as the translator has stayed rather faithful to the German original.  So while the book is lucid, it repays close reading.

As Kocka makes clear, the title can mean two distinct things: a history of the concept of capitalism, which has been as much a call to battle as an analytical tool, or an account of how capitalism, however defined, took over much if not all the world.  This book gives us some of both, the first chapter being devoted to the history of the term and a strenuous effort to define it, of which a bit more later.  Then comes a chronological review starting from the first stirrings of large-scale commerce, where Europe was a minor player compared with China and Arabia, and on to the medieval and Renaissance flowering of trade and towns in certain European regions.  The chapter titled “Expansion” takes the story through the early modern period (1500 to 1800), when Europe greatly extended its reach through trade and colonization.  The period also saw a slow and hesitant invasion of the sphere of production by capitalism, for example through proto-industrialization. The actual capitalist era comes next, the age of industrialization, culminating in a terrible twentieth century crisis (1914-45), then a near-miraculous recovery, and finally a renewed boost after the fall of the Soviet-based alternative and the rise of Asian tigers.

Three themes dominate the discussion.  The first is the “labor question” (quote marks in the text).  While wage labor is clearly the norm for a market-driven capitalist system, unfree labor has had a major role to play historically, particularly in the mines, plantations, and estates that furnished the goods feeding large-scale and long-distance commerce, from sugar to salt, wheat to silver, and rubber to cotton.  Yet one cannot comfortably label the areas dominated by this mode of production “capitalist.”  Otherwise one would, for example, view the southern states as more capitalist than the north in the mid-nineteenth century United States, which is certainly counterintuitive. Closely related is the issue of exploitation of labor, clearly present in many times and places, but offset, one must acknowledge, by the enormous gains in living standards over the long term in the most capitalistic settings.  Here I must interject my disappointment that the author completely omits any discussion of human capital, not only a key to recent and future sustained growth, but the one form of capital that cannot fully be separated from its laboring owner.  Does human capital substantially modify capitalist “relations of production?”  Or will the bosses find a way to capture its surplus returns as well?

A second theme, equally knotty, concerns the relationship between the capitalist economy, both in development and in its mature phase, and the state.  Clearly, the two are both rivals and complements.  Whereas conventional economic theory stresses the impediments government can place in the way of market efficiency and dynamics, Kocka focuses more on the positive contributions of politics to economics and on the necessity of political action to tame the economic excesses of capitalism and also to offset its corrosive impact on nature, culture, and community.  Historically too, European maritime expansion was driven as much by political (and religious) ambition as by the search for gain, while industrialization and state formation went hand in hand, not least in Germany.

Kocka’s third theme, one might almost say obsession, is finance.  It played a leading role in the first or mercantile phase of capitalism, when merchants and bankers were often one and the same, and it has been labeled the dominant sector in the late or mature phase of capitalism, also involving globalization.  Here one senses strongly the impact that the recent financial crisis has had on our author.  Viewed with the perspective of a few more years and from the United States rather than Europe, this focus seems a bit overdone, but who can say whether we have yet experienced the worst.

To close, I want to return to the defining characteristics of capitalism.  Kocka, like many others, stresses the key role of markets, one might almost say of the market.  However, it seems to me that he dismisses a bit too quickly the distinction Fernand Braudel drew (for the early modern period) between the market economy and capitalism (1982).   Kocka claims that Braudel’s capitalism does not require markets, which is absurd.  Instead, Braudel is saying that while one cannot have capitalism without markets, one can have markets without capitalism (though twentieth century authoritarian states have certainly tried to have rapid capital accumulation without free or even clearing markets).  The real distinction seems to me to be between the type of idealized markets we study in Econ 101, with no concentration of buyers or sellers, no pervasive economies of scale or rents, no meaningful product differences or informational asymmetries, minimal barriers to entry or exit, and thus only fleeting profits; and the real world markets where these and other imperfections are the rule rather than the exception.  In the latter, potential rewards are high enough to tempt the capitalist despite the corresponding risks.  To put the matter succinctly, I would reject any definition of capitalism that does not make a place for market power as well as markets.

