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The Economics of the Great Depression

Author(s):Wheeler, Mark
Reviewer(s):Wicker, Elmus

Mark Wheeler, editor, The Economics of the Great Depression. Kalamazoo,

MI: W.E. Upjohn Institute for Employment Research, l998. 220 pp. $25

(cloth), ISBN 0-88099-192-5; $15 (paper), ISBN 0-88099-191-7.

Reviewed for EH.NET by Elmus Wicker, Department of Economics, Indiana

University.

The Great Depression of the nineteen thirties remains perhaps the most

enduring economic enigma of the twentieth century despite the voluminous

literature it has generated.

There have been two general approaches to the study of the Great Depression: as

a specific country phenomenon and as a global even t.

Friedman and Schwartz (1965) preferred the former and concentrated on the U.S.

Charles Kindleberger (1973) and, more recently, Barry Eichengreen

(1992) have preferred the latter.

The occasion for this book was a series of six lectures given during the

academic year 1996-97 at Western Michigan University. The editor boasts that

these essays take a fresh approach to the study of the Great Depression, but it

is not always easy to detect wherein that “freshness”

resides.

Four of the six papers continue

the specific country approach: Robert Margo reexamines the U.S. labor market in

the thirties; James Fackler constructs and tests a macroeconomic model of the

U.S. for the l921-37 period, and Michael Bernstein attempts to revive a version

of the economic maturity hypothesis popular in the post World War II period.

David Wheelock links events in the Great Depression to the inflation bias of

the Fed and the ultimate collapse of the Bretton Woods international monetary

arrangements.

Carol Heim’s essay is the

only paper specifically global in scope. It examines the incidence of the Great

Depression in the U.S., the U.K. and in some less developed economies including

Latin America, India, China, and Japan.

If the Great Depression was a global event, it rarely

has received systemic and extensive treatment across continents. We know more

about what happened in the U.S. and Europe than we do about what happened in

Japan, China,

India and Africa. Carol Heim has performed yeoman service by drawing our

attention the

differential impact of the Great Depression across continents, among nations

and among industries within individual countries.

Heim begins by contrasting the depression’s impact on the U.S. and the U.K.

Great Britain, unlike the U.S., suffered from an industrial malaise during

1920s. The Great Depression simply exacerbated the situation. Still some

industries continued to grow while others declined, but labor failed to move

away from the depressed areas. In the U.S. the South managed to improve its

relative, if not its absolute, position partly as a consequence of labor

migration and the effects of the New Deal.

Heim breaks new ground when she describes the impact of the Great Depression on

the less developed countries. Japan continued to grow, while China does not

seem to have been affected. Heim attributes the moderate effects of the Great

Depression on the less developed countries to the

“delinking” of domestic currency from the international economy. Resources were

shifted from the export to domestic industries thereby stimulating economic

development. This is an interesting hypothesis which needs to be worked out

more fully than what was possible in a short lecture. The Great Depression as a

stimulus to economic growth in the less developed countries is a “fresh” and

provocative idea.

The other five papers treat the Great Depression as a specific country event.

James Fackler constructs an econometric model of the U.S. economy for the

period 1921-37. It is a variant of the standard aggregate demand

/aggregate supply with IS and LM underpinnings. His purpose is to attempt to

differentiate between alternative propagation mechanisms. He identifies three:

a decline in the money stock (Friedman and Schwartz),

autonomous changes in consumption (Temin) and

the debt-deflation or credit view (Fisher and Bernanke). Fackler recognizes

the they may not be mutually exclusive. It is doubtful how much we have learned

from this exercise.

Alternative propagation mechanisms can not be ruled out. The “best,” he

surmises, appears to be a shock to the IS curve whose source, however, can not

be

identified!

Robert Margo’s paper is more modest in its aspirations but, nevertheless,

makes two “fresh” contributions to the behavior of the labor market during the

Great Depress ion. He presents new evidence about the labor participation rate

of wives of husbands on WPA projects and the effects of the Great Depression on

income distribution. Using microeconomic data Margo refutes the “added worker

effect” hypothesis–that other family members have an incentive to seek

employment when the head of household becomes unemployed. What he finds is that

the WPA inhibited the wives of husbands on WPA from seeking a job. Even if

wages were relatively low on WPA projects, they were still better than what

married women could earn.

Margo’s conclusion that WPA work was essentially full time and excluded job

search is consistent with the Lucas-Rapping (1972) model of the Great

Depression where the labor market is presumably in continuous short

-term equilibrium.

Margo also questions the conventional wisdom that the Great Depression helped

to produce a more egalitarian distribution of income. This did not happen

because earnings differentials widened between skilled and unskilled

workers–the decline in hours worked was greater among the unskilled. By 1939,

however, the differential had returned to what it had been in the late 1920s.

Instead, a substantial decline in the inequality of wages occurred between 1940

and 1950.

The papers of Wheelock and Cecchetti are less concerned with the causes of the

Great Depression than with its legacies. Wheelock maintains that institutional

change spawned by the Great Depression imparted an inflationary bias to

monetary policy and completely undermined any

lasting commitment to the gold standard which led inevitably to the rejection

of the Bretton Woods agreement in 1971. He concludes correctly that the Fed’s

commitment to the full gold standard was weakened by gold sterilization in the

twenties, the priority of domestic stabilization objectives, a reluctance to

raise rates in 1931, and the final abandonment of gold temporarily in 1933. It

was not the Great Depression that weakened the U.S.

commitment to the gold standard but the realization when “push comes to shove”

exchange rate rigidity must be subservient to domestic stabilization

objectives.

Cecchetti derives three lessons of the Great Depression for current policy:

the central bank’s function as lender of last resort is of primary importance,

deflation is extremely costly, and the gold standard is very dangerous! One

lesson that we should have learned, but which Cecchetti omits, is that the

initial structure of the Federal Reserve (as embodied in the original Federal

Reserve Act) was faulty. All banks were not required to become members thereby

excluding those banks that later were in most need of Federal Reserve support.

A faulty Federal Reserve Act and not inept management was the primary cause of

the Fed not having done more.

