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Economic Backwardness in Historical Perspective: A Book of Essays

Author(s):Gerschenkron, Alexander
Reviewer(s):Fishlow, Albert

Project 2001: Significant Works in Economic History

Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press, 1962. 456 pp.

Review Essay by Albert Fishlow, International Affairs, Columbia University.

Alexander Gerschenkron: A Latecomer Who Emerged Victorious

Alexander Gerschenkron and his ideas have had, like excellent wine, a remarkable maturing in recent years. Rare is the sophisticated course in political economy that does not assign his model of relative backwardness as a required reading. Rarer still is the doctoral student in economic history who remains uninfluenced by his beguiling hypotheses about the process of historical change within Europe since the Industrial Revolution.

Gerschenkron’s Background and Early Career

Fortunately, as a consequence of a wonderful biography, The Fly Swatter, by Nicholas Dawidoff, (New York: Pantheon, 2002) his grandson, we know much more about his life than we had previously. Born in Odessa in 1904, he died in Cambridge, Massachusetts in 1978. His early life was eventful. He fled the Bolshevik Revolution with his father in 1920, apparently bound for Paris, but wound up in Vienna instead. The reason was his father’s immediate success in finding a position running a turbine factory. There he rapidly learned German, as well as Latin, enabling him to attempt to pass the entrance examination for secondary school within seven months. His failure, only in Latin and geometry, meant he was rejected. That challenge was overcome, months later when he easily gained admission. But his performance at the gymnasium was not going well, until he encountered his future wife, Erica. Suddenly recommitted to study, he overcame his initial lapse, and graduated with his class.

Thereafter he enrolled in the University of Vienna’s school of Nationalokonomie in 1924. His early professional career is not recorded in autobiography as was his first 20 years. Indeed, as Dawidoff summarizes it, “he didn’t much talk about the period from 1924 to 1938 because that was for him a period of growing frustration and disappointment that culminated in catastrophe.”

The University experience was the first of these disappointments. Whatever the strength in economics had been with Bohm-Bawerk, Menger and others who had pioneered in the Austrian school, it was not there in the 1920s. Gerschenkron graduated in 1928, his thesis focusing on Austria’s happy future as a Marxist democracy. He married, had a child and took a position representing a Belgian motorcycle firm in Vienna. That was successful, but inadequate. Three years later, he committed himself to politics and the Social Democrats. That ended in 1934 with the virtual civil war that terminated the party’s existence, and began the process of decline into Anschluss.

Gerschenkron’s parents left for England at that time. Four years later, he and his family would exit and join them, and hardly in easy circumstances. But the important novelty, and a decisive point in his career, was the invitation from Charles Gulick, a Berkeley professor whom he had earlier helped in his research in Austria, to come to the United States. His acceptance marked the real beginning of his academic career that subsequently was to flourish over the rest of his life.

But it began equivocally. The finished Gulick book, Austria from Habsburg to Hitler, a two-volume work, published in 1948 (Berkeley: University of California Press), was brilliant. There is good reason to credit Gerschenkron’s twelve months of continuous research and writing for that outcome. At least Berkeley provided a place for him to return, as he did in September 1939. There he was to stay for only five years before moving on to the Federal Reserve Board. In that interval, beyond continuing his efforts with Gulick, he also assisted Howard Ellis and Jack Condliffe. And he wrote, in long nights of private work, what proved to be his single piece of greatest length, Bread and Democracy in Germany, published in 1943 (Berkeley: University of California Press). That book attacked the Junkers for their exploitation of the rest of the German population, and earned him promotion to the rank of Instructor with the opportunity to teach courses. It did not earn him any greater special recognition at Berkeley — any more than Albert Hirschman’s simultaneous efforts there did — and he moved on to Washington in late 1944.

At the Federal Reserve, he established himself as an expert on the Soviet economy. This was a period when relationships with the Soviet Union became central to the United States, and when there were few others with his knowledge, interest and immense capacity to immerse himself in any and all information. He did well, advancing to head of the International Section, until the decisive moment came in 1948: Harvard offered him a position as a tenured professor, the successor to Abbot Payson Usher. He accepted, and his university career really began.

There were four parts of that career that are relevant. It all began, appropriately enough, with the Soviet Union. At Harvard, Gerschenkron established himself at the new Russian Research Center. In a notable Rand study in 1951, A Dollar Index of Soviet Machinery Output, 1927-28 to 1937, he showed that the remarkably high rates of growth of Soviet industrial production owed itself to the index number bias: a Laspeyres index calculated on the basis of 1926-27 weights significantly overstated real expansion. Rapid Soviet growth was not constructed on the basis of false statistics, but rather, inappropriate technique. The “Gerschenkron effect,” the difference between calculated Paasche and Laspeyres volume indexes, commemorates his contribution. Important as the work was at the time, deflating vastly superior Soviet growth, it was not to be the basis of his subsequent fame.

Gerschenkron’s Economic History: Understanding Economic Backwardness

His present reputation comes instead from his dedication to European economic history. He flourished as the doyen of economic history in the United States. He influenced a generation of Harvard economists through his required graduate course in economic history. His erudition and breadth of knowledge became legendary in its time. Gerschenkron defined an indelible, if unattainable, standard of scholarship for colleagues and students alike.

Backwardness was at the root of his model of late-comer economic development. His hypothesis first took form in a 1951 essay entitled “Economic Backwardness in Historical Perspective.” From that brief 25-page contribution to a conference held at Chicago, and later published in Economic Development and Cultural Change, were to emerge the central ideas that characterized his subsequent academic career. The essay gave its name to his volume of essays published by Harvard University Press in 1962. It is the opening chapter of that volume, and a significant reason that it was recently selected as one of the most influential works of economic history ever published.

The central notion is the positive role of relative economic backwardness in inducing systematic substitution for supposed prerequisites for industrial growth. State intervention could, and did, compensate for the inadequate supplies of capital, skilled labor, entrepreneurship and technological capacity encountered in follower countries seeking to modernize. England, the locus of the Industrial Revolution, could advance with free market guidance along the lines of Adam Smith. France, beginning later, would need greater intervention to compensate for its limitations. In Germany, the key innovation would be the formation of large banks to provide access to needed capital for industrialization, even as greater Russian backwardness required a larger and more direct state compensatory role.

Gerschenkron’s analysis is conspicuously anti-Marxian. It rejected the English Industrial Revolution as the normal pattern of industrial development and deprived the original accumulation of capital of its central force in determining subsequent expansion. It is likewise anti-Rostovian. There were no equivalent stages of economic growth in all participants. Elements of modernity and backwardness could survive side by side, and did, in a systematic fashion. Apparently disadvantageous initial conditions of access to capital could be overcome through new institutional arrangements. Success was indicated by proportionally more rapid growth in later developers, signaled by a decisive spurt in industrial expansion.

This model underlay Gerschenkron’s extraordinary research into the specific developmental experiences of Russia, Germany, France, Italy, Austria and Bulgaria. Those specific cases, in turn, bolstered his advocacy of a comparative, all-encompassing European structure. “In this fashion,” as he wrote in 1962, “the industrial history of Europe is conceived as a unified, and yet graduated pattern.”

Over time, and as he read prodigiously and modestly altered the theoretical foundation, the structure of his approach became ever more specific. I summarize it here in four hypotheses:

(1) Relative backwardness creates a tension between the promise of economic development, as achieved elsewhere, and the continuity of stagnation. Such a tension takes political form and motivates institutional innovation, whose product becomes appropriate substitution for the absent preconditions for growth.

(2) The greater the degree of backwardness, the more intervention is required in the market economy to channel capital and entrepreneurial leadership to nascent industries. Also, the more coercive and comprehensive were the measures required to reduce domestic consumption and allow national saving.

(3) The more backward the economy, the more likely were a series of additional characteristics: an emphasis upon domestic production of producers’ goods rather than consumers’ goods; the use of capital intensive rather than labor intensive methods of production; emergence of larger scale production units at the level both of the firm as well as the individual plant; and dependence upon borrowed, advanced technology rather than use of indigenous techniques.

(4) The more backward the country, the less likely was the agricultural sector to provide a growing market to industry, and the more dependent was industry upon growing productivity and inter-industrial sales, for its expansion. Such unbalanced growth was frequently made feasible through state participation.

The considerable appeal of the Gerschenkron model derives not only from its logical and consistent ordering of the nineteenth- and early-twentieth-century European experience. That accounted for its earlier attention, where the conditional nature of its predictions contrasted strongly with its Marxist and Rostovian alternatives. What has given it greater recent notice has been its broad scale generalization to the experience of the many late late-comers of the present Third World. His formulation dominates the stages of growth approach because of its emphasis upon differential development in response to different initial conditions. There is thus the irony of Walt Rostow’s demise at the hands of Gerschenkron – does anyone now assign The Stages of Economic Growth? — when Rostow had been the first choice of Harvard to succeed Usher in 1948.

In Gerschenkron’s own hands, his propositions afforded an opportunity to blend ideology, institutions and the historical experience of industrialization, especially in the case of his native Russia, in a dazzling fashion. For others, his approach has often proved a useful starting point for the historical discussion of other parts of the world, such as Henry Rosovsky did with Japan, and others, elsewhere. Always, application of the backwardness approach requires close attention to detail, as well as a quantitative emphasis.

Responses to Gerschenkron’s Thesis

The model is, of course, not without its limitations and its critics. History, even of Europe alone, does not in every detail bear easily the weight of such a grand design. In other parts of the world, and in a later time period, larger amendments are frequently required, and sometimes forgotten by current advocates. And somewhat surprisingly, in view of Gerschenkron’s own path-breaking essay in political economy, Bread and Democracy in Germany, there is too little special attention to the domestic classes and interests seeking to control the interventionist state. Backwardness can too easily become an alternative, technologically rooted explanation that distracts attention from the state and the politics surrounding it, rather than focusing upon its opportunities and constraints. Ultimately, as well, there are the many developmental failures — rather than only the successes — that now loom larger and attract attention. While he did explicitly treat Austria as a failed case, it was not a central part of his theoretical structure. Moreover, important current issues like globalization, the central role of international trade, and education are less significant through much of the nineteenth century in Europe.

Still, the concept of relative backwardness, and Gerschenkron’s always insightful and rich elaborations in so many national contexts, represent a brilliant and original approach to economic history that has been perhaps unequalled in the twentieth century. And more recently, with the rise of political economy as a field, his work is widely assigned as required reading. A quick measure of his current influence is the almost 2000 Google references that turn up with the entry of his name.

Gerschenkron’s Enduring Influence

His third great contribution came through his students. Dawidoff’s The Fly Swatter, provides a whole chapter, and more, focused on his role. First, in the 1950s came the students who worked upon the Soviet Union. Then, as his interests concentrated upon economic history, came his direction of the Ford Foundation supported Economic History Workshop at Harvard in the late 1950’s and 1960s. His seminar then, and the availability of fellowship support, attracted several Harvard students, and even some from neighboring MIT, to work in the field. Always, too, there were an impressive group of visitors to Cambridge who were invited to speak to the seminar, but never had permanence in its regular activities.

His recruitment techniques were subtle but effective. Economics 233, the course in economic history required of all graduate students, assigned a paper as well as a final examination. That provided a chance for him to assess each student early on through a brief visit to his office. Entry therein was a special occasion: filled as it was with books, journals, documents, maps, etc., it embodied scholarship with a capital S. Few who were recruited could desist, regardless of initial inclinations that were not directed to economic history.

The course was just the introduction. For those who went on in the field more seriously, the regular evening seminar became the focus. There ideas for dissertations were discussed and quantitative techniques evaluated. It was just as the computer was evolving and econometrics was undergoing rapid advance. Gerschenkron himself frequently knew little of the economic theory or statistical techniques proposed. He usually limited himself to a final evaluative comment, and one that either justified further research or implicitly suggested that another topic might be a better eventual choice. That judgment was informed by the previous discussion as well as his sense of the student’s intellectual capacity.

Gerschenkron had extremely good judgment or very good luck, or perhaps a combination of both. For the small crop of students who wrote with him over more than a decade went on to leadership as the field of economic history was just changing back from an historical emphasis to an economic one. Cliometrics was the new terminology. Leading universities absorbed his students, who almost always have had productive subsequent careers. Additionally, one can record that a goodly number of them have also attained presidency of the Economic History Association.

It was not his direct dissertation supervision that was responsible. He provided no topic, no suggestion of sources, no regular guidance, no timetable for conclusion. Most of the students chose subject matter far from continental Europe. What these persons gained was proximity to a stellar intellect, and close association with each other as they pursued their research. They also obtained a father figure whom they desperately sought to imitate in their own scholarship and subsequent teaching. Those who survived that complex relationship almost always emerged with deep affection and fond memories, even if the process was far from linear and continuous.

By the mid-1960s, ten of his students, both in Soviet economics and economic history, prepared a Festschrift in his honor. The book, Industrialization in Two Systems, was organized and edited by Henry Rosovsky, and published in 1966 (New York: Wiley). Many of the essays are still worth reading. But the dedication, from the Pirke Avot, states their strong feelings perhaps best of all: “The day is short, and the work is great, and the laborers are sluggish, and the reward is much, and the Master is urgent.”