Having put forward a couple of issues for further discussion, I should reiterate that this book offers a lot of material in a few pages, and a good view of economic history as seen notably from the dual viewpoints of Central Europe and the post-financial crisis moment. The reader will have to judge whether it makes a compelling case for ”capitalism” as the organizing concept for a millennium, or even half a millennium, of economic history.

References:

Fernand Braudel, Civilization and Capitalism, 15th-18th Century. Vol 2: The Wheels of Commerce, New York: Harper & Row, 1982

Peter A. Coclanis, “Review of L. Neal and J. Williamson (2014),” Journal of Economic History, 76 (1) 2016, pp. 286-290.

Larry Neal and Jeffrey G. Williamson, editors, The Cambridge History of Capitalism, Cambridge: Cambridge University Press, 2014.

Paul Hohenberg is past president of the Economic History Association and co-author (with Lynn Hollen Lees) of The Making of Urban Europe, 1000-1994.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (April 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Purchasing Power: The Economics of Modern Jewish History

Editor(s):Kobrin, Rebecca
Teller, Adam
Reviewer(s):Chiswick, Carmel U.

Published by EH.Net (March 2016)

Rebecca Kobrin and Adam Teller, editors, Purchasing Power: The Economics of Modern Jewish History.  Philadelphia: University of Pennsylvania Press, 2015.  vii + 355 pp. $65 (cloth), ISBN: 978-0-8122-4730-5.

Reviewed for EH.Net by Carmel U. Chiswick, Department of Economics, George Washington University.

Purchasing Power is a collection of eleven well-researched and well-documented essays about the economic life of Jews in a particular industry, time period, or location, usually as producers but sometimes also as consumers.  This subject has only recently been treated seriously as an important aspect of Jewish history, earlier work typically either ignored the practicalities of earning a living or else relied on — or even generated — stereotypes that obscure rather than illuminate.   The editors of Purchasing Power, Rebecca Kobrin of Columbia University and Adam Teller of Brown University, have made a good start on rectifying the situation with this book.

Part I of this collection, “Networks and Niches,” has five historical essays on the economic activities of Jews in various circumstances.  Chapter 1 by Bernard Dov Cooperman (University of Maryland) is about Jewish moneylenders in early modern Rome.  Chapter 2 by Carsten L. Wilke (Central European University, Budapest) focuses on the Jews of the French Pyrenees who held the tobacco monopoly in seventeenth-century Spain.  Chapter 3 by Cornelia Aust (Leibniz-Institute for European History, Mainz, Germany) uses bankruptcy data from eighteenth-century Central Europe to draw insights about the credit-worthiness of Jewish merchants.  Chapter 4 by Glenn Dynner (Sarah Lawrence College) considers whether residential restrictions affected (or did not affect) the success of Jewish businesses in nineteenth-century Poland, including some interesting analysis of unintended consequences.  Chapter 5 by Adam D. Mendelsohn (College of Charleston) tells the story of a family of English Jews that exported clothing to British colonies during the nineteenth century.  Chapter 6 by Jonathan Karp (Binghamton University, SUNY) describes twentieth-century American and British Jews whose economic niche was in (phonograph) record stores catering to collectors of early Rock’n’Roll and folk music.

Together these chapters provide a nuanced view of Jewish business networking, evidence that being Jewish was neither a necessary nor a sufficient condition for inclusion in a successful business relationship.  Most if not all of these networks depended on non-Jews for certain activities, and not every Jew was sufficiently reliable and trustworthy to be included.  In each instance, a person’s good name (i.e., reputation) would be much more important than his religion when it came to building a successful business network.  Jewish businessmen operating in the larger society and belonging to the Jewish community were subject to the (sometimes conflicting) laws and ethical standards of both, and while this could be unduly restrictive it might also provide some wriggle-room for evading the less advantageous legal context.  In a hostile socio-political environment Jews might make a living in niche industries that were scorned by others, but even in friendly environments Jewish innovators created successful niches in new industries or markets.  The reader cannot help but be struck by the entrepreneurship and innovation demonstrated in these chapters.