Bernstein eschews the relatively short-run view of the Great Depression. He

prefers an explanation couched in terms of secular changes in technology and

shrinkage of investment outlets that bears a strong resemblance to the older

theories of Kalecki, Schumpeter, and Hansen.

The key is to be found in the concept of industrial maturity which he derives

from the work of the Austrian economist Joseph Steindl (1976). In the Steindl

version there were long-run tendencies toward capital accumulation in

capitalist development which

led to diminished competition and investment. Bernstein acknowledges that

Steindl’s explanation does not have the unequivocal support of the historical

evidence.

There is no simple interpretation of the Great Depression to which these six

essays point.

Nor do they make any pretense at summarizing the state of the art. They

represent a combination of singular efforts to come to terms with specific

problems. Some are more successful than others.

References:

Barry Eichengreen. Golden Fetters: The Gold Standard and the Great

Depression, 1919-1939. New York: Oxford University Press, 1992.

Milton Friedman and Anna Jacobson Schwartz, The Great Contraction,

1929-1933, Princeton: Princeton University Press, 1965.

Charles P. Kindleberger. The World Depression, 1929-1939. Berkeley:

University of California Press. 1973.

Robert E. Lucas and Leonard Rapping. “Unemployment in the Great Depression:

Is There a Full Explanation?” Journal of Political Economy, 80, 1972,

pp.59-65.

Joseph Steindl, Maturity and Stagnation in American Capitalism, New

York:

Monthly Review Press, 1976.

Elmus Wicker is Professor of Economics, Emeritus at Indiana University. He is

the author of Banking Panics of the Great Depression, Cambridge

University Press. 1996, and Banking Panics of the Gilded Age, Cambridge

University Press, forthcoming.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

A Future of Capitalism: The Economic Vision of Robert Heilbroner

Author(s):Carroll, Michael C.
Reviewer(s):Emmett, Ross B.

Published by EH.NET (January 1999)

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Michael C. Carroll. A Future of Capitalism: The Economic Vision of Robert Heilbroner. New York: St. Martin’s Press, 1998. ix + 117 pp. $59.95 (cloth). ISBN: 0-312-17754-2.

Reviewed for EH.NET by Ross B. Emmett, Department of Economics, Augustana University College.

A Unified Vision for the Future?

Let me begin with two admissions. First, I would not be a historian of economics today if it were not for Robert Heilbroner. Encountering The Worldly Philosophers in my first-year “history of western civ ” course, and then again (with the same professor!) in my fourth-year “modern intellectual history” course, convinced me that the “economic mind” was central to modernity. I avidly consumed some of his other books as an undergraduate student: The Future as History, The Great Ascent, An Inquiry into the Human Prospect, Beyond Boom and Bust, and Marxism: For and Against. Questions regarding the relation between modernity and economics have dominated my career since. I thought it somehow fitting that my first opportunity to hear Heilbroner speak in person came only hours after I defended my dissertation.

Second, the more I reflect on the questions regarding modernity and economics that Heilbroner first raised for me, the less my reflections look like those Heilbroner himself offers. Reading A Future of Capitalism, by Michael Carroll (now teaching at West Virginia State College), confirmed my suspicions regarding the central differences. We will get to those differences in due course, but first, comments about Carroll’s treatment of Heilbroner.

The key to understanding Heilbroner’s work, Carroll tells us, is to construct out of his various works a systematic presentation of his ideas. This is what Carroll sets out to do. After a basic intellectual biography, he uses Heilbroner’s criticism of standard economics to set up the key components of Heilbroner’s “system”: a hermeneutic, multi-dimensional approach aimed at uncovering the hidden unifying structure of capitalist society. Carroll argues that Heilbroner combines Marx’s socioanalysis with a psychoanalytic perspective on human behavior and an economics focused on how power and social organization intersect in the material provisioning of humankind (informed by the work of Adolph Lowe, Heilbroner’s friend and colleague at the New School), in order to reveal the internalized institutions and values which comprise the capitalist system. Carroll moves freely among Heilbroner’s writings spanning several decades to show how his analysis focuses on the interlocking nature of, and tensions among, three central internalized institutions and values in capitalism: the drive to accumulate capital, the market, and division between private and public realms.

Once we appreciate Heilbroner’s understanding of the underlying structure of capitalism, Carroll then asks what Heilbroner’s view to the future would be: uncovering the central contradictions of capitalism allows some tentative conclusions about its further development. Can the system sustain the drive to accumulate? Probably not, but capitalism has proven remarkably resilient; it has the capacity to transform itself even though changes may also create constraints for the system. The system’s real enemies, therefore, are the disruptions which reveal its endemic self- contradictions: structural unemployment, for example, which emerges from the drive to accumulate and the market’s organizing features, yet undermines future productivity, aggregate demand, and people’s hopes for their future. Or globalization, which by extending the market’s organization around the world in the absence of a global institutional base, jeopardizes the system’s separation of the public and private worlds in the drive to “accumulate, accumulate, accumulate.” In these, and other disruptions, Heilbroner sees the evolution of capitalism continuing. The role of an economist like Heilbroner, Carroll argues, is not to sketch out the particular features of the future, but to trace “future visions”: potential outcomes of the evolution of the relations among capitalism’s central elements.

As you may perhaps see from the previous paragraphs, Carroll’s attempt to uncover the unifying structure of Heilbroner’s ideas parallels Heilbroner’s own hermeneutics of capitalism. For the hermeneuticist, interpreting texts and interpreting societies are similar problems. Unlike Heilbroner, however, Carroll’s stance toward Heilbroner’s system is not critical. He is in fact enamored with Heilbroner’s ideas; and not the kind of affection Marx had for capitalism! The net result is a book remarkably like those that appear all too frequently in the history of economic thought — studies of little-known or long-forgotten economists which seek to convince us of their place in the pantheon. Far more interesting would be a serious effort to seek out the reasons why Heilbroner’s ideas have had such little impact on the modern economics profession, or to examine the way his work has been shaped by, and has itself shaped, modernism in the social sciences.