A fourth and last relevant observation relates to his general intellect. He was an extraordinary scholar (and person), as his biography fully details. He was an exceptional reader, of good books and bad. In his own writings, his references were varied, and consciously intended to impress: “There was almost always a little Latin, unless there was a little Greek or a little German or a little Russian or a little French or a little Italian; …” Nor did he exclusively write on economic history. There were his book reviews and other essays, including the one joint work — with his wife — on the adequacy of the diverse translations of Hamlet’s quatrain to Ophelia in sixteen different languages. There were his regular lunchtime performances at the Faculty Club and Eliot House and his interactions with other Harvard scholars. His talents were notable and appreciated: what other economist would have been offered chairs in Italian literature and Slavic studies?

Not surprisingly, upon reaching the mandatory retirement age of 65 in 1969, he was offered a further five years. But those years were not a happy terminus to his long stay at Harvard. The war in Vietnam, and the student reaction, imposed a large cost, as it did to many others who had fled Europe in the 1930s. Long-standing friendships were broken, as with John Kenneth Galbraith. The end of the economic history requirement in 1973 was another major disappointment. Perhaps the greatest one, however, was his inability to publish the great work, the big book that would summarize his brilliant insights into the process of European industrial change, the book that could and would influence political scientists and economists for generations to come. Despite this lapse, Gerschenkron’s influence has subsequently blossomed. The collection of essays under review, which opens with the backwardness thesis and closes with appendices on industrial development in Italy and Bulgaria (with reflections on Soviet literature along the way) — has achieved a hallowed acceptance.

Recent Developments and Gerschenkron’s Ideas

The current surge of interest in political economy has brought a second wave of increasing interest in Gerschenkron’s insights. As the contemporary world continues to confront the problem of inadequate development, particularly over the last twenty years in Latin America and Africa, that special magic of nineteenth century backwardness stimulates greater appeal, and greater hope. So does the case of success in Asia.

The rapid pace of development in East Asia, for example, has inspired a whole set of major works over the last fifteen years, seeking to ascertain how a region, apparently condemned to continuing stagnation by religion, language and tradition, could spurt ahead in the 1970s and subsequent periods. Even the recent pause, requiring massive assistance from the IMF and extensive domestic restructuring, has come off with barely a temporary decline.

After all the discussion of major changes supposedly required in the system of international financial flows in the past few years, little has, in fact, happened. The market has continued to distribute something like $1 trillion, in both capital flows as well as foreign investment, throughout the world. Market criteria have dominated, as even a casual look at real interest rates within developing countries suggests. This has not much altered the pattern of development. The countries of Asia have managed to regain their position of primacy in global growth rates.

With AIDS spreading rapidly throughout Africa, with malaria and other diseases recurring, with environmental degradation threatening, with a demographic transition that will begin to exert the pressure of an aging population, there is no lack of additional new problems that are pressing. On the other side is the reality of declining international assistance from the already developed North.

Failure of economic development to become a global process, as it appeared to do in the 1960s, and for broad convergence in per capita income levels to occur, now constitutes a major intellectual and practical challenge. Should one opt against the pressures of increasing globalization, and return to the industrial protection and import substitution of the past? Should one seek to enhance the role of central direction and decision at the expense of decentralization and private determination? Should one attack the inequality of income and poverty by imposing greater burdens upon the domestic rich and foreign investors? Should one engage in significant land reform? Should one renationalize after the extraordinary privatization that has occurred over the last decade or so?

These new issues are not ones that Gerschenkron explicitly raised. But they are implicit in his efforts to pose the advantages of backwardness. What was an advantage in one historical setting can readily become a disadvantage in another. But the very effort to construct an explicit, and testable, model is what differentiates him from his contemporaries. Shura, as he was better known by those very close to him, is guaranteed a place in the pantheon of economic history.

Albert Fishlow is Professor of International Affairs and Director, Institute of Latin American Studies at Columbia University. He has served as Deputy Assistant Secretary of State for Inter-American Affairs; Dean of International and Area Studies at UC-Berkeley; Paul A. Volcker Senior Fellow for International Economics at the Council of Foreign Affairs; and coeditor of Journal of Development Economics, among numerous other positions.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

The Peasants of Languedoc

Author(s):Ladurie, Emmanuel Le Roy
Reviewer(s):McCants, Anne E.C.

Project 2001: Significant Works in Economic History

Emmanuel Le Roy Ladurie, The Peasants of Languedoc.

Review Essay by Anne E.C. McCants, Department of History, Massachusetts Institute of Technology.

There and Back Again: The Great Agrarian Cycle Revisited

It has been thirty-six years since the original publication of Le Roy Ladurie’s now classic Les Paysans de Languedoc, whose English translation appeared only eight years later. This work of “total” regional history (p. 8), grounded in the climate and topography of its fixed place, narrated around a loving reconstruction of time series data drawn from land tax registers, grain (and other commodity) prices, population registers and communicant lists, and ultimately nuanced by an anthropologist’s sensitivity to the social impact of even small changes in literacy and spiritual affiliation, is in many respects the crowning achievement of the Annales school for the post-Braudelian generation.1 It takes for its subject a place close to the heart of Braudel himself, the Mediterranean French province of Languedoc, and the people who tilled its fields and nurtured its vines, mostly in the small family holdings which so captured the historical imagination of French scholars of the inter- and post-war periods. It also takes as its time period those in-between centuries so favored by Braudel, following the dramatic collapse of the fourteenth century, but well before the acceleration of change brought on by industrialization in the late eighteenth century and thereafter. Despite the poverty and hardship, not to mention the periodic bouts of starvation and insanity, which cross the pages of this book, it retains nonetheless a bucolic vision of the French countryside, only superficially touched by the affairs of men, at least in anything but the very long run. Finally, it attends most fully to the natural and human processes characterized best by an ebb and flow of cyclical change: climate, the productivity of the soil, and population. In all of these respects the intellectual debts to Marc Bloch, Fran?ois Simiand, and of course Fernand Braudel are immediately obvious.

Yet in important ways Le Roy Ladurie also deviates from what had by the time of this publication become the normative format for a major work of Annales history. Instead of dividing his subject into the classic, and fundamentally non-sequential, tri-part formula of structure, conjuncture, et ?v?nement, Le Roy Ladurie instead follows the older norm of telling his story in time. He begins with the tailings of the fourteenth century crisis, what he calls “the low-water mark of a society.” He then traces the effects of the so-called “wage and price scissors” of the long sixteenth century, culminating once again with population collapse and economic depression in the seventeenth century. The self-proclaimed “protagonist” of this book is “a great agrarian cycle, lasting from the end of the fifteenth century to the beginning of the eighteenth, studied in its entirety” (p. 289). While as heroes go this is still a far cry from the kings and generals of old-fashioned history, it is clearly less fixed in time and space than Braudel’s mountains and seas with their capacity for geologic movement only. The Peasants of Languedoc is thus a narrative, and like all good narratives it is susceptible to accidental interventions in the plot and to their concomitant unanticipated outcomes. And so Le Roy Ladurie’s ‘great agrarian cycle’ turns out to have embedded in it a hint of something more linear, a harbinger of the demise of his otherwise so carefully crafted longue dur?e, and what he himself calls “the seeds of true growth” (p. 302). Yet his own lingering ambivalence about what others have been tempted to call progress is underscored by his choice of metaphor to describe it. In the same breath in which he invokes “incandescent particles in the darkest hours” he also speaks of the “contagion of true growth” (p. 303). Is economic growth (that is the “increase of individual wealth” (p. 303) in his definition) good or bad, or both simultaneously? This question, which seems so easily answered by anyone trained in neo-classical economics, lingers unresolved by La Roy Ladurie. Indeed, it perhaps remains to the present unanswered by those who have followed him in the French historical school, particularly as it has turned increasingly back towards the study of culture and in the process adopted many of the methodologies and proclivities of the anthropologist.2

What then are these (insidious?) interventions that push the great agrarian (read Malthusian) cycle off course? Perhaps somewhat surprisingly they are phenomena which Max Weber would have recognized even if their shading is not exactly that of a Protestant ethic. They include the spread of viticulture and sericulture to the detriment of the subsistence grain; the gradual appearance of an “industrial mentality,” admittedly never well defined but seemingly linked with the increase in production of exportable commodities; the spread of remedial education and its powerful accompaniment literacy; and finally, the most nebulous of all, “a certain psychological transfiguration and a general improvement in behavior,” that is best characterized by the “virtue of self-control” (p. 307). Le Roy Ladurie cites the decline of dueling, spontaneous knife fights, and religious fanaticism as just the most obvious evidence of the shift towards a more “intellectual” and “composed” life (p. 309). The link from this reform of manners to real (that is sustainable) economic growth is only inferred, but presumably those who can refrain from emotional outbursts of violence will also be better able to defer consumption gratification in order to invest for the future. Without these (overwhelmingly cultural) interventions the peasant smallholder might have been doomed to an endless Malthusian repetition of the great agrarian cycle of expansion — characterized by population growth, downward pressure on family farm size, the cultivation of marginal lands, the impoverishment of heirs, and rising subsistence prices — and retreat, in which all of the above signs would reverse. As long as subsistence agriculture remained the dominant activity of the agrarian economy population won the race over bread every time (p. 73). Malthus would have been right, if he had not been born too late. Certainly for La Roy Ladurie Malthus was the true prophet of the age that just preceded his own (p. 311)

Yet not many scholars remain unabashed Malthusians or even slightly watered-down neo-Malthusians these days. We have learned well from Ester Boserup that population pressure could and did drive human societies to greater intensity of work effort and the concomitant technological modifications suited to natural resource scarcity and labor abundance. We have learned from Adam Smith and his many followers the productivity advantages of specialization, encouraged as it was by the rise of urban places and the increasingly dense networks of trade among them. We have learned as well from the Marxists of Robert Brenner=s tribe that power relationships between and among individuals and social groups (dare I call them classes?) could powerfully impact the nature of economic response to demographic catastrophe, both on the individual level and for societies as a whole. And of course, we also know from the body of theory built up over the last century in mainstream economics departments that markets are capable of clearing an amazing range of commodities, and that they often did so even in the somewhat murky pre-industrial past. Finally, the “New” Institutional Economics has taught us that social and political institutions had a lot to do with how well markets were actually able to perform their pure function. What then is there for the Anglo-speaking economic historian (most likely trained in the neo-classical tradition) to take from this book and its larger research agenda nearly four decades out?

Fortunately lots. To begin with there is the terrific data series reconstructed over a substantially long period of time to allow for serious study of the macro-dynamics of a pre-industrial economy. For even if Le Roy Ladurie “confuses rent with profits” as Douglas North pointed out long ago, we do not have to follow in that confusion.3 We can read the rent series for what it really is, using it in tandem with price and wage series as a base for understanding the changing profitability of subsistence agriculture, particularly as it varied by the scale of the farm operation. For as La Roy Ladurie rightly emphasizes throughout his exposition, it is far too simplistic to speak only of booms and depressions in the agrarian economy overall. If you had a surplus to sell, falling grain prices induced hardship; but the story was very different for those forced onto the market to ensure sufficient quantities of bread for survival. For them agrarian depressions could be a time of relative plenty. Thus the macro-dynamics that inhere in his great agrarian cycle could produce both winners and losers simultaneously, depending on the distribution of property, and the larger social structure in which farming took place. It is always good for us to be reminded of this complication.

The Peasants of Languedoc also provides a model for the integration of cultural history into economic history which is still relevant today. Despite La Roy Ladurie’s now outdated reliance on Malthus for the structure within which his narrative operates, he nonetheless discerns the cultural forces which were at work in eighteenth-century Languedoc (and in nascent form even earlier) to disrupt the Malthusian paradigm. To the claim on this side of the Atlantic that ‘institutions matter’ a fresh reading of Le Roy Ladurie offers the reminder that mentalit? matters too. Adequate labor and capital resources may have been necessary conditions for economic growth of the modern variety, but they were hardly sufficient. Their application in new ways required whole new modes of thought and behavior. Thus, as any Frenchman would surely understand in the widest possible sense that we are what we eat, La Roy Ladurie would also have us understand that we produce what we think.

Finally this book remains the most accessible to the American student (of all ages) of all the major works to come out of the Annales school. It is neither geologic in its movement, nor overwhelming in its scope. Yet it achieves its stated goal to be “total” in its comprehension of its own subject. The barren mountain reaches, rolling fields of grain and vine, and scrub filled blessedly with chestnut trees; the long cycles of climate change, and the violent bursts of climatic extremes; the struggling peasant with too many children, the upstart coqs de village, and the emerging bourgeois of Montpellier; “Huguenot carders and Papist peasants” (p. 158); all of these characters come alive on the pages of this book. Their multiple, often conflicting, stories are woven together seamlessly by La Roy Ladurie into a complicated whole that looks remarkably like real human experience. If the master economic narrative sometimes goes astray or suffers from lapses of logical explanation, this seems a forgivable fault to this enthusiastic reader. There is much indeed for us to learn, not only about the agrarian economy of a Mediterranean province before industrialization, but about historical storytelling as well.


1. All quotes from the text are taken from the English translation by John Day, published in paperback by the University of Illinois Press in 1976.