While the chapters in Part I focus on how Jews earned a living, those in Part II give examples of how economically successful Jews used their wealth to help their less-fortunate co-religionists.  Chapter 7 by Abigail Green (Brasenose College and University of Oxford) considers the nineteenth-century appearance of international Jewish philanthropy, as increasingly high-income Jews in the liberal West tried to alleviate the poverty and powerlessness of Oriental Jews.  Chapter 8 by Derek Penslar (University of Oxford and University of Toronto) describes how Israel was able to finance its 1948 War of Independence with donations from Diaspora Jewish organizations, from wealthy Jewish philanthropists, and from the many contributions of individual middle- and low-income Western (especially American) Jews.  Chapter 9 by Veerle Vanden Daelon (Centre for Historical Research and Documentation on War and Contemporary Society in Brussels) follows the fortunes (good and bad) of Antwerp’s Jews in the diamond industry as they weathered the crises of two World Wars, struggled with the twin challenges of modernization and globalization, and interacted with Belgian governments that were sometimes friendly and sometimes not.  Chapter 10 by Jonathan Dekel-Chen (Hebrew University of Jerusalem) takes the late twentieth-century “Free Soviet Jewry” movement as an example of how financial resources and political activism greatly influenced Jewish communities in the U.S. and UK, even though it is unclear how much of this actually effected change in the Soviet Union.  Chapter 11 by Adam Sutcliffe (King’s College, London) concludes the volume with a re-examination of how Werner Sombart’s important work on Jews and capitalism reflected the popular stereotypes of his time and place, influencing the politics of Jewish economic history for decades to come.

With a few exceptions, Purchasing Power focuses on big successes, whether tracing the growth of business empires or the distribution of wealth to improve the welfare of others.  It is a welcome contribution to the growing literature on the economic activities of Jews.  Part I is myth-busting, providing evidence that the most successful Jewish commercial networks were probably not nearly so parochial as common stereotypes might suggest.  Part II deals with another stereotype, that of a few powerful Jews using their wealth to manipulate world events, but its focus is on politics within the Jewish community rather than influences on the larger society.  Each of the two Parts are composed of chapters that are themselves useful references that open new doors for further research.

As an economist interested in Jewish economic history, I welcome the (belated) entry of historians into this field.  I look forward, however, to new studies that place this literature in a broader perspective.   Most Jews would have earned their livelihood in small businesses, in crafts and trades, or in professions like medicine or clergy, and it would be interesting to know how their economic lives affected the Jewish community as well as the broader economy.  Since Jews were typically a tiny minority in their respective societies, it would be interesting to compare their philanthropic patterns with those of non-Jewish neighbors.  (Any such comparison might well consider that religious philanthropy typically occurred in the context of a state religion for non-Jews but not for Jews, an important difference explored in the growing literature on the economics of religion.)  Perhaps the greatest contribution made by the collection of essays in Purchasing Power is that each chapter is important not only for the light it sheds on the economic activity of Jews but also as a foundation for further research into the economic history of the Jewish people.

Carmel U. Chiswick is the author of Judaism in Transition:  How Economic Choices Shape Religious Tradition, Stanford University Press, 2014.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (March 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
History of Economic Thought; Methodology
International and Domestic Trade and Relations
Markets and Institutions
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Middle East
North America
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Making of a World Trading Power: The European Economic Community (EEC) in the GATT Kennedy Round Negotiations (1963-67)

Author(s):Coppolaro, Lucia
Reviewer(s):Maneschi, Andrea

Published by EH.Net (November 2015)

Lucia Coppolaro, The Making of a World Trading Power: The European Economic Community (EEC) in the GATT Kennedy Round Negotiations (1963-67). Farnham, UK: Ashgate, 2013. xvii + 237 pp. $135 (hardcover), ISBN: 978-1-4094-3375-0.

Reviewed for EH.Net by Andrea Maneschi, Department of Economics, Vanderbilt University.

This book is a valuable addition to the economic, political and historical literature on the evolution of the European Economic Community (EEC), and how it affected — and was affected by — the contentious Kennedy Round of negotiations that took place in Geneva under the aegis of the General Agreement on Tariffs and Trade (GATT) between 1963 and 1967. Lucia Coppolaro wrote it as part of a postdoctoral program at the Institute of Social Sciences of the University of Lisbon. Her painstaking research into an important episode of European economic history is based partly on the archives of GATT; the European Union and its institutions, particularly the Council of Ministers and the European Commission; American, British, French and German archives; and interviews with officials and politicians who participated in the Kennedy Round.