And make no mistake, Heilbroner is a modernist, despite his criticism of the type of modernism inherent in 20th century economics. Heilbroner’s modernism appears in the search for the underlying unity of capitalism, the effort to give it a singular meaning, and the quest to identify its future. Like Marx before him, and numerous other hermeneutic scholars of the mid-twentieth century, Heilbroner searches for unity beneath the fragmentation, even if only to reveal the nature of the fragmentation.

The hermeneuticist’s approach to unity and fragmentation has been at the center of my attention over the past couple of years, as I have been engaged in a series of discussions on hermeneutic theory with a number of my colleagues in other disciplines. One of the key issues we have identified as a source of division among us is the difference between those who believe that hermeneutic theory provides the capacity for creating meaning and unity in the midst of a fragmented social system, and those who believe that hermeneutics provides a means of uncovering meaning, unified or fragmented. The former group identifies the difference between hermeneutics and science with the distinction between the unity and the fragmentation of knowledge–despite epistemological claims for science’s unique role in creating knowledge, science fragments, while hermeneutics unites. (Carroll makes much the same claim in his chapter on Heilbroner’s critique of modern economics.) The latter group, myself included, identified hermeneutics with the uncovering of meaning/s, and sees the quest for unity (in either hermeneutic theory or science) as a peculiar attribute of modernism. In this latter way of thinking, texts such as Heilbroner’s are the sites of multiple meanings, and their interpretation may gain more from trying to locate those different meanings (contextually, or in terms of various interpretive communities) rather than the quest to render them coherent and consistent. In a similar fashion, capitalism is over-determined: a social framework being pulled in various directions by a host of competing self-contradictions and tensions; generating multiple meanings and an array of present realities and future possibilities.

I appreciate hermeneutic theory because it reminds me of things my training in economics attempted to make me forget, and urges upon me a humility in regard to the appreciation of the work of others that modernity encouraged me to ignore. Reading Heilbroner provided much the same experience. In the end, however, I see no more reason to look for a unified account of the future of capitalism than I do a systematic treatment of such a wonderful writer’s lifetime of work.

Ross B. Emmett John P. Tandberg Associate Professor of Economics Augustana University College, Camrose , Alberta, Canada

A scholar of American economics during the interwar years, Ross Emmett has focused on Frank H. Knight and Chicago economics. Two articles will appear shortly: “The Economist and the Entrepreneur: Modernist Impulses in Frank H. Knight’s Risk, Uncertainty and Profit,” forthcoming in History of Political Economy (Spring 1999); and “Entrenching Disciplinary Competence: The Role of General Education and Graduate Study in Chicago Economics,” forthcoming in The Transformation of American Economics: From Interwar Pluralism to Postwar Neoclassicism, edited by Malcolm Rutherford and Mary Morgan. A two-volume selection of essays by Frank H. Knight will appear from The University of Chicago Press in the next year

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Laboring for Freedom: A New Look at the History of Labor in America

Author(s):Jacoby, Daniel
Reviewer(s):Friedman, Gerald

Published by EH.NET (November 1998)

Daniel Jacoby, Laboring for Freedom: A New Look at the History of Labor in

America. Armonk, NY: M.E. Sharpe, 1998. 224 pp.

$61.95 (hardcover); $22.95 (paperback), ISBN: 0765602512 (hardcover);

0765602520 (paperback).

Reviewed for EH.NET by Gerald Friedman, Department of Economics,

University of

Massachusetts at Amherst.

Not so long ago, Labor History was a simple field chronicling the growth of

labor unions and labor-oriented political parties on the assumption that the

organized working class was to be the cutting

edge of social change. Upholding the banner of the organized working class,

labor historians from John R. Commons through Philip Foner and David Montgomery

shaped our conception of American industrial history from the 1920s through the

1980s.

In recent

years this simple vision of labor history has collapsed along with its Marxist

social theory. Critical of white,

male-dominated unions advancing a narrow, anti-Communist, and sometimes

politically conservative agenda, radicals rejected the old institutional

history. They sought to substitute a new labor history celebrating the

rank-and-file and focused on the radical opponents of the established union

leadership. Some rejected unions altogether to chronicle the history of groups

traditionally outside the unions, including household workers and racial

minorities. Speaking a new language of culture, gender, and race, some have

replaced the labor union with the community and transposed the locus of

struggle from the state and the workplace

to the social

group and the family.

Instead of strikes and elections, social struggles have become more abstract

and universal, contests over the definitions of words and the social

constructions of our realities.

From a different perspective, many neoclassical economists have joined

historians and anthropologists in rejecting the old labor history’s focus on

working-class institutions. Past labor historians,

they charge, have underestimated the ability of individual workers to better

their circumstances by using competitive markets. They have shown how free

workers have improved their circumstances, forcing up wages at undesirable jobs

by leaving them for alternative employment. Unions and cultural constructs,

they argue, are epiphenomena. The underlying reality

is the economic circumstances of society shaped by relative factor supplies

and technological change.

No longer is there a shared consensus about what labor history is or how to

place new works in a clear, ongoing chronicle.

Into this confusion comes Daniel Jacoby with a new vision of labor history as

the history of freedom. An economic historian at the University of Washington

at Bothell, Jacoby has written on public education and labor relations in the

Progressive Era. Here, he interprets American labor history as a struggle by

individual workers to gain ‘freedom,’ to win more power and more opportunity to

act without constraint. Jacoby interprets the struggle historically. It

changes over time because technology, social constructions, and institutions

shape the possible scope for opportunity and freedom in each period.

Behind this historical circumstance lies a still-greater contradiction, that

between ‘positive’ and ‘negative’ freedom,

between ‘freedom from’ constraint and ‘freedom to’ act. Jacoby makes this

traditional dichotomy a useful tool by showing how in the United States the

distinction between ‘positive’ and ‘negative’

freedom has been manifested as a struggle over “independence or contract.” The

American Revolution, Jacoby argues, made

“republican independence” the nation’s creed, linking freedom to the ownership

of productive property. In 1776 this left little for blacks or women, largely

excluded from property ownership. But the American Revolution provided the

language with which Americans pragmatically dismantled “remaining bastions of

traditional authority” (page 33) including slavery and gender inequality.