2. See Peter Burke, The French Historical Revolution: The Annales School 1929-89, Stanford, 1990, especially pp. 79-93.

3. Douglass North, AComment@ in Journal of Economic History, Vol. 31, no. 1, 1978, p. 80.

Anne McCants is the author of Civic Charity in a Golden Age: Orphan Care in Early Modern Amsterdam, University of Illinois Press, 1997, and numerous articles on living standards, migration, and marriage patterns in northern Europe. She teaches in history, economics and women’s studies at MIT.

Subject(s):Historical Demography, including Migration
Geographic Area(s):Europe
Time Period(s):Medieval

The Future of U.S. Capitalism

Author(s):Pryor, Frederic L.
Reviewer(s):Higgs, Robert

Published by EH.NET (October 2002)

Frederic L. Pryor, The Future of U.S. Capitalism. New York: Cambridge

University Press, 2002. xiii + 447 pp. $35 (hardback), ISBN: 0-521-81358-1.

Reviewed for EH.NET by Robert Higgs, The Independent Institute.

The Future of U.S. Capitalism, by Frederic L. Pryor, is an odd book,

and I doubt that many economic historians will find it useful, either in

research or in teaching. Pryor’s objective in the book is to forecast the

future development of various economic, social, and political aspects of U.S.

“capitalism.” (His choice of terms would not be mine. In my view, anything

properly described as capitalism in the United States came to an end no later

than 1933. To retain the term “capitalism” contributes to misunderstandings of

how a predominantly market-oriented system works, and thereby fosters further

inroads into what little remains of the market system.) In Pryor’s own words,

he intends to consider: “What have been the key trends in the U.S. economic

system in the second half of the twentieth century and what causes underlay

them? If current trends will not continue, what will replace them, and why? At

what points do we lack sufficient knowledge, either theoretical or factual, to

make responsible predictions about the future?” (p. 1).

After an introductory chapter, the author considers “internal influences on the

economic system,” with chapters on saving and economic growth, economic

fluctuations and financial crises, economic inequality, and globalization. Next

he takes up “external influences on the economic system,” with chapters on

natural resources and the environment, social factors, and political factors. A

final set of chapters deals with “changes in crucial economic institutions and

organizations,” giving attention to the evolution of business enterprises,

market competition, government regulation and ownership, and government

spending. The conclusion considers, “Whither U.S. Capitalism?” Besides

including more than thirty pages of appendices on data and statistical

relationships, the author directs the interested reader to an extensive

collection of “external appendices and accompanying tables and charts” that can

be viewed at his web site.

Pryor declares that the book “is not about the economy per se” (p. 2) but

“about the institutions and organizations through which economic activity is

channeled. [I]t is an exercise in positive, not normative, economics” (p. 3). A

reader who expects to find an analysis deeply informed by the new institutional

economics, however, will be disappointed. No coherent overarching theory or

model guides the analysis. Instead, Pryor calls on various theoretical

rationales in an ad hoc manner as he proceeds from one topic to another. A

great deal of the econometric analysis amounts to little more than data mining.

On the spectrum from optimism to pessimism, Pryor definitely stands closer to

the darker terminus, concluding that “the U.S. economic system faces some very

serious problems in the coming decades” (p. 23).

No brief review can even list all the specific issues Pryor considers in this

book. Suffice to say, he takes up hundreds of separate matters large and small,

spends considerable time assessing data problems, and presents countless

regression equations as well as many tables, graphs, and charts. His analysis

is, if anything, data-intensive, a reflection no doubt of his seeming faith

that if we crunch enough numbers, we will put ourselves in a position to

forecast future developments accurately. Time and again, however, he finds

himself immersed in a “welter of conflicting results” (p. 96), or confronting

an empirical association for which “the nature of [the causal] mechanism

remains unclear” (p. 97), or up against empirical findings that “raise some

serious problems of interpretation,” and because “the evidence is fragile,”

“robust conclusions cannot be drawn” (p. 107), or confessing that “this kind of

calculation is fraught with uncertainty” (p. 170). To resolve conflicting

theoretical and empirical considerations, Pryor often simply judges on the

basis of his “subjective impression” (p. 359). At one point, he writes that

“the rate of technology advance is the key, and this is difficult to predict”

(p. 171). In fact, it is impossible to predict, as past prognosticators have

demonstrated repeatedly. What Pryor says in a particular context might well

have been said of the entire enterprise: “Given the nature of the data, the

results of the statistical experiments … should be considered only as

suggestive” (p. 188). What he observes about cultural trends might have been

observed equally about nearly everything discussed in the book: “the analysis

of current culture and values may tell us little about the future” (p. 199).

Looming over the hodge-podge of micro-level examinations Pryor makes, one great

problem threatens to demolish any value the analyses might have. The author

himself acknowledges this threat, but he forges ahead anyhow. The great

difficulty arises because “the impact on the U.S. economic system of a severe

financial crisis or an adverse production shock would be great. Like a major

war, however, such events cannot be easily predicted” (p. 81). (Translation:

cannot be predicted.) “If such a depression occurs, its impact would probably

outweigh most of the other factors discussed in this book.” Yet, “in order to

analyze systematically these other factors impinging on the future of U.S.

capitalism, I assume … that an extremely serious downturn will not occur. …

that the U.S. will really have such a lucky break” (p. 81). Has the system

avoided big shocks such as major wars and financial collapses in the past?

Certainly not for any extended period. We would be hoping against hope to

suppose that whereas in the past the system has always been troubled

episodically by big crises, in the future it will be free of them. Yet when

they occur, all bets are off. This fact of historical life is just one of

several reasons why no science of history is possible, and therefore why no

long-range predictions deserve to be taken seriously. Trends exist, to be sure,

but the long-term development of any socio-economic system consists more

decisively in a series of contingencies laid end to end, with the realization

of each major contingency setting in train a new path-dependent process.

At the end, Pryor pulls together his expectations about the nature of U.S.

capitalism in 2050 — a sort of semi-fascist distopia, or “a capitalism with an

inhuman face” (p. 367) — as follows:

Along the political dimension, the overall level of governmental intervention

will be roughly the same, but with a different composition: public expenditures

will be higher, regulation of industry will be lower, government intervention

into the economy will be less effective, and repression of the population will

be harsher. Along the economic dimension, markets will be less competitive. And

along the social dimension, solidarity will probably be less, and, despite

increased affluence, the quality of our lives will deteriorate and economic

life will be more pitiless.

These results, combined with the ever-larger size of enterprises, point toward

a greater oligarchical control of both the state and the economy. That is,

economic and political elites will continue to fuse, government intervention in

the economy will be less aimed at raising the general welfare of the population

than at ameliorating certain economic problems faced by particular segments of

the elite. The decreasing progressivity of the tax structure and rising income

inequalities will be telling indicators of these developments. These trends

will be reinforced by declining political participation and mounting distrust

toward the government, in major part because more people will feel powerless to

influence policies and events. Expenditures on internal security, pensions, and

health will increase, primarily to palliate political discontent that might

erupt into serious domestic strife (p. 364).

The good news is that one can place hardly any weight at all on these forlorn


Having plowed through Pryor’s big, dense book, the reader who has retained his

sympathy for the author may wish that the labor theory of value were valid. If

it were, then one could be sure that Pryor, who must have labored long and hard

over this project, had created a work of considerable value. Alas, the labor

theory of value is bunk; and, sad to say, the product of Pryor’s labors is not

likely to find a high place in anyone’s subjective value ranking.

Robert Higgs is senior fellow in political economy at the Independent

Institute, editor of The Independent Review, and author of many articles

and books, including Crisis and Leviathan: Critical Episodes in the Growth

of American Government (New York: Oxford University Press, 1987). His

current research includes further investigations in the political economy of


Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Triumph of the Optimists: 101 Years of Global Investment Returns

Author(s):Dimson, Elroy
Marsh, Paul
Staunton, Mike
Reviewer(s):James, John A.

Published by EH.NET (August 2002)

Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists: 101

Years of Global Investment Returns. Princeton, NJ: Princeton University

Press, 2002. xii + 339 pp. $99.50 (cloth), ISBN: 0-691-09194-3.

Reviewed for EH.NET by John A. James, Department of Economics, University of


First of all, I still don’t get the title. It is alluded to only at the very

end of the book. Things had not gone so great in the first half of the

twentieth century — two world wars, the Great Depression, hyperinflations,

etc. At mid-century “who but the most rampant optimist would then have dreamt

that over the next half-century the annualized real return on equities would be

9 percent…” (p. 224)? How can a book then that offers less optimistic

estimates of long-run returns, filling in the historical record, extending rate

of return series backward, to a period when equity returns were generally lower

than those following World War II, be called “The Triumph of the Optimists”?

Now that I’ve vented for a bit about the title (but I shall come back to it

again later), let me describe what the book involves. The authors, all

affiliated with the London Business School, argue that the best-known long-term

series on returns to equities, those based on US stocks from the Center for

Research in Security Prices (CRSP) database beginning in 1926, might be

potentially misleading. After all, the United States and US industry in

particular had generally done pretty well over this period, so the picture one

would get of the long-term return to equity based on such evidence might be too

high. What we need are more data, extending farther back in time and covering

more countries.

The authors have done an extraordinary job in assembling such a dataset. It

encompasses annual real and nominal returns on equities, bonds, and bills, as

well as GDP, inflation, and exchange rate data, over 101 years (1900-2000) for

sixteen countries (Australia, Belgium, Canada, Denmark, France, Germany,

Ireland, Italy, Japan, Netherlands, South Africa, Spain, Sweden, Switzerland,

United Kingdom, and United States). It is assembled carefully with an eye to

consistency over time and across countries. In constructing the equity indexes

care is taken to avoid survivor bias, overweighting companies that last and/or

become more important over time. Broader indexes are preferred to narrower

ones. Where no satisfactory index existed, one was constructed, as for the UK

between 1900 and 1954 (no mention is made, curiously, of Richard Grossman’s

index (2002) which overlaps part of this period). Long-term performance is

measured based on total returns, dividends as well as capital gains. For almost

all countries component return series are weighted by company market

capitalization. Arithmetic rather than geometric averaging is used.

The countries selected are those for which a century run of financial data

exists. The authors make a point of taking care to avoid easy data bias, that

is a preference for data which is easy to obtain, steering clear of difficult

periods such as wars and their aftermath or periods for which numbers are hard

to get, usually earlier ones. Omitting such periods could bias average returns

upward significantly. So there really is a bit more than a century of

as-consistent-as-they-can-make-it data for most variables here (that said, in

most of the book the experience of the German hyperinflation is almost always

excluded since it would otherwise dominate the means and standard deviations of

the variable in question). The focus on the long run, a century of data,

however means that countries in which financial markets disappeared for a while

– Russia, China, etc. — are excluded. Emerging markets and developing

countries are similarly excluded. So we have North American and European

countries plus Australia, South Africa, and Japan. The inclusion of other

countries would have been interesting, but given the magnitude of the endeavor

already, it would be querulous to ask for more. And the countries in the sample

did account for 88 percent of world stock market value in 2000, perhaps more in


The most common time unit used for reporting summary statistics of variables is

the century, although it is sometimes broken down into half-century periods.

There is certainly something to be said for surveying the full historical

record, encompassing the impacts of extraordinary shocks like wars and other

disasters. Ignoring the tails of the distribution has had serious consequences

for some hedge funds, for example, in recent years. While such a wholistic

emphasis on long-run annual average means and standard deviations has the

advantage that it captures the influence of lots of different institutions and

events, it also obscures potentially interesting relationships. I, for one,

would have liked to see more information broken by exchange rate regime, which

is done to some degree in one chapter, but not generally.

We learn here that equity holders did better than bond holders over the

twentieth century (one important word here — inflation). Value stocks (those

with higher dividend yields and/or higher ratios of book value to market value

of equity) yielded higher returns in the long run than did growth stocks

(Chapter 10). Generalizing from historical equity returns in the United States

turned out to be not that misleading after all. While average returns in the US

were higher than the sample average, they weren’t extraordinarily higher. The

authors spend substantial time (Chapters 13 and 14) on the equity-risk premium,

the difference between the long-term average annual return on equities and that

on default-free government bonds or bills, the additional compensation

necessary for holding a risky asset. The average annual 1900-2000 equity-risk

premium relative to bills in the US was 5.8 percent; for the weighted whole

sample, 4.9 percent. Relative to long bonds it was 5.0 percent for the US, 4.6

percent for the world index. These figures run about 1.5 percentage points

lower than previous estimates for the US and UK (pp. 174-175). (So is this the

Triumph of the Optimists — after we measure the equity premium more carefully,

it’s still a good bit larger than zero?)

While results such as the above will be the focus of many general readers,

economic and financial historians will find that this volume has myriad charms.

Perusing the multitudinous tables, graphs, and charts is really endlessly

fascinating. How much effect would international diversification have had on

average returns? How much effect has currency risk had on the returns to

international investment? We see, among other things, that German and American

equity returns were sizably negatively correlated during World War II

(interestingly, while French and German returns were negatively correlated

during World War I, they were positively correlated during World War II) (p.

116). And there’s much, much more. Those seeking a respite from formal modeling

and econometric tests will find a safe haven here. The principal instrument of

assessment is the eyeball. There are lots and lots of colored figures to be

studied, but very few formal statistical tests are reported. The graphs (pp.