As Coppolaro notes, President John Kennedy proposed this GATT Round, later named after him, partly in response to the creation of the EEC. Its member countries were still learning how to interact with each other, and the world at large, in their decade-old customs union. The EEC then consisted of France, the Federal Republic of Germany, Italy, Belgium, Luxembourg, and the Netherlands, known as “the Six.” In addition to eliminating tariffs on each other and creating a Common External Tariff, their attention was focused on the difficult task of devising a Common Agricultural Policy (CAP), a vital component of their union. Hence two sets of negotiations took place concurrently: among the EEC member countries, and within the GATT itself. The other members of the GATT viewed the EEC with some suspicion because of the opportunities for trade diversion that their customs union might engender, when EEC countries shifted their import purchases from cheaper world suppliers to their EEC partner countries. The CAP gave the EEC a great bargaining advantage in the GATT, since its proposals (once reached after much arduous intra-EEC bargaining) could not be modified, and the U.S. did not wish to challenge the CAP.

Kennedy’s initiative forced the EEC to take the important steps of formulating a common commercial policy, and anticipating the creation of the CAP in order to participate from a position of strength in a possible liberalization of agricultural trade in the GATT. While learning to organize trade among themselves, the Six were under pressure to limit trade diversion from their trade partners in America, the Commonwealth countries, the European Free Trade Association, their former colonies, and other less developed countries (LDCs). In addition, they were faced with the United Kingdom’s application to join the EEC, which again complicated their task.

Coppolaro focuses on three main issues: the thorny bargaining among the Six, as they sought to establish a common position in the Geneva negotiations; the roles of the six member states and of the EEC institutions (primarily the European Commission and the Council of Ministers of the EEC) in formulating a common position in Brussels and conducting negotiations in Geneva with other GATT countries; and the impact that the evolving EEC played in the GATT negotiations and their final outcome.

The European Commission achieved an increasingly important role in the EEC’s trade policymaking. Coppolaro describes how the policies of the EEC member states interwove with those of the EEC’s Council of Ministers, which was subject to the interests of its member states, and of the supranational European Commission. Social scientists have debated whether the Council or the Commission was the more powerful of the two. The Commission was subject to a strict oversight by the six member states from 1963 to early 1967. Coppolaro convincingly argues that, in the concluding phase of the Kennedy Round, the Commission gained new capacities and much greater discretion, and ended up as a strong and independent agency.

The creation and evolution of the EEC and its CAP played important roles in the GATT negotiations and their final outcome. The dramatic events in the history of the EEC’s trade policy that Coppolaro describes include the “Chicken War,” a commercial war that broke out in 1962 between the EEC and the United States over American chicken exports. It was concluded in 1963 just as the Kennedy Round talks were starting, with the U.S. imposing retaliatory duties on EEC exports. This first test of the acceptability of the CAP by the EEC’s trade partners showed how seriously the EEC intended to defend its CAP. Another crisis became known as the “Empty Chair Crisis,” when France in 1965 withdrew from the Council of Ministers, causing the Kennedy Round negotiations to grind temporarily to a halt.

International trade economists have long debated whether preferential trade agreements such as the European Union or NAFTA are stepping stones or stumbling blocks toward the multilateral liberalization of global trade achieved in successive GATT negotiating rounds. Coppolaro argues that the EEC acted as a stepping stone to liberalization with regard to industrial products, where its industries could compete advantageously with those of its GATT partners. With regard to agriculture the EEC was instead a stumbling block, since it was so busy setting up its own CAP that it did not wish to explore the possibility of trade gains for its own farm exports in the GATT round, and instead favored protection.

Negotiations among GATT members, and among the EEC member states, during the Kennedy Round were motivated by neomercantilism, not by a free trade ideology based on the advantages of mutual specialization. Coppolaro repeatedly points out that the GATT, including the Six EEC countries, worked “like a bazaar.” To obtain trade concessions from other countries, member countries needed to grant them reciprocal favors on a pragmatic basis. An important exception to this self-serving behavior was that of the United States until the conclusion of the Kennedy Round. After the success of the Marshall Plan, the U.S. strongly supported the creation and further development of the EEC, first under the Eisenhower administration and then under Kennedy’s, despite the fact that the CAP ran counter to the interests of American farm exporters. As Coppolaro puts it, “The CAP was considered the price the United States had to pay for European integration.” She argues that the U.S. was the only true leader in promoting GATT rounds and upholding worldwide integration, a role that the EEC never wished to claim. However, the GATT acted like a “rich-man’s club” vis-a-vis the LDCs, since it failed to liberalize trade in the commodities (such as textiles and farm products) of greatest interest to them. To the LDCs’ dismay, the EEC became a major exporter of agricultural products thanks to its CAP.