Republicanism, Jacoby shows, was an expansive doctrine; its logic demanded that

America push freedom forward to encompass others,

to free the slave and to make blacks and women the legal equals of white men.

But at the same time that American society was conducting this republican

struggle for freedom from caste privilege,

it experienced growing division between capitalists and a growing class of

proletarian wage earners. For women and for ex-slaves,

extending the right to sell their wage labor power and to make contracts in the

wage-labor market was an extraordinary burst of freedom. (This was true as

well, although Jacoby says little about them, for the former European and

Asian serfs and small peasants who came to America and comprised much of our

wage labor force.) But the situation was very different for white male

laborers who became proletarian wage laborers instead of independent

producers. For them, the right to contract marked a loss of control over their

work, a loss of freedom, compared to some earlier, or anticipated, status as

free producers, managing their work independently. As proletarians, they

discovered, as Jacoby notes,

that in the traditional creed of republican independence “only property, not

merely the freedom to contract it, yielded an adequate basis for real

independence” (page 55). No longer able to achieve autonomy on their own,

these workers were forced to look towards social institutions and collective

action to gain freedom.

Having established the parameters of the controversy over freedom and contract,

Jacoby proceeds to interpret American history as the struggle between

‘freedom-from-constraints-on-labor-

contracts’ and ‘freedom-as-opportunity-to-regulate-work-

collectively.’ In the late-nineteenth century, Supreme Court Justice Stephen

J. Field extended the Fourteenth Amendment prohibition of legislation denying

individuals of any fundamental rights to an absolute protection of the right

of individuals and corporations to make contracts. Under the legal doctrine of

“Substantive Due Process,” courts between the 1880s and 1930s disallowed a

broad range of collective legislation and worker action regulating wages,

hours of work, and the conditions of employment. Substantive due process

protected individuals’ freedom from social and political constraints, by

assuring them their opportunity to make contracts.

But it ignored the basic inequality in opportunity between wealthy employers

and their workers. Jacoby shows how Progressive-era reformers sought to

reconcile contractual equality with capitalist property relations by extending

public education. Education was to assure equality of opportunity, to be “the

last countervailing force”

to economic tendencies undermining “labor freedom in the United States” (page

99). But an effective balance to powerful employers came only in the 1930s

when state support for labor unions allowed effective collective bargaining and

New-Deal era legislation and court decisions restricted the right to contact.

Expanding positive freedom came at the expense of negative freedom from

constraint.

The old labor history often ended with the New Deal,

vie wing it as the final achievement of the American labor movement.

Jacoby goes further. Although gender disappears from America’s struggle for

freedom in his later chapters, he carries his discussion of freedom into the

1990s, writing about Civil Rights and union struggles in the post-World War II

era. In the concluding chapters, Jacoby warns against the impact of free

markets on worker standards in the era of the “global piano.” He fears a

“race to the bottom” driving working

conditions and wages in advanced economies down to the level of the poorest.

Jacoby notes how Germany, Japan, and some other advanced countries have avoided

this threat from globalization through regulatory policy and advanced education

and suggests that the United States might learn from their experience. Thus

his work ends on a salutary note, recognizing past progress and warning

against future threats.

Laboring for Freedom provides a survey of American history that might be

useful for students in courses in economic history and history generally as

well in courses in labor history as such. The book provides little new

research. Instead, its merit is in the reinterpretation of older material,

placing an existing literature into a provocative new framework. Jacoby’s book

is deceptively thin. It has fewer than 170 pages of text but Jacoby packs into

this limited text a new synthesis of American history built around labor. This

is a significant achievement in a work that should be read widely by historians

and all social

scientists.

Gerald Friedman Department of Economics University of Massachusetts at Amherst

Gerald Friedman is the author of State-Making and Labor Movements:

France and the United States, 1876-1914 (Cornell University Press,

1998) as well as numerous

articles on the history of organized labor in the United States and Europe.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Socializing Capital: The Rise of the Large Industrial Corporation in America

Author(s):Roy, William G.
Reviewer(s):Levenstein, Margaret

H-NET BOOK REVIEW Published by H-Business@eh-net.muohio.edu (August, 1998)

William G. Roy. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, N.J.: Princeton University Press, 1997. xv + 338 pp. Figures, tables, notes, bibliography, and index. $35.00 (cloth), ISBN 0-69-104353- 1.

Reviewed for H-Business by Margaret Levenstein , University of Michigan

This book is extraordinarily ambitious and wide-ranging in its treatment of a very significant topic. At times Roy focuses specifically on the merger wave of the 1890s during which many large firms turned to public capital markets to facilitate mergers. But much of the book, and, from my perspective, the most interesting parts, take a much longer term view, examining changes in property rights and the use of those rights by railroads and then manufacturing firms over the course of the century. Most of the central points of the book I think are correct and many of Roy’s methodological points provide useful correctives to tendencies in business and economic hi story. There were sections of the book that I found insightful bordering on brilliant. There were also sections of the book that I thought were unconvincing, and others that were simply wrong.

The central points of the book can be summarized as follows :

1. The large, widely-held manufacturing corporation is a social creation, not a natural entity.

2. The corporation as it exists today is historically contingent and developed from pre-existing forms. In particular, it evolved from the public corporation, used by the state to accomplish public purposes and was given special privileges (monopoly, eminent domain, limited liability) in order to do so. The happenstance convergence of the economic crisis of 1837, the emergence of the railroad, and the po wer of the “anti-monopoly, anti-state” version of Jacksonian anti-corporatism privatized and democratized the corporation. Thus the corporate form retained many of its privileges (limited liability, alienability of ownership) but made those privileges available to all through general incorporation laws. In doing so, the corporation lost its public purpose and its public accountability (as well as its claim to monopoly).

3. There existed historical alternatives. Manufacturing could have continued to be conducted in firms that were not corporations. The corporate form could have retained its public purpose and its public accountability. The state could have remained a more active economic player in its own right — owning railroads or banks or manufacturing as today the state owns highways. It could have developed a stronger regulatory apparatus, developing the capability to administer public enterprises and assure that those who received the privilege of incorporation fulfilled a public responsibility. In other words, the boundaries between public and private could have been drawn quite differently in many dimensions.