96-97) certainly suggest that purchasing power parity holds in the long run,

for example. But for a formal test of the proposition as well as an analysis of

factors underlying deviations from PPP one must go to Taylor (2002) — who is

cited in the text. Another thing missing in addition to formal tests is any

significant amount of historical or institutional detail. It would have been

nice to have a bit of a story or some context as to why the graphs and charts

look as they do. Why was the equity premium in France for instance

three-and-a-half times that in Denmark? Is it the lingering influence of John


Curiously, this volume has the look and feel of a textbook — wide margins;

glossy paper; bright, multicolor figures; excruciatingly detailed introductions

to each chapter describing precisely what will be covered and long

recapitulations at the end of each. But if it is a textbook, for what course or

audience is it aimed? In an assessment of prospects for the future, for

example, the fact that readers are told “if equities remain risky, as must

certainly be the case, equity investors should continue to expect a positive

risk premium” (p. 210) might seem to indicate not a very advanced one. The

repetitive style makes reading it through from cover to cover, as I did, a

bittersweet experience. Rather, it would seem much more felicitous to use it as

a reference book (as the dust jacket itself notes), to be dipped into or

browsed again and again.

Finally, the lessons of history. Now that the long-term equity premium has been

properly measured, is this then a guide to future returns? Well, no. The

authors argue (Chapter 13) that the future equity premium is going to be lower

than it used to be. Watch for the sequel, “The Triumph of the Pessimists.”


Grossman, Richard S. (2002), “New Indices of British Equity Prices, 1870-1913,”

Journal of Economic History, 62, 121-146.

Taylor, Alan M. (2002), “A Century of Purchasing-Power Parity,” Review of

Economics and Statistics, 84, 139-150.

John A. James is a professor of economics at the University of Virginia. He

continues to work on the operation of the interregional payments system before

the Federal Reserve.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century

Author(s):Backhouse, Roger E.
Reviewer(s):Samuels, Warren J.

Published by EH.NET (August 2002)

Roger E. Backhouse, The Ordinary Business of Life: A History of Economics

from the Ancient World to the Twenty-First Century. Princeton, NJ:

Princeton University Press, 2002. x + 369 pp. $35.00 (hardcover), ISBN:


Reviewed for EH.NET by Warren J. Samuels, Department of Economics, Michigan

State University.

Roger Backhouse, who holds a chair in the History and Philosophy of Economics

at the University of Birmingham, is a leading, indeed virtuoso, historian of

economic thought. He has written three different histories of economic thought.

His A History of Modern Economic Analysis (New York: Basil Blackwell,

1985) focused on the history of economic theory, centering on the theories of

value and price. Theory exists somewhat in its own ethereal world. Backhouse’s

Economists and the Economy: The Evolution of Economic Ideas, 1600 to the

Present Day (New York: Basil Blackwell, 1988) presented the context in

which economic theory developed along with the development of theory itself.

The context consisted of economic history, political economy and the history of

economic ideas. Theory, while not necessarily directly generated by context,

was closely related. Backhouse’s The Ordinary Business of Life has a

differently designed combination: the economic-history context, so long as it

was important, then increasingly the development of economic theory as a

separate discipline. The title conveys the message, using Alfred Marshall’s

definition of economics rather than Lionel Robbins’s definition ostensibly

limiting economics to the analytics of pure resource allocation. (I say

“ostensibly” because it is the rare historian of economic thought who can

remain so narrow.) The intended reader is not the doctoral candidate seeking

deeper mastery of economic theory — who has the textbooks of Mark Blaug or

Ingrid Rima, for example, for such purpose — but the advanced undergraduate

and lay reader. The book also appears in the Penguin series.

Such a trio comports with a variety of conceptions of the discipline and its

history. It also gives effect to the Post Modernist view that different stories

can be told about the same putative subject — though, of course, the subject

changes with the story (even this point Backhouse holds at arm’s length; see p.

328). That Backhouse can author three such different accounts attests to his

skill and versatility, his non-dogmatic view of the history of economic

thought, and that while he is not wedded to Post Modernism he does go part way

with it. Not many historians of economic thought have the combined knowledge of

economic history, intellectual history and economic theory that Backhouse

offers to the world.

The historical coverage by chapter reflects the design strategy. The sequence

is as follows, after a Prologue: The Ancient World, The Middle Ages, The

Emergence of the Modern World View — the Sixteenth Century; Science, Politics

and Trade in Seventeenth-Century England; Absolutism and Enlightenment in

Eighteenth-Century France; and The Scottish Enlightenment of the Eighteenth

Century. Through chapter 6 on the Scottish Enlightenment (including Adam

Smith), the emphasis is clearly on political, social, and broad intellectual

developments. Thereafter, the focus is on the development of economic theory,

almost as if the foregoing types of development were suspended, though the

message may instead be that modern economics is an emanation of the modern

(Western) economy and not the pure, a-institutional science its practitioners

tend to claim: Classical Political Economy, 1790-1870; The Split between

History and Theory in Europe, 1879-1914; The Rise of American Economics,

1870-1939; Money and the Business Cycle, 1898-1939; Econometrics and

Mathematical Economics, 1930 to the Present; Welfare Economics and Socialism,

1870 to the Present; Economists and Policy, 1939 to the Present; and Expanding

the Discipline, 1960 to the Present; concluding with an unnumbered epilogue,

“Economists and Their History.”

Readers of this review may be particularly interested in Backhouse’s treatment,

in Chapter 3, of the emergence of the modern worldview; and the split between

history and theory (Chapter 8). They may fault Backhouse for neglecting

economic thought in other cultures (if only to explore how culture-laden is

Western economics, just as one might study how theory-laden are facts); for not

being more critical; for neglecting American economic thought before 1870; and

so on.

Backhouse, to his credit, however, emphasizes the inevitable selectivity and

thereby limited coverage of his or anyone’s story of the history of economic

thought. He also warns the reader of the danger of presentism, of treating

“past writers as though they were modern academic economists” (p. 3), while

insisting that we inevitably view the past through the lens of the present and

proposing that we identify and state our “preconceptions as explicitly as

possible” (p. 7). He emphasizes that different generations ask different

questions, “perhaps even questions we find it hard to understand,” such that

the question of “progress” in economics is problematic (p. 8).

Notwithstanding these and perhaps other Post Modernist ideas, the domain

treated in this and Backhouse’s other books is rather conventional. Not

surprisingly, the story turns from externalist to internalist: “As economics

developed … into an academic subject, the problems economists tackled were

increasingly ones that arose within the discipline.” Thus, “Given that my main

aim is to explain how the discipline reached its present state, developments

within its theoretical ‘core’ are clearly prominent” (p. 9). A critic might ask

how economic thought reached its (parlous) present state.

Backhouse thus increasingly narrows his domain as academic economists did

likewise; academic practice thus eclipses the other elements of the story.

Actually, therefore, Backhouse, like many other historians of economic thought,

tells two stories: the story of economic thought broadly considered and the

story of the technical ideas of a narrowly focused academic discipline. But he

alerts the reader that those “developments within its theoretical core … are

not the whole story” (p. 9). If Backhouse had included something of the broader

work of, say, Vilfredo Pareto and Friedrich von Hayek, or Kenneth Boulding and

Herbert Simon, as he does with Smith, a different story might have been told.

Perhaps that is the design for a fourth book!

Part of the story Backhouse tells as follows: Histories that glowingly tell of

the technical progress of economics “conceal as much as they reveal. Behind the

fa?ade of increased mathematical rigour and precision lie fundamental changes

in the meanings that have been attached to central conceptions and in the ways

in which economists have understood what they were doing” (p. 327). If

Backhouse can successfully convey to his reader an appreciation of some of the

linguistic problems in economics (and elsewhere), he will have raised the level

of historiographical understanding in practice. (See Warren J. Samuels, “Some

Problems in the Use of Language in Economics,” Review of Political

Economy, Vol. 13, no. 1 (2001), pp. 91-100.) His other field is

methodology, and he is very good at it, too.

Warren Samuels is the author of numerous books and articles in the history of

economic thought and was named Distinguished Fellow of the History of Economics

Society in 1997. Among his recent books is Historians of Economics and

Economic Thought: The Construction of Disciplinary Memory, edited with

Steven Medema (Routledge, 2001).

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

Capitalist Development in the Twentieth Century: An Evolutionary-Keynesian Approach

Author(s):Cornwall, John
Cornwall, Wendy
Reviewer(s):Vedder, Richard K.

Published by EH.NET (August 2002)

John Cornwall and Wendy Cornwall, Capitalist Development in the Twentieth

Century: An Evolutionary-Keynesian Approach. Cambridge and New York:

Cambridge University Press, 2001. xv + 286 pp. $60 (hardback), ISBN:


Reviewed for EH.Net by Richard Vedder, Department of Economics and College of

Business, Ohio University.

As David Colander accurately states in his forward to Capitalist

Development in the Twentieth Century, John and Wendy Cornwall “are true,

unrepentant Keynesians.” In this tour de horizon of modern macroeconomic

history, aggregate demand is the leading actor — cycles in economic

performance are determined by the robustness of aggregate demand. The Cornwalls

more or less believe in the reverse of Say’s Law: Demand creates its own


The authors believe that the best single indicator of an economy’s

macroeconomic performance is the rate of unemployment. Unemployment was

relatively low or “full” in many Westernized nations in the 1920s, and

especially in the “golden age” of the 1950s and 1960s. The reason, they

believe, is that aggregate demand was growing by healthy amounts in those eras.

By contrast, the period since 1973 has been one of sluggish economic

performance, explainable in large part by institutional (often

government-imposed) restraints in the growth in aggregate demand. The slow

growth in aggregate demand, the authors opine, has led to reduced savings,

investment, and productivity growth. Of particular importance, nations where

labor, business and government reached “social bargains” (incomes policies)

were able to stimulate aggregate demand through government policy, but most of

these social bargains fell by the wayside after 1973.

While my overall impression of the book is not favorable, it nonetheless has

several strengths. Let me mention four. First, it is reasonably well written,

using enough symbols, jargon and econometrics to keep professional economists

satisfied, yet at the same time it is clear enough for the intelligent

layperson to understand the rudiments of the main points. In an era and

profession where writing incomprehensibly is considered to be a sign of virtue

and erudition, this is no small accomplishment. To be sure, the discussion of

such things as “hysteretic processes with exogenous origins” (p.102) is filled

with typical academic pretentious jargon that would put the most diehard

Keynesian to sleep, but on the whole this book is above average in clarity for

economist-written works.

Second, the book makes an important point, that many economic model builders

ignore, specifically that institutional arrangements and the structure of the

economy matter, and often matter a great deal. Moreover, as the Cornwalls

observe, institutional arrangements change over time with economic changes, and

this can impact economic performance.

Third, while the authors are truly militant Keynesians, they realize that a

1950-style old Keynesian story simply will not cut it in today’s world. In

particular, they eschew Keynes’s emphasis on the short run, and try to evaluate

the impact that aggregate demand has on intermediate to longer run economic

growth. With the decline in the importance of the business cycle, this is a

necessary adjustment. The Cornwalls also reject or downplay much of the New

Keynesian emphasis on microanalysis of wage and price rigidities (e.g.,

efficiency wages, menu costs, and so forth). Borrowing some from ideas of the

New Institutional Economics, the Cornwalls believe that evolutionary changes in

institutions and economic structure have an important role to play in

explaining changing economic performance.

Lastly, as EH.NET readers will applaud, the Cornwalls appreciate the importance

of history, and its usefulness in assessing economic phenomena. While not

economic historians, they have written what is a somewhat less than

comprehensive but still interesting macroeconomic history of the twentieth

century within the context of trying to explain what makes the macroeconomic

world work. Yet, despite all of these virtues, this is in my judgment a badly

flawed book for a simple reason: I think the authors are just plain wrong in

their assessments. Moreover, they are not merely sporadically wrong, but

persistently and unrelentingly mistaken. To borrow a favorite Cornwallian term,

this book suffers a bad case of misguided intellectual hysteresis. To be fair,

I am not a Keynesian (although I started out as one), so a priori one would not

expect a particularly positive assessment of this work from me. But I suspect

that more neutral observers on the Keynesian/non-Keynesian continuum would find

many of the same objections.

Before enumerating some problems with the Cornwalls’ analysis, I would make an

obvious point that the issue of whether economic progress is supply or

demand-induced is not a new one. For example, many trees have been destroyed

making books on the question of whether the Industrial Revolution is best

explained by emphasizing supply or demand. In an era where demand is

increasingly taken for granted, the Cornwalls’ book does make us at least

consider the possibility that the new (post-Keynes) conventional wisdom might

be wrong.

I would also note that in some respects Cornwall and Cornwall show deference to

an early, classical tradition that in some ways is the antithesis of Keynesian

economics as practiced in the original by Keynes himself. For example, the

authors stress the importance of capital formation in long-term growth, a view

far more akin to Adam Smith than to Keynes. Original Keynesian analysis

vilified savings, the funding source for capital formation, yet Cornwall and

Cornwall believe that investment is critical to the dynamic process of long-run

economic transformation. There is a bit of Adam Smith, and also a lot of Joseph

Schumpeter, in the Cornwall and Cornwall interpretation of history.