The EEC turned out to be a primary beneficiary of the Kennedy Round, since the GATT negotiations forced it to make the compromises necessary to become a trading bloc with common commercial and agricultural policies, which converted it (as the “European Union”) into a trading power comparable to the United States in international economic clout and geopolitical importance.

Andrea Maneschi is the author of Comparative Advantage in International Trade: A Historical Perspective (1998) and of articles on David Ricardo’s trade theory.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2015). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
Europe
North America
Time Period(s):20th Century: WWII and post-WWII

Macroeconomics and the Phillips Curve Myth

Author(s):Forder, James
Reviewer(s):Mazumder, Sandeep

Published by EH.Net (June 2015)

James Forder, Macroeconomics and the Phillips Curve Myth. Oxford: Oxford University Press, 2014. ix + 306 pp. $90 (hardcover), ISBN: 978-0-19-968365-9.

Reviewed for EH.Net by Sandeep Mazumder, Department of Economics, Wake Forest University.

The Phillips curve has long been considered a workhorse of modern macroeconomics, and the term is thrown around frequently by both academics and central bankers alike, without much consideration as to its origin. In his book, James Forder forces us to reconsider the inception of this term, and how the model itself developed in the 1960s and 1970s in the macroeconomics literature.

In particular, in response to the foundational work of A.W.H. Phillips (1958) — where the negative relationship between inflation and unemployment is posited — three other papers stand head and shoulders above the others in the formation of the literature. Namely, Paul Samuelson and Robert Solow (1960) who argue that policymakers can choose a point along the Phillips curve, and then Edmund Phelps (1967) and Milton Friedman (1968) who introduced the movement of the curve itself via changes in inflation expectations.

At least, this is how the story goes according to the current literature. The author of this book argues that the true account of proceedings did not evolve in this aforementioned way at all. Further still, all of these so-called new findings to the literature were already widely known. Thus the term “myth” is used alongside “Phillips curve.”

In this book, James Forder successfully convinces the reader of many points, which indeed should force the current state of the inflation-unemployment literature to treat the formation of the story more carefully. For example, Phillips was not the first to discuss inflation-unemployment tradeoffs (David Hume, Irving Fisher, and Jan Tinbergen had already done so), while there is evidence that Phillips himself disregarded much of his own 1958 paper. Forder does an excellent job of highlighting Phillips’ key contributions, which does not include the discovery of an inflation (or wage change)-unemployment tradeoff. Namely, Phillips suggested that this relationship would be stable over time, and he was even revolutionary with his claims that wages were being driven by supply and demand without the need of considering social forces. Arguably, Phillips’ biggest contribution was the idea that an observable “law of motion” in economics might actually exist.

Likewise, Forder does a thorough job of convincing the reader that Samuelson and Solow (1960) were not pursuing “inflationism” in their paper, while Friedman (1968) was not the first to discuss expected price changes with regards to wage bargaining. Moreover, a persuasive case is made that Richard Lipsey (1960) is a paper that possibly belongs in the “hall of fame” when it comes to the formation of the Phillips curve as we know it today.

That being said, the book suffers from several problems with its arguments. One such problem is that the author condemns the literature for using the term “Phillips curve,” both in the past and today, in a way that does not resemble what Phillips had originally intended with his research back in 1958. Indeed it is true that the term “Phillips curve” can be used in a variety of different settings. But surely this makes Phillips’ contribution vital, not trivial. Yes, the model may not be used in the exact way he was originally thinking, but arguably he (and others) crucially began a new genre of the study of inflation-unemployment tradeoffs that has evolved in many different ways over the past few decades to what we have today. Another way of putting it is this: the curve today may not resemble what we find in Phillips (1958), but that does not mean that Phillips was not instrumental (whether by intention or fluke) in putting the subject matter at the forefront of macroeconomics, regardless of whether it happened a few years after he wrote or a few decades afterwards.