4. Manufacturing firms followed the incorporation practices of railroads because that was required by investment banking firms to get access to large pools of capital, not because the corporate form was demanded by manufacturers to coordinate increasingly complex, large-scale, high-throughput technology.

5. Manufacturing firms (the “trusts”) turned to New Jersey’s incorporation law in order to legalize collusive activities, not to coordinate increasingly complex, large- scale, high-throughput technology.

6. The corporation was privatized – lost its public use and public accountability – and the corporation was socialized – its securities widely owned but no longer controlled by owners – not because this organizational form was the most “efficient” way to organize manufacturing production. Rather, manufacturing firms embrace and continuing use of the corporate form was the result of a “logic of power.”

Roy uses several methods to make his case. He first presents a theoretical argument that a “social logic based on institutional arrangements, including power” (p. 6) is more useful for understanding the dimensions and dynamics of the economy than is an analysis based on “the logic of efficiency.” The latter position he identifies with Chandler, and much of the book is cast as a polemic against Chandler. While I am very sympathetic to his historicizing and “de-naturalizing” of the corporation, I thought this framing of the issue was largely counter- productive. His presentation of Chandler sometimes bordered on caricature. Chandler’s point is not that managers are concerned only with efficiency or that clever managers always pi ck the most efficient organizational design. His point is that it was only in firms where managers made choices that gave the firm a competitive advantage that the firm survived. But Roy ignores the role of competition. He argues that “efficiency theorists” are functionalists, simply providing an ex post rationalization of whatever happened to emerge. While he is certainly correct that some business history is functionalist, and neo-classical economic historians are apt to fall back on “best of all possible worlds” descriptions of whatever institutions exist, the competitive model does provide a story of why it is that we should think that those that survive are different from those that didn’t; their survival is taken as an indication that they are better at competing. Thus it would have been useful to explain how power influenced who survived the competitive process and how power determined the rules of the competitive process. That is, it would have been useful to explain why the firms that survive the competitive process are not necessarily the most efficient. Instead, for the most part, Roy simply ignores competition as a significant force in capitalist economies, arguing that “the social arrangement that governed American industry could only vaguely be described as a market. American businessmen have always been aware that they share common interests at least as much as they compete over conflicting interests” (pp. 176-7). Roy is absolutely correct that American businessmen have often cooperated. But that does not mean that there is no market; it means that those who have been able to cooperate, and better yet, dominate cooperative agreements, are the firms that have survived and prospered. I would dispense with the word “efficiency” altogether. A more useful question is whether firms survived because they were good at inventing new, lower cost technology, good at getting workers to work harder, good at getting tax breaks from local governments, good at increasing demand for their product, good at getting access to others’ property through eminent domain, good at getting cheap capital because of connections to investment bankers. Whether or not any of these particular attributes improves efficiency or is a Good Thing for society as a whole (as if there is such a thing) is an altogether separate question.

Roy then turns to an econometric test of the “power” and “efficiency” explanations. He asks which industries were more likely to adopt the corporate form during the 1890s merger wave (which he measures by their use of publicly-traded securities, thus excluding incorporated firms that were not traded on public exchanges). He finds that average size of the firm and capital intensity are significantly and positively related to an industry’s use of publicly-traded securities. He also finds that labor productivity was negatively related to the use of such securities and that industry growth rates were insignificant. He concludes from this that Chandler and “the efficiency theorists” are wrong. Size matters even when controlling for other things. Labor productivity is lower in “incorporated” industries, so it must not be that incorporation makes firms more efficient. There are several problems with this analysis: he looks only at the 1890s and therefore conflates where the merger wave took place with where the corporate form endured. He groups “Chandlerian” causes of incorporation (growth and capital intensity) with effects (i.e. labor productivity); perhaps the negative relations hip between productivity and incorporation reflects the need for organizational change in low-productivity industries? His unit of analysis is the industry, which groups together large and small firms, and he treats large industries and small industries equivalently. Are we surprised that there are no large firms in the hammock or lapidary works industries despite a faster rate of growth than electrical machinery (p. 30)? Chapter two, which presents this econometric analysis, should be skipped entirely by anyone who has read Naomi Lamoreaux’s The Great Merger Movement (and if you haven’t read it you should). Lamoreaux presents a much more convincing and complete econometric rejection of the Chandlerian contention that the merger wave of the 1890s was motivated by the need for vertical coordination of inherently high-throughput technology. Save your time for the more edifying chapters to come.

In Chapters 3 and 6, Roy compares the history of public enterprise, the legal rights of corporations, and the emerging dominance of “socialized capital” in three states: New Jersey, Pennsylvania, and Ohio. He examines the evolution of the corporation from a tool used by states to encourage economic development and raise revenues to its emergence as a private agent, available to all through general incorporation statutes with no public responsibility or accountability. Roy argues that the differences in the experience of public investment during the canal and early railroad period, as well as the political interpretations placed on that experience, determined the rules under which corporations operated in each state at the end of the century. New Jersey had the most limited experience with public corporations, both quantitatively and qualitatively. It participated as an investor in the Camden and Amboy, and was able to keeps its taxes low as a result, but the railroad controlled the state rather than the other way around. Pennsylvania had both mixed corporations in which it invested and public corporations. Ohio had the most activist policy, both the most successful- the Ohio canal system developed the region and integrated it into the national economy – and the most spectacular failure when logrolling resulted in the expansion of public subsidization of canals and railroads and nearly bankrupted the state. Roy examines the implications of these different experiences for three aspects of corporate law: the permissibility of corporations owning other corporations, the powers of boards of directors (relative to shareholders), and the extent of limited liability. Roy finds that in all three aspects of corporate law, the experience with public and mixed corporations during the canal era shaped state attitudes such that New Jersey’s corporate law was the most “privatized,” allowing corporations broad flexibility in owning other corporations, giving power to corporate boards, and extending unlimited liability through both a general incorporation statute and special charters. Ohioans were at the other end of the spectrum, suspicious of the corporate form, retaining double liability and strictly limiting the activities of corporations to those for which they were chartered. Roy finds that these differences in corporate law led to differences in the importance of corporate capital in the three states. While some of this difference in corporate capital obviously reflects capital mobility – corporations with operations elsewhere chartered in New Jersey to take advantage of its lax laws – Roy’s fundamental point is that business in Ohio was simply less likely to be organized within a corporation. Thus, he suggests, economic activity need not have taken place within the socialized corporation, or at least not within a corporation with no social responsibility . Where the state legislature was unwilling to confer such generous benefits on the corporation, businesses made do with other forms of organization.