Turning to the objections, it is argued that there are swings in economic

performance explainable by changes in the robustness of aggregate demand

influenced by institutional changes. In particular, the 1950s and 1960s were

the “golden age” of modern economies, and the era since 1973 has been something

of a disaster because of declining growth in aggregate demand.

Virtually the sole criterion used to evaluate economic performance is the

unemployment rate. Unemployment is higher in the last three decades, so

economic performance has worsened. I would suggest this is a highly

questionable basic premise as it pertains to the U.S., although it is certainly

more defensible for Europe. While average unemployment rates in the 1980s and

1990s were higher than in the 1950s and 1960s in the U.S., by most other

measures the economy in the latter period either approximately equaled or

surpassed the earlier record. Real per capita GDP grew 57 percent from 1950 to

1970 – and 55 percent from 1980 to 2000 – hardly an important distinction. Real

household wealth rose faster in the latter period, and real per capita

consumption rose by almost the same amount in both periods. Job creation was

actually greater in the latter period — the number of new jobs per 100

incremental population over 16 was 64 in the 1950-70 period, compared with 81

in the 1980-2000 era.

The authors assert that increased unemployment was involuntary in nature,

citing the rising duration of unemployment as evidence. I would argue that most

the rise in unemployment, especially in Europe, reflected onerous new labor

regulations and the impact that increasingly generous welfare state benefits

had on the desire to work. Reservation wages rose sharply as the alternative to

work — long-lived generous welfare benefits — became a viable option. Why is

the duration of unemployment more than twice as high in Germany as in the U.S.?

Germans can collect generous unemployment benefits for three to four times as

long as Americans without any adverse consequences. These unemployed are hardly

“involuntarily” out of work. A secondary factor in the unemployment rise in the

1970s and 1980s was demographic: an increase in the proportion of workers in

young age cohorts that are typically more unemployment-prone.

The Cornwalls assert that governmental macro fiscal and monetary

policies can reduce unemployment through heightened aggregate demand. It is

argued that political constraints limited the use of demand stimulus after

1973. The evidence shows otherwise. In the U.S. the federal government ran far

greater fiscal deficits on average in the two decades after 1973 than in the

two decades before. For example, in the midst of the “golden age” of the 1960s,

the federal deficit was less than one percent of GDP in eight of ten years,

while the smallest deficit in the 1980s was nearly three times that amount.

Monetary growth on average was greater in the latter era as well (the median

annual growth rate of M1 in the 1960s was 3.5 percent; in the 1980s, it was 7.0

percent). The same pattern generally is true in Europe. The Cornwalls simply

refuse to admit the problem may have been the impotency of macro stimulus, and

they claim fiscal/monetary constraint in the latter period prevented full

employment, despite the evidence that such constraint was simply not present.

The discussion of the Great Depression is also wanting. Other than the

Friedman-Schwartz monetary explanation, there is no mention of other

non-Keynesian explanations of the Depression, including ones stressing

international monetary disturbances (e.g., Barry Eichengreen), Austrian

business cycles, or the Hoover high wage policy. The Keynesian argument

explaining the Depression was made better, in this author’s judgment, by

earlier writers such as E. Cary Brown.

Moreover, there is not a scintilla of hard evidence relating to the “social

bargains” (incomes policy) allegedly common in the 1950s and 1960s compared

with later years. There is no description of how these policies worked in

specific countries, for example. We are supposed to take on blind faith the

repeated assertion that income policies worked in producing the golden age of

the 1950s and 1960s, but broke down somehow after 1973. Somehow a single

regression equation (p. 91) with no social bargain variables is construed to

support the Cornwalls’ incredibly weak argument.

The book is full of absolutely wild assertions. A few samples: “The view that

an increase in aggregate demand will not reduce involuntary unemployment

because it is unable to reduce the real wage contains the implicit assumption

that the real wage is determined in the labor market. This assumption has been

shown to be unrealistic…” (p. 46) A single unpublished paper from 1990 is

used to back up this assertion. Better yet, “Over two decades of neoliberalism

have revealed its similarities to the laissez-faire regimes of earlier times —

prosperity for the few and insecurity for many” (p. 268). To argue that in,

say, the 1990s, few had prosperity but many were economically insecure in the

U.S. or Europe is simply fiction. Speaking of the era after the golden age, the

authors claim that “the role of government in domestic and international

economic affairs has been greatly reduced, social bargains no longer dominate

labor market outcomes and price stability has become an overriding economic

goal” (p. 242). It is a fact that government spending as a percent of GDP has

risen, not fallen, in nearly every major western industrialized country in the

era since the so-called golden age, and regulatory activity has increased as

well. To say that government’s role has been “greatly reduced” simply defies

the factual evidence.

The possibility that rising unemployment and sluggish growth in Europe reflects

the debilitating effects of high taxation, regulatory rigidities, and the

disincentive effects of the welfare state is virtually ignored. There are a

variety of plausible explanations for economic changes that have occurred in

the past several decades, but the Cornwalls have not presented them. Save your

money: don’t buy this book.

Richard Vedder is co-author of Out of Work: Unemployment and Government in

Twentieth-Century America (New York: New York University Press, 1997).

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

A Financial History of the United States

Author(s):Markham, Jerry W.
Reviewer(s):Wright, Robert E.

Published by EH.NET (June 2002)


Jerry W. Markham, A Financial History of the United States. Armonk, NY: M.E. Sharpe, 2002. Volume 1: xxii + 437 pp.; Volume 2: xx + 412 pp.; Volume 3: xx + 449 pp. $349.00 (cloth), ISBN: 0-7656-0730-1.

Reviewed for EH.NET by Robert E. Wright.

Former SEC attorney Jerry W. Markham currently teaches corporate and international law at the University of North Carolina at Chapel Hill. Heretofore, he has written extensively on the history of the regulation of commodity futures trading. The work under review is his first significant foray into the broad study of financial history and, quite frankly, it shows. Given the high costs of purchasing and reading these three volumes, the reviewer feels an obligation to the academic community not to mince words: the thesis of this review is that Markham’s opus is seriously flawed.

Markham clearly wanted his book to be a Narrative in the Grand Olde Style, not an academic monograph seeking to prove a point, so not a single table or equation graces the volume. Moreover, the book does not present a thesis so much as an attitude. Like many Americans, Markham views the financial sector with suspicion. He fails, therefore, to give full credit to the crucial role of finance in U.S. economic development. For instance, he claims that banks issued notes “without limits” (1:132; 1:133), that “speculators” made “vast fortunes” (1:109), and that investors fell easy prey to any old “speculative frenzy” (1:98) that happened to form. “Every advance in finance,” Markham opines, “was accompanied by fraud and over-reaching by the unscrupulous” (1:380). Busy with such hyperbole, he fails to explicate how intermediaries, speculators, and investors interacted to finance the mightiest economy on Earth.

Markham ignores too many important secondary works to be taken seriously as an authority in financial history. For instance in Volume 1, which covers the colonial period to 1900, he fails to cite any of the following economic historians: Howard Bodenhorn, Stuart Bruchey, David Cowen, Thomas Doerflinger, E. James Ferguson, Gary Gorton, Gregory Hunter, Naomi Lamoreaux, Diane Lindstrom, John Majewski, Cathy Matson, John J. McCusker, Ranald Michie, George Rappaport, Winifred Rothenberg, Mary Schweitzer, or Richard Sylla. Moreover, he pays scant attention to the important contributions of Stuart Banner, Edwin Perkins, and Hugh Rockoff, among others. In short, the book is not based on anything approaching a comprehensive review of the extant literature.

Markham also fails to survey significant primary source material. He cites a few court cases, an occasional old legal treatise, some congressional reports, a handful of newspaper articles, and Joseph Martin’s descriptions of the Boston stock market. More maddening still, Markham cites recent articles from the Wall Street Journal, the Washington Post, the New York Times, and the Raleigh News & Observer as authorities on historical subjects! Journalists often rely on the same outdated, often nineteenth-century, secondary sources that Markham also leans upon, including William Gouge’s infamous book on antebellum banks and an array of late nineteenth-century hard money polemicists. Worst of all, many of Markham’s assertions are completely undocumented, allowing him to breathe life into a series of apocryphal stories of questionable origins and unlikely authenticity (see, for example, 1:50, 68).

Historians do not have to uncover new archival sources or re-examine known sources in a fresh manner in order to make a contribution. A good story well told will always be appreciated. Due to the inadequacies of Markham’s prose, however, few readers will come to appreciate financial history’s many good stories. The book reads like a rough draft, not a polished book. Numerous simple declarative sentences, at times virtually unconnected conceptually, and rampant use of the passive voice make the book difficult to read. Consider, for example, the following excerpt, which is all-too-typical of the author’s style: “Wheat farm bonds on Canadian lands were sold in Chicago. Those bonds paid 7 per cent per annum. Spitzer, Rorick & Co. offered municipal bonds that netted from 4.25 to 5.75 percent. Seney, Rogers & Co. sold real estate gold bonds and mortgages on Chicago property. Investments from $100 to $50,000 were sought” (2:62).

Markham regularly incorporates quotations of secondary authors into his own sentence structure, as if the words emanated from an historical figure instead of an historian. Only when the reader turns to the endnote, at the end of the volume and difficult to find because of the book’s odd numbering scheme does it become clear that the ‘great quotation’ is that of Bray Hammond, Paul Studenski, or Margaret Myers, not that of Robert Morris, Alexander Hamilton, or Jay Gould.

Indeed, Markham displays precious little historical sense. He notes that “colonial governments eventually found themselves issuing the paper currency advocated by Franklin and others,” then goes on to describe paper money emissions made decades before Franklin’s birth (1:50). He describes a retail purchase that George Washington made in Maryland in 1770 and bolsters it with Madame Knight’s famous discussion of prices in New England in 1704 (1:53-54). I wonder what a judge would say to the following reasoning: “The worldwide depression in 1765 added to the economic problems encountered by the American colonies. A creditor of Paul Revere sought to attach his property for a debt of ten pounds. Nevertheless, some consumer protection was appearing. A law against usurious loans was adopted in New York in 1661″ (1:56)? Similar examples abound (1:63, 70, 83, 126).

Outright errors also abound. Some of the more technical errors, like confusing “bottomry” loans (on ships) with “respondentia” loans (on cargo), would perhaps be partially understandable were not the author a legal scholar (1:6). Other errors, like calling a tontine “a form of lottery scheme” (1:81), referring to bills of exchange as “currency” (1:48), and confusing banknotes and bills of credit (1:72) suggest that Markham is not conversant with the financial terminology of the era. Other errors probably stem from the volume’s impoverished editing. Consider, for example, his “definition” of a put option: “A put option entitled the option holder to sell stock to the writer of the stock [sic] at a specified price.”

Markham makes little use of financial theory. In numerous places, for instance, he could have explained his anecdotes using basic financial concepts like adverse selection and moral hazard (1:38-39, 55). In other places, Markham makes wild comparisons between past and present practices. For instance, he somehow concludes that the “exchange of flour in one state for flour in another in order to save transportation expenses” is “an early form of a swap transaction” (1:70). He describes U.S. Deferred bonds as “when issued” securities instead of discount (zero coupon) bonds (1:119). Similarly, he fails to see that the market correctly priced convertible bank notes as discount bonds (1:132).

The very subtitle of Volume 2, From J.P. Morgan to the Institutional Investor (1900-1970), is misleading because it implies that Morgan predated institutional investors. In fact, institutional investors, particularly life insurance companies and mutual savings banks, were important players in the nation’s financial markets by the 1860s, not the 1960s. True, institutional investors largely eschewed common stocks until the 1960s, but it is well known that equity investment represents a small percentage of external finance flows. Markham’s assertion that “the first seven decades of the twentieth century witnessed more challenges to American finance than all the years before” seems at best a matter of opinion and, at worst, another example of the author’s lack of historical perspective (2:369).

Outright errors and misleading statements again abound in Volume 2. For instance, Markham claims that the Blue Sky Laws were passed “to stop the sale of worthless securities” (2:370). Law professor Paul Mahoney, however, has shown that commercial banks fought for the passage of those securities regulations in order to disembowel their major competitor, the commercial paper market. Markham also asserts that “the Federal Reserve legislation [of 1913] adopted the concept of ‘open market’ operations in which the Federal Reserve banks bought and sold government securities and eligible private debt issues in order to influence the money supply” (2:46). In fact, the Fed discovered the monetary policy uses of open market operations some years after its establishment ( and at first favored private paper and municipal warrants over Treasuries (David Marshall, “Origins of the Use of Treasury Debt in Open Market Operations: Lessons for the Present,” Federal Reserve Bank of Chicago Economic Perspectives, 2002 1Q: 45-54).

Time and space limitations prevent a fuller discussion of the shortcomings of Markham’s mammoth book. Volume 3, From the Age of Derivatives into the New Millennium, appears to contain fewer outright errors than the first two volumes, but it too suffers from a lack of focus, editing, evidence, and documentation. Indeed, only six pages of notes support 357 pages of text. The conclusion to the third volume confidently predicts the demise of paper money, paper correspondence, brick-and-mortar stores, and specialized financial services firms. “Undoubtedly, Wal-Mart and its like,” Markham claims, will supply consumers with mortgages, mutual funds, insurance policies, and “a host of other financial services” (3:365). Markham does not make clear, however, why Wal-Mart will fare any better than Sears did.