At times, the book also suffers from putting forth trivial arguments in too strong of a manner. For instance, the lack of self-citation of authors such as Samuelson, in no shape constitutes that they did not believe in their own previous work. Many economists simply prefer not to self-cite. Additionally, one could argue that many of the cited papers in this book are done so in a misguided and confused way. For example, the author says in chapter 7 that Guillermo Calvo “did not use the [New Keynesian Phillips Curve] expression.” Calvo’s pricing work was a foundational assumption that eventually led to the NKPC — he was not the originator of the model himself — so there is no reason to expect references to the NKPC in his work.

Furthermore, the author argues that several other researchers use Phillips curves without citing the original Phillips (1958) paper. This again in no way means that authors are not using Phillips’ work, but rather that it has become status quo in the literature to take the term “Phillips curve” for granted. Moreover, the author tries to argue that the Phillips curve was not relevant to policymaking, despite being used frequently in reports such as the Economic Report of the President. Does not the appearance of the term in the report in of itself constitute use by policymakers?

Another recurring problem in the book is that the author often makes strong arguments out of situations that do not warrant it. For instance, while the case for Friedman not being the first to bring inflation expectations to the model is well made, the fact remains that Friedman almost definitely is responsible for bringing the idea to the forefront of macroeconomic thinking given his prominence in the profession. Further still, in chapter 5 of the book, the author argues against the “inflationist” movement of the Phillips curve by presenting the case of those who were “anti-inflationists.” Is it any surprise, especially among macroeconomists, that there were people on either side of the debate? This does not represent a rejection of the Phillips curve, but rather a healthy debate about the merits of some of its implications. Indeed, the absence of “inflationist” ideas from policymakers’ own words (chapter 6) should also not be a surprise, and certainly does not constitute evidence against the Phillips curve. When would we ever expect a Federal Reserve official to publicly declare the benefits of inflation, even if they really thought it was true? Doing so would almost certainly be a death sentence on their own central banking career.

In conclusion, Forder has compelled me to consider Phillips’ role in the formation of the current model as we know it today more carefully, as well as the contributions of Samuelson, Solow, and Friedman. But I would imagine that this is true of almost anyone in history: if you look back in time, we probably frequently attribute more praise to certain individuals and not enough to others. Just ask Trevor Swan about his work on growth models! Regardless of whether this happened or not, the Phillips curve to this day remains a workhorse in macroeconomics when considering issues of price stability and full employment. Indeed, the policy implications are as vital as ever — not for picking a point on a menu of choices — but in terms of using the model to compute forecasts of possible future inflation rates, a point which is completely missed by the author. For these reasons, the Phillips curve is far from being a “myth.”

References:

Calvo, G.A. (1983) “Staggered Prices in a Utility-Maximizing Framework,” Journal of Monetary Economics, 12(3): 383-398.

Friedman, M. (1968) “The Role of Monetary Policy,” American Economic Review, 58(1): 1-17.

Lipsey, R.G. (1960) “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1862-1957: A Further Analysis,” Economica, 27(105), 1-31.

Phelps, E.S. (1967) “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,’ Economica, 34(135): 254-281.

Phillips, A.W. (1958) “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,” Economica, 25(100): 283-299.

Samuelson, P.A. and R.M. Solow (1960) “Analytical Aspects of Anti-Inflation Policy,” American Economic Review, 50(2): 177-194.

Sandeep Mazumder in an Associate Professor of Economics at Wake Forest University. His recent research has focused on inflation dynamics in the United States.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2015). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):History of Economic Thought; Methodology
Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

The Political and Economic Thought of the Young Keynes

Author(s):Cristiano, Carlo
Reviewer(s):Shilts, Wade E.

Published by EH.Net (January 2015)

Carlo Cristiano, The Political and Economic Thought of the Young Keynes.  London: Routledge, 2014. xvi + 262 pp.  $140 (hardcover), ISBN: 978-0-415-65926-0.

Reviewed for EH.Net by Wade E. Shilts, Department of Economics and Business, Luther College.