This empirical conclusion supports Roy’s argument that there were actually two distinct political responses to the canal crisis within the Jacksonian anti-corporate movement. One demanded more accountability on the part of the quasi-public corporation (i.e. more government) while the other demanded privatization (less government). Roy makes the interesting argument that the privatization ideology won out because it was self-fulfilling. Suspicion of the state led to weak oversight. With no oversight, projects were corrupt or failed; that failure was then interpreted as the failure of public investment (p. 74). But it is not clear from his comparison of the three states that strong state oversight was ever really in consideration. As he shows elsewhere in the book, the choices considered were either democratization of access to corporate privileges through general incorporation statutes or limitation of those privileges by statutes such as Ohio’s requiring double liability and strictly limiting the activities of corporations to those for which they were chartered.

Here and elsewhere, Roy compares the choices made in the United States to those made in France where a strong and competent state apparatus was created. This comparative perspective, though presented more casually than those between the U.S. states, is often very helpful. Unlike the U. S. case where states competed with one another and were, therefore, forced into a prisoner’s dilemma race to the bottom in terms of the social responsibilities of private actors, France was able to chart a very different course. Whether the “strong state ” approach was one that could ever have emerged in the United States will, of course, be debated by many. But that is not Roy’s point. The point is that there is nothing natural or inevitable about the present configuration of rights and responsibilities that constitute the corporation.

Chapters 4 and 5 examine the way that the railroad and investment banking influenced the construction of the corporation. Many of the generalizations he makes in his history of the railroads will not sit well with most economic and business historians. One could read these chapters and think that the railroads were a failure, both privately and publicly. For the most part, neither was the case. And the reader might understandably be confused when he presents Rockefeller’s demand for railroad rebates as an example of how the railroads exercised power. But try to ignore that and focus on the his fundamental point. The financing of railroads was not simply corrupt, or political, or determined by power games among the major players (though all that was certainly the case). The development of institutions to finance railroads determined the set of institutions that industrial corporations could choose from when they needed to finance growth and short term operations. The structure of those inherited institutions favored concentrated over unconcentrated industries, favored incorporation and management-owner separation, perhaps favored some technologies, organizations of work, and regions over others. This point is important and profound. The evidence he gives in its support is not always well organized to make his point. But the challenge that he lays out is clear. The observed choices of corporations are not necessarily the optimal ones in a global sense. They are the choices corporations made given the incentives created by institutions created for a different purpose and as part of deeply politicized process.

Chapters 7 and 8 return to the merger movement of the 1890s. He correctly argues that it is wrong to see this period as one of a shift from a competitive market to an administered or monopolized one. U.S. firms had been cooperating to control prices in many industries throughout the nineteenth century. In fact, he argues, it is only with the emerging dominance of a “free market” ideology that the state makes the strong distinction, now taken for granted in anti-trust law, between contracts promoting trade and those in restraint of trade. Others will argue that there was a long-standing tradition in common law not to enforce contracts in restraint of trade. But there is also a long-standing tradition of allowing quasi- public organizations, such as guilds and corporations, to engage in behavior that we would today think of as monopolistic. Roy perhaps takes this argument too far when he says, “If governments did not enforce contracts between buyers and sellers, markets would collapse by the same sort of opportunism that wrecked the pools” (p. 190). While the current state of the economy in Russia reflects the underlying truth of this statement, we should also recognize that there is not the same inherent incentive to deviate from a mutually beneficial contract to exchange that there is with a contract to restrict output or fix prices. It is true that the state creates and enforces markets, but there is a difference between a self-enforcing contract and one that is inherently a prisoners’ dilemma.

This chapter includes a very interesting section examining the interaction between the first use of the New Jersey incorporation statute and the terms of the statute. He not only shows that the writing of the statute was the result of a complex political process. He also shows that the way that it was used differed substantially even from the purposes of the first corporations for which it was written.

In these chapters he presents the histories of particular industries, arguing that their use of the corporate form cannot be explained by changes in their technology (i.e. by managerial demand). The histories of the sugar and tobacco industries, familiar to business historians, are re-told in a new light. Rather, he argues, the desire for monopoly control and the expectation of financiers that the corporate form would be used, led firms to incorporate. He also makes the interesting argument that the merger wave of the 1890s changed the expectations of investors so that “when a group of entrepreneurs wanted to establish a large-scale industrial enterprise, henceforth the standard procedure would be to mobilize the resources of the corporate institutions by recruiting investment bankers, brokerage houses, and the investment press in order to attract sufficient capital” p. 254. Prior to the 1890s it was deemed acceptable for Andrew Carnegie to operate his steel business as a limited partnership; after the merger wave of the 1890s investors perceived non- corporate firms as higher risk. Trying to operate outside the corporate sphere was now a more costly choice, but only because the prior history had changed investors’ (and investment bankers’ in particular) ideas about how business had to be organized.

The comparison of the three states is intended to suggest that there were various paths that the development of the corporation could have taken. But sin ce the corporation is now firmly ensconced in all three a more overarching point is that competition between the three states limited the power of any individual state to determine the structure of the corporation. The three states are also relatively similar in terms of their level of economic development, industrialization, and integration into the national economy. A slightly different story might have been told, and Roy’s argument made stronger, if he had looked at states that were less developed and continued to have more active state economic development policies throughout the century, including state investment in banks, railroads, and corporations. Did those states making post bellum public investments in corporations demand public accountability? Or had the prevailing ideology of the private corporation so come to dominate by the second half of the century that even where there was substantial and direct state investment the corporation was seen as an autonomous and privately responsible agent?