To conclude, I do not suggest that you use this opus, but if you do, use it with great care. The historical development of U.S. financial markets and institutions is an enormously important and complex topic. A quality, scholarly synthetic overview is still desperately needed.

Robert E. Wright is the author of The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850 (Cambridge, 2002), Hamilton Unbound: Finance and the Creation of the American Republic (Greenwood, 2002), History of Corporate Finance: Development of Anglo-American Securities Markets, Laws, and Financial Practices and Theories (Pickering & Chatto, 2002), Origins of Commercial Banking in America, 1750-1800 (Rowman & Littlefield, 2001), and three forthcoming works tentatively titled Corporate Governance in Historical Perspective: The Importance of Stakeholder Activism (Pickering & Chatto), Mutually Beneficial: The Guardian and Life Insurance in America (New York University Press), and Financing American Economic Growth: The Philadelphia Story (New York University Press).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Economic History of India 1857-1947

Author(s):Roy, Tirthankar
Reviewer(s):Hejeebu, Santhi

Published by EH.NET (March 2002)

Tirthankar Roy, The Economic History of India 1857-1947. Delhi: Oxford

University Press, 2000. xiv + 318pp. Rs. 595 or $24.95 (cloth), ISBN:


Reviewed for EH.NET by Santhi Hejeebu, Department of Economics and History,

University of Iowa.

Teachers of Indian economic history will welcome Tirthankar Roy’s Economic

History of India 1857-1957. Roy provides a chronological survey of the

colonial economy by economic sector — agriculture, small-scale industry,

large-scale industry, plantations, mines, banking, and the public sector. The

book also provides separate chapters on “the macroeconomy” and “population and

labour force.” In a heterodox field in which historical economists often find

themselves defensive about their methods and struggling with a paucity of

records, Roy offers a serious attempt to place the tools of economic analysis

in the service of Indian history. The goal of his Economic History of

India is to convey to budding historians and economists how this might be


Despite the fact that the survey covers the colonial period, Roy does not view

the government of British India as the prime mover of the economy. This is most

evident in his lucid discussion of the de-industrialization debate. He writes,

“De-industrialization means a decline in traditional small scale industry that

(a) derived from technological obsolescence against British goods, (b) was

sustained by colonial policies, and (c) remained uncompensated by new

enterprise. The term makes explicit contrast between Britain which experienced

industrialization, and her major colony India, which experienced

de-industrialization, at the same time and due to the same set of causes,

namely trade and technological change” (p. 124). The debate surrounding

de-industrialization is as central to Indian economic history as that of

slavery is to American economic history. Enormous intellectual effort was put

to the issue in the 1960s and 1970s and to a lesser extent in the 1980s. After

two major monographs on traditional industry during the colonial period, Roy is

well placed to provide an alternative perspective, which he calls

“commercialization.” Roy maintains that “products of British mechanized

industry replacing Indian hand-made goods [in India] was more exceptional than

the rule” (p. 128). Machine-made cloth was a poor substitute for handloom cloth

in important market segments of the textile industry. Market segmentation

implied that large and small-scale industry did not directly compete leaving

open the possibility of survival and expansion of the latter. His

commercialization thesis also provides evidence of mechanization and

organizational innovation in traditional industries. Thus if Roy does not see

the British government as the prime mover, it’s because he knows better. Roy’s

own contribution to the research literature has led him to fresh insights on

what happened in the bazaar.

Pedagogically Roy’s handling of de-industrialization offers a brilliant

illustration of the delights of Indian economic history. It offers students an

intellectual feast with all the elements for exciting classroom exchange: the

performance of the economy and nationalist discourse, Marxist vs. neo-classical

principles, complex social norms in a commercializing economy, implicit

theorizing, institutional change, alternative hypotheses and tests of evidence,

disputes over evidentiary standards. De-industrialization is certainly one of

the livelier segments in my course and I am grateful for a teaching tool that

organizes many strands of the debate.

Roy’s book is not without its drawbacks however. Money and banking are barely

touched upon. The banking sector illustrates well what Rajat Ray called the

imperial “division of economic space” and thus lends itself well to a full

discussion of how colonialism interacted with commercialization. Instead

banking is anachronistically placed in the same chapter with plantations and

mines, while monetary policy (i.e. exchange rate stabilization) is tucked

inside the chapter on macroeconomy. The index does not even contain entries for

either shroffs (moneychangers) or hundis (bills of exchange). What institutions

operated in the informal banking sector and how did they operate? How did

monetary policy affect the opportunities available to or choices made by

indigenous entrepreneurs? The book does not provide clear answers.

One might find other points worth taking issue with. Roy at times skims too

lightly over opposing views. For example, in chapter one he describes the

“world systems school” as the most famous school to have expounded views of

underdevelopment. Yet Roy does not cite Wallerstein’s work explicitly and

within a sentence or two, world systems theory becomes indistinguishable from

Marxist theory. For good reason Roy does not share many of the specific views

of what he calls the “left-nationalist paradigm.” His terse treatment of such

positions is however more than compensated by the focused and systematic

treatment his provides overall.

Indeed Roy’s clear and organized handling of complex issues (such as the

economics of common property rights in agriculture) surpasses the treatment

found in other textbooks. Dietmar Rothermund’s Economic History of India

from Pre-colonial Times to 1991 (Routledge, 1993) provides a drive-thru

version of Indian history. It is a competent chronological overview that does

not enter into any substantive historiographic or economic issues. However I

would discourage exposing the young to such gems of economic analysis as

“Compelled always to have an export surplus, India could not import too much”

(Rothermund, p. 37). A more refined alternative is B.R. Tomlinson’s Economy

of Modern India, 1860-1970 (Cambridge University Press, 1996). The three

core chapters of this work are masterpieces of synthesis but not easy to

disaggregate into a sequence of coherent class lectures and exercises. Roy’s

work by contrast is neither too diluted nor too condensed. He keeps the

narrative flowing and at the same time ably describes the economic issues at

stake, the possible counterfactuals, and the evidence supporting competing

positions. It should be noted that none of the available surveys of Indian

economic history contain the photo essays or graphical expositions typical in

textbooks on American economic history.

While the inner flap bills this as a textbook, the work will interest a wider

audience. Roy’s up-to-date overview of the historical research makes the field

accessible to anyone interested in the development of the global economy and

its national parts. It’s a pity it ends at 1947.

Santhi Hejeebu researches the East India Company in the eighteenth century.

She is currently writing an article called “Mechanism Design in the English

East India Company” (joint with Pablo Casas-Arce). She is also interested in

the organization of Indian merchant groups in the early modern period and is

working on an article called “South Asian Firms: Competing Theories in an

Emerging Field” (joint with Scott Levi). She teaches several courses in Asian

economic and business history.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):20th Century: Pre WWII

An Economic History of Twentieth-Century Latin America

Author(s):Cárdenas, Enrique
Ocampo, José Antonio
Thorp, Rosemary
Reviewer(s):Beatty, Edward

Published by EH.NET (February 2002)


Enrique C?rdenas, Jos? Antonio Ocampo and Rosemary Thorp, editors, An Economic History of Twentieth-Century Latin America, three volumes. New York: Palgrave, 2000. Volume 1: The Export Age: The Latin American Economies in the Late Nineteenth and Early Twentieth Centuries , 344 pp. $75 or ?52.50 (hardback), ISBN:0-333-91304-3; Volume 2: Latin America in the 1930s. The Role of the Periphery in World Crisis, 320 pp. $69.96 or ?50.00, ISBN: 0-333-63341-5; Volume 3: Industrialization and the State in Latin America: The Postwar Years, 360 pp. $75 or ?52.50, ISBN: 0-333-63342-3.

Reviewed for EH.NET by Edward (Ted) Beatty, Department of History, University of Notre Dame.

The three densely packed volumes that constitute An Economic History of Latin America in the Twentieth Century mark the culmination of a long-term project to present the region’s economic history from the 1870s through the late twentieth century. Their publication is a landmark event, and these volumes should provide an essential reference on the economic history of the region for some time to come. Each volume stakes out one of three principal subperiods: volume one examines the “Export Age,” ca. 1870 to the 1920s; volume two probes the region during the 1930s; while volume three focuses on the era of “accelerated industrialization,” ca. 1940-1980. Each volume begins with one or more introductory and thematically oriented chapters that set out the central economic and historiographic issues for the period, followed by chapter-length studies of particular countries. Argentina, Brazil, Chile, Columbia, Mexico, and Central America get chapters in each volume, while Peru is covered twice and Bolivia, Cuba, and Venezuela each once. The authors of the country studies in each volume all occupy central positions in their fields, and most are Latin Americans themselves. One of the many attributes of this collection is to disseminate their work widely in Britain and North America. Each chapter builds on the authors’ previous scholarship and most synthesize the central historiographic debates and contributions of the extant literature. This review will concentrate primarily on volumes one and three. The second volume is a reprint of Latin America in the 1930s, edited by Rosemary Thorp and first published in 1984. This ambitious project also yielded an overview volume, Progress, Poverty and Exclusion: an Economic History of Latin America in the Twentieth Century, written by Rosemary Thorp and published in 1998 by the Inter-American Development Bank and Johns Hopkins Press. It has been reviewed for EH.NET by Alan Taylor.

Volume one, The Export Age, traces how the expansion of world trade and investment largely drove Latin America’s export growth and was itself a product of nineteenth century revolutions in technology, transportation, and institutions. The result was an extraordinary demand for raw materials and the opportunistic response of most Latin American nations. While geography, natural resource endowments, and domestic social and political features shaped the particular way in which each nation engaged the world economy and was in turn shaped by that engagement, the underlying factors convincingly justify the unity of a regional periodization. While our understanding of the overall contours of this story and its periodization have in many ways remained unchanged over the past half century, important aspects have changed remarkably, even over the past decade. Several merit particular mention.

First, recent monographs have increasingly examined the significance of early industrialization in countries like Brazil and Mexico over the period 1880-1914. In these cases and others, investment in domestic manufacturing came precisely when producers in the North Atlantic countries could place ever cheaper and better quality goods in Latin American markets. While export growth and export linkages help us understand the changing domestic markets that made large scale domestic manufacturing possible, they were nowhere sufficient. New investments to import foreign technologies and erect large factories made sense only with programs of government protection, both at state and national levels. While these efforts are not detailed in any of the chapters here, there is widespread recognition of the role of the state in shaping investment patterns in the export sector as well as in other activities. Several chapters incorporate this revisionist story, although it is notably ignored in the title and to a great extent in the introductory chapter of volume one. We are left with the implicit conclusion that it is debatably anachronistic — misleading at most and overly narrow at least — to continue labeling the 1870-1914 era simply as Latin America’s “export age.”

Second, several of the contributions here suggest that if Latin America fell further behind the industrialized North Atlantic in the late nineteenth century (or, seen another way, did not take full advantage of opportunities for growth), it is not because the region exported too much, but that it exported too little. Beginning in the 1940s one common view of the region’s economic history (most visibly expressed by ECLA economists) held that the opening of Latin American economies in the nineteenth century and the export booms that accompanied this opening led to growth but also to underdevelopment, due in large part to a secular decline in terms of trade (see E.V.K. Fitzgerald’s account of this in chapter 3 of volume 3). The pessimism, which colored much of the scholarship on the export age before the 1980s, has given way to a more complex and mixed account. The revisionist argument that late nineteenth century export growth provided a significant foundation for twentieth century development (including physical infrastructure, manufacturing capacity, state capacity, and human capital) is present in a number of the accounts here. The chapters on Colombia and Bolivia state this most clearly (see, for instance, p. 62), but the theme runs throughout the volume. What is missing, however, is a broader assessment of the way in which linkages, spillovers, and externalities of export sector growth were not narrowly economic in scope but shaped fundamental social and political transitions during the 1880-1920 period. The chapters of Alan Knight on Mexico and Roberto Cort?s Conde on Argentina provide partial exceptions to this tendency. In contrast to the generally pessimistic tone of many earlier accounts of nineteenth century development — its dependent nature, limited technology transfer, rising inequality — this volume offers a more positive account of substantial growth, of a new foundation for future development, and of the creation of a modern state.

Volume two, Latin America in the 1930s, compiles papers first written in 1981 and 1982 and subsequently published in 1984. The current volume is an exact reprint. I touch on it only briefly here as it was extensively reviewed fifteen years ago. Despite its age, these contributions still stand as authoritative assessments of the region during and immediately following the Great Depression, and this holds true both for the summary chapters by Carlos D?az Alejandro and Charles Kindleberger as well as for the individual country studies. Two issues strike me as I read the volume now, nearly two decades after it was first written. First, the moderately revisionist view of these contributions still holds up: the Great Depression may constitute a turning point in economic thought and certainly helped shape the region’s move towards state-led industrialization, but in many important ways the 1930s witnessed a continuation of tendencies already apparent in the 1920s. In particular, nearly every one of these country studies note that import substituting industrialization (ISI) was already underway, and most decisively so in the larger nations. If in the early 1980s these authors attributed the beginnings of ISI to the 1920s, more recent research has placed its origins exactly in the so-called “export-era” of the late nineteenth century, as I noted above. Second, this volume represents the last chance for an examination of Latin America’s twentieth century history as yet uncolored by the economic debacle of the 1980s and the subsequent movement towards neoliberal openings. Although in its particulars the story presented here of the region’s response to 1930s trade and finance shocks differs in relatively minor ways from what might be written today, its tone throughout lacks the pervasive pessimism and critique of state-led industrialization which has largely characterized writing in the post-debt crisis era. This is not to say, however, that the accounts presented here can be ignored because they are dated — quite the contrary. They continue to provide our most authoritative assessment of the macro-economic crisis and response during that crucial era, and it might be argued that their pre-crisis perspective provides us with an important corrective to the consistently critical assessments of recent years. Needless to say, the more recent work of Enrique C?rdenas, Alan Taylor, and others provides essential new perspectives.