The sixty-ninth volume in Routledge’s Explorations in Economic History series  provides a needed addition to the story of that icon of modern interventionist economics, John Maynard Keynes.  However, while scholars of Keynes will find Carlo Cristiano’s monograph especially valuable, The Political and Economic Thought of the Young Keynes is not merely a book for specialists.

Cristiano delves into the puzzle, even contradiction, about Keynes encountered whenever one tries to reconcile the young “philosopher” of Cambridge and Bloomsbury with the older  “political” man who wrote The Economic Consequences of the Peace and The General Theory of Employment, Interest, and Money.  Whether one starts in the first volume of Skidelsky’s magisterial biography (1983) or elsewhere in the “new Keynes scholarship,” Keynes before World War I appears as a Cambridge Apostle and an idealist, a follower of the analytic philosopher George Edward Moore and a member of the Bloomsbury Group; after the war, however, he has become a political economist and an advisor to monetary authorities, a recommender of specific policies regarding gold exchange standards and liquidity traps and a pragmatic advocate of intervention in the short run.  The dominant explanation has Keynes transformed by his service at Treasury during the war (“I work for a government I despise for ends I think criminal,” went one 1917 letter to fellow Bloomsbury member, Duncan Grant), and by anger at the heavy-handedness of Versailles.

Cristiano’s close examination of Keynes’ choices between 1902 and 1914, however, shows any discontinuity between the young “philosophical” Keynes and the older “political” Keynes was more nominal than real.   The Cambridge Keynes was indeed a committed Apostle, but he was also a regular participant in the political debates of the Cambridge Union.  His philosophy was heavily influenced by Moore, but also by the example of Edmund Burke.  The India Office clerk was part of the Bloomsbury Group, but he also joined the Royal Economic Society and attended the Economic Club at University College.  Young Keynes entered Treasury already possessing deep interests in politics, in empire, and the choices of economic policymakers.

By no means was Keynes’ path to membership in the political Establishment inevitable when he matriculated at King’s College in 1902.  But neither were his interests in the choices of monetary economics merely “passions” of a youth that “were not importantly political at all” (Skidelsky, 1983, p.3).  Young Keynes was an earnest Apostle of strong convictions and great certainties.  He was a brilliant student, of course, but still a student whose convictions could and were pulling him in multiple directions.  Whether Keynes would have been typical of all brilliant sons of privilege reading for the math Tripos at Edwardian Cambridge, I do not know, but his certainties would be familiar to any today who have been fortunate enough to teach or advise honors-level twenty-year-olds.  Some of Keynes’ fellow Apostles may have settled upon a single worldview at 18.  Keynes had not.

Cristiano, an independent scholar most recently at the University of Pisa, has dug deep into both the Collected Writings and the Keynes Papers archived in the King’s College Modern Archives Centre.  Adding to these the diary of Keynes’ father, John Neville Keynes, the official papers of Alfred Marshall and other archival sources, as well as mastery of the secondary literature, he weaves a new and complex tapestry of Keynes’ early years, dividing the story into two periods, with Cambridge and India providing dual foci for both.   The first period comprises his undergraduate years (1902-1905) and his early years at the India Office (1906-1908), and the second begins with his decision to become an economics lecturer at Cambridge in 1908 and ends with the long days of August 1914.

In the opening chapter, “Portraits of Keynes as a Young Man,” Cristiano tracks the evolution of the story of the young Keynes since the first obituaries and Roy Harrod’s biography (1951).  His critical synthesis, much more than a mere “literature survey,” by itself will provide great value to any non-specialist.  Indeed, a stranger to the last three decades of the “new Keynes scholarship” need look no further than the basic references listed in Cristiano’s first two endnotes (p. 30).

Five more chapters and an epilogue then set forth how Keynes’ worldview on the eve of the War had developed along three dimensions of historical context: one provided by the ideas of imperialism and the New Liberalism; a second provided by probability theory and Alfred Marshall; and the third provided by his ever-growing network with central government and the civil service.  Each chapter solidifies one or more of the three dimensions.