Roy makes several important methodological points that economic and business historians should heed. First, he emphasizes that actors can exercise power without power being the motivation for their actions. Individuals and groups exercise power when their actions determine the choice set or the constraints faced by others. I think this broad definition of power is very useful and would help economic and business historians to understand and analyze political movements, from late 19th century populism to late 20th century resistance to free trade. But defined this broadly we also have to recognize that the exercise of power is not inherently a bad thing. For example, in a capitalist economy with strong patent protection technological innovation gives the innovator power. Users of older technologies cannot simply continue to operate as they have in the past. This is the creative destruction that Schumpeter celebrated- and it is really does destroy something that someone values. That’s why the technocratic distinction between efficiency and distribution that economists cling to is silly. Any policy choice that has a significant impact on the “efficiency” of the economy will also have distributional consequences. That doesn’t mean that we don’t want technological change. Much of the time we probably do. But this perspective forces us to acknowledge that there are social decisions to be made, not simply private actors doing whatever they please, and that those social decisions require tradeoffs. Second, this book will serve as an enormously useful corrective to the tendency among economists studying the firm, property rights, and institutions generally (a growing trend that is very healthy in and of itself) to follow Oliver Williamson’s “In the beginning, there were markets” approach. Roy argues forcefully, and correctly, that both the market and the firm are social constructions. That does not mean that they are arbitrary or unreal. It means that their structure and their existence are the result of past political decisions and the outcome of social and political conflict. This is also a useful corrective to an approach that conflates the notion of the existence of a market with “rational” behavior by individuals. The existence of a market changes how rational individuals behave. Competitive pressure forces rational individuals to calculate more, and it increases the weight of monetary factors in those calculations relative to very real concerns for community and the quality of human inter action. Economic historians recognize this effect of the market on individual behavior when they can cast it in a positive light (see Sokoloff’s 1992 work on the spread of markets and the rate of patenting, for example), but tend to downplay it otherwise (see Rothenberg 1992, for example).

Third, Roy makes an interesting case for an interplay between contingency and determinacy in the book. He argues for contingency in order to make the case that there is nothing natural or inevitable about the current institution of the corporation. The current configuration of rights and responsibilities that constitute the corporation is the result of highly contingent events in the past. But he does not accept the standard version of path dependence and raises questions that I have long thought were problematic with that approach. He makes clear that while the current construction of the corporation is contingent and path dependent in the sense that it would and could have been different if different events had occurred at key turning points (particularly during the 1830s canal crises), he does not see this as simply the result of chance. The key events were themselves the result of who had power at the time. This approach opens up a whole line of fruitful research in this area. Why was it that the response to the canal crisis was privatization rather than increased regulation? Why was it that some state constitutions were modified to limit direct involvement in economic activity and others weren’t? These were explicitly political decisions that had long term economic ramifications. Understanding the political forces behind these decisions would be very useful. Roy also makes the point, applicable quite generally to the path dependence approach, that what matters is not simply the cost of shifting from one path to another (e.g. from one keyboard to another) but who bears that cost. If those who have the power to make the decisions about whether to switch paths do not bear the costs, then the switch will appear “costless” (see McGuire, Granovetter, and Schwartz, forthcoming).

In making the argument for the contingency of the corporation Roy plays down some forces – powerful forces I am sure he would agree – that led to its current incarnation. On a mundane level he downplays competition among states allowed by the federal structure that led to a spiraling down of public responsibilities for private actors. But on a more basic level, the transformation of assets from things that natural individuals own, use, and are responsible for, to capital personified in the corporation, responsible no longer to the state and barely to its nominal owners, seems to me not a happenstance, contingent event. The corporation gives agency to capital. It’s not for nothing that we call it a capitalist economy.

Finally, Roy’s “de-naturalizing” of the corporation is a giant step forward for business history. So is his problematizing of the boundaries between private and public, the economy and the state, and the rejection of the dichotomy of an “interventionist state” and a “natural market.” As Roy makes clear, the state creates the market, so it is meaningless to talk of it intervening in it. That language simply serves to de-legitimize some actions of the state relative to others. Finally, acknowledging that there are social choices to be made that influence how the economy will function in the future is important, and not simply for academics. Post-cold war ideology presents the corporation not only as natural but all- powerful. It is good to remind people that they can, through social and political action, make choices about how such social creations operate.

Bibliography

Lamoreaux, Naomi R. The Great Merger Movement in American Business, 1895-1904. Cambridge, England: Cambridge University Press, 1985.

McGuire, Patrick, Mark Granovetter, and Michael Schwartz. Forthcoming. The Social Construction of Industry: Human Agency in the Development, Diffusion, and Institutionalization of the Electric Utility Industry. New York, N.Y. and Cambridge, England: Cambridge University Press.

Rothenberg, Winifred (1992). From Market Places to a Market Economy: The Transformation of Rural Massachusetts . Chicago, Ill.: University of Chicago Press.

Sokoloff, Kenneth (1992). “Invention, Innovation, and Manufacturing Productivity Growth in the Antebellum Northeast” in Robert Gallman and John Wallis American Economic Growth and Standards of Living before the Civil War (Chicago, Ill.: University of Chicago Press), pp. 345-378 .

Williamson, Oliver E. (1985). The Economic Institutions of Capitalism. New York, N.Y.: The Free Press.

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Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):19th Century

Creating a National Home: Building the Veterans’ Welfare State 1860-1900

Author(s):Kelly, Patrick J.
Reviewer(s):Costa, Dora L.

EH.NET BOOK REVIEW Published by EH.NET (January 1998) Patrick J. Kelly, Creating a National Home: Building the Veterans’ Welfare State 1860-1900. Cambridge, MA: Harvard University Press. viii + 250 pp. $37.50 (cloth), ISBN: 0-674-17560-3. Reviewed for EH.NET by Dora L. Costa, Department of Economics, MIT.

Union Army veterans and the programs that benefited them have received considerable attention of late. This reviewer has used the wealth of records generated by the Union Army pension program to study the evolution of retirement, taking advantage of the peculiarities of the program for statistical identification. The most common focus, however, has been not on the veterans as data, but on why veterans’ programs developed in the first place and the ramifications of this development for the twentieth century welfare state. Thus, Theda Skocpol, among others, has argued that disgust with veterans’ pensions delayed the development of state provided old age pensions.

In this book Patrick Kelly (Department of History, University of Texas at San Antonio) traces the development of veterans’ homes from their origins in the efforts of local women’s philanthropic organizations to a federal system consisting of four regional branches by the 1870s and eight by the end of the nineteenth century. He documents the initial resistance to veterans’ institutions arising from the fear that these would foster dependency and from the conviction that pensions were a better (and cheaper) way to compensate veterans. When it became clear that there would always be some veterans unable to take care of themselves even with generous pensions, he describes how the political alliance between Republicans and veterans led to the creation of a National Asylum. This National Asylum then turned into a National Home, as managers of the veterans’ Homes sought to avoid the stigma of the poorhouse and the asylum by using the rhetoric of domesticity. But, they avoided the stigma of the poorhouse not just through their choice of rhetoric. The sites for homes were chosen for the beauty of their grounds (the first site was a bankrupt resort) and the architectural plan of the most successful branch (the Central) combined the characteristics of military installations with those of Utopian communities and included workshops, libraries, and chapels. The kitchen provided generous portions of the artery clogging food of the era. The homes, although located outside of cities, were easily accessible via rail and were integrated into the public life of the neighboring community.

Veterans spent their pensions in town (often, much to the managers’ chagrin, in saloons, gambling establishments, and brothels); passing theater groups provided entertainment; city residents used the grounds of the home as a public park; and the homes organized entertainment for the entire city for Decoration Day (now known as Memorial Day) and the Fourth of July. Although veterans’ homes did not have the stigma of the poorhouse, they were institutions nonetheless. The men wore uniforms resembling their Union Army uniforms, slept in barracks with 40 or even 100 other men, needed a pass to leave the home, and were awakened by a bugle call, called to mess by a bugle call, and sent to bed by a bugle call. The veterans who entered the homes were too sick to support themselves, too poor to pay for care within their own homes, and had no family members who were able to support them. For anyone working with Civil War veterans as data or for anyone working on nineteenth century institutional care, Kelly’s book will be a useful reference. However, Kelly is not content to tell a straight history. He argues that his study of veterans’ homes has much wider significance because the National Home prepared the way for the later expansion of both the United States welfare and warfare states. Because the National Homes were highly visible tourist attractions, Kelly claims that they helped insinuate the state into the common life experience of post-Civil War Americans. Given the paucity of evidence, I found these claims excessive. Kelly presents no evidence that the attitude of Americans toward the federal government underwent a profound change. Even if it did, could we attribute this to veterans’ homes? Although Kelly points out that the homes had assisted 100,000 Union veterans by 1900, this sum pales in comparison to the number of pension beneficiaries. In 1900 alone almost ten times as many pensioners were on the Union Army pension rolls. Even more striking, until the advent of the New Deal the basic welfare institutions of the United States remained unchanged and until World War II the small peacetime army could hardly lead anyone to talk of a “warfare” state. Dora L. Costa Department of Economics Massachusetts Institute of Technology Dora Costa is the Ford Career Development Associate Professor of Economics at MIT and a faculty research fellow at the National Bureau of Economic Research. Her book, The Evolution of Retirement: An American Economic History, 1880-1990, uses Union Army veterans as data and will be forthcoming in April from the University of Chicago Press.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):19th Century

The Rise of Big Government in the United States

Author(s):Walker, John F.
Vatter, Harold G.
Reviewer(s):Troesken, Werner

EH.NET BOOK REVIEW

Published by EH.NET (January 1998)

John F. Walker and Harold G. Vatter, The Rise of Big Government in the United States. Armonk, NY: M.E. Sharpe, 1997. 256 pp. $64.95 (cloth), ISBN: 0765600668 . $24.95 (paper), ISBN 0765600676.

Reviewed for EH.NET by Werner Troesken, Department of History, University of Pittsburgh,

In The Rise of Big Government in the United States, John F. Walker and Harold G. Vatter argue that government growth is response to the evolution of the market, shifts in ideology, and changes in international relations. Although Walker and Vatter document the growth of local and state governments, they focus mainly on the growth of the federal government. Their story begins in 1890 and extends through the present. Walker and Vatter take issue with two common explanations for the rise big government. First, they claim that economic and political crises have not caused the size of government to ratchet upward, as Robert Higgs argued in Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York, 1987). Second, they claim that government bureaucrats seeking to maximize their own power and wealth have not prompted the rise of big government, as William Niskanen argued in Bureaucracy and Representative Government (Chicago, 1971).

For Walker and Vatter, government growth is primarily a response to the vagaries and failures of the market. In a nutshell, when the market generates outcomes that society does not like, society demands that the government intervene and make things better. The government’s ability to solve the problems wrought by the market depends critically on the larger culture’s ideological make-up. In eras dominated by a laissez-faire ideology, the government grows less, and is less successful in dealing with the problems generated by the market.

Although Walker and Vatter are both economic historians, they chose not to consider much recent work in economic history. Consider two examples. The authors argue that federal deposit insurance has stabilized the banking industry and protected small depositors. In making this argument, Walker and Vatter do not refer to numerous articles by Charles Calomiris, David Wheelock, and Eugene White. The works of Calomiris, Wheelock, White, and others, highlight the moral hazard and adverse selection problems that have plagued deposit insurance schemes throughout history. Walker and Vatter also argue that since World War II, fiscal policy has stabilized the macroeconomy and prevented severe downturns. Their discussion would have been better had they addressed Christina Romer’s work on pre- and post-war business cycles.

Overall, Walker and Vatter tell a plausible story, though I would have preferred a more balanced analysis, one that identified the costs, as well as the benefits, of big government. Readers wanting an introduction to the rise of big government, or those wanting an account that emphasizes the benefits of big government, will probably find this a useful book. Those wanting a more thorough or balanced account should look elsewhere.

Werner Troesken Department of History University of Pittsburgh

Werner Troesken is author of Why Regulate Utilities? The New Institutional Economics and the Chicago Gas Industry, 1849-1924 (University of Michigan Press, 1996).

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