Volume three, Industrialization and the State in Latin America, makes the issue of state intervention explicit. Over the past decade or so there has been if not a revolution, then a significant shift in conventional views of Latin America’s post-war economic history. Although state-led industrialization, import substituting industrialization (ISI), or desarrollo hacia afuera has had its critics since the 1950s, it has been roundly vilified over the past decade or so as responsible for many if not most of the current ills of the region. The lead chapter in this volume provides a revisionist view — the first synthesis of the region and era written over a decade after its final collapse in the early 1980s. On one hand, the authors generally do not question the now-common acceptance of the inefficiencies generated by the long duration of highly protective policies, although most prefer not to dwell there long. Their macroeconomic focus tends to see costs in terms of the region’s lost opportunity to exploit the benefits of expanding world trade between 1950 and 1970, instead of in microeconomic inefficiencies. On the other hand, the authors balance this pessimistic view with an appreciation for the development that occurred in most countries through the period. This included most importantly the linkages of industrial growth to technological capacity, the emergence of effective national states, and the development of social infrastructure, including human capital. This is most explicit in the overview chapters and the account of Argentina, but runs through each chapter in some form. Most of the contributions in this volume also prefer to view the policy foundations of ISI as a result not of domestic policy errors or a rent-seeking political economy, but of rational short-term responses to international and macroeconomic circumstances in a world where few alternatives appeared feasible. By the 1960s, recurring macroeconomic crises and growing social conflict made the aggressive pursuit of alternative paths even more difficult. Although many countries began a retreat from the more aggressive version of ISI in the 1960s and 1970s (or began to include some export incentives, as in Brazil), its final demise was driven only by the severe external shocks and domestic crises of the early 1980s. How the substantial if problematic industrial growth that occurred from 1940 to 1980 was accompanied by a significant improvement in human development (though also by the persistence of high inequality) is alluded to but not explored in detail.

The editors’ decision to include chapters on technology (by Jorge Katz and Bernardo Kosacoff) and on the role of international institutions like the World Bank and IADB (by Richard Webb) in volume three should be commended. Both provide uncommon and extremely useful perspectives on central actors and outcomes of the ISI era. These two chapters provide novel views of the era of accelerated industrialization, but the chapter by Katz and Kosacoff is weakened by a vagueness that runs through many of the country studies as well. Despite the central role attributed to “institutions” in this chapter and in many of the country chapters, we get relatively little discussion of the nature of institutions: of the relationship between formal structure and administrative practice, of the way in which they structured incentives to invest in productive or rent-seeking activities, and of their mutability in the face of economic and political crises. Author after author asserts the importance of institution building in the post-war era, but institutions remain rather opaque black boxes throughout. The extensive contributions of recent work on property rights institutions and positive political economy finds little reflection here.

Most of the country chapters in volume three emphasize the tremendous change in social welfare experienced by most countries. In the companion volume, Progress, Poverty and Exclusion, Rosemary Thorp summarizes the change between 1900 and 1995: average per capita income (in constant US dollars) rose from $185 to $990, life expectancy increased from 29 to 68 years, while illiteracy fell from 71 percent to 10 percent. Most chapters here also point out how economic growth and average welfare did not mean better income distribution — often quite the opposite. What is not generally explored, however, is the relationship between social welfare and each country’s economic history. Although the implicit suggestion is that social welfare and economic growth are somehow linked, largely ignored is the more direct and causal relationship between politics — a combination of populist politics and the maturation of the basic elements of modern welfare states — and social welfare. The chapters on Venezuela and Brazil present the best accounts of the social consequences of particular growth experiences, although these two present more discouraging accounts of social welfare development than most other countries in the region. The problem throughout is not so much the uneven inclusion of social welfare issues, but rather the lack of an explanation for the relationship among social welfare, inequality, and economic growth.

All three volumes approach Latin American economic history largely from a macroeconomic perspective and with a particular emphasis on the international context. The influence of a distinctly British-style development economics is clear throughout. While the role of the state is a central component of nearly all national stories told in these volumes, and while institutional approaches are touched on here and there, accounting for domestic political economy is absent from most, as is the broader social context. Furthermore, issues such as labor, technology, and consumers receive relatively little coverage, with a few notable exceptions. These contributions, in other words, represent an approach rather removed from recent tendencies by economic historians in the United States to privilege microeconomic topics and institutions, especially those related to property rights and policies which shaped firms’ behavior.

Despite the superb quality of all of these country studies, I will offer two complaints. The first may not be entirely fair. The country studies in all three volumes provide — as advertised — economic histories of national export sectors and their linkages. Most admit up front that the export economy embraced neither most of the national labor force nor (in most cases) most of the nations’ GDP. While the accounts here are impressive, this historian still awaits a more broadly conceived economic history of Latin America since the mid-nineteenth century, an account that would incorporate a broader synthesis of economic and social history within the narrative story. One exception in this first volume is the fine synthesis of export, agricultural, and manufacturing issues in Mexico by Alan Knight, notably further outside the field of economic history than most of the contributors. Secondly (and more frustratingly), there are distressingly few citations and references in these volumes to scholarship after 1990 or so. Antonio Santamar?a Garc?a’s chapter on Cuba is a notable exception, and in general this problem is greatest in volume two (remember, a reprint of the 1984 volume) and in volume one, and somewhat less so in volume three. Given the wealth of new insights that economic historians of the region have offered over the past ten years, this suggests a volume that teeters on the verge of outdatedness at publication. Certainly the tremendous time and logistics that went into the production of these volumes necessitate substantial lag between composition and publication, but the gap here is occasionally striking. Together, however, these contributions succeed in reflecting the sea change in our understanding of the economic history of the long twentieth century in Latin America.

In conclusion, these volumes provide a sorely needed single source on the economic history of modern Latin America. With the exception of Victor Bulmer-Thomas’s broad and indispensable overview of the region, nowhere else is this available. These volumes will prove an enduring and much used reference for present and future economic historians. No other source matches the comprehensive, concise, and sophisticated accounts presented here. As important as this contribution is, however, it speaks only to the converted. Do these volumes speak to non-economic historians? Do they help convince historians of other persuasions that the economic history of their nations-of-study is not only interesting but necessary in order to understand social and cultural history? Do these volumes make this argument — at least implicitly — in a way that is accessible and compelling to those skeptical of the accessibility and relevance of economic history? I think the answer is a tentative yes, although I wish that I could say so with less hesitation. Recently the chasm between economic history, on one hand, and social and cultural history, on the other has widened considerably. This has been nowhere more true than within Latin American history in the United States. I recently attended a seminar of Latin American historians (at an institution not too far from my own) where I was shocked not so much by the presence of antipathy and scorn for social science approaches, as by its vehemence. What the broader community of Latin American scholars need from economic historians are works that seek to bridge or reach across that gap. With the exception of several chapter contributions here (for instance, those by Alan Knight and Roberto Cort?s Conde in volume one), these volumes do not accomplish this — although the introductory chapters by the volumes’ editors stand out in their clear, relatively non-technical, and authoritative presentation of a complex history. (I should note that the summary volume Progress, Poverty and Exclusion by Rosemary Thorp does a better job of presenting a compelling economic history to non-economists, although it too falls short of this ideal.) Most of the country chapters present sophisticated treatments of the nations’ macroeconomic experience over the past century. In doing so they offer a landmark resource for those already interested in the region’s economic history, but will not likely be read closely by others, and that is a shame.

This review cannot do justice to the rich variety of the thirty-three separate chapters collected in these volumes. Suffice it to say that nowhere else will the economist or historian find such a useful collection of concise and authoritative accounts. The concerns I have expressed in this review touch more on what I would have liked to see than on the quality of what is presented, which is excellent throughout. The introductory and overview chapters of the three volumes are alone worth the price of purchase. These should be required reading for every graduate student in the field — and for the rest of us as well. Together these volumes will provide an indispensable reference for future efforts to evaluate and re-evaluate what will continue to be a much-debated era in Latin American economic history.

Edward (Ted) Beatty is Assistant Professor of History at the University of Notre Dame and Fellow at the Kellogg Institute of International Studies. He has recently published a book on industrial policy in Mexico, Institutions and Investment: The Political Basis of Industrialization in Mexico before 1911 (Stanford University Press, 2001), and is currently working on the history of technological change in Mexico during the same period.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII

The Rise of the Western World: A New Economic History

Author(s):North, Douglass C.
Thomas, Robert Paul
Reviewer(s):Coelho, Philip R. P.

Project 2001: Significant Works in Economic History

North, Douglass C. and Robert Paul Thomas, The Rise of the Western World: A New Economic History. New York: Cambridge University Press, 1973. viii + 171 pp. ISBN: 0-521-29099-6.

Review Essay by Philip R. P. Coelho, Department of Economics, Ball State University. <>

New or Old Economic History? Incentives and Development

This is a landmark book on the impact of property rights on European economic development. Published over a quarter of a century ago, its stated goal is “… to suggest new paths for the study of European economic history rather than … either [a detailed and exhaustive study or a precise empirical test that are the] … standard formats” (p. vii). North and Thomas attempt to identify the elements that allowed the Western European economy to rise to affluence. Their argument is made transparent in Chapter One (Theory and Overview): the key to growth was and is an efficient economic system. Efficient in the sense that the system of property rights gives individuals incentives to innovate and produce, and, conversely inhibits those activities (rent-seeking, theft, arbitrary confiscation and/or excessive taxation) that reduce individual incentives. They argue that property rights are classic public goods because: (1) once a more efficient set of property rights is discovered the marginal cost of copying it is low (compared to the cost of discovering and developing it); (2) it is prohibitively expensive to prevent other political jurisdictions from emulating a more efficient set of property rights regardless of whether they contributed to their construction; (3) and finally, the idea of a set of property rights, like all ideas, is non-rival — we can all consume the same idea and the “stock” of the idea is not diminished. These public good aspects lead them to conclude that there may be under investment in the attempts to create more efficient sets of property rights because the jurisdiction that invests in the development of property rights pays the entire cost of their development but receives only benefits that accrue to its jurisdiction, while other jurisdictions can get the benefits without any of the developmental costs. Thus, the problems of public goods and the “free riders.”

Chapter Two (“An Overview”) sets the historical stage for their analysis. North and Thomas begin with tenth-century Europe and an examination of the classic feudal system. They contend that relatively low population densities and the absence of security (both economic and personal) led to a retreat from market exchange to one of self-sufficiency and to the development of feudalism. Protection was valuable and had to be paid for, but in the absence of markets it was paid for in kind rather than money. Since agricultural output could not be exchanged in the market (land) lords demanded labor services (dues) rather than output shares. Labor dues could be used to produce a more desirable set of consumables than output shares. Lacking market exchange, manorial labor was more fungible than agricultural output. The authors argue that from kings down to peasants, the absence of markets was the mid-wife to feudalism. The second prong of their thesis is that in feudalism, as in any societal arrangement, there existed a myriad of details, known as the custom of the manor that allowed the system to function. Once established, these customs became the set of property rights that molded the economic and personal relationships of feudalism.

As the centuries progressed populations grew and manorial economies replicated themselves. North and Thomas contend that land was available at the constant marginal cost (the cost of clearing land) up to the thirteenth century. At the end of this period diminishing returns to labor employed in agriculture manifested itself. The growth of population densities and the establishment of political order allowed markets to emerge. Diminishing returns and emergent markets gave feudal lords incentives to convert their serfs’ labor dues into fixed money payments. The lords were better off receiving a fixed payment rather than labor dues because the market price for labor was falling due to Malthusian diminishing returns to labor in agriculture. The commutation of labor services into money payments could not be reversed when labor became more valuable during the plagues of the fourteenth century. Amending the custom of the manor was subject to severe transactions costs, consequently by the sixteenth century servile labor in Western Europe was not viable.

Part Two (Chapters 3-7) presents evidence to buttress this thesis. Chapter 3 explores property rights in humans and land, Chapters 4 and 5 develop the frontier movement and the settling of land. Chapter 6 explores diminishing returns to agriculture in the thirteenth century, and Chapter 7 the devastation associated with the fourteenth century. Part Three of the book deals with the period 1500 to 1700 and covers the “unsuccessful” national economies of Spain and France and the successful ones of Holland and England. North and Thomas argue that inefficient sets of property rights hindered economic growth in Spain and France, while more efficient sets promoted the economic growth of England and Holland.

The paragraphs above are a rough sketch of the North-Thomas thesis on the growth of Western Europe. How well have the last 25 years of the twentieth century treated it, and how much consideration should it be given? The first question is relatively easy to answer. Texts and books in European economic development and history generally cite The Rise of the Western World, with the notable exceptions of David Landes and Rondo Cameron. In the academic literature it is frequently cited: The Social Science Citation Index for the years 1986-1990 gives the book about fifteen citations per year (68 total citations in the entire five year period), and for the last decade of the twentieth century (and subsequent to North winning the Nobel Prize in economics) citations rose to about twenty per year.1 But how big is that? It is larger than most, but not in the league of scholarship that alters the way a subject is considered. A relevant example is Ester Boserup’s The Conditions of Agricultural Growth that, for the same period (1986-90), was cited 158 times, or more than twice as frequently as North and Thomas. I believe the citation count assessment of the significance of this book is relatively accurate. The Rise of the Western World is an addition to the historiography of property rights, but it does not accomplish its stated goal: to explain the rise of the West. Furthermore there are significant gaps in its argument.

First, its reliance on Malthusian population theory may be misplaced. In 1966 the aforementioned Ester Boserup published her work The Conditions of Agricultural Growth (not cited in North and Thomas). From empirical evidence she argued that increasing populations led to the intensification of economic activities: From hunting and gathering, to a long-cycle agricultural rotation mixed in with hunting and gathering, to settled agriculture. In Boserup’s analysis output per man-year rises in agricultural societies relative to hunting and gathering societies, but output per hour devoted to the acquisition of food may have fallen. Boserup’s thesis is much more sophisticated than (and contradictory to) the simple Malthusian framework that North and Thomas rely upon. She points out that it is extraordinarily difficult to compare outputs in societies with different levels of production intensity. Population densities lead to different modes of production and entirely different societies. An increase in population density increases the range of productive activities that can be produced for market exchange, and as Adam Smith explains increased specialization leads to increased output and the size of the market limits specialization. North and Thomas recognize this interdependency explicitly. They state that increasing specialization due to increasing population densities may have partially offset Malthusian diminishing returns. How do they know it was a partial offset? The evidence they offer on diminishing returns and a Malthusian crisis in medieval England is primarily derived from the works of James E. Thorold Rogers, who investigated six centuries of wages and prices in England.2

As a source, Rogers is an excellent compilation of manorial roles and other data sources, however he is not a transparent writer and he is difficult to interpret. In volume one of A History of Agriculture and Prices in England (1866) he states, “… we may… conclude that the price of the service [wage labor], in so far as it was affected by competition, represents fully the economical conditions of supply and demand, and is interpreted by the evidence of prices” (p. 253). This may be interpreted to mean that wages are an accurate representation of the laborers’ incomes, but that does not seem to be what Rogers meant. Two pages later he writes that: “In many cases the labourer or artisan was fed. In this case, of course, he received lower wages. … At Southampton, the various artisans are almost invariably fed, … [In 1385] we read … of an allowance instead of food. As a rule, however, the wages paid are irrespective of any other arrangement. Sometimes, but very rarely, and only in the earlier part of the period, the labourer is paid in kind.” And in Six Centuries of Work and Wages (1884), Rogers indicates that feeding workers was considered routine (pp. 170, 328, 354-55, 510, 540-541, etc.).

I interpret Rogers to mean that in the early centuries of his study day laborers did not normally receive family food allowances, but that they were typically fed on the job. Given the nature of work (agricultural labor from shortly after sunrise to sunset) and medieval food preservation and preparation technology, not feeding workers would have forced them to devote significant amounts of time away from working to food preparation and to feeding themselves (just getting bread would be a formidable task given their work hours and the work hours of bakers). Besides being fed on the job laborers frequently had other perquisites such as gleaning, allotments of beer, and small amounts of land for individual agricultural activities (kitchen gardens). All these in-kind payments are mentioned in Rogers (1866) and are considered normal. North and Thomas base their work not only on the wage data from Rogers, but also on his price data for agricultural products.3 In order to determine real wages, money wages are divided by an index of agricultural prices.4 Notice that the numerator typically ignores payments in kind and the denominator is exclusively a food index. Medieval workers’ consumption bundles had a heavy food component, but if one is being partially paid in food and resources devoted to food (kitchen gardens), then real wage indexes that focus solely on the costs of food may be seriously distorted unless the income (both in money and in kind) elasticity for food is one and the overwhelming preponderance of the budget is devoted to food. Mildly put, the data that North and Thomas rely upon to show Malthusian diminishing returns are not entirely adequate to the task.

Other sources question the use of the Malthusian paradigm. James Z. Lee and Wang Feng unequivocally deny that Chinese agriculture from 1300 to 1800 experienced Malthusian crises. Similarly, Julian L. Simon disputed the empirical validity of the Malthusian model. Others question the North and Thomas view of medieval English agriculture. Gregory Clark questions the view of a primitive English agriculture running into diminishing returns in the early fourteenth century.5 Certainly the fourteenth-century plague was a disaster to the European economy, but it does not follow that the plagues that devastated it were direct consequences of Malthusian diminishing returns. More likely it was, as William McNeill hypothesized, a result of an integrated Old World economy that led to the introduction of a “new” pathogen to a dense, flea-ridden European population.6

So there are difficulties with North and Thomas’s belief that the diseases of the fourteenth and fifteenth centuries are a manifestation of declining living standards (Malthusianism). They do not consider that the plague may have been exogenous, that pathogens are subject to their own dynamics and evolution and not necessarily a result of human intervention.7 North and Thomas simply assert that the plague was a result of over population, diminishing returns, and declining living standards. But if that is so, why did the plague reoccur after population had declined and (according to the data they rely upon) wages had increased? And why did plague occur earlier — in the mid-sixth century? North and Thomas do not have answers.

There is a straightforward explanation to these questions that is grounded in epidemiology: It is that the plague was a “new” disease to fourteenth-century Europe and its relatively dense population resulted in high rates of infection and mortality. These rates decreased as immunities (both acquired and genetic) became more predominant in the populations of Europe. What has this to do with Malthus and diminishing returns? Nothing: The simple Malthusian doctrine correlating high death rates with low living standards is suspect. It assumes that diseases are a function of poverty while there is evidence that the causation runs from diseases to poverty, and it is contradicted by data which show areas with high money incomes (cities) having higher death rates than those areas with low money incomes (rural areas). Consequently any line of reasoning that relies upon the Malthusian doctrine, as does The Rise of the Western World, is suspect.

There are other flaws in their thesis, some minor, some major. A minor omission is that they do not specify why the servile labor force accepted the original commutation of labor services to money payments. According to their high transactions cost model, “the custom of the manor” would have made the initial negotiations prohibitively costly. A simple observation that personal freedom to the individual was worth more than the value of the money payments would correct this omission. And, such an observation would reinforce their claim that when the purchasing power of a unit of money fell (inflation) the lords were unable to switch back to servile labor.

A more significant difficulty with their thesis is their claim that while diminishing returns to labor existed in the countryside, urban areas had constant returns. These are inconsistent with declining real wages, because migration from village to town will prevent agricultural wages from falling.8 Another difficulty is their lack of knowledge of antiquity: They seem to believe that institutional innovations such as insurance and bills of exchange were medieval innovations, but these were known and used at least by the Hellenistic era, and the ancients developed many contractual forms that were resurrected and used again during the European Renaissance.9

So North and Thomas’s book is not without its flaws, but blemishes and all it still makes significant contributions in its emphasis on an efficient set of property rights as a necessary condition for economic development to take place. In this emphasis North and Thomas returned to the fundamentals of economics and its founding father, Adam Smith, who said: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought by the natural course of things.”

The Rise of the Western World is right to echo these sentiments. Since its publication in 1973 the modest increases in economic and personal freedom that the Chinese have experienced have led its population to a degree of affluence entirely unanticipated a quarter of a century ago. Similarly, the decline in law and order has bought economic and personal disasters to many in parts of Asia and Africa. The lesson seems a hard one to learn: the protection of the liberties of people to both their persons and properties is the most effective way to promote the general welfare in the long run. Short-run policies that restrict these liberties inevitably reduce welfare in both the short and long run. By focusing on this lesson in The Rise of the Western World, North and Thomas have done the profession and humanity a meritorious service.


1. Counting citations is a tricky business because a slight change in the citation can result in an entry separate from the main one. Thus D.C. North and R.P. Thomas may be counted differently from D. North and R. Thomas.

2. North and Thomas cite other evidence, but much of this is ultimately derived from Rogers’s work. For example E.H. Phelps Brown and Shelia Hopkins’s works on wages and prices are based on data gathered from Rogers.

3. North and Thomas rely on the Phelps Brown and Hopkins works (1955, 1956, 1957) on real wages whose data are derived from the wage and price data of Rogers.

4. “Index” may not be a completely accurate term because the index frequently contains only one commodity; then, to be specific, it is a wage series expressed in wheat units.

5. Clark (1991) using labor inputs in harvesting as a proxy for wheat yields finds little change in output per acre over the medieval era. He observes that: “Interestingly the labour input on reaping wheat from 1250 to 1450 seems to have risen little, implying a constancy of yields over this period. This is consistent with the work of Titow and of Farmer on the Winchester and Westminster estates over the medieval period. … Wheat yields were fairly constant over the medieval period, the population losses of the Black Death having little impact on yields” (p. 454, footnotes omitted).

In another article, Clark (1988) observes that relatively low yields per acre in medieval England could be attributed to the relatively high interest rates. Taken together these observations do not lend support to the thesis that medieval Europe was in a Malthusian crisis because, if it were so, we would expect to see declining mean output per unit of labor and increasing mean output per unit of land as diminishing returns makes labor relatively abundant and land relatively scarce. The opposite would occur if, as a result of the Black Death, labor became relatively scarce.

6. North and Thomas do not recognize that the plague may have been the result of increasing living standards. As incomes rose trade increased and disease pools in different regions became integrated. Mortal diseases newly introduced to an area frequently have a devastating impact on the native population. For more on this see McNeill.

7. Exogenous in the sense that the plague was not a disease endemic to fourteenth-century Europe, although, most likely, it had appeared in Europe in the first millennium CE; see J. C. Russell for further information.

8. For a complete specification of this model see Chambers and Gordon.

9. Edward F. Cohen argues and presents persuasive evidence that these institutional forms were abundant in fourth-century BC Athens.


Boserup, Ester. The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure. Chicago: Aldine, 1965.

Cameron, Rondo. A Concise Economic History of the World. New York: Oxford University Press, 1989.

Clark, Gregory. “Yields per Acre in English Agriculture, 1250-1860: Evidence from Labour Inputs,” Economic History Review 44 (1991): 445-60.

Clark, Gregory. “The Costs of Capital and Medieval Agricultural Technique,” Explorations in Economic History 25 (1988): 265-94.

Chambers, Edward J. and Donald F. Gordon. “Primary Products and Economic Growth: An Empirical Measurement,” Journal of Political Economy 74 (1966): 315-32.

Cohen, Edward E. Athenian Economy and Society: A Banking Perspective. Princeton: Princeton University Press, 1992.

Lee, James Z. and Wang Feng. One Quarter of Humanity: Malthusian Mythology and Chinese Realities, 1700-2000. Cambridge, MA: Harvard University Press, 1999.

Landes, David S. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: Norton, 1998.

McNeill, William H. Plagues and Peoples. New York: Anchor Books, 1976.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of Building Wages,” Economica 22 (1955): 195-206.

Phelps Brown, E. H. and Shelia V. Hopkins. “Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage-Rates,” Economica 23 (1956): 296-314.

Phelps Brown, E. H. and Shelia V. Hopkins. “Wage-Rates and Prices: Evidence for Population Pressure in the Sixteenth Century,” Economica 24 (1957): 289-306.

Rogers, James E. Thorold. Six Centuries of Work and Wages. New York: G.P. Putnam’s Sons, 1884.

Rogers, James E. Thorold. A History of Agriculture and Prices in England. Oxford: Clarendon Press, 1866.

Russell, Josiah C. “That Earlier Plague,” Demography 5 (1968): 174-84.

Simon, Julian L. The Economics of Population Growth. Princeton: Princeton University Press, 1977.

Simon, Julian L. Population and Development in Poor Countries: Selected Essays. Princeton: Princeton University Press, 1992.

Simon, Julian L. The Ultimate Resource 2. Princeton: Princeton University Press, 1998.

Simon, Julian L. and Herman Kahn (editors). The Resourceful Earth: A Response to Global 2000. New York: Oxford, 1984.

Philip R. P. Coelho has written on long-run economic growth (“An Examination into the Causes of Economic Growth,” Research in Law and Economics 1985) and is currently working on the impact of morbid diseases on economic history and growth (see: “Biology Disease and Economics: An Alternative History of Slavery in the American South,” with Robert A. McGuire, Journal of Bioeconomics Vol. 1, 1999; “Epidemiology and the Demographic Transition in the New World,” Health Transition Review, Vol. 7, 1997; and “African and European Bound Labor in the British New World: The Biological Consequences of Economic Choices” with Robert A. McGuire, The Journal of Economic History, Vol. 57, 1997.)


Subject(s):Servitude and Slavery
Geographic Area(s):Europe
Time Period(s):Medieval