“‘Liberal Imperialist,’ 1902-1905” (chapter two) shows the maths undergraduate and regular debater at the Union.  President of the Liberal Club, Keynes was neither a Gladstonian nor a New Liberal.  Rather, he was an elitist believing strongly in the civilizing effects of empire, but who also believed in an active role for the state in bringing about moderate progressive reform.

“Keynes, Marshall, and Cambridge Economics in 1905” (chapter three) and “From Apprentice to Lecturer” (chapter four) show Keynes studying index numbers under A.C. Pigou and monetary economics under Alfred Marshall.  Because Marshall would not publish his refined work on the demand and supply of money and his re-elaboration of the quantity theory until much later (1923), that part of his work was not widely known.  But Keynes was at Cambridge, with the kind of certainties that made him both receptive and willing to disagree (and thereby an ideal fit to Marshall’s pedagogic philosophy), giving him a real comparative advantage to trade with those in government who would pursue empire and reform.

“Lecturing and Electioneering” (chapter five), and “India” (chapter six) show Keynes deepening that comparative advantage as an academic, and then exercising it for the management of empire.  Two years before starting at Treasury, Keynes had already written his first major work in economics, Indian Currency and Finance, and before it was published he had joined (and authored the report of) a Royal Commission on the same subject.

Self-deprecatingly, Cristiano describes his work as if he were merely connecting the dots, merely basing it “solidly on precisely that which should surprise us least about Keynes” (p. xiv): “In fact, none of these elements — the civil servant, the liberal activist, the Marshallian monetary economist — has ever been denied.  There is not very much in this book that has not hitherto been mentioned by at least one of Keynes’ primary biographers” (p. 9).  But the author is too modest.  The detail he describes as “not very much … that has not hitherto been mentioned” is original scholarship, and it is very good.

The Political and Economic Thought of the Young Keynes is not a quick read.  As the author notes in his preface (p. xv), the book builds upon a doctoral thesis (University of Florence); and he has mastered the Monographic Voice:  staid title, long paragraphs, passive sentence constructions.  In our zeal for scholarly detachment and precision, we have unfortunately ensured few important monographs in economics or history (or I expect any other discipline) ever demonstrate the elegance and readability of Keynes’ works.  And as a result, we see the unintended and unfortunate consequence of too little diffusion of the increased knowledge that scholarship like Cristiano’s represents: for whether we are researchers in other areas, teachers of honors students or ordinary ones, or like Keynes, givers of advice to citizens and policymakers, our time becomes too scarce.

But that is a general gripe of this reviewer, not one peculiar to the book at hand.  Cristiano’s careful work here should not be ignored merely because he writes in the style that we academics demand from young scholars wishing to publish, a style that, as this review itself demonstrates, we all practice.  Cristiano’s is a book well worth the time of anyone interested in Keynes or the evolution of Keynesian ideas.

Young Keynes should be a part of any serious research collection, institutional or personal.  Though that monographic voice means non-honors undergraduate writers of term papers will try to avoid it, the book should also be in any undergraduate collection which serves courses in intellectual history or the history of economic thought. It is a book that will reward either a single sampling or multiple readings, one which will yield insight each time it is opened.

References:

Roy F. Harrod, The Life of John Maynard Keynes.  New York: Harcourt, Brace, 1951.

John Maynard Keynes, Indian Currency and Finance.  London: Macmillan, 1913.

John Maynard Keynes, The Economic Consequences of the Peace.  London: Macmillan, 1919.

John Maynard Keynes, The General Theory of Employment, Interest, and Money. New York, Harcourt, Brace, 1936.

John Maynard Keynes, Letter to Duncan Grant, December 15, 1917.  Quoted in Skidelsky (1983), xix.

Alfred Marshall, Money, Credit, and Commerce.  London: Macmillan, 1923.

Robert Skidelsky, John Maynard Keynes: A Biography. Volume I: Hopes Betrayed, 1883-1920. London, MacMillan, 1983.

Wade Shilts is Associate Professor of Economics at Luther College.  His research interests include the history of the joint stock company in Great Britain, the history of gambling in America, and the future of undergraduate economic education everywhere.  He is currently working on two books, How Big is ‘Big’?  Economic Numeracy for Citizens of an Anarchic World, which he plans to finish in 2015, and Barriers of Faith: Listening and the Future of Economic Education.  He may be reached at shiltswa@luther.edu.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII