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The Economic History of Korea

The Economic History of Korea

Myung Soo Cha, Yeungnam University

Three Periods

Two regime shifts divide the economic history of Korea during the past six centuries into three distinct periods: 1) the period of Malthusian stagnation up to 1910, when Japan annexed Korea; 2) the colonial period from 1910-45, when the country embarked upon modern economic growth; and 3) the post colonial decades, when living standards improved rapidly in South Korea, while North Korea returned to the world of disease and starvation. The dramatic history of living standards in Korea presents one of the most convincing pieces of evidence to show that institutions — particularly the government — matter for economic growth.

Dynastic Degeneration

The founders of the Chosôn dynasty (1392-1910) imposed a tribute system on a little-commercialized peasant economy, collecting taxes in the form of a wide variety of products and mobilizing labor to obtain the handicrafts and services it needed. From the late sixteenth to the early seventeenth century, invading armies from Japan and China shattered the command system and forced a transition to a market economy. The damaged bureaucracy started to receive taxes in money commodities — rice and cotton textiles — and eventually began to mint copper coins and lifted restrictions on trade. The wars also dealt a serious blow to slavery and the pre-war system of forced labor, allowing labor markets to emerge.

Markets were slow to develop: grain markets in agricultural regions of Korea appeared less integrated than those in comparable parts of China and Japan. Population and acreage, however, recovered quickly from the adverse impact of the wars. Population growth came to a halt around 1800, and a century of demographic stagnation followed due to a higher level of mortality. During the nineteenth century, living standards appeared to deteriorate. Both wages and rents fell, tax receipts shrank, and budget deficits expanded, forcing the government to resort to debasement. Peasant rebellions occurred more frequently, and poor peasants left Korea for northern China.

Given that both acreage and population remained stable during the nineteenth century, the worsening living standards imply that the aggregate output contracted, because land and labor were being used in an ever more inefficient way. The decline in efficiency appeared to have much to do with disintegrating system of water control, which included flood control and irrigation.

The water control problem had institutional roots, as in Q’ing China. Population growth caused rapid deforestation, as peasants were able to readily obtain farmlands by burning off forests, where property rights usually remained ill-defined. (This contrasts with Tokugawa Japan, where conflicts and litigation following competitive exploitation of forests led to forest regulation.) While the deforestation wrought havoc on reservoirs by increasing the incidence and intensity of flooding, private individuals had little incentives to repair the damages, as they expected others to free-ride on the benefits of their efforts. Keeping the system of water control in good condition required public initiatives, which the dynastic government could not undertake. During the nineteenth century, powerful landowning families took turns controlling minor or ailing kings, reducing the state to an instrument serving private interests. Failing to take measures to maintain irrigation, provincial officials accelerated its decay by taking bribes in return for conniving at the practice of farming on the rich soil alongside reservoirs. Peasants responded to the decaying irrigation by developing new rice seed varieties, which could better resist droughts but yielded less. They also tried to counter the increasingly unstable water supply by building waterways linking farmlands with rivers, which frequently met opposition from people farming further downstream. Not only did provincial administrators fail to settle the water disputes, but also some of them became central causes of clashes. In 1894 peasants protested against a local administrator’s attempts to generate private income by collecting fees for using waterways, which had been built by peasants. The uprising quickly developed into a nationwide peasant rebellion, which the crumbling government could suppress only by calling in military forces from China and Japan. An unforeseen consequence of the rebellion was the Sino-Japanese war fought on the Korean soil, where Japan defeated China, tipping the balance of power in Korea critically in her favor.

The water control problem affected primarily rice farming productivity: during the nineteenth century paddy land prices (as measured by the amount of rice) fell, while dry farm prices (as measured by the amount of dry farm products) rose. Peasants and landlords converted paddy lands into dry farms during the nineteenth century, and there occurred an exodus of workers out of agriculture into handicraft and commerce. Despite the proto-industrialization, late dynastic Korea remained less urbanized than Q’ing China, not to mention Tokugawa Japan. Seasonal fluctuations in rice prices in the main agricultural regions of Korea were far wider than those observed in Japan during the nineteenth century, implying a significantly higher interest rate, a lower level of capital per person, and therefore lower living standards for Korea. In the mid-nineteenth century paddy land productivity in Korea was about half of that in Japan.

Colonial Transition to Modern Economic Growth

Less than two decades after having been opened by Commodore Perry, Japan first made its ambitions about Korea known by forcing the country open to trade in 1876. Defeating Russia in the war of 1905, Japan virtually annexed Korea, which was made official five years later. What replaced the feeble and predatory bureaucracy of the ChosǑn dynasty was a developmental state. Drawing on the Meiji government’s experience, the colonial state introduced a set of expensive policy measures to modernize Korea. One important project was to improve infrastructure: railway lines were extended, and roads and harbors and communication networks were improved, which rapidly integrated goods and factor markets both nationally and internationally. Another project was a vigorous health campaign: the colonial government improved public hygiene, introduced modern medicine, and built hospitals, significantly accelerating the mortality decline set in motion around 1890, apparently by the introduction of the smallpox vaccination. The mortality transition resulted in a population expanding 1.4% per year during the colonial period. The third project was to revamp education. As modern teaching institutions quickly replaced traditional schools teaching Chinese classics, primary school enrollment ration rose from 1 percent in 1910 to 47 percent in 1943. Finally, the cadastral survey (1910-18) modernized and legalized property rights to land, which boosted not only the efficiency in land use, but also tax revenue from landowners. These modernization efforts generated sizable public deficits, which the colonial government could finance partly by floating bonds in Japan and partly by unilateral transfers from the Japanese government.

The colonial government implemented industrial policy as well. The Rice Production Development Program (1920-1933), a policy response to the Rice Riots in Japan in 1918, was aimed at increasing rice supply within the Japanese empire. In colonial Korea, the program placed particular emphasis upon reversing the decay in water control. The colonial government provided subsidies for irrigation projects, and set up institutions to lower information, negotiation, and enforcement costs in building new waterways and reservoirs. Improved irrigation made it possible for peasants to grow high yielding rice seed varieties. Completion of a chemical fertilizer factory in 1927 increased the use of fertilizer, further boosting the yields from the new type of rice seeds. Rice prices fell rapidly in the late 1920s and early 1930s in the wake of the world agricultural depression, leading to the suspension of the program in 1933.

Despite the Rice Program, the structure of the colonial economy has been shifting away from agriculture towards manufacturing ever since the beginning of the colonial rule at a consistent pace. From 1911-40 the share of manufacturing in GDP increased from 6 percent to 28 percent, and the share of agriculture fell from 76 percent to 41 percent. Major causes of the structural change included diffusion of modern manufacturing technology, the world agricultural depression shifting the terms of trade in favor of manufacturing, and Japan’s early recovery from the Great Depression generating an investment boom in the colony. Also Korea’s cheap labor and natural resources and the introduction of controls on output and investment in Japan to mitigate the impact of the Depression helped attract direct investment in the colony. Finally, subjugating party politicians and pushing Japan into the Second World War with the invasion of China in 1937, the Japanese military began to develop northern parts of Korea peninsula as an industrial base producing munitions.

The institutional modernization, technological diffusion, and the inflow of Japanese capital put an end to the Malthusian degeneration and pushed Korea onto the path of modern economic growth. Both rents and wages stopped falling and started to rise from the early twentieth century. As the population explosion made labor increasingly abundant vis-a-vis land, rents increased more rapidly than wages, suggesting that income distribution became less equal during the colonial period. Per capita output rose faster than one percent per year from 1911-38.

Per capita grain consumption declined during the colonial period, providing grounds for traditional criticism of the Japanese colonialism exploiting Korea. However, per capita real consumption increased, due to rising non-grain and non-good consumption, and Koreans were also getting better education and living longer. In the late 1920s, life expectancy at birth was 37 years, an estimate several years longer than in China and almost ten years shorter than in Japan. Life expectancy increased to 43 years at the end of the colonial period. Male mean stature was slightly higher than 160 centimeters at the end of the 1920s, a number not significantly different from the Chinese or Japanese height, and appeared to become shorter during the latter half of the colonial period.

South Korean Prosperity

With the end of the Second World War in 1945, two separate regimes emerged on the Korean peninsula to replace the colonial government. The U.S. military government took over the southern half, while communist Russia set up a Korean leadership in the northern half. The de-colonization and political division meant sudden disruption of trade both with Japan and within Korea, causing serious economic turmoil. Dealing with the post-colonial chaos with economic aid, the U.S. military government privatized properties previously owned by the Japanese government and civilians. The first South Korean government, established in 1948, carried out a land reform, making land distribution more egalitarian. Then the Korean War broke out in 1950, killing one and half million people and destroying about a quarter of capital stock during its three year duration.

After the war, South Korean policymakers set upon stimulating economic growth by promoting indigenous industrial firms, following the example of many other post-World War II developing countries. The government selected firms in targeted industries and gave them privileges to buy foreign currencies and to borrow funds from banks at preferential rates. It also erected tariff barriers and imposed a prohibition on manufacturing imports, hoping that the protection would give domestic firms a chance to improve productivity through learning-by-doing and importing advanced technologies. Under the policy, known as import-substitution industrialization (ISI), entrepreneurs seemed more interested in maximizing and perpetuating favors by bribing bureaucrats and politicians, however. This behavior, dubbed as directly unproductive profit-seeking activities (DUP), caused efficiency to falter and living standards to stagnate, providing a background to the collapse of the First Republic in April 1960.

The military coup led by General Park Chung Hee overthrew the short-lived Second Republic in May 1961, making a shift to a strategy of stimulating growth through export promotion (EP hereafter), although ISI was not altogether abandoned. Under EP, policymakers gave various types of favors — low interest loans being the most important — to exporting firms according to their export performance. As the qualification for the special treatment was quantifiable and objective, the room for DUP became significantly smaller. Another advantage of EP over ISI was that it accelerated productivity advances by placing firms under the discipline of export markets and by widening the contact with the developed world: efficiency growth was significantly faster in export industries than in the rest of the economy. In the decade following the shift to EP, per capita output doubled, and South Korea became an industrialized country: from 1960/62 to 1973/75 the share of agriculture in GDP fell from 45 percent to 25 percent, while the share of manufacturing rose from 9 percent to 27 percent. One important factor contributing to the achievement was that the authoritarian government could enjoy relative independence from and avoid capture by special interests.

The withdrawal of U.S. troops from Vietnam in the early 1970s and the subsequent conquest of the region by the communist regime alarmed the South Korean leadership, which has been coping with the threat of North Korea with the help of the U.S. military presence. Park Chung Hee’s reaction was to reduce the level of reliance on the U.S. armed support by expanding capability to produce munitions, which required returning to ISI to build heavy and chemical industries (HCI). The government intervened heavily in the financial markets, directing banks to provide low interest loans to chaebols — conglomerates of businesses owned by a single family — selected for the task of developing different sectors of HCI. Successfully expanding the capital-intensive industries more rapidly than the rest of the economy, the HCI drive generated multiple symptoms of distortion, including rapidly slowing growth, worsening inflation and accumulation of non-performing loans.

Again the ISI ended with a regime shift, triggered by Park Chung Hee’s assassination in 1979. In the 1980s, the succeeding leadership made systematic attempts to sort out the unwelcome legacy of the HCI drive by de-regulating trade and financial sectors. In the 1990s, liberalization of capital account followed, causing rapid accumulation of short-term external debts. This, together with a highly leveraged corporate sector and the banking sector destabilized by the financial repression, provided the background to the contagion of financial crisis from Southeast Asia in 1997. The crisis provided a strong momentum for corporate and financial sector reform.

In the quarter century following the policy shift in the early 1960s, the South Korean per capita output grew at an unusually rapid rate of 7 percent per year, a growth performance paralleled only by Taiwan and two city-states, Hong Kong and Singapore. The portion of South Koreans enjoying the benefits of the growth increased more rapidly from the end of 1970s, when the rising trend in the Gini coefficient (which measures the inequality of income distribution) since the colonial period was reversed. The growth was attributable far more to increased use of productive inputs — physical capital in particular — than to productivity advances. The rapid capital accumulation was driven by an increasingly high savings rate due to a falling dependency ratio, a lagged outcome of rapidly falling mortality during the colonial period. The high growth was also aided by accumulation of human capital, which started with the introduction of modern education under the Japanese rule. Finally, the South Korean developmental state, as symbolized by Park Chung Hee, a former officer of the Japanese Imperial army serving in wartime Manchuria, was closely modeled upon the colonial system of government. In short, South Korea grew on the shoulders of the colonial achievement, rather than emerging out of the ashes left by the Korean War, as is sometimes asserted.

North Korean Starvation

Neither did the North Korean economy emerge out of a void. Founders of the regime took over the system of command set up by the Japanese rulers to invade China. They also benefited from the colonial industrialization concentrated in the north, which had raised the standard of living in the north above that in the south at the end of the colonial rule. While the economic advantage led the North Korean leadership to feel confident enough to invade the South in 1950, it could not sustain the lead: North Korea started to lag behind the fast growing South from the late 1960s, and then suffered a tragic decline in living standards in the 1990s.

After the conclusion of the Korean War, the North Korean power elites adopted a strategy of driving growth through forced saving, which went quickly to the wall for several reasons. First, managers and workers in collective farms and state enterprises had little incentive to improve productivity to counter the falling marginal productivity of capital. Second, the country’s self-imposed isolation made it difficult for it to benefit from the advanced technologies of the developed world through trade and foreign investment. Finally, the despotic and militaristic rule diverted resources to unproductive purposes and disturbed the consistency of planning.

The economic stalemate forced the ruling elites to experiment with the introduction of material incentives and independent accounting of state enterprises. However, they could not push the institutional reform far enough, for fear that it might destabilize their totalitarian rule. Efforts were also made to attract foreign capital, which ended in failure too. Having spent the funds lent by western banks in the early 1970s largely for military purposes, North Korea defaulted on the loans. Laws introduced in the 1980s to draw foreign direct investment had little effect.

The collapse of centrally planned economies in the late 1980s virtually ended energy and capital goods imports at subsidized prices, dealing a serious blow to the wobbly regime. Desperate efforts to resolve chronic food shortages by expanding acreage through deforestation made the country vulnerable to climatic shocks in the 1990s. The end result was a disastrous subsistence crisis, to which the militarist regime responded by extorting concessions from the rest of the world through brinkmanship diplomacy.

Further Reading

Amsden, Alice. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press, 1989.

Ban, Sung Hwan. “Agricultural Growth in Korea.” In Agricultural Growth in Japan, Taiwan, Korea, and the Philippines, edited by Yujiro Hayami, Vernon W. Ruttan, and Herman M. Southworth, 96-116. Honolulu: University Press of Hawaii, 1979.

Cha, Myung Soo. “Imperial Policy or World Price Shocks? Explaining Interwar Korean Consumption Trend.” Journal of Economic History 58, no. 3 (1998): 731-754.

Cha, Myung Soo. “The Colonial Origins of Korea’s Market Economy.” In Asia-Pacific Dynamism, 1550-2000, edited by A.J.H. Latham and H. Kawakatsu, 86-103. London: Routledge, 2000.

Cha, Myung Soo. “Facts and Myths about Korea’s Economic Past.” Forthcoming in Australian Review of Economic History 44 (2004).

Cole, David C. and Yung Chul Park. Financial Development in Korea, 1945-1978. Cambridge: Harvard University Press, 1983.

Dollar, David and Kenneth Sokoloff. “Patterns of Productivity Growth in South Korean Manufacturing Industries, 1963-1979.” Journal of Development Economics 33, no. 2 (1990): 390-27.

Eckert, Carter J. Offspring of Empire: The Koch’ang Kims and the Colonial Origins of Korean Capitalism, 1876-1945. Seattle: Washington University Press, 1991.

Gill, Insong. “Stature, Consumption, and the Standard of Living in Colonial Korea.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Joerg Baten, 122-138. Stuttgart: Franz Steiner Verlag, 1998.

Gragert, Edwin H. Landownership under Colonial Rule: Korea’s Japanese Experience, 1900-1935. Honolulu: University Press of Hawaii, 1994.

Haggard, Stephan. The Political Economy of the Asian Financial Crisis. Washington: Institute of International Economics, 2000.

Haggard, Stephan, D. Kang and C. Moon. “Japanese Colonialism and Korean Development: A Critique.” World Development 25 (1997): 867-81.

Haggard, Stephan, Byung-kook Kim and Chung-in Moon. “The Transition to Export-led Growth in South Korea: 1954-1966.” Journal of Asian Studies 50, no. 4 (1991): 850-73.

Kang, Kenneth H. “Why Did Koreans Save So Little and Why Do They Now Save So Much?” International Economic Journal 8 (1994): 99-111.

Kang, Kenneth H, and Vijaya Ramachandran. “Economic Transformation in Korea: Rapid Growth without an Agricultural Revolution?” Economic Development and Cultural Change 47, no. 4 (1999): 783-801.

Kim, Kwang Suk and Michael Roemer. Growth and Structural Transformation. Cambridge, MA: Harvard University Press, 1979.

Kimura, Mitsuhiko. “From Fascism to Communism: Continuity and Development of Collectivist Economic Policy in North Korea.” Economic History Review 52, no.1 (1999): 69-86.

Kimura, Mitsuhiko. “Standards of Living in Colonial Korea: Did the Masses Become Worse Off or Better Off under Japanese Rule?” Journal of Economic History 53, no. 3 (1993): 629-652.

Kohli, Atul. “Where Do High Growth Political Economies Come From? The Japanese Lineage of Korea’s ‘Developmental State’.” World Development 9: 1269-93.

Krueger, Anne. The Developmental Role of the Foreign Sector and Aid. Cambridge: Harvard University Press, 1982.

Kwon, Tai Hwan. Demography of Korea: Population Change and Its Components, 1925-66. Seoul: Seoul National University Press, 1977.

Noland, Marcus. Avoiding the Apocalypse: The Future of the Two Koreas. Washington: Institute for International Economics, 2000.

Palais, James B. Politics and Policy in Traditional Korea. Cambridge: Harvard University Press, 1975.

Stern, Joseph J, Ji-hong Kim, Dwight H. Perkins and Jung-ho Yoo, editors. Industrialization and the State: The Korean Heavy and Chemical Industry Drive. Cambridge: Harvard University Press, 1995.

Woo, Jung-en. Race to the Swift: State and Finance in Korean Industrialization. New York: Columbia University Press, 1991.

Young, Alwyn. “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience.” Quarterly Journal of Economics 110, no. 3 (1995): 641-80.

Citation: Cha, Myung. “The Economic History of Korea”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-korea/

Japanese Industrialization and Economic Growth

Carl Mosk, University of Victoria

Japan achieved sustained growth in per capita income between the 1880s and 1970 through industrialization. Moving along an income growth trajectory through expansion of manufacturing is hardly unique. Indeed Western Europe, Canada, Australia and the United States all attained high levels of income per capita by shifting from agrarian-based production to manufacturing and technologically sophisticated service sector activity.

Still, there are four distinctive features of Japan’s development through industrialization that merit discussion:

The proto-industrial base

Japan’s agricultural productivity was high enough to sustain substantial craft (proto-industrial) production in both rural and urban areas of the country prior to industrialization.

Investment-led growth

Domestic investment in industry and infrastructure was the driving force behind growth in Japanese output. Both private and public sectors invested in infrastructure, national and local governments serving as coordinating agents for infrastructure build-up.

  • Investment in manufacturing capacity was largely left to the private sector.
  • Rising domestic savings made increasing capital accumulation possible.
  • Japanese growth was investment-led, not export-led.

Total factor productivity growth — achieving more output per unit of input — was rapid.

On the supply side, total factor productivity growth was extremely important. Scale economies — the reduction in per unit costs due to increased levels of output — contributed to total factor productivity growth. Scale economies existed due to geographic concentration, to growth of the national economy, and to growth in the output of individual companies. In addition, companies moved down the “learning curve,” reducing unit costs as their cumulative output rose and demand for their product soared.

The social capacity for importing and adapting foreign technology improved and this contributed to total factor productivity growth:

  • At the household level, investing in education of children improved social capability.
  • At the firm level, creating internalized labor markets that bound firms to workers and workers to firms, thereby giving workers a strong incentive to flexibly adapt to new technology, improved social capability.
  • At the government level, industrial policy that reduced the cost to private firms of securing foreign technology enhanced social capacity.

Shifting out of low-productivity agriculture into high productivity manufacturing, mining, and construction contributed to total factor productivity growth.

Dualism

Sharply segmented labor and capital markets emerged in Japan after the 1910s. The capital intensive sector enjoying high ratios of capital to labor paid relatively high wages, and the labor intensive sector paid relatively low wages.

Dualism contributed to income inequality and therefore to domestic social unrest. After 1945 a series of public policy reforms addressed inequality and erased much of the social bitterness around dualism that ravaged Japan prior to World War II.

The remainder of this article will expand on a number of the themes mentioned above. The appendix reviews quantitative evidence concerning these points. The conclusion of the article lists references that provide a wealth of detailed evidence supporting the points above, which this article can only begin to explore.

The Legacy of Autarky and the Proto-Industrial Economy: Achievements of Tokugawa Japan (1600-1868)

Why Japan?

Given the relatively poor record of countries outside the European cultural area — few achieving the kind of “catch-up” growth Japan managed between 1880 and 1970 – the question naturally arises: why Japan? After all, when the United States forcibly “opened Japan” in the 1850s and Japan was forced to cede extra-territorial rights to a number of Western nations as had China earlier in the 1840s, many Westerners and Japanese alike thought Japan’s prospects seemed dim indeed.

Tokugawa achievements: urbanization, road networks, rice cultivation, craft production

In answering this question, Mosk (2001), Minami (1994) and Ohkawa and Rosovsky (1973) emphasize the achievements of Tokugawa Japan (1600-1868) during a long period of “closed country” autarky between the mid-seventeenth century and the 1850s: a high level of urbanization; well developed road networks; the channeling of river water flow with embankments and the extensive elaboration of irrigation ditches that supported and encouraged the refinement of rice cultivation based upon improving seed varieties, fertilizers and planting methods especially in the Southwest with its relatively long growing season; the development of proto-industrial (craft) production by merchant houses in the major cities like Osaka and Edo (now called Tokyo) and its diffusion to rural areas after 1700; and the promotion of education and population control among both the military elite (the samurai) and the well-to-do peasantry in the eighteenth and early nineteenth centuries.

Tokugawa political economy: daimyo and shogun

These developments were inseparable from the political economy of Japan. The system of confederation government introduced at the end of the fifteenth century placed certain powers in the hands of feudal warlords, daimyo, and certain powers in the hands of the shogun, the most powerful of the warlords. Each daimyo — and the shogun — was assigned a geographic region, a domain, being given taxation authority over the peasants residing in the villages of the domain. Intercourse with foreign powers was monopolized by the shogun, thereby preventing daimyo from cementing alliances with other countries in an effort to overthrow the central government. The samurai military retainers of the daimyo were forced to abandon rice farming and reside in the castle town headquarters of their daimyo overlord. In exchange, samurai received rice stipends from the rice taxes collected from the villages of their domain. By removing samurai from the countryside — by demilitarizing rural areas — conflicts over local water rights were largely made a thing of the past. As a result irrigation ditches were extended throughout the valleys, and riverbanks were shored up with stone embankments, facilitating transport and preventing flooding.

The sustained growth of proto-industrialization in urban Japan, and its widespread diffusion to villages after 1700 was also inseparable from the productivity growth in paddy rice production and the growing of industrial crops like tea, fruit, mulberry plant growing (that sustained the raising of silk cocoons) and cotton. Indeed, Smith (1988) has given pride of place to these “domestic sources” of Japan’s future industrial success.

Readiness to emulate the West

As a result of these domestic advances, Japan was well positioned to take up the Western challenge. It harnessed its infrastructure, its high level of literacy, and its proto-industrial distribution networks to the task of emulating Western organizational forms and Western techniques in energy production, first and foremost enlisting inorganic energy sources like coal and the other fossil fuels to generate steam power. Having intensively developed the organic economy depending upon natural energy flows like wind, water and fire, Japanese were quite prepared to master inorganic production after the Black Ships of the Americans forced Japan to jettison its long-standing autarky.

From Balanced to Dualistic Growth, 1887-1938: Infrastructure and Manufacturing Expand

Fukoku Kyohei

After the Tokugawa government collapsed in 1868, a new Meiji government committed to the twin policies of fukoku kyohei (wealthy country/strong military) took up the challenge of renegotiating its treaties with the Western powers. It created infrastructure that facilitated industrialization. It built a modern navy and army that could keep the Western powers at bay and establish a protective buffer zone in North East Asia that eventually formed the basis for a burgeoning Japanese empire in Asia and the Pacific.

Central government reforms in education, finance and transportation

Jettisoning the confederation style government of the Tokugawa era, the new leaders of the new Meiji government fashioned a unitary state with powerful ministries consolidating authority in the capital, Tokyo. The freshly minted Ministry of Education promoted compulsory primary schooling for the masses and elite university education aimed at deepening engineering and scientific knowledge. The Ministry of Finance created the Bank of Japan in 1882, laying the foundations for a private banking system backed up a lender of last resort. The government began building a steam railroad trunk line girding the four major islands, encouraging private companies to participate in the project. In particular, the national government committed itself to constructing a Tokaido line connecting the Tokyo/Yokohama region to the Osaka/Kobe conurbation along the Pacific coastline of the main island of Honshu, and to creating deepwater harbors at Yokohama and Kobe that could accommodate deep-hulled steamships.

Not surprisingly, the merchants in Osaka, the merchant capital of Tokugawa Japan, already well versed in proto-industrial production, turned to harnessing steam and coal, investing heavily in integrated spinning and weaving steam-driven textile mills during the 1880s.

Diffusion of best-practice agriculture

At the same time, the abolition of the three hundred or so feudal fiefs that were the backbone of confederation style-Tokugawa rule and their consolidation into politically weak prefectures, under a strong national government that virtually monopolized taxation authority, gave a strong push to the diffusion of best practice agricultural technique. The nationwide diffusion of seed varieties developed in the Southwest fiefs of Tokugawa Japan spearheaded a substantial improvement in agricultural productivity especially in the Northeast. Simultaneously, expansion of agriculture using traditional Japanese technology agriculture and manufacturing using imported Western technology resulted.

Balanced growth

Growth at the close of the nineteenth century was balanced in the sense that traditional and modern technology using sectors grew at roughly equal rates, and labor — especially young girls recruited out of farm households to labor in the steam using textile mills — flowed back and forth between rural and urban Japan at wages that were roughly equal in industrial and agricultural pursuits.

Geographic economies of scale in the Tokaido belt

Concentration of industrial production first in Osaka and subsequently throughout the Tokaido belt fostered powerful geographic scale economies (the ability to reduce per unit costs as output levels increase), reducing the costs of securing energy, raw materials and access to global markets for enterprises located in the great harbor metropolises stretching from the massive Osaka/Kobe complex northward to the teeming Tokyo/Yokohama conurbation. Between 1904 and 1911, electrification mainly due to the proliferation of intercity electrical railroads created economies of scale in the nascent industrial belt facing outward onto the Pacific. The consolidation of two huge hydroelectric power grids during the 1920s — one servicing Tokyo/Yokohama, the other Osaka and Kobe — further solidified the comparative advantage of the Tokaido industrial belt in factory production. Finally, the widening and paving during the 1920s of roads that could handle buses and trucks was also pioneered by the great metropolises of the Tokaido, which further bolstered their relative advantage in per capita infrastructure.

Organizational economies of scale — zaibatsu

In addition to geographic scale economies, organizational scale economies also became increasingly important in the late nineteenth centuries. The formation of the zaibatsu (“financial cliques”), which gradually evolved into diversified industrial combines tied together through central holding companies, is a case in point. By the 1910s these had evolved into highly diversified combines, binding together enterprises in banking and insurance, trading companies, mining concerns, textiles, iron and steel plants, and machinery manufactures. By channeling profits from older industries into new lines of activity like electrical machinery manufacturing, the zaibatsu form of organization generated scale economies in finance, trade and manufacturing, drastically reducing information-gathering and transactions costs. By attracting relatively scare managerial and entrepreneurial talent, the zaibatsu format economized on human resources.

Electrification

The push into electrical machinery production during the 1920s had a revolutionary impact on manufacturing. Effective exploitation of steam power required the use of large central steam engines simultaneously driving a large number of machines — power looms and mules in a spinning/weaving plant for instance – throughout a factory. Small enterprises did not mechanize in the steam era. But with electrification the “unit drive” system of mechanization spread. Each machine could be powered up independently of one another. Mechanization spread rapidly to the smallest factory.

Emergence of the dualistic economy

With the drive into heavy industries — chemicals, iron and steel, machinery — the demand for skilled labor that would flexibly respond to rapid changes in technique soared. Large firms in these industries began offering premium wages and guarantees of employment in good times and bad as a way of motivating and holding onto valuable workers. A dualistic economy emerged during the 1910s. Small firms, light industry and agriculture offered relatively low wages. Large enterprises in the heavy industries offered much more favorable remuneration, extending paternalistic benefits like company housing and company welfare programs to their “internal labor markets.” As a result a widening gulf opened up between the great metropolitan centers of the Tokaido and rural Japan. Income per head was far higher in the great industrial centers than in the hinterland.

Clashing urban/rural and landlord/tenant interests

The economic strains of emergent dualism were amplified by the slowing down of technological progress in the agricultural sector, which had exhaustively reaped the benefits due to regional diffusion from the Southwest to the Northeast of best practice Tokugawa rice cultivation. Landlords — around 45% of the cultivable rice paddy land in Japan was held in some form of tenancy at the beginning of the twentieth century — who had played a crucial role in promoting the diffusion of traditional best practice techniques now lost interest in rural affairs and turned their attention to industrial activities. Tenants also found their interests disregarded by the national authorities in Tokyo, who were increasingly focused on supplying cheap foodstuffs to the burgeoning industrial belt by promoting agricultural production within the empire that it was assembling through military victories. Japan secured Taiwan from China in 1895, and formally brought Korea under its imperial rule in 1910 upon the heels of its successful war against Russia in 1904-05. Tenant unions reacted to this callous disrespect of their needs through violence. Landlord/tenant disputes broke out in the early 1920s, and continued to plague Japan politically throughout the 1930s, calls for land reform and bureaucratic proposals for reform being rejected by a Diet (Japan’s legislature) politically dominated by landlords.

Japan’s military expansion

Japan’s thrust to imperial expansion was inflamed by the growing instability of the geopolitical and international trade regime of the later 1920s and early 1930s. The relative decline of the United Kingdom as an economic power doomed a gold standard regime tied to the British pound. The United States was becoming a potential contender to the United Kingdom as the backer of a gold standard regime but its long history of high tariffs and isolationism deterred it from taking over leadership in promoting global trade openness. Germany and the Soviet Union were increasingly becoming industrial and military giants on the Eurasian land mass committed to ideologies hostile to the liberal democracy championed by the United Kingdom and the United States. It was against this international backdrop that Japan began aggressively staking out its claim to being the dominant military power in East Asia and the Pacific, thereby bringing it into conflict with the United States and the United Kingdom in the Asian and Pacific theaters after the world slipped into global warfare in 1939.

Reform and Reconstruction in a New International Economic Order, Japan after World War II

Postwar occupation: economic and institutional restructuring

Surrendering to the United States and its allies in 1945, Japan’s economy and infrastructure was revamped under the S.C.A.P (Supreme Commander of the Allied Powers) Occupation lasting through 1951. As Nakamura (1995) points out, a variety of Occupation-sponsored reforms transformed the institutional environment conditioning economic performance in Japan. The major zaibatsu were liquidated by the Holding Company Liquidation Commission set up under the Occupation (they were revamped as keiretsu corporate groups mainly tied together through cross-shareholding of stock in the aftermath of the Occupation); land reform wiped out landlordism and gave a strong push to agricultural productivity through mechanization of rice cultivation; and collective bargaining, largely illegal under the Peace Preservation Act that was used to suppress union organizing during the interwar period, was given the imprimatur of constitutional legality. Finally, education was opened up, partly through making middle school compulsory, partly through the creation of national universities in each of Japan’s forty-six prefectures.

Improvement in the social capability for economic growth

In short, from a domestic point of view, the social capability for importing and adapting foreign technology was improved with the reforms in education and the fillip to competition given by the dissolution of the zaibatsu. Resolving tension between rural and urban Japan through land reform and the establishment of a rice price support program — that guaranteed farmers incomes comparable to blue collar industrial workers — also contributed to the social capacity to absorb foreign technology by suppressing the political divisions between metropolitan and hinterland Japan that plagued the nation during the interwar years.

Japan and the postwar international order

The revamped international economic order contributed to the social capability of importing and adapting foreign technology. The instability of the 1920s and 1930s was replaced with replaced with a relatively predictable bipolar world in which the United States and the Soviet Union opposed each other in both geopolitical and ideological arenas. The United States became an architect of multilateral architecture designed to encourage trade through its sponsorship of the United Nations, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (the predecessor to the World Trade Organization). Under the logic of building military alliances to contain Eurasian Communism, the United States brought Japan under its “nuclear umbrella” with a bilateral security treaty. American companies were encouraged to license technology to Japanese companies in the new international environment. Japan redirected its trade away from the areas that had been incorporated into the Japanese Empire before 1945, and towards the huge and expanding American market.

Miracle Growth: Soaring Domestic Investment and Export Growth, 1953-1970

Its infrastructure revitalized through the Occupation period reforms, its capacity to import and export enhanced by the new international economic order, and its access to American technology bolstered through its security pact with the United States, Japan experienced the dramatic “Miracle Growth” between 1953 and the early 1970s whose sources have been cogently analyzed by Denison and Chung (1976). Especially striking in the Miracle Growth period was the remarkable increase in the rate of domestic fixed capital formation, the rise in the investment proportion being matched by a rising savings rate whose secular increase — especially that of private household savings – has been well documented and analyzed by Horioka (1991). While Japan continued to close the gap in income per capita between itself and the United States after the early 1970s, most scholars believe that large Japanese manufacturing enterprises had by and large become internationally competitive by the early 1970s. In this sense it can be said that Japan had completed its nine decade long convergence to international competitiveness through industrialization by the early 1970s.

MITI

There is little doubt that the social capacity to import and adapt foreign technology was vastly improved in the aftermath of the Pacific War. Creating social consensus with Land Reform and agricultural subsidies reduced political divisiveness, extending compulsory education and breaking up the zaibatsu had a positive impact. Fashioning the Ministry of International Trade and Industry (M.I.T.I.) that took responsibility for overseeing industrial policy is also viewed as facilitating Japan’s social capability. There is no doubt that M.I.T.I. drove down the cost of securing foreign technology. By intervening between Japanese firms and foreign companies, it acted as a single buyer of technology, playing off competing American and European enterprises in order to reduce the royalties Japanese concerns had to pay on technology licenses. By keeping domestic patent periods short, M.I.T.I. encouraged rapid diffusion of technology. And in some cases — the experience of International Business Machines (I.B.M.), enjoying a virtual monopoly in global mainframe computer markets during the 1950s and early 1960s, is a classical case — M.I.T.I. made it a condition of entry into the Japanese market (through the creation of a subsidiary Japan I.B.M. in the case of I.B.M.) that foreign companies share many of their technological secrets with potential Japanese competitors.

How important industrial policy was for Miracle Growth remains controversial, however. The view of Johnson (1982), who hails industrial policy as a pillar of the Japanese Development State (government promoting economic growth through state policies) has been criticized and revised by subsequent scholars. The book by Uriu (1996) is a case in point.

Internal labor markets, just-in-time inventory and quality control circles

Furthering the internalization of labor markets — the premium wages and long-term employment guarantees largely restricted to white collar workers were extended to blue collar workers with the legalization of unions and collective bargaining after 1945 — also raised the social capability of adapting foreign technology. Internalizing labor created a highly flexible labor force in post-1950 Japan. As a result, Japanese workers embraced many of the key ideas of Just-in-Time inventory control and Quality Control circles in assembly industries, learning how to do rapid machine setups as part and parcel of an effort to produce components “just-in-time” and without defect. Ironically, the concepts of just-in-time and quality control were originally developed in the United States, just-in-time methods being pioneered by supermarkets and quality control by efficiency experts like W. Edwards Deming. Yet it was in Japan that these concepts were relentlessly pursued to revolutionize assembly line industries during the 1950s and 1960s.

Ultimate causes of the Japanese economic “miracle”

Miracle Growth was the completion of a protracted historical process involving enhancing human capital, massive accumulation of physical capital including infrastructure and private manufacturing capacity, the importation and adaptation of foreign technology, and the creation of scale economies, which took decades and decades to realize. Dubbed a miracle, it is best seen as the reaping of a bountiful harvest whose seeds were painstakingly planted in the six decades between 1880 and 1938. In the course of the nine decades between the 1880s and 1970, Japan amassed and lost a sprawling empire, reorienting its trade and geopolitical stance through the twists and turns of history. While the ultimate sources of growth can be ferreted out through some form of statistical accounting, the specific way these sources were marshaled in practice is inseparable from the history of Japan itself and of the global environment within which it has realized its industrial destiny.

Appendix: Sources of Growth Accounting and Quantitative Aspects of Japan’s Modern Economic Development

One of the attractions of studying Japan’s post-1880 economic development is the abundance of quantitative data documenting Japan’s growth. Estimates of Japanese income and output by sector, capital stock and labor force extend back to the 1880s, a period when Japanese income per capita was low. Consequently statistical probing of Japan’s long-run growth from relative poverty to abundance is possible.

The remainder of this appendix is devoted to introducing the reader to the vast literature on quantitative analysis of Japan’s economic development from the 1880s until 1970, a nine decade period during which Japanese income per capita converged towards income per capita levels in Western Europe. As the reader will see, this discussion confirms the importance of factors discussed at the outset of this article.

Our initial touchstone is the excellent “sources of growth” accounting analysis carried out by Denison and Chung (1976) on Japan’s growth between 1953 and 1971. Attributing growth in national income in growth of inputs, the factors of production — capital and labor — and growth in output per unit of the two inputs combined (total factor productivity) along the following lines:

G(Y) = { a G(K) + [1-a] G(L) } + G (A)

where G(Y) is the (annual) growth of national output, g(K) is the growth rate of capital services, G(L) is the growth rate of labor services, a is capital’s share in national income (the share of income accruing to owners of capital), and G(A) is the growth of total factor productivity, is a standard approach used to approximate the sources of growth of income.

Using a variant of this type of decomposition that takes into account improvements in the quality of capital and labor, estimates of scale economies and adjustments for structural change (shifting labor out of agriculture helps explain why total factor productivity grows), Denison and Chung (1976) generate a useful set of estimates for Japan’s Miracle Growth era.

Operating with this “sources of growth” approach and proceeding under a variety of plausible assumptions, Denison and Chung (1976) estimate that of Japan’s average annual real national income growth of 8.77 % over 1953-71, input growth accounted for 3.95% (accounting for 45% of total growth) and growth in output per unit of input contributed 4.82% (accounting for 55% of total growth). To be sure, the precise assumptions and techniques they use can be criticized. The precise numerical results they arrive at can be argued over. Still, their general point — that Japan’s growth was the result of improvements in the quality of factor inputs — health and education for workers, for instance — and improvements in the way these inputs are utilized in production — due to technological and organizational change, reallocation of resources from agriculture to non-agriculture, and scale economies, is defensible.

With this in mind consider Table 1.

Table 1: Industrialization and Economic Growth in Japan, 1880-1970:
Selected Quantitative Characteristics

Panel A: Income and Structure of National Output

Real Income per Capita [a] Share of National Output (of Net Domestic Product) and Relative Labor Productivity (Ratio of Output per Worker in Agriculture to Output per Worker in the N Sector) [b]
Years Absolute Relative to U.S. level Year Agriculture Manufacturing & Mining

(Ma)

Manufacturing,

Construction & Facilitating Sectors [b]

Relative Labor Productivity

A/N

1881-90 893 26.7% 1887 42.5% 13.6% 20.0% 68.3
1891-1900 1,049 28.5 1904 37.8 17.4 25.8 44.3
1900-10 1,195 25.3 1911 35.5 20.3 31.1 37.6
1911-20 1,479 27.9 1919 29.9 26.2 38.3 32.5
1921-30 1,812 29.1 1930 20.0 25.8 43.3 27.4
1930-38 2,197 37.7 1938 18.5 35.3 51.7 20.8
1951-60 2,842 26.2 1953 22.0 26.3 39.7 22.6
1961-70 6,434 47.3 1969 8.7 30.5 45.9 19.1

Panel B: Domestic and External Sources of Aggregate Supply and Demand Growth: Manufacturing and Mining (Ma), Gross Domestic Fixed Capital Formation (GDFCF), and Trade (TR)

Percentage Contribution to Growth due to: Trade Openness and Trade Growth [c]
Years Ma to Output Growth GDFCF to Effective

Demand Growth

Years Openness Growth in Trade
1888-1900 19.3% 17.9% 1885-89 6.9% 11.4%
1900-10 29.2 30.5 1890-1913 16.4 8.0
1910-20 26.5 27.9 1919-29 32.4 4.6
1920-30 42.4 7.5 1930-38 43.3 8.1
1930-38 50.5 45.3 1954-59 19.3 12.0
1955-60 28.1 35.0 1960-69 18.5 10.3
1960-70 33.5 38.5

Panel C: Infrastructure and Human Development

Human Development Index (HDI) [d] Electricity Generation and National Broadcasting (NHK) per 100 Persons [e]
Year Educational Attainment Infant Mortality Rate (IMR) Overall HDI

Index

Year Electricity NHK Radio Subscribers
1900 0.57 155 0.57 1914 0.28 n.a.
1910 0.69 161 0.61 1920 0.68 n.a.
1920 0.71 166 0.64 1930 2.46 1.2
1930 0.73 124 0.65 1938 4.51 7.8
1950 0.81 63 0.69 1950 5.54 11.0
1960 0.87 34 0.75 1960 12.28 12.6
1970 0.95 14 0.83 1970 34.46 21.9

Notes: [a] Maddison (2000) provides estimates of real income that take into account the purchasing power of national currencies.

[b] Ohkawa (1979) gives estimates for the “N” sector that is defined as manufacturing and mining (Ma) plus construction plus facilitating industry (transport, communications and utilities). It should be noted that the concept of an “N” sector is not standard in the field of economics.

[c] The estimates of trade are obtained by adding merchandise imports to merchandise exports. Trade openness is estimated by taking the ratio of total (merchandise) trade to national output, the latter defined as Gross Domestic Product (G.D.P.). The trade figures include trade with Japan’s empire (Korea, Taiwan, Manchuria, etc.); the income figures for Japan exclude income generated in the empire.

[d] The Human Development Index is a composite variable formed by adding together indices for educational attainment, for health (using life expectancy that is inversely related to the level of the infant mortality rate, the IMR), and for real per capita income. For a detailed discussion of this index see United Nations Development Programme (2000).

[e] Electrical generation is measured in million kilowatts generated and supplied. For 1970, the figures on NHK subscribers are for television subscribers. The symbol n.a. = not available.

Sources: The figures in this table are taken from various pages and tables in Japan Statistical Association (1987), Maddison (2000), Minami (1994), and Ohkawa (1979).

Flowing from this table are a number of points that bear lessons of the Denison and Chung (1976) decomposition. One cluster of points bears upon the timing of Japan’s income per capita growth and the relationship of manufacturing expansion to income growth. Another highlights improvements in the quality of the labor input. Yet another points to the overriding importance of domestic investment in manufacturing and the lesser significance of trade demand. A fourth group suggests that infrastructure has been important to economic growth and industrial expansion in Japan, as exemplified by the figures on electricity generating capacity and the mass diffusion of communications in the form of radio and television broadcasting.

Several parts of Table 1 point to industrialization, defined as an increase in the proportion of output (and labor force) attributable to manufacturing and mining, as the driving force in explaining Japan’s income per capita growth. Notable in Panels A and B of the table is that the gap between Japanese and American income per capita closed most decisively during the 1910s, the 1930s, and the 1960s, precisely the periods when manufacturing expansion was the most vigorous.

Equally noteworthy of the spurts of the 1910s, 1930s and the 1960s is the overriding importance of gross domestic fixed capital formation, that is investment, for growth in demand. By contrast, trade seems much less important to growth in demand during these critical decades, a point emphasized by both Minami (1994) and by Ohkawa and Rosovsky (1973). The notion that Japanese growth was “export led” during the nine decades between 1880 and 1970 when Japan caught up technologically with the leading Western nations is not defensible. Rather, domestic capital investment seems to be the driving force behind aggregate demand expansion. The periods of especially intense capital formation were also the periods when manufacturing production soared. Capital formation in manufacturing, or in infrastructure supporting manufacturing expansion, is the main agent pushing long-run income per capita growth.

Why? As Ohkawa and Rosovsky (1973) argue, spurts in manufacturing capital formation were associated with the import and adaptation of foreign technology, especially from the United States These investment spurts were also associated with shifts of labor force out of agriculture and into manufacturing, construction and facilitating sectors where labor productivity was far higher than it was in labor-intensive farming centered around labor-intensive rice cultivation. The logic of productivity gain due to more efficient allocation of labor resources is apparent from the right hand column of Panel A in Table 1.

Finally, Panel C of Table 1 suggests that infrastructure investment that facilitated health and educational attainment (combined public and private expenditure on sanitation, schools and research laboratories), and public/private investment in physical infrastructure including dams and hydroelectric power grids helped fuel the expansion of manufacturing by improving human capital and by reducing the costs of transportation, communications and energy supply faced by private factories. Mosk (2001) argues that investments in human-capital-enhancing (medicine, public health and education), financial (banking) and physical infrastructure (harbors, roads, power grids, railroads and communications) laid the groundwork for industrial expansions. Indeed, the “social capability for importing and adapting foreign technology” emphasized by Ohkawa and Rosovsky (1973) can be largely explained by an infrastructure-driven growth hypothesis like that given by Mosk (2001).

In sum, Denison and Chung (1976) argue that a combination of input factor improvement and growth in output per combined factor inputs account for Japan’s most rapid spurt of economic growth. Table 1 suggests that labor quality improved because health was enhanced and educational attainment increased; that investment in manufacturing was important not only because it increased capital stock itself but also because it reduced dependence on agriculture and went hand in glove with improvements in knowledge; and that the social capacity to absorb and adapt Western technology that fueled improvements in knowledge was associated with infrastructure investment.

References

Denison, Edward and William Chung. “Economic Growth and Its Sources.” In Asia’s Next Giant: How the Japanese Economy Works, edited by Hugh Patrick and Henry Rosovsky, 63-151. Washington, DC: Brookings Institution, 1976.

Horioka, Charles Y. “Future Trends in Japan’s Savings Rate and the Implications Thereof for Japan’s External Imbalance.” Japan and the World Economy 3 (1991): 307-330.

Japan Statistical Association. Historical Statistics of Japan [Five Volumes]. Tokyo: Japan Statistical Association, 1987.

Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford: Stanford University Press, 1982.

Maddison, Angus. Monitoring the World Economy, 1820-1992. Paris: Organization for Economic Co-operation and Development, 2000.

Minami, Ryoshin. Economic Development of Japan: A Quantitative Study. [Second edition]. Houndmills, Basingstoke, Hampshire: Macmillan Press, 1994.

Mitchell, Brian. International Historical Statistics: Africa and Asia. New York: New York University Press, 1982.

Mosk, Carl. Japanese Industrial History: Technology, Urbanization, and Economic Growth. Armonk, New York: M.E. Sharpe, 2001.

Nakamura, Takafusa. The Postwar Japanese Economy: Its Development and Structure, 1937-1994. Tokyo: University of Tokyo Press, 1995.

Ohkawa, Kazushi. “Production Structure.” In Patterns of Japanese Economic Development: A Quantitative Appraisal, edited by Kazushi Ohkawa and Miyohei Shinohara with Larry Meissner, 34-58. New Haven: Yale University Press, 1979.

Ohkawa, Kazushi and Henry Rosovsky. Japanese Economic Growth: Trend Acceleration in the Twentieth Century. Stanford, CA: Stanford University Press, 1973.

Smith, Thomas. Native Sources of Japanese Industrialization, 1750-1920. Berkeley: University of California Press, 1988.

Uriu, Robert. Troubled Industries: Confronting Economic Challenge in Japan. Ithaca: Cornell University Press, 1996.

United Nations Development Programme. Human Development Report, 2000. New York: Oxford University Press, 2000.

Citation: Mosk, Carl. “Japan, Industrialization and Economic Growth”. EH.Net Encyclopedia, edited by Robert Whaples. January 18, 2004. URL http://eh.net/encyclopedia/japanese-industrialization-and-economic-growth/

The Economic History of Indonesia

Jeroen Touwen, Leiden University, Netherlands

Introduction

In recent decades, Indonesia has been viewed as one of Southeast Asia’s successful highly performing and newly industrializing economies, following the trail of the Asian tigers (Hong Kong, Singapore, South Korea, and Taiwan) (see Table 1). Although Indonesia’s economy grew with impressive speed during the 1980s and 1990s, it experienced considerable trouble after the financial crisis of 1997, which led to significant political reforms. Today Indonesia’s economy is recovering but it is difficult to say when all its problems will be solved. Even though Indonesia can still be considered part of the developing world, it has a rich and versatile past, in the economic as well as the cultural and political sense.

Basic Facts

Indonesia is situated in Southeastern Asia and consists of a large archipelago between the Indian Ocean and the Pacific Ocean, with more than 13.000 islands. The largest islands are Java, Kalimantan (the southern part of the island Borneo), Sumatra, Sulawesi, and Papua (formerly Irian Jaya, which is the western part of New Guinea). Indonesia’s total land area measures 1.9 million square kilometers (750,000 square miles). This is three times the area of Texas, almost eight times the area of the United Kingdom and roughly fifty times the area of the Netherlands. Indonesia has a tropical climate, but since there are large stretches of lowland and numerous mountainous areas, the climate varies from hot and humid to more moderate in the highlands. Apart from fertile land suitable for agriculture, Indonesia is rich in a range of natural resources, varying from petroleum, natural gas, and coal, to metals such as tin, bauxite, nickel, copper, gold, and silver. The size of Indonesia’s population is about 230 million (2002), of which the largest share (roughly 60%) live in Java.

Table 1

Indonesia’s Gross Domestic Product per Capita

Compared with Several Other Asian Countries (in 1990 dollars)

Indonesia Philippines Thailand Japan
1900 745 1 033 812 1 180
1913 904 1 066 835 1 385
1950 840 1 070 817 1 926
1973 1 504 1 959 1 874 11 439
1990 2 516 2 199 4 645 18 789
2000 3 041 2 385 6 335 20 084

Source: Angus Maddison, The World Economy: A Millennial Perspective, Paris: OECD Development Centre Studies 2001, 206, 214-215. For year 2000: University of Groningen and the Conference Board, GGDC Total Economy Database, 2003, http://www.eco.rug.nl/ggdc.

Important Aspects of Indonesian Economic History

“Missed Opportunities”

Anne Booth has characterized the economic history of Indonesia with the somewhat melancholy phrase “a history of missed opportunities” (Booth 1998). One may compare this with J. Pluvier’s history of Southeast Asia in the twentieth century, which is entitled A Century of Unfulfilled Expectations (Breda 1999). The missed opportunities refer to the fact that despite its rich natural resources and great variety of cultural traditions, the Indonesian economy has been underperforming for large periods of its history. A more cyclical view would lead one to speak of several ‘reversals of fortune.’ Several times the Indonesian economy seemed to promise a continuation of favorable economic development and ongoing modernization (for example, Java in the late nineteenth century, Indonesia in the late 1930s or in the early 1990s). But for various reasons Indonesia time and again suffered from severe incidents that prohibited further expansion. These incidents often originated in the internal institutional or political spheres (either after independence or in colonial times), although external influences such as the 1930s Depression also had their ill-fated impact on the vulnerable export-economy.

“Unity in Diversity”

In addition, one often reads about “unity in diversity.” This is not only a political slogan repeated at various times by the Indonesian government itself, but it also can be applied to the heterogeneity in the national features of this very large and diverse country. Logically, the political problems that arise from such a heterogeneous nation state have had their (negative) effects on the development of the national economy. The most striking difference is between densely populated Java, which has a long tradition of politically and economically dominating the sparsely populated Outer Islands. But also within Java and within the various Outer Islands, one encounters a rich cultural diversity. Economic differences between the islands persist. Nevertheless, for centuries, the flourishing and enterprising interregional trade has benefited regional integration within the archipelago.

Economic Development and State Formation

State formation can be viewed as a condition for an emerging national economy. This process essentially started in Indonesia in the nineteenth century, when the Dutch colonized an area largely similar to present-day Indonesia. Colonial Indonesia was called ‘the Netherlands Indies.’ The term ‘(Dutch) East Indies’ was mainly used in the seventeenth and eighteenth centuries and included trading posts outside the Indonesian archipelago.

Although Indonesian national historiography sometimes refers to a presumed 350 years of colonial domination, it is exaggerated to interpret the arrival of the Dutch in Bantam in 1596 as the starting point of Dutch colonization. It is more reasonable to say that colonization started in 1830, when the Java War (1825-1830) was ended and the Dutch initiated a bureaucratic, centralizing polity in Java without further restraint. From the mid-nineteenth century onward, Dutch colonization did shape the borders of the Indonesian nation state, even though it also incorporated weaknesses in the state: ethnic segmentation of economic roles, unequal spatial distribution of power, and a political system that was largely based on oppression and violence. This, among other things, repeatedly led to political trouble, before and after independence. Indonesia ceased being a colony on 17 August 1945 when Sukarno and Hatta proclaimed independence, although full independence was acknowledged by the Netherlands only after four years of violent conflict, on 27 December 1949.

The Evolution of Methodological Approaches to Indonesian Economic History

The economic history of Indonesia analyzes a range of topics, varying from the characteristics of the dynamic exports of raw materials, the dualist economy in which both Western and Indonesian entrepreneurs participated, and the strong measure of regional variation in the economy. While in the past Dutch historians traditionally focused on the colonial era (inspired by the rich colonial archives), from the 1960s and 1970s onward an increasing number of scholars (among which also many Indonesians, but also Australian and American scholars) started to study post-war Indonesian events in connection with the colonial past. In the course of the 1990s attention gradually shifted from the identification and exploration of new research themes towards synthesis and attempts to link economic development with broader historical issues. In 1998 the excellent first book-length survey of Indonesia’s modern economic history was published (Booth 1998). The stress on synthesis and lessons is also present in a new textbook on the modern economic history of Indonesia (Dick et al 2002). This highly recommended textbook aims at a juxtaposition of three themes: globalization, economic integration and state formation. Globalization affected the Indonesian archipelago even before the arrival of the Dutch. The period of the centralized, military-bureaucratic state of Soeharto’s New Order (1966-1998) was only the most recent wave of globalization. A national economy emerged gradually from the 1930s as the Outer Islands (a collective name which refers to all islands outside Java and Madura) reoriented towards industrializing Java.

Two research traditions have become especially important in the study of Indonesian economic history during the past decade. One is a highly quantitative approach, culminating in reconstructions of Indonesia’s national income and national accounts over a long period of time, from the late nineteenth century up to today (Van der Eng 1992, 2001). The other research tradition highlights the institutional framework of economic development in Indonesia, both as a colonial legacy and as it has evolved since independence. There is a growing appreciation among scholars that these two approaches complement each other.

A Chronological Survey of Indonesian Economic History

The precolonial economy

There were several influential kingdoms in the Indonesian archipelago during the pre-colonial era (e.g. Srivijaya, Mataram, Majapahit) (see further Reid 1988,1993; Ricklefs 1993). Much debate centers on whether this heyday of indigenous Asian trade was effectively disrupted by the arrival of western traders in the late fifteenth century

Sixteenth and seventeenth century

Present-day research by scholars in pre-colonial economic history focuses on the dynamics of early-modern trade and pays specific attention to the role of different ethnic groups such as the Arabs, the Chinese and the various indigenous groups of traders and entrepreneurs. During the sixteenth to the nineteenth century the western colonizers only had little grip on a limited number of spots in the Indonesian archipelago. As a consequence much of the economic history of these islands escapes the attention of the economic historian. Most data on economic matters is handed down by western observers with their limited view. A large part of the area remained engaged in its own economic activities, including subsistence agriculture (of which the results were not necessarily very meager) and local and regional trade.

An older research literature has extensively covered the role of the Dutch in the Indonesian archipelago, which began in 1596 when the first expedition of Dutch sailing ships arrived in Bantam. In the seventeenth and eighteenth centuries the Dutch overseas trade in the Far East, which focused on high-value goods, was in the hands of the powerful Dutch East India Company (in full: the United East Indies Trading Company, or Vereenigde Oost-Indische Compagnie [VOC], 1602-1795). However, the region was still fragmented and Dutch presence was only concentrated in a limited number of trading posts.

During the eighteenth century, coffee and sugar became the most important products and Java became the most important area. The VOC gradually took over power from the Javanese rulers and held a firm grip on the productive parts of Java. The VOC was also actively engaged in the intra-Asian trade. For example, cotton from Bengal was sold in the pepper growing areas. The VOC was a successful enterprise and made large dividend payments to its shareholders. Corruption, lack of investment capital, and increasing competition from England led to its demise and in 1799 the VOC came to an end (Gaastra 2002, Jacobs 2000).

The nineteenth century

In the nineteenth century a process of more intensive colonization started, predominantly in Java, where the Cultivation System (1830-1870) was based (Elson 1994; Fasseur 1975).

During the Napoleonic era the VOC trading posts in the archipelago had been under British rule, but in 1814 they came under Dutch authority again. During the Java War (1825-1830), Dutch rule on Java was challenged by an uprising led by Javanese prince Diponegoro. To repress this revolt and establish firm rule in Java, colonial expenses increased, which in turn led to a stronger emphasis on economic exploitation of the colony. The Cultivation System, initiated by Johannes van den Bosch, was a state-governed system for the production of agricultural products such as sugar and coffee. In return for a fixed compensation (planting wage), the Javanese were forced to cultivate export crops. Supervisors, such as civil servants and Javanese district heads, were paid generous ‘cultivation percentages’ in order to stimulate production. The exports of the products were consigned to a Dutch state-owned trading firm (the Nederlandsche Handel-Maatschappij, NHM, established in 1824) and sold profitably abroad.

Although the profits (‘batig slot’) for the Dutch state of the period 1830-1870 were considerable, various reasons can be mentioned for the change to a liberal system: (a) the emergence of new liberal political ideology; (b) the gradual demise of the Cultivation System during the 1840s and 1850s because internal reforms were necessary; and (c) growth of private (European) entrepreneurship with know-how and interest in the exploitation of natural resources, which took away the need for government management (Van Zanden and Van Riel 2000: 226).

Table 2

Financial Results of Government Cultivation, 1840-1849 (‘Cultivation System’) (in thousands of guilders in current values)

1840-1844 1845-1849
Coffee 40 278 24 549
Sugar 8 218 4 136
Indigo, 7 836 7 726
Pepper, Tea 647 1 725
Total net profits 39 341 35 057

Source: Fasseur 1975: 20.

Table 3

Estimates of Total Profits (‘batig slot’) during the Cultivation System,

1831/40 – 1861/70 (in millions of guilders)

1831/40 1841/50 1851/60 1861/70
Gross revenues of sale of colonial products 227.0 473.9 652.7 641.8
Costs of transport etc (NHM) 88.0 165.4 138.7 114.7
Sum of expenses 59.2 175.1 275.3 276.6
Total net profits* 150.6 215.6 289.4 276.7

Source: Van Zanden and Van Riel 2000: 223.

* Recalculated by Van Zanden and Van Riel to include subsidies for the NHM and other costs that in fact benefited the Dutch economy.

The heyday of the colonial export economy (1900-1942)

After 1870, private enterprise was promoted but the exports of raw materials gained decisive momentum after 1900. Sugar, coffee, pepper and tobacco, the old export products, were increasingly supplemented with highly profitable exports of petroleum, rubber, copra, palm oil and fibers. The Outer Islands supplied an increasing share in these foreign exports, which were accompanied by an intensifying internal trade within the archipelago and generated an increasing flow of foreign imports. Agricultural exports were cultivated both in large-scale European agricultural plantations (usually called agricultural estates) and by indigenous smallholders. When the exploitation of oil became profitable in the late nineteenth century, petroleum earned a respectable position in the total export package. In the early twentieth century, the production of oil was increasingly concentrated in the hands of the Koninklijke/Shell Group.


Figure 1

Foreign Exports from the Netherlands-Indies, 1870-1940

(in millions of guilders, current values)

Source: Trade statistics

The momentum of profitable exports led to a broad expansion of economic activity in the Indonesian archipelago. Integration with the world market also led to internal economic integration when the road system, railroad system (in Java and Sumatra) and port system were improved. In shipping lines, an important contribution was made by the KPM (Koninklijke Paketvaart-Maatschappij, Royal Packet boat Company) that served economic integration as well as imperialist expansion. Subsidized shipping lines into remote corners of the vast archipelago carried off export goods (forest products), supplied import goods and transported civil servants and military.

The Depression of the 1930s hit the export economy severely. The sugar industry in Java collapsed and could not really recover from the crisis. In some products, such as rubber and copra, production was stepped up to compensate for lower prices. In the rubber exports indigenous producers for this reason evaded the international restriction agreements. The Depression precipitated the introduction of protectionist measures, which ended the liberal period that had started in 1870. Various import restrictions were launched, making the economy more self-sufficient, as for example in the production of rice, and stimulating domestic integration. Due to the strong Dutch guilder (the Netherlands adhered to the gold standard until 1936), it took relatively long before economic recovery took place. The outbreak of World War II disrupted international trade, and the Japanese occupation (1942-1945) seriously disturbed and dislocated the economic order.

Table 4

Annual Average Growth in Economic Key Aggregates 1830-1990

GDP per capita Export volume Export

Prices

Government Expenditure
Cultivation System 1830-1840 n.a. 13.5 5.0 8.5
Cultivation System 1840-1848 n.a. 1.5 - 4.5 [very low]
Cultivation System 1849-1873 n.a. 1.5 1.5 2.6
Liberal Period 1874-1900 [very low] 3.1 - 1.9 2.3
Ethical Period 1901-1928 1.7 5.8 17.4 4.1
Great Depression 1929-1934 -3.4 -3.9 -19.7 0.4
Prewar Recovery 1934-1940 2.5 2.2 7.8 3.4
Old Order 1950-1965 1.0 0.8 - 2.1 1.8
New Order 1966-1990 4.4 5.4 11.6 10.6

Source: Booth 1998: 18.

Note: These average annual growth percentages were calculated by Booth by fitting an exponential curve to the data for the years indicated. Up to 1873 data refer only to Java.

The post-1945 period

After independence, the Indonesian economy had to recover from the hardships of the Japanese occupation and the war for independence (1945-1949), on top of the slow recovery from the 1930s Depression. During the period 1949-1965, there was little economic growth, predominantly in the years from 1950 to 1957. In 1958-1965, growth rates dwindled, largely due to political instability and inappropriate economic policy measures. The hesitant start of democracy was characterized by a power struggle between the president, the army, the communist party and other political groups. Exchange rate problems and absence of foreign capital were detrimental to economic development, after the government had eliminated all foreign economic control in the private sector in 1957/58. Sukarno aimed at self-sufficiency and import substitution and estranged the suppliers of western capital even more when he developed communist sympathies.

After 1966, the second president, general Soeharto, restored the inflow of western capital, brought back political stability with a strong role for the army, and led Indonesia into a period of economic expansion under his authoritarian New Order (Orde Baru) regime which lasted until 1997 (see below for the three phases in New Order). In this period industrial output quickly increased, including steel, aluminum, and cement but also products such as food, textiles and cigarettes. From the 1970s onward the increased oil price on the world market provided Indonesia with a massive income from oil and gas exports. Wood exports shifted from logs to plywood, pulp, and paper, at the price of large stretches of environmentally valuable rainforest.

Soeharto managed to apply part of these revenues to the development of technologically advanced manufacturing industry. Referring to this period of stable economic growth, the World Bank Report of 1993 speaks of an ‘East Asian Miracle’ emphasizing the macroeconomic stability and the investments in human capital (World Bank 1993: vi).

The financial crisis in 1997 revealed a number of hidden weaknesses in the economy such as a feeble financial system (with a lack of transparency), unprofitable investments in real estate, and shortcomings in the legal system. The burgeoning corruption at all levels of the government bureaucracy became widely known as KKN (korupsi, kolusi, nepotisme). These practices characterize the coming-of-age of the 32-year old, strongly centralized, autocratic Soeharto regime.

From 1998 until present

Today, the Indonesian economy still suffers from severe economic development problems following the financial crisis of 1997 and the subsequent political reforms after Soeharto stepped down in 1998. Secessionist movements and the low level of security in the provincial regions, as well as relatively unstable political policies, form some of its present-day problems. Additional problems include the lack of reliable legal recourse in contract disputes, corruption, weaknesses in the banking system, and strained relations with the International Monetary Fund. The confidence of investors remains low, and in order to achieve future growth, internal reform will be essential to build up confidence of international donors and investors.

An important issue on the reform agenda is regional autonomy, bringing a larger share of export profits to the areas of production instead of to metropolitan Java. However, decentralization policies do not necessarily improve national coherence or increase efficiency in governance.

A strong comeback in the global economy may be at hand, but has not as yet fully taken place by the summer of 2003 when this was written.

Additional Themes in the Indonesian Historiography

Indonesia is such a large and multi-faceted country that many different aspects have been the focus of research (for example, ethnic groups, trade networks, shipping, colonialism and imperialism). One can focus on smaller regions (provinces, islands), as well as on larger regions (the western archipelago, the eastern archipelago, the Outer Islands as a whole, or Indonesia within Southeast Asia). Without trying to be exhaustive, eleven themes which have been subject of debate in Indonesian economic history are examined here (on other debates see also Houben 2002: 53-55; Lindblad 2002b: 145-152; Dick 2002: 191-193; Thee 2002: 242-243).

The indigenous economy and the dualist economy

Although western entrepreneurs had an advantage in technological know-how and supply of investment capital during the late-colonial period, there has been a traditionally strong and dynamic class of entrepreneurs (traders and peasants) in many regions of Indonesia. Resilient in times of economic malaise, cunning in symbiosis with traders of other Asian nationalities (particularly Chinese), the Indonesian entrepreneur has been rehabilitated after the relatively disparaging manner in which he was often pictured in the pre-1945 literature. One of these early writers, J.H. Boeke, initiated a school of thought centering on the idea of ‘economic dualism’ (referring to a modern western and a stagnant eastern sector). As a consequence, the term ‘dualism’ was often used to indicate western superiority. From the 1960s onward such ideas have been replaced by a more objective analysis of the dualist economy that is not so judgmental about the characteristics of economic development in the Asian sector. Some focused on technological dualism (such as B. Higgins) others on ethnic specialization in different branches of production (see also Lindblad 2002b: 148, Touwen 2001: 316-317).

The characteristics of Dutch imperialism

Another vigorous debate concerns the character of and the motives for Dutch colonial expansion. Dutch imperialism can be viewed as having a rather complex mix of political, economic and military motives which influenced decisions about colonial borders, establishing political control in order to exploit oil and other natural resources, and preventing local uprisings. Three imperialist phases can be distinguished (Lindblad 2002a: 95-99). The first phase of imperialist expansion was from 1825-1870. During this phase interference with economic matters outside Java increased slowly but military intervention was occasional. The second phase started with the outbreak of the Aceh War in 1873 and lasted until 1896. During this phase initiatives in trade and foreign investment taken by the colonial government and by private businessmen were accompanied by extension of colonial (military) control in the regions concerned. The third and final phase was characterized by full-scale aggressive imperialism (often known as ‘pacification’) and lasted from 1896 until 1907.

The impact of the cultivation system on the indigenous economy

The thesis of ‘agricultural involution’ was advocated by Clifford Geertz (1963) and states that a process of stagnation characterized the rural economy of Java in the nineteenth century. After extensive research, this view has generally been discarded. Colonial economic growth was stimulated first by the Cultivation System, later by the promotion of private enterprise. Non-farm employment and purchasing power increased in the indigenous economy, although there was much regional inequality (Lindblad 2002a: 80; 2002b:149-150).

Regional diversity in export-led economic expansion

The contrast between densely populated Java, which had been dominant in economic and political regard for a long time, and the Outer Islands, which were a large, sparsely populated area, is obvious. Among the Outer Islands we can distinguish between areas which were propelled forward by export trade, either from Indonesian or European origin (examples are Palembang, East Sumatra, Southeast Kalimantan) and areas which stayed behind and only slowly picked the fruits of the modernization that took place elsewhere (as for example Benkulu, Timor, Maluku) (Touwen 2001).

The development of the colonial state and the role of Ethical Policy

Well into the second half of the nineteenth century, the official Dutch policy was to abstain from interference with local affairs. The scarce resources of the Dutch colonial administrators should be reserved for Java. When the Aceh War initiated a period of imperialist expansion and consolidation of colonial power, a call for more concern with indigenous affairs was heard in Dutch politics, which resulted in the official Ethical Policy which was launched in 1901 and had the threefold aim of improving indigenous welfare, expanding the educational system, and allowing for some indigenous participation in the government (resulting in the People’s Council (Volksraad) that was installed in 1918 but only had an advisory role). The results of the Ethical Policy, as for example measured in improvements in agricultural technology, education, or welfare services, are still subject to debate (Lindblad 2002b: 149).

Living conditions of coolies at the agricultural estates

The plantation economy, which developed in the sparsely populated Outer Islands (predominantly in Sumatra) between 1870 and 1942, was in bad need of labor. The labor shortage was solved by recruiting contract laborers (coolies) in China, and later in Java. The Coolie Ordinance was a government regulation that included the penal clause (which allowed for punishment by plantation owners). In response to reported abuse, the colonial government established the Labor Inspectorate (1908), which aimed at preventing abuse of coolies on the estates. The living circumstances and treatment of the coolies has been subject of debate, particularly regarding the question whether the government put enough effort in protecting the interests of the workers or allowed abuse to persist (Lindblad 2002b: 150).

Colonial drain

How large of a proportion of economic profits was drained away from the colony to the mother country? The detrimental effects of the drain of capital, in return for which European entrepreneurial initiatives were received, have been debated, as well as the exact methods of its measurement. There was also a second drain to the home countries of other immigrant ethnic groups, mainly to China (Van der Eng 1998; Lindblad 2002b: 151).

The position of the Chinese in the Indonesian economy

In the colonial economy, the Chinese intermediary trader or middleman played a vital role in supplying credit and stimulating the cultivation of export crops such as rattan, rubber and copra. The colonial legal system made an explicit distinction between Europeans, Chinese and Indonesians. This formed the roots of later ethnic problems, since the Chinese minority population in Indonesia has gained an important (and sometimes envied) position as capital owners and entrepreneurs. When threatened by political and social turmoil, Chinese business networks may have sometimes channel capital funds to overseas deposits.

Economic chaos during the ‘Old Order’

The ‘Old Order’-period, 1945-1965, was characterized by economic (and political) chaos although some economic growth undeniably did take place during these years. However, macroeconomic instability, lack of foreign investment and structural rigidity formed economic problems that were closely connected with the political power struggle. Sukarno, the first president of the Indonesian republic, had an outspoken dislike of colonialism. His efforts to eliminate foreign economic control were not always supportive of the struggling economy of the new sovereign state. The ‘Old Order’ has for long been a ‘lost area’ in Indonesian economic history, but the establishment of the unitary state and the settlement of major political issues, including some degree of territorial consolidation (as well as the consolidation of the role of the army) were essential for the development of a national economy (Dick 2002: 190; Mackie 1967).

Development policy and economic planning during the ‘New Order’ period

The ‘New Order’ (Orde Baru) of Soeharto rejected political mobilization and socialist ideology, and established a tightly controlled regime that discouraged intellectual enquiry, but did put Indonesia’s economy back on the rails. New flows of foreign investment and foreign aid programs were attracted, the unbridled population growth was reduced due to family planning programs, and a transformation took place from a predominantly agricultural economy to an industrializing economy. Thee Kian Wie distinguishes three phases within this period, each of which deserve further study:

(a) 1966-1973: stabilization, rehabilitation, partial liberalization and economic recovery;

(b) 1974-1982: oil booms, rapid economic growth, and increasing government intervention;

(c) 1983-1996: post-oil boom, deregulation, renewed liberalization (in reaction to falling oil-prices), and rapid export-led growth. During this last phase, commentators (including academic economists) were increasingly concerned about the thriving corruption at all levels of the government bureaucracy: KKN (korupsi, kolusi, nepotisme) practices, as they later became known (Thee 2002: 203-215).

Financial, economic and political crisis: KRISMON, KRISTAL

The financial crisis of 1997 started with a crisis of confidence following the depreciation of the Thai baht in July 1997. Core factors causing the ensuing economic crisis in Indonesia were the quasi-fixed exchange rate of the rupiah, quickly rising short-term foreign debt and the weak financial system. Its severity had to be attributed to political factors as well: the monetary crisis (KRISMON) led to a total crisis (KRISTAL) because of the failing policy response of the Soeharto regime. Soeharto had been in power for 32 years and his government had become heavily centralized and corrupt and was not able to cope with the crisis in a credible manner. The origins, economic consequences, and socio-economic impact of the crisis are still under discussion. (Thee 2003: 231-237; Arndt and Hill 1999).

(Note: I want to thank Dr. F. Colombijn and Dr. J.Th Lindblad at Leiden University for their useful comments on the draft version of this article.)

Selected Bibliography

In addition to the works cited in the text above, a small selection of recent books is mentioned here, which will allow the reader to quickly grasp the most recent insights and find useful further references.

General textbooks or periodicals on Indonesia’s (economic) history:

Booth, Anne. The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities. London: Macmillan, 1998.

Bulletin of Indonesian Economic Studies.

Dick, H.W., V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie. The Emergence of a National Economy in Indonesia, 1800-2000. Sydney: Allen & Unwin, 2002.

Itinerario “Economic Growth and Institutional Change in Indonesia in the 19th and 20th centuries” [special issue] 26 no. 3-4 (2002).

Reid, Anthony. Southeast Asia in the Age of Commerce, 1450-1680, Vol. I: The Lands below the Winds. New Haven: Yale University Press, 1988.

Reid, Anthony. Southeast Asia in the Age of Commerce, 1450-1680, Vol. II: Expansion and Crisis. New Haven: Yale University Press, 1993.

Ricklefs, M.C. A History of Modern Indonesia since ca. 1300. Basingstoke/Londen: Macmillan, 1993.

On the VOC:

Gaastra, F.S. De Geschiedenis van de VOC. Zutphen: Walburg Pers, 1991 (1st edition), 2002 (4th edition).

Jacobs, Els M. Koopman in Azië: de Handel van de Verenigde Oost-Indische Compagnie tijdens de 18de Eeuw. Zutphen: Walburg Pers, 2000.

Nagtegaal, Lucas. Riding the Dutch Tiger: The Dutch East Indies Company and the Northeast Coast of Java 1680-1743. Leiden: KITLV Press, 1996.

On the Cultivation System:

Elson, R.E. Village Java under the Cultivation System, 1830-1870. Sydney: Allen and Unwin, 1994.

Fasseur, C. Kultuurstelsel en Koloniale Baten. De Nederlandse Exploitatie van Java, 1840-1860. Leiden, Universitaire Pers, 1975. (Translated as: The Politics of Colonial Exploitation: Java, the Dutch and the Cultivation System. Ithaca, NY: Southeast Asia Program, Cornell University Press 1992.)

Geertz, Clifford. Agricultural Involution: The Processes of Ecological Change in Indonesia. Berkeley: University of California Press, 1963.

Houben, V.J.H. “Java in the Nineteenth Century: Consolidation of a Territorial State.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 56-81. Sydney: Allen & Unwin, 2002.

On the Late-Colonial Period:

Dick, H.W. “Formation of the Nation-state, 1930s-1966.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 153-193. Sydney: Allen & Unwin, 2002.

Lembaran Sejarah, “Crisis and Continuity: Indonesian Economy in the Twentieth Century” [special issue] 3 no. 1 (2000).

Lindblad, J.Th., editor. New Challenges in the Modern Economic History of Indonesia. Leiden: PRIS, 1993. Translated as: Sejarah Ekonomi Modern Indonesia. Berbagai Tantangan Baru. Jakarta: LP3ES, 2002.

Lindblad, J.Th., editor. The Historical Foundations of a National Economy in Indonesia, 1890s-1990s. Amsterdam: North-Holland, 1996.

Lindblad, J.Th. “The Outer Islands in the Nineteenthh Century: Contest for the Periphery.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 82-110. Sydney: Allen & Unwin, 2002a.

Lindblad, J.Th. “The Late Colonial State and Economic Expansion, 1900-1930s.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 111-152. Sydney: Allen & Unwin, 2002b.

Touwen, L.J. Extremes in the Archipelago: Trade and Economic Development in the Outer Islands of Indonesia, 1900‑1942. Leiden: KITLV Press, 2001.

Van der Eng, Pierre. “Exploring Exploitation: The Netherlands and Colonial Indonesia, 1870-1940.” Revista de Historia Económica 16 (1998): 291-321.

Zanden, J.L. van, and A. van Riel. Nederland, 1780-1914: Staat, instituties en economische ontwikkeling. Amsterdam: Balans, 2000. (On the Netherlands in the nineteenth century.)

Independent Indonesia:

Arndt, H.W. and Hal Hill, editors. Southeast Asia’s Economic Crisis: Origins, Lessons and the Way forward. Singapore: Institute of Southeast Asian Studies, 1999.

Cribb, R. and C. Brown. Modern Indonesia: A History since 1945. Londen/New York: Longman, 1995.

Feith, H. The Decline of Constitutional Democracy in Indonesia. Ithaca, New York: Cornell University Press, 1962.

Hill, Hal. The Indonesian Economy. Cambridge: Cambridge University Press, 2000. (This is the extended second edition of Hill, H., The Indonesian Economy since 1966. Southeast Asia’s Emerging Giant. Cambridge: Cambridge University Press, 1996.)

Hill, Hal, editor. Unity and Diversity: Regional Economic Development in Indonesia since 1970. Singapore: Oxford University Press, 1989.

Mackie, J.A.C. “The Indonesian Economy, 1950-1960.” In The Economy of Indonesia: Selected Readings, edited by B. Glassburner, 16-69. Ithaca NY: Cornell University Press 1967.

Robison, Richard. Indonesia: The Rise of Capital. Sydney: Allen and Unwin, 1986.

Thee Kian Wie. “The Soeharto Era and After: Stability, Development and Crisis, 1966-2000.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 194-243. Sydney: Allen & Unwin, 2002.

World Bank. The East Asian Miracle: Economic Growth and Public Policy. Oxford: World Bank /Oxford University Press, 1993.

On economic growth:

Booth, Anne. The Indonesian Economy in the Nineteenth and Twentieth Centuries. A History of Missed Opportunities. London: Macmillan, 1998.

Van der Eng, Pierre. “The Real Domestic Product of Indonesia, 1880-1989.” Explorations in Economic History 39 (1992): 343-373.

Van der Eng, Pierre. “Indonesia’s Growth Performance in the Twentieth Century.” In The Asian Economies in the Twentieth Century, edited by Angus Maddison, D.S. Prasada Rao and W. Shepherd, 143-179. Cheltenham: Edward Elgar, 2002.

Van der Eng, Pierre. “Indonesia’s Economy and Standard of Living in the Twentieth Century.” In Indonesia Today: Challenges of History, edited by G. Lloyd and S. Smith, 181-199. Singapore: Institute of Southeast Asian Studies, 2001.

Citation: Touwen, Jeroen. “The Economic History of Indonesia”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-indonesia/

Education and Economic Growth in Historical Perspective

David Mitch, University of Maryland Baltimore County

In his introduction to the Wealth of Nations, Adam Smith (1776, p. 1) states that the proportion between the annual produce of a nation and the number of people who are to consume that produce depends on “the skill, dexterity, and judgment with which its labour is generally applied.” In recent decades, analysts of economic productivity in the United States during the twentieth century have made allowance for Smith’s “skill, dexterity, and judgment” of the labor force under the rubric of labor force quality (Ho and Jorgenson 1999; Aaronson and Sullivan 2001; DeLong, Goldin, and Katz 2003). These studies have found that a variety of factors have influenced labor force quality in the U.S., including age structure and workforce experience, female labor force participation, and immigration. One of the most important determinants of labor force quality has been years of schooling completed by the labor force.

Data limitations complicate generalizing these findings to periods before the twentieth century and to geographical areas beyond the United States. However, the rise of modern economic growth over the last few centuries seems to roughly coincide with the rise of mass schooling throughout the world. The sustained growth in income per capita evidenced in much of the world over the past two to two and a half centuries is a marked divergence from previous tendencies. Kuznets (1966) used the phrase “modern economic growth” to describe this divergence and he placed its onset in the mid-eighteenth century. More recently, Maddison (2001) has placed the start of sustained economic growth in the early nineteenth century. Maddison (1995) estimates that per capita income between 1520 and 1992 increased some eight times for the world as a whole and up to seventeen times for certain regions. Popular schooling was not widespread anywhere in the world before 1600. By 1800, most of North America, Scandinavia, and Germany had achieved literacy rates well in excess of fifty percent. In France and England literacy rates were closer to fifty percent and school attendance before the age of ten was certainly widespread, if not yet the rule. It was not until later in the nineteenth century and the early twentieth century that Southern and Eastern Europe were to catch up with Western Europe and it was only the first half of the twentieth century that saw schooling become widespread through much of Asia and Latin America. Only later in the twentieth century did schooling begin to spread throughout Africa. The twentieth century has seen the spread of secondary and university education to much of the adult population in the United States and to a lesser extent in other developed countries.[2] However, correlation is not causation; rising income per capita may have contributed to rising levels of schooling, as well as schooling to income levels. Thus, the contribution of rising schooling to economic growth should be examined more directly.

Estimating the Contribution of the Rise of Mass Schooling to Economic Growth: A Growth Accounting Perspective

Growth accounting can be used to estimate the general bounds of the contribution the rise of schooling has made to economic growth over the past few centuries.[3] A key assumption of growth accounting is that factors of production are paid their social marginal products. Growth accounting starts with estimates of the growth of individual factors of production, as well as the shares of these factors in total output and estimates of the growth of total product. It then apportions the growth in output into that attributable to growth in each factor of production specified in the analysis and into that due to a residual that cannot otherwise be explained. Estimates of how much schooling has increased the productivity of individual workers, combined with estimates of the increase in schooling completed by the labor force, yield estimates of how much the increase in schooling has contributed to increasing output. A growth accounting approach offers the advantage that with basic estimates (or at least possible ranges) for trends in output, labor force, schooling attainment, and preferably capital stock and factor shares, it yields estimates of schooling’s contribution to economic growth. An important disadvantage is that it relies on indirect estimates at the micro level for how schooling influences productivity at the aggregate level, rather than on direct empirical evidence.[4]

Back-of-the-envelope estimates of increases in income per capita attributable to rising levels of education over a period of a few centuries can be obtained by considering possible ranges of levels of schooling increases as measured in average years of schooling along with possible ranges of rates of return per year of schooling, in terms of the percentage by which a year of schooling raises earnings and common ranges for labor’s share in national income. By using a Cobb-Douglas specification of the aggregate production function with two factors of production, labor and physical capital, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods:

1) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )α

Where Y = output, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote the initial and final time period over which the schooling changes occur.[5] This formulation is a partial equilibrium one, holding constant the level of physical capital. However, the level of physical capital should be expected to increase in response to improved labor force quality due to more schooling. A common specification of a growth model that allows for such responses of physical capital implies the following ratio between final and initial national income per worker (see Lord 2001, 99-100):

2) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 )

The bounds on increases in years of schooling can be placed at between zero and 16, that is, between a completely unschooled and presumably illiterate population to one in which a college education is universal. As bounds on returns to increasing earnings per year of schooling, one can employ Krueger and Lindahl’s (2001) survey of results from recent estimates of earnings functions, which finds that returns range from 5 percent to 15 percent. The implications of varying these two parameters are reported in Tables 1A and 1B. Table 1A reports estimates based on the partial equilibrium specification holding constant the level of physical capital in equation 1). Table 1B reports estimates allowing for a changing level of physical capital as in equation 2). Labor’s share of income has been set at a commonly used value of 0.7 (see DeLong, Goldin and Katz 2003, 29; Maddison 1995, 255).

Table 1A
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Holding the Physical Capital Stock Constant

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.035 1.07 1.10
3 1.11 1.22 1.34
6 – illiteracy to
universal grammar school
.23 1.49 1.80
12 – illiteracy to
universal high school
1.51 2.23 3.23
16 – illiteracy to
universal college
1.73 2.91 4.78

Table 1B
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Allowing for Steady-state Changes in the Physical Capital Stock

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.05 1.10 1.15
3 1.16 1.33 1.52
6 – illiteracy to
universal grammar school
1.34 1.77 2.31
12 – illiteracy to
universal high school
1.79 3.14 5.35
16 – illiteracy to
universal college
2.18 4.59 9.36

The back-of-the-envelope calculations in Tables 1A and 1B make two simple points. First, schooling increases have the potential to explain a good deal of estimated long-term increases in per capita income. With the average member of an economy’s labor force embodying investments of twelve years of schooling and a moderate ten-percent rate of return per year of schooling and no increase in the capital stock, at least 17 percent of Maddison’s eight-fold increase in per capita income can be accounted for (i.e. 1.23/7) by rising schooling. Indeed, a 16 year schooling increase allowing for steady-state capital stock increases and at 15 percent per year return overexplains Maddison’s eight-fold increase (8.36/7). After all, if schooling has had substantial effects on the productivity of individual workers, if a sizable share of the labor force has experienced improvements in schooling completed and with labor’s share of output greater than half, then the contribution of rising schooling to increasing output should be large.

Second, the contribution of schooling increases that have actually occurred historically to per capita income increases is more modest accounting for at best about one fifth of Maddison’s one-fold increase. Thus an increase in average years of schooling completed by the labor force of 6 years, roughly that entailed by the spread of universal grammar schooling, would account for 19 percent (1.31/7) of an eight-fold per capita output increase at a high 15 percent rate of return allowing for steady state changes in the physical capital stock (Table 1B). And at a low 5 percent return per year of schooling, the contribution would be only 5 percent of the increase (0.34/7). Making lower-level elementary education universal would entail increasing average years of schooling completed by the labor force by 1 to 3 years; in most circumstances this is not a trivial accomplishment as measured by the societal resources required. However, even at a high 15 percent per year return and allowing for steady state changes in the capital stock (Table 1B), the contribution of a 3 year increase in average years of schooling would only account for 7 percent (0.52/7) of Maddison’s eight-fold increase.

How do the above proposed bounds on schooling increases compare with possible increases in the physical capital stock? Kendrick (1993, 143) finds a somewhat larger growth rate in his estimated human capital stock than in the stock of non-human capital for the U.S. between 1929 and 1969, though for the sub-period 1929-48, he estimates a slightly higher growth rate for the non-human capital stock. In contrast, Maddison (1995, 35-37) estimates larger increases in the value of non-residential structures per worker and in the value of machinery and equipment per worker than in years of schooling per adult for the U.S. and the U.K. between 1820 and 1992. For the U.S., he estimates that the value of non-residential structures per worker rose by 21 times and the value of machinery and equipment per worker rose by 141 times in comparison with a ten-fold increase in the years of schooling per adult between 1820 and 1992. For the U.K., his estimates indicate a 15 fold increase in the value of structures per worker and a 97 fold increase in value of machinery and equipment per worker in contrast with a seven-fold increase in average years of schooling between 1820 and 1992. It should be noted that these estimates are based on cumulated investments in schooling to estimate human capital; that is, they are based on the costs incurred to produce human capital. Davies and Whalley (1991, 188-189) argue that estimates based on the alternative approach of calculating the present value of future earnings premiums attributable to schooling and other forms of human capital yield substantially higher estimates of human capital due to capturing inframarginal returns above costs accruing to human capital investments. For the growth accounting approach employed here, the cumulated investment or cost approach would seem the appropriate one. Are there more inherent bounds on the accumulation of human capital over time than non-human capital? One limit on the accumulation of human capital is set by how much of one’s potential working life a worker is willing to sacrifice for purposes of improving education and future productivity. This can be compared with the corresponding limit on the willingness to sacrifice current consumption for wealth accumulation.

However, this discussion makes no explicit allowance for changes over time in the quality of schooling. Improvements in teacher training and teacher recruitment along with ongoing curriculum developments among other factors could lead to ongoing improvements over time in how much a year of school attendance would improve the underlying future productivity of the student. Woessmann (2002) and Hanushek and Kimcoe (2000) have recently argued for the importance of allowing for variation in school quality in estimating the impact of cross national variation in human capital levels on economic growth. Woessmann (2002) makes the suggestion that allowing for improvements in the quality of schooling can remove the upper bounds on schooling investment that would be present if this was simply a matter of increasing the percentage of the population enrolled in school at given levels of quality. While there would seem to be inherent bounds on the proportion of one’s life that one is willing to spend in school, such bounds would not apply to increases in expenditures and other means of improving school quality.

Expenditures per pupil appear to have risen markedly over long periods of time. Thus, in the United States, expenditure per pupil in public elementary and secondary schools in constant 1989-90 dollars rose by over 6 times between 1923-24 and 1973-74 (National Center for Educational Statistics, 60). And in Victorian England, nominal expenditures per pupil in state subsidized schools more than doubled between 1870 and 1900, despite falling prices (Mitch 1982, 204). These figures do not control for the rising percentage of students enrolled in higher grade levels (presumably at higher expenditure per student), general rises in living standards affecting teachers’ salaries and other factors influencing the abilities of those recruited into teaching. Nevertheless, they suggest the possibility of sizable improvements over time in school quality.

It can be argued that implicitly allowance is made for improvements in school quality in the rate of return imputed per year of schooling completed on average by the labor force. Insofar as schools became more effective over time in transmitting knowledge and skills, the economic return per year of schooling should have increased correspondingly. Thus any attempt to allow for school quality in a growth accounting analysis should be careful to avoid double counting school quality in both school inputs and in returns per year of schooling.

The benchmark for the impact of increases in average levels of schooling completed in Table 1 are Maddison’s estimates of changes in output per capita over the last two centuries. In fact, major increases in schooling levels have most commonly been compressed into intervals of several decades or less, rather than periods of a century or more. This would imply that the contribution to output growth of improvements in labor force quality due to increases in schooling levels would have been concentrated primarily in periods of marked improvement in schooling levels and would have been far more modest during periods of more sluggish increase in educational attainment. In order to gauge the impact of the time interval over which changes in schooling occur on growth rates of output, Table 2 provides the change in average years of schooling implied by some of the hypothetical changes in average levels of schooling attainment reported in Table 1 for various time periods.

Table 2

Annual Change in Average Years of Schooling per Adult per Year Implied by Hypothetical Figures in Table 1

Time period over which increase occurred
Total Increase in
Average Years of
Schooling per Adult
5 years 10 years 30 years 50 years 100 years
1 0.2 0.1 0.033 0.02 0.01
3 0.6 0.3 0.1 0.06 0.03
6 1.2 0.6 0.2 0.12 0.06
9 1.8 0.9 0.3 0.18 0.09

Table 3 translates these rates of schooling growth into output growth rates using the partial equilibrium framework of equation 1) using a value for the share of labor of 0.7 as above. The contribution of schooling to growth rates of output and output per capita can be calculated as labor’s share times the percentage return per year of schooling on earnings times the annual increase in average years of schooling.

Table 3A
Contribution of Schooling for Large Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 6 year rise in average years of schooling 6 year rise in average years of schooling 9 year rise in average years of schooling 9 year rise in average years of schooling
5% return 10 % return 5 % return 10% return
30 years 0.7% 1.4% 1.05% 2.1%
50 years 0.42% 0.84% 0.63% 1.26%

Table 3B
Contribution of Schooling for Small to Modest Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 1 year rise in average years of schooling 1 year rise in average years of schooling 3 year rise in average years of schooling 3 year rise in average years of schooling
5 % return 10 % return 5% return 10% return
5 years 0.7% 1.4% 2.1% 4.2%
10 years 0.35% 0.7% 1.05% 2.1%
20 years 0.175% 0.35% 0.525% 1.05%
30 years 0.12% 0.23% 0.35% 0.7%
50 years 0.07% 0.14% 0.21% 0.42%
100 years 0.035% 0.07% 0.105% 0.21%

The case of the U.S. in the twentieth century as analyzed in DeLong, Goldin and Katz (2003) offers an example of how apparent limits or at least resistance to ongoing expansion of schooling have lowered the contribution of schooling to growth. They find that between World War I and the end of the century, improvements in labor quality attributable to schooling can account for about a quarter of the growth of output per capita in the U.S. during this period; this is similar in magnitude to Denison’s (1962) estimates for the first part of this period. This era saw the mean years of schooling completed by age 35 increased from 7.4 years for an American born in 1875 to 14.1 years for an American born in 1975 (DeLong, Goldin and Katz 2003, 22). However, in the last two decades of the twentieth century the rate of increase of mean years of schooling completed leveled off and correspondingly the contribution of schooling to labor quality improvements fell almost in half.

Maddison (1995) has compiled estimates of the average years of schooling completed for a number of countries going back to 1820. It is indicative of the sparseness of schooling completed by adult population estimates that Maddison reports estimates for only 3 countries, the U.S., the U.K., and Japan, all the way back to 1820. Maddison’s figures come from other studies and their reliability warrants further critical scrutiny than can be accorded them here. Since systematic census evidence on adult educational attainment did not begin until the mid-twentieth century, estimates of labor force educational attainment prior to 1900 should be treated with some skepticism. Nevertheless, Maddison’s estimates can be used to give a sense of plausible changes in levels of schooling completed over the last century and a half. The average increases in years of schooling per year for various time periods implied by Maddison’s figures are reported in Table 4. Maddison constructed his figures by giving primary education a weight of 1, secondary education a weight of 1.4, and tertiary, a weight of 2 based on evidence on relative earnings for each level of education.

Table 4
Estimates of the Annual Change in Average Years of Schooling per Person aged 15-64 for Selected Countries and Time Periods

Country 1913-1973 1870-1973 1870-1913
U.S. 0 .112 0.107 0.092
France 0.0783
Germany 0.053
Netherlands 0.064
U.K. 0.0473 0.0722 0.102
Japan 0.112 0.106 0.090

Source: Maddison (1995), 37, Table 2-3

Table 5
Annual Growth Rates in GDP per Capita

Region 1820-70 1870-1913 1913-50 1950-73 1973-92
12 West European Countries 0.9 1.3 1.2 3.8 1.8
4 Western Offshoots 1.4 1.5 1.3 2.4 1.2
5 South European Countries n.a. 0.9 0.7 4.8 2.2
7 East European Countries n.a. 1.2 1.0 4.0 -0.8
7 Latin American Countries n.a. 1.5 1.9 2.4 0.4
11 Asian Countries 0.1 0.7 -0.2 3.1 3.5
10 African countries n.a. n.a. 1.0 1.8 -0.4

Source: Maddison (1995), 62-63, Table 3-2.

In comparing Tables 2 and 4 it can be observed that the estimated actual changes in years of schooling compiled by Maddison (as well as the average over 55 countries reported by Lichtenberg (1994) for the third quarter of the twentieth century) fall within a lower bound set in the hypothetical ranges of a 3 year increase in average schooling spread over a century and an upper bound set by a 6 year increase in average schooling spread over 50 years.

Equations 1) and 2) above assume that each year of schooling of a worker has the same impact on productivity. In fact it has been common to find that the impact of schooling on productivity varies according to level of education. While the rate of return as a percentage of costs tends to be higher for primary than secondary schooling, which is in turn higher than tertiary education, this reflects the far lower costs, especially lower foregone earnings, of primary schooling (Psacharopolous and Patrinos 2004). The earnings premium per year of schooling tends to be higher for higher levels of education and this earnings premium, rather than the rate of return as a percentage costs, is the appropriate measure for assessing the contribution of rising schooling to growth (OECD 2001). Accordingly growth accounting analyses commonly construct schooling indexes weighting years of schooling according to estimates of each year’s impact on earnings (see for example Maddison 1995; Denison 1962). DeLong, Goldin and Katz (2003) use chain weighted indexes of returns according to each level of schooling. A rough approximation of the effect of allowing for variation in economic impact by level of schooling in the analysis in Table 1 is simply to focus on the mid-range 10 percent rate of return as an approximate average of high, low, and medium level returns.[6]

The U.S. is notable for rapid expansion in schooling attainment over the twentieth century at both the secondary and tertiary level, while in Europe widespread expansion has tended to focus on the primary and lower secondary level. These differences are evident in Denison’s estimates of the actual differences in educational distribution between the United States and a number of Western European countries in the mid-twentieth century (see Table 6).

Table 6

Percentage Distributions of the Male Labor Force by Years of Schooling Completed

Years of School Completed United States 1957 France 1954 United Kingdom 1951 Italy 1961
0 1.4 0.3 0.2 13.7
1-4 5.7 2.4 0.2 26.1
5-6 6.3 19.2 0.8 38.0
7 5.8 21.1 4.0 4.2
8 17.2 27.8 27.2 8.1
9 6.3 4.6 45.1 0.7
10 7.3 4.1 8.4 0.7
11 6.0 6.5 7.3 0.6
12 26.2 5.4 2.5 1.8
13-15 8.3 5.4 2.2 3.0
16 or more 9.5 3.2 2.1 3.1

Source: Denison (1967), 80, Table 8-1.

Some segments of the population are likely to have much greater enhancements of productivity from additional years of schooling than others. Insofar as the more able benefit from schooling compared to the rest of the ability distribution, putting substantially greater relative emphasis on expansion of higher levels of schooling could considerably augment growth rates over a more egalitarian strategy. This result would follow from a substantially greater premium assigned to higher levels of education. However, some studies of education in developing countries have found that they allocate a disproportionate share of resources to tertiary schooling at the expense of primary schooling, reflecting efforts of elites to benefit their offspring. How this has impeded economic growth would depend on the disparity in rates of return among levels of education, a point of some controversy in the economics of education literature (Birdsall 1996; Psacharopoulos 1996).

While allocating schooling disproportionately towards the more able in a society may have promoted growth, there would have been corresponding losses stemming from groups that have been systematically excluded or at least restricted in their access to education due to discrimination by factors such as race, gender and religion (Margo 1990). These losses could be attributed in part to the presence of individuals of high ability in groups experiencing discrimination due to failure to provide them with sufficient education to properly utilize their talents. However, historians such as Ashton (1948, 15) have argued that the exclusion of non-Anglicans from English universities prior to the mid-nineteenth century resulted in the channeling of their talents into manufacturing and commerce.

Even if returns have been higher at some levels of education than others, a sustained and substantial increase in labor force quality would seem to entail an egalitarian strategy of widespread increase in access to schooling. The contrast between the rapid increase in access to secondary and tertiary schooling in the U.S. and the much more limited increase in access in Europe during the twentieth century with the correspondingly much greater role for schooling in accounting for economic growth in the U.S. than in Europe (see Denison 1967) points to the importance of an egalitarian strategy in sustaining ongoing increases in aggregate labor force quality.

One would expect on increase in the relative supply of more schooled labor to lead to a decline in the premium to schooling, other things equal. Some recent analyses of the contribution of schooling to growth have allowed for this by specifying a parametric relationship between the distribution of schooling in an economy’s labor force and its impact on output or on a hypothesized intermediary human capital factor (Bils and Klenow 2000).[7]

Direct empirical evidence on trends in the premium to schooling is helpful both to obviate reliance on a theoretical specification and to allow for factors such as technical change that may have offset the impact of the increasing supply of schooling. Goldin and Katz (2001) have developed evidence on trends in the premium to schooling over the twentieth century that have allowed them to adjust for these trends in estimating the contribution of schooling to economic growth (DeLong, Goldin and Katz 2003). They find a marked fall in the premium to schooling, roughly falling in half between 1910 and 1950. However, they also find that this decline in the schooling premium was more than offset by their estimated increase over this same period in years of schooling completed by the average worker of 2.9 years and hence that on net schooling increases contributed to improved productivity of the U.S. workforce. They estimate increases of 0.5 percent per year in labor productivity due to increased educational attainment between 1910 and 1950 relative to the average total annual increase in labor productivity of 1.62 percent over the entire period 1915 to 2000. For the period since 1960, DeLong, Goldin and Katz find that the premium to education has increased while the increase in educational attainment at first increased and then declined. During this latter period, the increase in labor force quality has declined, as noted above, despite a widening premium to education, due to the slowing down in the increase in educational attainment.

Classifying the Range of Possible Relationships between Schooling and Economic Growth

In generalizing beyond the twentieth-century U.S. experience, allowance should be made both for the role of influences other than education on economic growth and for the possibility that the impact of education on growth can vary considerably according to the historical situation. In fact to understand why and how education might contribute to economic growth over the range of historical experience, it is important to investigate the variation in the impact of education on growth that has occurred historically. In relating education to economic growth, one can distinguish four basic possibilities.

The first is one of stagnation in both educational attainment and in output per head. Arguably, this was the most common situation throughout the world until 1750 and even after that date characterized Southern and Eastern Europe through the late nineteenth century, as well as most of Africa, Asia, and Latin American through the mid-twentieth century. The qualifier “arguably” is inserted here, because this view of the matter almost surely makes inadequate allowance for the improvements in informal acquisition of skills through family transmission and direct experience as well as through more formal non-schooling channels such as guild-sponsored apprenticeships, an aspect to be taken up further below. It also makes no allowance for the possible long-term improvements in per capita income that took place prior to 1750 but have been inadequately documented. Still focusing on formal schooling as the source of improvement in labor force, there is reason to think that this may have been a pervasive situation throughout much of human history.

The second situation is one in which income per capita rose despite stagnating education levels; factors other than improvements in educational attainment were generating economic growth. England during its industrial revolution, 1750 to 1840 is a notable instance in which some historians have argued that this situation prevailed. During this period, English schooling and literacy rates rose only slightly if at all, while income per capita appears to have risen. Literacy and schooling appears to have been of little use in newly created manufacturing occupations such as in cotton spinning. Indeed, literacy rates and schooling actually appears to have declined in some of the most rapidly industrializing areas of England such as Lancashire (Sanderson 1972; Nicholas and Nicholas 1992). Not all have concurred with this interpretation of the role of education in the English industrial revolution and the result depends on how educational trends are measured and how education is specified as affecting output (see Laqueur; Crafts 1995; Mitch 1999). Moreover this makes no allowance for the role of informal acquisition of skills. Boot (1995) argues that in the case of cotton spinners, informal skill acquisition with experience was substantial.

The simplest interpretation of this situation is that other factors contributed to economic growth other than schooling or human capital more generally. The clearest non-human capital explanatory factor would perhaps be physical capital accumulation; another might be foreign trade. However, if one turns to technological advance as a driving force, then this gives rise to the possibility that human capital — at least broadly defined — was if not the underlying force at least a central contributing factor to the industrial revolution. The argument for this possibility is that the improvements in knowledge and skills associated with technological advance are embodied in human agents and hence are forms of human capital. Recent work by Mokyr (2002) would suggest this interpretation. Nevertheless, the British industrial revolution does remain as a prominent instance in which human capital conventionally defined as schooling stagnated in the presence of a notable upsurge in economic growth. A less extreme case is provided by the post-World War II European catch-up with the United States, as Denison’s (1967) growth accounting analysis indicates that this occurred despite slower European increases in educational attainment due to other factors offsetting this. Historical instances such as that of the British industrial revolution call into question the common assumption that education is a necessary prerequisite for economic growth (see Mitch 1990).

The third situation is one in which rising educational attainment corresponds with rising rates of economic growth. This is the situation one would expect to prevail if education contributes to economic productivity and if any negative factors are not sufficient to offset this influence. One sub-set of instances would be those in which very large and reasonably compressed increases in the educational attainment of the labor force occurred. One important example of this is the twentieth century U.S., with the high school movement followed by increases in college attendance, as noted above. Another would be those of certain East Asian economies since World War II, as documented in the growth accounting analysis by Young (1995) of the substantial contributions of their rising educational attainment to their rapid growth rates. Another sub-set of cases corresponding to more modest increases in schooling can be interpreted as applying either to countries experiencing schooling increases focussed at the elementary level, as in much of Western Europe over the nineteenth century. The so-called literacy campaigns, as in the Soviet Union and Cuba (see Arnove and Graff eds. 1987) in the early and mid-twentieth century with modest improvements in educational attainment over compressed time periods of just a few decades could also be viewed as fitting into this sub-category. However, whether there were increases in output per capita corresponding to these more modest increases in educational attainment remains to be established.

The fourth situation is one in which economic growth has stagnated despite the presence of marked improvements in educational attainment. Possible examples of this situation would include the early rise of literacy in some Northern European areas, such as Scotland and Scandinavia, in the seventeenth and eighteenth centuries (see Houston 1988; Sandberg 1979) and some regions of Africa and Asia in the later twentieth century (see Pritchett 2001). One explanation of this situation is that it reflects instances in which any positive impact of educational attainment is small relative to other influences having an adverse impact. But one can also interpret it as reflecting situations in which incentive structures direct educated people into destructive and transfer activities inimical to economic growth (see North 1990; Baumol 1990; Murphy, Shleifer, and Vishny 1991).

Cross-country studies of the relationship between changes in schooling and growth since 1960 have yielded conflicting results which in itself could be interpreted as supporting the presence of some mix of the four situations just surveyed. A number of studies have found at best a weak relationship between changes in schooling and growth (Pritchett 2001; Bils and Klenow 2000); others have found a stronger relationship (Topel 1999). Much seems to depend on issues of measurement and on how the relationship between schooling and output is specified (Temple 2001b; Woessmann 2002, 2003).

The Determinants of Schooling

Whether education contributes to economic growth can be seen as depending on two factors, the extent to which educational levels improve over time and the impact of education on economic productivity. The first factor is a topic for extended discussion in its own right and no attempt will be made to consider it in depth here. Factors commonly considered include rising income per capita, distribution of political power, and cultural influences (Goldin 2001, Lindert 2004, Mariscal and Sokoloff 2000, Easterlin 1981; Mitch 2004). The issue of endogeneity of determination has often been raised with respect to the determinants of schooling. Thus, it is plausible that rising income contributes to rising levels of schooling and that the spread of mass education can influence the distribution of political power as well as the reverse. While these are important considerations, they are sufficiently complex to warrant extended attention in their own right.[8]

Influences on the Economic Impact of Schooling

Insofar as schooling improves general human intellectual capacities, it could be seen as having a universal impact irrespective of context. However, Rosenzweig (1995; 1999) has noted that the even the general influence of education on individual productivity or adaptability depend on the complexity of the situation. He notes that for agricultural tasks primarily involving physical exertion, no difference in productivity is evident between workers according to education levels; however, in more complex allocative decisions, education does enhance performance. This could account for findings that literacy rates were low among cotton spinners in the British industrial revolution despite findings of substantial premiums to experience (Sanderson 1972; Boot 1995). However, other studies have found literacy to have a substantial positive impact on labor productivity in cotton textile manufacture in the U.S., Italy, and Japan (Bessen 2003; A’Hearn 1998, Saxonhouse 1977) and have suggested a connection between literacy and labor discipline.

A more macro influence is the changing sectoral composition of the economy. It is common to suggest that the service and manufacturing sector have more functional uses for educated labor than the agricultural sector and hence that the shift from agriculture to industry in particular will lead to greater use of educated labor and in turn to require more educated labor forces. However, there are no clear theoretical or empirical grounds for the claim that agriculture makes less use of educated labor than other sectors of the economy. In fact, farmers have often had relatively high literacy rates and there are more obvious functional uses for education in agriculture in keeping accounts and keeping up with technological developments than in manufacturing. Nilsson et al (1999) argue that the process of enclosure in nineteenth-century Sweden, with the increased demands for reading and writing land transfer documents that this entailed, increased the value of literacy in the Swedish agrarian economy. The findings noted above that those in cotton textile occupations associated with early industrialization in Britain had relatively low literacy rates is one indication of the lack of any clear cut ranking across broad economic sectors in the use of educated labor.

Changes in the organization of decision making within major sectors as well as changes in the composition of production within sectors are more likely to have had an impact on demands for educated labor. Thus, within agriculture the extent of centralization or decentralization of decision making, that is the extent to which farm work forces consisted of farmers and large numbers of hired workers or of large numbers of peasants each with scope for making allocative decisions, is likely to have affected the uses made of educated labor in agriculture. Within manufacturing, a given country’s endowment of skilled relative to unskilled labor has been seen as influencing the extent to which openness to trade increases skill premiums, though this entails endogenous determination (Wood 1995).

Technological advance would have tended to boost the demand for more skilled and educated labor if technological advance and skills are complementary, as is often asserted.

However, there is no theoretical reason why technology and skills need be complementary and indeed concepts of directed technological change or induced innovation would suggest that in the presence of relatively high skill premiums, technological advance would be skill saving rather than skill using. Goldin and Katz (1998) have argued that the shift from the factory to continuous processing and batch production associated with the shift of power sources from steam to electricity in the early twentieth century lead to rising technology skill complementarity in U.S. manufacturing. It remains to be established how general this trend has been. It could be related to the distinction made between the dominance in the United States of extensive growth in the nineteenth century due to the growth of factors of production such as labor and capital and the increasing importance of intensive growth in the twentieth century. Intensive growth is often associated with technological advance and a presumed enhanced value for education (Abramovitz and David 2000). Some analysts have emphasized the importance of capital-skill complementarity. For example, Galor and Moav (2003) point to the level of the physical capital stock as a key influence on the return to human capital investment; they suggest that once physical capital stock accumulation surpassed a certain level, the positive impact of human capital accumulation on the return to physical capital became large enough that owners of physical capital came to support the rise of mass schooling. They cite the case of schooling reform in early twentieth century Britain as an example.

Even sharp declines in the premiums to schooling do not preclude a significant impact of education on economic growth. DeLong, Goldin and Katz’s (2003) growth accounting analysis for the twentieth century U.S. makes the point that even at modest positive returns to schooling on the order of 5 percent per year of schooling, with large enough increases in educational attainment, the contribution to growth can be substantial.

Human Capital

Economists have generalized the impact of schooling on labor force quality into the concept of human capital. Human capital refers to the investments that human beings make in themselves to enhance their economic productivity. These investments can take on many forms and include not only schooling but also apprenticeship, a healthy diet, and exercise, among other possibilities. Some economists have even suggested that more amorphous societal factors such as trust, institutional tradition, technological know how and innovation can all be viewed as forms of human capital (Temple 2001a; Topel 1999; Mokyr 2002). Thus broadly defined, human capital would appear as a prime candidate for explaining much of the difference across nations and over time in output and economic growth. However, gaining much insight into the actual magnitudes and the channels of influence by which human capital might influence economic growth requires specification of both the nature and determinants of human capital and how human capital affects aggregate production of an economy.

Much of the literature on human capital and growth makes the implicit assumption that some sort of numerical scale exists for human capital, even if multidimensional and even if unobservable. This in turn implies that it is meaningful to relate levels and changes of human capital to levels of income per capita and rates of economic growth. Given the multiplicity of factors that influence human knowledge and skill and in turn how these influence labor productivity, difficulties would seem likely to arise with attempts to measure aggregate human capital similar to those that have arisen with attempts to specify and measure the nature of human intelligence. Woessmann (2002, 2003) provides useful surveys of some of the issues involved in attempting to specify human capital at the aggregate level appropriate for relating it to economic growth.

One can distinguish between approaches to the measurement of human capital that focus on schooling, as in the discussion above, and those that take a broader view. Broad view approaches try to capture all investments that may have improved human productivity from whatever source, including not just schooling but other productivity enhancing investments, such as on-the-job training. The basic premise of broad view approaches is that for an aggregate economy, the income going to labor over and above what that labor would earn if it were paid the income of an unskilled worker can be viewed as human capital. This measure can be constructed in various ways including as a ratio using unskilled labor earnings as the denominator as in Mulligan and Sala-I-Martin (1997) or using the share of labor income not going as compensation for unskilled labor as in Crafts (1995) and Mitch (2004). Mulligan and Sala-I-Martin (2000) point to some of the major index number problems that can arise in using this approach to aggregate heterogeneous workers.

Crafts and Mitch find that for Britain during its late eighteenth and early nineteenth century industrial revolution between one-sixth and one-fourth of income per capita can be attributed to human capital measured as the share of labor income not going as compensation for unskilled labor.

One approach that has been taken recently to estimate the role of human capital differences in explaining international differences in income per capita is to consider changes in immigrant earnings between origin and destination countries along with differences between immigrant and native workers in the destination country. Olson (1996) suggested that the large increase in earnings of immigrants commonly observed in moving from a low income to a high income country points to a small role for human capital in explaining the wide variation in per capita income across countries. Hendricks (2002) has used differences between immigrant and native earnings in the U.S. to estimate the contribution of otherwise unobserved skill differences to explaining differences in income per capita across countries and finds that they account for only a small part of the latter differences. Hendricks’ approach raises the issue of whether there could be long-term increases in otherwise unobserved skills that could have contributed to economic growth.

The Informal Acquisition of Human Capital

One possible source of such skills is through the informal acquisition of human capital through on-the-job experience. Insofar as work has been common from early adolescence onwards, the issue arises of why the aggregate stock of skills acquired through experience would vary over time and thus influence rates of economic growth. Some types of on-the-job experience which contribute to economic productivity, such as apprenticeship, may entail an opportunity cost and aggregate trends in skill accumulation will be influenced by societal willingness to incur such opportunity costs.

Insofar as schooling continues through adolescence, this can interfere with the accumulation of workforce experience. DeLong, Goldin and Katz (2003) note the tradeoff between rising average years of schooling completed and decreasing years of labor force experience in influencing labor force quality of the U.S. labor force in the last half of the twentieth century. Connolly (2004) has found that informal experience played a relatively greater role in Southern economic growth than for other regions of the United States.

Hansen (1997) has also distinguished the academically-oriented secondary schooling the United States developed in the late nineteenth and early twentieth century from the vocationally-oriented schooling and apprenticeship system that Germany developed over the same time period. Goldin (2001) argues that in the United States the educational system developed general abilities suitable for the greater opportunities for geographical and occupational mobility that prevailed there, while specific vocational training was more suitable for the more restricted mobility opportunities in Germany.

Little evidence exists on whether long-term trends in informal opportunities for skill acquisition have influenced growth rates. However, Smith’s (1776) view of the importance of the division of labor in influencing productivity would suggest that the impact of trends in these opportunities may well have been quite sizable.

Externalities from Education

Economists commonly claim that education yields benefits to society over and above the impact on labor market productivity perceived by the person receiving the education. These benefits can include impacts on economic productivity, such as impacts on technological advance. They can also include non-labor market benefits. Thus McMahon (2002, 11) in his assessment of the social benefits of education includes not only direct effects on economic productivity but also impacts on a) population growth rates and health b) democratization, political stability, and human rights, c) the environment, d) reduction of poverty and inequality, e) crime and drug use, and f) labor force participation. While these effects may appear to involve primarily non-market activity and thus would not be reflected in national output measures and growth rates, factors such as political stability, democratization, population growth, and health have obvious consequences for prospects for long-term growth. However, allowance should be made for the simultaneous influence of the distribution of political power and life expectancy on societal investments in schooling.

For the period since 1960, numerous studies have employed cross country variation in various estimates of human capital and income per capita to directly estimate the impact of human capital on levels of income per capita and growth. A central goal of many such estimates is to see if there are externalities to education on output over and above the private returns estimated from micro data. The results have been conflicting and this has been attributed not only to problems of measurement error but also to differences in specification of human capital and its impact on growth. There does not appear to be strong evidence of large positive externalities to human capital (Temple 2001a). Furthermore, McMahon (2004) reports some empirical specifications which yield substantial indirect long-run effects.

For the period before 1960, limits on the availability of data on schooling and income have limited the use of this empirical regression approach. Thus, any discussion of the impact of externalities of education on production is considerably more conjectural. The central role of government, religious, and philanthropic agencies in the provision of schooling suggests the presence of externalities. Politicians and educators more frequently justified government and philanthropic provision of schooling by its impacts on religious and moral behavior than by any market failure resulting in sub-optimal provision of schooling from the standpoint of maximizing labor productivity. Thus, Adam Smith in his discussion of mass schooling in The Wealth of Nations, places more emphasis on its value to the state in enhancing orderliness and decency while reducing the propensity to popular superstition than on its immediate value in enhancing the economic productivity of the individual worker.

The Impact of the Level of Human Capital on Rates of Economic Growth

The approaches considered thus far relate changes in educational attainment of the labor force to changes in output per worker. An alternative, though not mutually exclusive, approach is to relate the level of educational attainment of an economy’s labor force to its rate of economic growth. The argument for doing so is that a high but unchanging level of educational attainment should contribute to growth by facilitating creativity, innovation and adaptation to change as well as facilitating the ongoing maintenance and improvement of skill in the workforce. Topel (1999) has argued that there may not be any fundamental difference between the two types of approach insofar as ongoing sources of productivity advance and adaptation to change could be viewed as reflecting ongoing improvements in human capital. Nevertheless, some empirical studies based on international data for the late twentieth century have found that a country’s level of educational attainment has a much stronger impact on its rate of economic growth than its rate of improvement in educational attainment (Benhabib and Spiegel 1994).

The paucity of data on schooling attainment has limited the empirical examination of the relationship between levels of human capital and economic growth for periods before the late twentieth century. However, Sandberg (1982) has argued, based on a descriptive comparison of economies in various categories, that those with high levels of schooling in 1850 subsequently experienced faster rates of economic growth. Some studies, such as O’Rourke and Williamson (1997) and Foreman-Peck and Lains (1999), have found that high levels of schooling and literacy have contributed to more rapid rates of convergence for European countries in the late nineteenth century and at the state level for the U.S. over the twentieth century (Connolly 2004).

Bowman and Anderson (1963), a much earlier study based on international evidence for the mid-twentieth century, can be interpreted in the spirit of relating levels of education to subsequent levels of income growth. Their reading of the cross-country relationship between literacy rates and per capita income at mid-twentieth-century was that a threshold of 40 percent adult literacy was required for a country to have a per capita income above 300 1955 dollars. Some have ahistorically projected back this literacy threshold to earlier centuries although the Bowman and Anderson proposal was intended to apply to mid-twentieth century development patterns.

The mechanisms by which the level of schooling would influence the rate of economic growth are problematic to establish. One can distinguish two general possibilities. One would be that higher levels of educational attainment facilitate adaptation and responsiveness to change throughout the workforce. This would be especially important where a large percentage of workers are in decision making positions such as an economy composed largely of small farmers and other small enterprises. The finding of Foster and Rosenzweig (1996) for late twentieth century India that the rate of return to schooling is higher during periods of more rapid technological advance in agriculture would be consistent with this. Likewise, Nilsson et al (1999) find that literacy was important for nineteenth-century Swedish farmers in dealing with enclosure, an institutional change. The other possibility is that higher levels of educational attainment increase the potential pool from which an elite group responsible for innovation can be recruited. This could be viewed as applying specifically to scientific and technical innovation as in Mokyr (2002) and Jones (2002) — but also to technological and industrial leadership more generally (Nelson and Wright 1992) and to facilitating advancement in society by ability irrespective of social origins (Galor and Tsiddon 1997). Recently, Labuske and Baten (2004) have found that international rates of patenting are related to secondary enrollment rates.

Two issues have arisen in the recent theoretical literature regarding specifying relationships between the level of human capital and rates of economic growth. First, Lucas (1988) in an influential model of the impact of human capital on growth, specifies that the rate of growth of human capital formation depends on initial levels of human capital, in other words that parents’ and teachers’ human capital has a direct positive influence on the rate of growth of learners’ human capital. This specification of the impact of the initial level of human capital allows for ongoing and unbounded growth of human capital and through this its ongoing contribution to economic growth. Such ongoing growth of human capital could occur through improvements in the quality of schooling or through enhanced improvements in learning from parents and other informal settings. While it might be plausible to suppose that improved education of teachers will enhance their effectiveness with learners, it seems less plausible to suppose that this enhanced effectiveness will increase unbounded in proportion to initial levels of education (Lord 2001, 82).

A second issue is that insofar as higher levels of human capital contribute to economic growth through increases in research and development activity and innovative activity more generally, one would expect the presence of scale effects. Economies with larger populations holding constant their level of human capital per person should benefit from more overall innovative activity simply because they have more people engaged in innovative activity. Jones (1995) has pointed out that such scale effects seem implausible if one looks at the time series relationship between rates of economic growth and those engaged in innovative activity. In recent decades the growth of the number of scientists, engineers, and others engaged in innovative activity has far outstripped the actual growth of productivity and other indicators of direct impact on innovation. Thus, one should allow for diminishing returns in the relationship between levels of education and technological advance.

Thus, as with schooling externalities, considering the impact of levels of education on growth offers numerous channels of influence leaving the challenge for the historian of ascertaining their quantitative importance in the past.

Conclusion

This survey has considered some of the basic ways in which the rise of mass education has contributed to economic growth in recent centuries. Given their potential influence on labor productivity, levels and changes in schooling and of human capital more generally have the potential for explaining a large share of increases in per capita output over time. However, increases in mass schooling seem to explain a major share of economic growth only over relatively short periods of time, with a more modest impact over longer time horizons. In some situations, such as the United States in the twentieth century, it appears that improvements in the schooling of the labor force have made substantial contributions to economic growth. Yet schooling should not be seen as either a necessary or sufficient condition for generating economic growth. Factors other than education can contribute to economic growth and in their absence, it is not clear that schooling in itself can contribute to economic growth. Moreover, there are likely limits on the extent to which average years of schooling of the labor force can expand, although improvement in the quality of schooling is not so obviously bounded. Perhaps the most obvious avenue through which education has contributed to economic growth is by expanding the rate of technological change. But as has been noted, there are numerous other possible channels of influence ranging from political stability and property rights to life expectancy and fertility. The diversity of these channels point to both the challenges and the opportunities in examining the historical connections between education and economic growth.

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[1] I have received helpful comments on this essay from Mac Boot, Claudia Goldin, Bill Lord, Lant Pritchett, Robert Whaples, and an anonymous referee. At an earlier stage in working through some of this material, I benefited from a quite useful conversation with Nick Crafts. However, I bear sole responsibility for remaining errors and shortcomings.

[2] For a detailed survey of trends in schooling in the early modern and modern period see Graff (1987).

[3] See Barro (1998) for a brief intellectual history of growth accounting.

[4] Blaug (1970) provides an accessible, detailed critique of the assumptions behind Denison’s growth accounting approach and Topel (1999) provides a further discussion of the problems of using a growth accounting approach to measure the contribution of education, especially those due to omitting social externalities.

[5] By using a Cobb-Douglas specification of the aggregate production function, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods, t = 0 and t =1:

Start with the aggregate production function specification:

Y = A K(1-α) [(1+r)S L]α

Y/L = A (K/L)(1-α) [(1+r)S L/L]α

Y/L = A (K/L)(1-α) [(1+r)S]α

Assume that the average years of schooling of the labor force is the only change between t = 0 and t =1; that is, assume no change in the ratio of capital to labor between time periods. Then the ratio of the income per worker in the later time period to the earlier time period will be:

(Y/L)1/ (Y/L)0 = ( (1 + r )S1- S0 )α

Where Y = output, A = a measure of the current state of technology, K = the physical capital stock, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote initial and final time periods.

As noted above, the derivation above is for a partial equilibrium change in years of schooling of the labor force holding constant the physical capital stock. Allowing for physical capital stock accumulation in response to schooling increases in a Solow-type model implies that the ratio of final to initial output per worker will be

(Y/L)1/ (Y/L)0 = ( (1 + r )S1 - S0 ) .

For a derivation of this see Lord (2001, 99-100). Lord’s derivation differs from that here by specifying the technology parameter A as labor augmenting. Allowing for increases in A over time due to technical change would further increase the contribution to output per worker of additional years of schooling.

[6]To take a specific example, suppose that in the steady-state case of Table 1B, a 5 percent earnings premium per year of schooling is assigned to the first 6 years of schooling, i.e. primary schooling, a 10 percent earnings premium per year is assigned to the next 6 years of schooling, i.e. secondary schooling, and a 15 percent earnings premium per year is assigned to the final 4 years of schooling, that is college. In that case, the impact on steady state income per capita compared with no schooling at all would be (1.05)6x(1.10)6x(1.15)4 = 4.15, compared with the 4.59 in going from no schooling to universal college at a 10 percent rate of return for every year of school completed.

[7] Denison’s standard growth accounting approach assumes that education is labor augmenting and, in particular, that there is an infinite elasticity of substitution between skilled and unskilled labor. This specification is conventional in growth accounting analysis. But another common specification in entering education into aggregate production functions is to specify human capital as a third factor of production along with unskilled labor and physical capital. Insofar as this is done with a Cobb-Douglas production function specification, as is conventional, the implied elasticity of substitution between human capital and either unskilled labor or physical capital is unity. The complementarity between human capital and other inputs this implies will tend to increase the contribution of human capital increases to economic growth by decreasing the tendency for diminishing returns to set in. (For a fuller treatment of the considerations involved see Griliches 1970, Conlisk 1970, Broadberry 2003). For an application of this approach in a historical growth accounting exercise, see Crafts (1995), who finds a fairly substantial contribution of human capital during the English industrial revolution. For a critique of Crafts’ estimates see Mitch (1999).

[8] For an examination of long-run growth dynamics with schooling investments endogenously determined by transfer-constrained family decisions see Lord 2001, 209-213 and Rangazas 2000. Lord and Rangazas find that allowing for the fact that families are credit constrained in making schooling investment decisions is consistent with the time path of interest rates in the U.S. between 1870 and 1970.

Citation: Mitch, David. “Education and Economic Growth in Historical Perspective”. EH.Net Encyclopedia, edited by Robert Whaples. July 26, 2005. URL http://eh.net/encyclopedia/education-and-economic-growth-in-historical-perspective/

Economy of England at the Time of the Norman Conquest

John McDonald, Flinders University, Adelaide, Australia

The Domesday Survey of 1086 provides high quality and detailed information on the inputs, outputs and tax assessments of most English estates. This article describes how the data have been used to reconstruct the eleventh-century Domesday economy. By exploiting modern economic theory and statistical methods the reconstruction has led to a radically different assessment of the way in which the Domesday economy and fiscal system were organized. It appears that tax assessments were based on a capacity to pay principle subject to politically expedient concessions and we can discover who received lenient assessments and why. Penetrating questions can be asked about the economy. We can compare the efficiency of Domesday agricultural production with the efficiency of more modern economies, measure the productivity of inputs and assess the impact of feudalism and manorialism on economic activity. The emerging picture of a reasonably well organized economy and fair tax system contrasts with the assessment of earlier historians who saw the Normans as capable military and civil administrators but regarded the economy as haphazardly run and tax assessments as “artificial” or arbitrary. The next section describes the Survey, the contemporary institutional arrangements and the main features of Domesday agricultural production. Some key findings on the Domesday economy and tax system are then briefly discussed.

Domesday England and the Domesday Survey

William the Conqueror invaded England from France in 1066 and carried out the Domesday Survey twenty years later. By 1086, Norman rule had been largely consolidated, although only after rebellion and civil dissent had been harshly put down. The Conquest was achieved by an elite, and, although the Normans brought new institutions and practices, these were superimposed on the existing order. Most of the Anglo-Saxon aristocracy were eliminated, the lands of over 4,000 English lords passing to less than 200 Norman barons, with much of the land held by just a handful of magnates.

William ruled vigorously through the Great Council. England was divided into shires, or counties, which were subdivided into hundreds. There was a sophisticated and long established shire administration. The sheriff was the king’s agent in the county, royal orders could be transmitted through the county and hundred courts, and an effective taxation collection system was in place.

England was a feudal state. All land belonged to the king. He appointed tenants-in-chief, both lay and ecclesiastical, who usually held land in return for providing a quota of fully equipped knights. The tenants-in-chief might then grant the land to sub-tenants in return for rents or services, or work the estate themselves through a bailiff. Although the Survey records 112 boroughs, agriculture was the predominant economic activity, with stock rearing of greater importance in the south-west and arable farming more important in the east and midlands. Manorialism was a pervasive influence, although it existed in most parts of England in a modified form. On the manor the peasants worked the lord’s demesne in return for protection, housing, and the use of plots of land to cultivate their own crops. They were tied to the lord and the manor and provided a resident workforce. The demesne was also worked by slaves who were fed and housed by the lord.

The Domesday Survey was commissioned on Christmas day, 1085, and it is generally thought that work on summarizing the Survey was terminated with the death of William in September 1087. The task was facilitated by the availability of Anglo-Saxon hidage (tax) lists. The counties of England were grouped into (probably) seven circuits. Each circuit was visited by a team of commissioners, bishops, lawyers and lay barons who had no material interests in the area. The commissioners were responsible for circulating a list of questions to land holders, for subjecting the responses to a review in the county court by the hundred juries, often consisting of half Englishmen and half Frenchmen, and for supervising the compilation of county and circuit returns. The circuit returns were then sent to the Exchequer in Winchester where they were summarized, edited and compiled into Great Domesday Book.

Unlike modern surveys, individual questionnaire responses were not treated confidentially but became public knowledge, being verified in the courts by landholders with local knowledge. In such circumstances, the opportunities for giving false or misleading evidence were limited.

Domesday Book consists of two volumes, Great (or Exchequer) Domesday and Little Domesday. Little Domesday is a detailed original survey circuit return of circuit VII, Essex, Norfolk and Suffolk. Great Domesday is a summarized version of the other circuit returns sent to the King’s treasury in Winchester. (It is thought that the death of William occurred before Essex and East Anglia could be included in Great Domesday.) The two volumes contain information on the net incomes or outputs (referred to as the annual values), tax assessments and resources of most manors in England in 1086, some information for 1066, and sometimes also for an intermediate year. The information was used to revise tax assessments and document the feudal structure, “who held what, and owed what, to whom.”

Taxation

The Domesday tax assessments relate to a non-feudal tax, the geld, thought to be levied annually by the end of William’s reign. The tax can be traced back to the danegeld, and, although originally a land tax, by Norman times, it was more broadly based and a significant impost on landholders.

There is an extensive literature on the Norman tax system, much of it influenced by Round (1895), who considered the assessments to be “artificial,” in the sense that they were imposed from above via the county and hundred with little or no consideration of the capacity of an individual estate to pay the tax. Round largely based his argument on an unsystematic and subjective review of the distribution of the assessments across estates, vills and the hundreds of counties.

In (1985a) and (1986, Ch. 4), Graeme Snooks and I argued that, contrary to Round’s hypothesis, the tax assessments were based on a capacity to pay principle, subject to some politically expedient tax concessions. Similar tax systems operate in most modern societies and reflect an attempt to collect revenue in a politically acceptable way. We found empirical support for the hypothesis, using statistical methods. We showed, for example, that for Essex lay estates about 65 percent of variation in the tax assessments could be attributed to variations in manorial net incomes or manorial resources, two alternative ways of measuring capacity to pay. Similar results were obtained for other counties. Capacity to pay explains from 64 to 89 percent of variation in individual estate assessment data for the counties of Buckinghamshire, Cambridgeshire, Essex and Wiltshire, and from 72 to 81 percent for aggregate data for 29 counties (see McDonald and Snooks, 1987a). The estimated tax relationships capture the main features of the tax system.

Capacity to pay explains most variation in tax assessments, but some variation remains. Who and which estates were treated favorably? And what factors were associated with lenient taxation? These issues were investigated in McDonald (1998) where frontier methods were used to derive a measure of how favorable the tax assessments were for each Essex lay estate. (The frontier methods, also known as “data envelopment analysis,” use the tax and income observations to trace out an outer bound, or frontier, for the tax relationship.) Estates, tenants-in-chief and local areas (hundreds) of the county with lenient assessments were identified, and statistical methods used to discover factors associated with favorable assessments. Some significant factors were the tenant-in-chief holding the estate (assessments tended to be less beneficial for the tenants-in-chief holding a large number of estates in Essex), the hundred location (some hundreds receiving more favorable treatment than others), proximity to an urban center (estates remote from the urban centers being more favorably treated), economic size of the estate (larger estates being less favorably treated) and tenure (estates held as sub-tenancies having more lenient assessments). The results suggest a similarity with more modern tax systems, with some groups and activities receiving minor concessions and the administrative process inducing some unevenness in the assessments. Although many details of the tax system have been lost in the mists of time, careful analysis of the Survey data has enabled us to rediscover its main features.

Production

Since Victorian times historians have used Domesday Book to study the political, institutional and social structures and the geography of Domesday England. However, the early scholars tended to draw away from economic issues. They were unable to perceive that systematic economic relationships were present in the Domesday economy, and, in contrast to their view that the Normans displayed considerable ability in civil administration and military matters, economic production was regarded as poorly organized (see McDonald and Snooks, 1985a, 1985b and 1986, especially Ch 3). One explanation why the Domesday scholars were unable to discover consistent relationships in the economy lies in the empirical method they adopted. Rather than examining the data as a whole using statistical techniques, conclusions were drawn by generalizing from a few (often atypical) cases. It is not surprising that no consistent pattern was evident when data were restricted to a few unusual observations. It would also appear that the researchers often did not have a firm grasp of economic theory (for example, seemingly being perplexed that the same annual value, that is, net output, could be generated by estates with different input mixes, see McDonald and Snooks, 1986, Ch. 3).

In McDonald and Snooks (1986), using modern economic and statistical methods, Graeme Snooks and I reanalyzed manorial production relationships. The study shows that strong relationships existed linking estate net output to inputs. We estimated manorial production functions which indicate many interesting characteristics of Domesday production: returns to scale were close to constant, oxen plough teams and meadowland were prized inputs in production but horses contributed little, and villans, bordars and slaves (the less free workers) contributed far more than freemen and sokemen ( the more free) to the estate’s net output. The evidence suggested that in many ways Domesday landholders operated in a manner similar to modern entrepreneurs. Unresolved by this research was the question of how similar was the pattern of medieval and modern economic activity. In particular, how well organized was estate production?

Clearly, in an absolute sense Domesday estate production was inefficient. With modern technology, using, for example, motorized tractors, output could have been increased many-fold. A more interesting question is: Given the contemporary technology and institutions, how efficient was production?

In McDonald (1998) frontier methods were used to measure best practice, given the economic environment. We then measured how far, on average, estate production was below the best practice frontier. Providing some estates were effectively organized, so that best practice was good practice, this will be a useful measure. If many estates were run haphazardly and ineffectively, average efficiency will be low and efficiency dispersion measures large. Comparisons with average efficiency levels in similar production situations will give an indication of whether Domesday average efficiency was unusually low.

A large number of efficiency studies have been reported in the literature. Three case studies with characteristics similar to Domesday production are Hall’s (1975) study of agriculture after the Civil War in the American South, Hall and LeVeen’s (1978) analysis of small Californian farms and Byrnes, Färe, Grosskopf and Lovell’s (1988) study of American surface coalmines. For all three studies the individual establishment is the production unit, the economic activity is unsophisticated primary production and similar frontier methods are used to measure efficiency.

The comparison studies suggest that efficiency levels varied less across Domesday estates than they did among postbellum Southern farms and small Californian farms in the 1970s (and were very similar for Domesday estates and US surface coalmines). Certainly, the average Domesday estate efficiency level does not appear to be unusually low when compared with average efficiency levels in similar production situations.

In McDonald (1998) estate efficiency measures are also used to examine details of production on individual estates and statistical methods employed to find factors associated with efficiency. Some of these include the estate’s tenant-in-chief (some tenants-in-chief displayed more entrepreneurial flair than others), the size of the estate (larger estates, using inputs in different proportions to smaller estates, tended to be more efficient) and the kind of agriculture undertaken (estates specialized in grazing were more efficient).

Largely through the influences of feudalism and manorialism, Domesday agriculture suffered from poorly developed factor markets and considerable immobility of inputs. Although there were exceptions to the rule, as a first approximation, manorial production can be characterized in terms of estates worked by a residential labor force using the resources, which were available on the estate.

Input productivity depends on the mix of inputs used in production, and with estates endowed with widely different resource mixes, one might expect that input productivities would vary greatly across estates. The frontier analysis generates input productivity measures (shadow prices), and these confirm this expectation — indeed on many estates some inputs made very little contribution to production. The frontier analysis also allows us to estimate the economic cost of input rigidity induced by the feudal and manorial arrangements. The calculation indicates that if inputs had been mobile among estates an increase in total net output of 40.1 percent would have been possible. This potential loss in output is considerable. The frontier analysis indicates the loss in total net output resulting from estates not being fully efficient was 51.0 percent. The loss in output due to input rigidities is smaller, but of a similar order of magnitude.

Domesday Book is indeed a rich data source. It is remarkable that so much can be discovered about the English economy almost one thousand years ago.

Further reading

Background information on Domesday England is contained in McDonald and Snooks (1986, Ch. 1 and 2; 1985a, 1985b, 1987a and 1987b) and McDonald (1998). For more comprehensive accounts of the history of the period see Brown (1984), Clanchy (1983), Loyn (1962), (1965), (1983), Stenton (1943), and Stenton (1951). Other useful references include Ballard (1906), Darby (1952), (1977), Galbraith (1961), Hollister (1965), Lennard (1959), Maitland (1897), Miller and Hatcher (1978), Postan (1966), (1972), Round (1895), (1903), the articles in Williams (1987) and references cited in McDonald and Snooks (1986). The Survey is discussed in McDonald and Snooks (1986, sec. 2.2), the references cited there, and the articles in Williams (1987). The Domesday and modern surveys are compared in McDonald and Snooks (1985c).
The reconstruction of the Domesday economy is described in McDonald and Snooks (1986). Part 1 contains information on the basic tax and production relationships and Part 2 describes the methods used to estimate the relationships. The tax and production frontier analysis and efficiency comparisons are described in McDonald (1998). The book also explains the frontier methodology. A series of articles describe features of the research to different audiences: McDonald and Snooks (1985a, 1985b, 1987a, 1987b), economic historians; McDonald (2000), economists; McDonald (1997), management scientists; McDonald (2002), accounting historians (who recognize that Domesday Book possesses many attributes of an accounting record); and McDonald and Snooks (1985c), statisticians. Others who have made important contributions to our understanding of the Domesday economy include Miller and Hatcher (1978), Harvey (1983) and the contributors to the volumes edited by Aston (1987), Holt (1987), Hallam (1988) and Britnell and Campbell (1995).

References

Aston, T.H., editor. Landlords, Peasants and Politics in Medieval England. Cambridge: Cambridge University Press, 1987.
Ballard, Adolphus. The Domesday Inquest. London: Methuen, 1906.
Brittnell, Richard H. and Bruce M.S. Campbell, editors. A Commercialising Economy: England 1086 to c. 1300. Manchester: Manchester University Press, 1995.
Brown, R. Allen. The Normans. Woodbridge: Boydell Press, 1984.
Byrnes, P., R. Färe, S. Grosskopf and C.A. K. Lovell. “The Effect of Unions on Productivity: U.S. Surface Mining of Coal.” Management Science 34 (1988): 1037-53.
Clanchy, M.T. England and Its Rulers, 1066-1272. Glasgow: Fontana, 1983.
Darby, H.C. The Domesday Geography of Eastern England. Reprinted 1971. Cambridge: Cambridge University Press, 1952.
Darby, H.C. Domesday England. Reprinted 1979. Cambridge: Cambridge University Press, 1977.
Darby, H.C. and I.S. Maxwell, editor. The Domesday Geography of Northern England. Cambridge: Cambridge University Press, 1962.
Galbraith, V.H. The Making of Domesday Book. Oxford: Clarendon Press,1961.
Hall, A. R. “The Efficiency of Post-Bellum Southern Agriculture.” Ann Arbor, MI: University Microfilms International, 1975.
Hall, B. F. and E. P. LeVeen. “Farm Size and Economic Efficiency: The Case of California.” American Journal of Agricultural Economics 60 (1978): 589-600.
Hallam, H.E. Rural England, 1066-1348. Brighton: Fontana, 1981.
Hallam, H.E., editor. The Agrarian History of England and Wales, II: 1042-1350. Cambridge: Cambridge University Press, 1988.
Harvey, S.P.J. “The Extent and Profitability of Demesne Agriculture in the Latter Eleventh Century.” In Social Relations and Ideas: Essays in Honour of R.H. Hilton, edited by T.H. Ashton et al. Cambridge, Cambridge University Press, 1983.
Hollister, C.W. The Military Organisation of Norman England. Oxford: Clarendon Press. 1965.
Holt, J. C., editor. Domesday Studies. Woodbridge: Boydell Press, 1987.
Langdon, J. “The Economics of Horses and Oxen in Medieval England.” Agricultural History Review 30 (1982): 31-40.
Lennard, R. Rural England 1086-1135: A Study of Social and Agrarian Conditions. Oxford: Clarendon Press, 1959.
Loyn, R. Anglo-Saxon England and the Norman Conquest. Reprinted 1981. London: Longman, 1962.
Loyn, R. The Norman Conquest. Reprinted 1981. London: Longman, 1965.
Loyn, R. The Governance of Anglo-Saxon England, 500-1087. London: Edward Arnold, 1983.
McDonald, John. “Manorial Efficiency in Domesday England.” Journal of Productivity Analysis 8 (1997): 199-213.
McDonald, John. Production Efficiency in Domesday England. London: Routledge, 1998.
McDonald, John. “Domesday Economy: An Analysis of the English Economy Early in the Second Millennium.” National Institute Economic Review 172 (2000): 105-114.
McDonald, John. “Tax Fairness in Eleventh Century England.” Accounting Historians Journal 29 (2002): 173-193.
McDonald, John. and G. D. Snooks. “Were the Tax Assessments of Domesday England Artificial? The Case of Essex.” Economic History Review 38 (1985a): 353-373.
McDonald, John. and G. D. Snooks. “The Determinants of Manorial Income in Domesday England: Evidence from Essex.” Journal of Economic History 45 (1985b): 541-556.
McDonald, John. and G. D. Snooks. “Statistical Analysis of Domesday Book (1086).” Journal of the Royal Statistical Society, Series A 148 (1985c): 147-160.
McDonald, John. and G. D. Snooks. Domesday Economy: A New Approach to Anglo-Norman History. Oxford: Clarendon Press, 1986.
McDonald, John. and G. D. Snooks. “The Suitability of Domesday Book for Cliometric Analysis.” Economic History Review 40 (1987a): 252-261.
McDonald, John. and G. D. Snooks. “The Economics of Domesday England.” In
A. Williams, editor, Domesday Book Studies. London: Alecto Historical Editions, 1987.
Maitland, Frederic William. Domesday Book and Beyond. Reprinted 1921, Cambridge: Cambridge University Press, 1897.
Miller, Edward, and John Hatcher. Medieval England: Rural Society and Economic Change 1086-1348. London: Longman, 1978.
Morris, J., general editor. Domesday Book: A Survey of the Counties of England. Chichester: Phillimore, 1975.
Postan, M. M. Medieval Agrarian Society in Its Prime, The Cambridge Economic History of Europe. Vol. 1, M. M. Postan, editor. Cambridge: Cambridge University Press, 1966.
Postan, M. M. The Medieval Economy and Society: An Economic History of Britain in the Middle Ages. London: Weidenfeld & Nicolson, 1972.
Raftis, J. A. The Estates of Ramsey Abbey: A Study in Economic Growth and Organisation. Toronto: Pontifical Institute of Medieval Studies, 1957.
Round, John Horace. Feudal England: Historical Studies on the Eleventh and Twelfth Centuries. Reprinted 1964. London: Allen & Unwin, 1895.
Round, John Horace. “Essex Survey.” In VCH Essex. Vol. 1, reprinted 1977. London: Dawson, 1903.
Snooks, G. D. “The Dynamic Role of the Market in the Anglo-Saxon Economy and Beyond, 1086-1300.” In A Commercialising Economy: England 1086 to c. 1300, edited by R. H. Brittnell and M. S. Campbell. Manchester: Manchester University Press, 1995.
Stenton, D. M. English Society in the Middle Ages. Reprinted 1983. Harmondsworth: Penguin, 1951.
Stenton, F. M. Anglo-Saxon England. Reprinted 1975. Oxford: Clarendon Press, 1943.
Victoria County History. London: Oxford University Press, 1900-.
Williams, A., editor. Domesday Book Studies. London: Alecto Historical Editions, 1987.

Citation: McDonald, John. “Economy of England at the Time of the Norman Conquest”. EH.Net Encyclopedia, edited by Robert Whaples. September 9, 2004. URL http://eh.net/encyclopedia/economy-of-england-at-the-time-of-the-norman-conquest/

An Economic History of Denmark

Ingrid Henriksen, University of Copenhagen

Denmark is located in Northern Europe between the North Sea and the Baltic. Today Denmark consists of the Jutland Peninsula bordering Germany and the Danish Isles and covers 43,069 square kilometers (16,629 square miles). 1 The present nation is the result of several cessions of territory throughout history. The last of the former Danish territories in southern Sweden were lost to Sweden in 1658, following one of the numerous wars between the two nations, which especially marred the sixteenth and seventeenth centuries. Following defeat in the Napoleonic Wars, Norway was separated from Denmark in 1814. After the last major war, the Second Schleswig War in 1864, Danish territory was further reduced by a third when Schleswig and Holstein were ceded to Germany. After a regional referendum in 1920 only North-Schleswig returned to Denmark. Finally, Iceland, withdrew from the union with Denmark in 1944. The following will deal with the geographical unit of today’s Denmark.

Prerequisites of Growth

Throughout history a number of advantageous factors have shaped the Danish economy. From this perspective it may not be surprising to find today’s Denmark among the richest societies in the world. According to the OECD, it ranked seventh in 2004, with income of $29.231 per capita (PPP). Although we can identify a number of turning points and breaks, for the time period over which we have quantitative evidence this long-run position has changed little. Thus Maddison (2001) in his estimate of GDP per capita around 1600 places Denmark as number six. One interpretation could be that favorable circumstances, rather than ingenious institutions or policies, have determined Danish economic development. Nevertheless, this article also deals with time periods in which the Danish economy was either diverging from or converging towards the leading economies.

Table 1:
Average Annual GDP Growth (at factor costs)
Total Per capita
1870-1880 1.9% 0.9%
1880-1890 2.5% 1.5%
1890-1900 2.9% 1.8%
1900-1913 3.2% 2.0%
1913-1929 3.0% 1.6%
1929-1938 2.2% 1.4%
1938-1950 2.4% 1.4%
1950-1960 3.4% 2.6%
1960-1973 4.6% 3.8%
1973-1982 1.5% 1.3%
1982-1993 1.6% 1.5%
1993-2004 2.2% 2.0%

Sources: Johansen (1985) and Statistics Denmark ‘Statistikbanken’ online.

Denmark’s geographical location in close proximity of the most dynamic nations of sixteenth-century Europe, the Netherlands and the United Kingdom, no doubt exerted a positive influence on the Danish economy and Danish institutions. The North German area influenced Denmark both through long-term economic links and through the Lutheran Protestant Reformation which the Danes embraced in 1536.

The Danish economy traditionally specialized in agriculture like most other small and medium-sized European countries. It is, however, rather unique to find a rich European country in the late-nineteenth and mid-twentieth century which retained such a strong agrarian bias. Only in the late 1950s did the workforce of manufacturing industry overtake that of agriculture. Thus an economic history of Denmark must take its point of departure in agricultural development for quite a long stretch of time.

Looking at resource endowments, Denmark enjoyed a relatively high agricultural land-to-labor ratio compared to other European countries, with the exception of the UK. This was significant for several reasons since it, in this case, was accompanied by a comparatively wealthy peasantry.

Denmark had no mineral resources to speak of until the exploitation of oil and gas in the North Sea began in 1972 and 1984, respectively. From 1991 on Denmark has been a net exporter of energy although on a very modest scale compared to neighboring Norway and Britain. The small deposits are currently projected to be depleted by the end of the second decade of the twenty-first century.

Figure 1. Percent of GDP in selected=

Source: Johansen (1985) and Statistics Denmark ’Nationalregnskaber’

Good logistic can be regarded as a resource in pre-industrial economies. The Danish coast line of 7,314 km and the fact that no point is more than 50 km from the sea were advantages in an age in which transport by sea was more economical than land transport.

Decline and Transformation, 1500-1750

The year of the Lutheran Reformation (1536) conventionally marks the end of the Middle Ages in Danish historiography. Only around 1500 did population growth begin to pick up after the devastating effect of the Black Death. Growth thereafter was modest and at times probably stagnant with large fluctuations in mortality following major wars, particularly during the seventeenth century, and years of bad harvests. About 80-85 percent of the population lived from subsistence agriculture in small rural communities and this did not change. Exports are estimated to have been about 5 percent of GDP between 1550 and 1650. The main export products were oxen and grain. The period after 1650 was characterized by a long lasting slump with a marked decline in exports to the neighboring countries, the Netherlands in particular.

The institutional development after the Black Death showed a return to more archaic forms. Unlike other parts of northwestern Europe, the peasantry on the Danish Isles afterwards became a victim of a process of re-feudalization during the last decades of the fifteenth century. A likely explanation is the low population density that encouraged large landowners to hold on to their labor by all means. Freehold tenure among peasants effectively disappeared during the seventeenth century. Institutions like bonded labor that forced peasants to stay on the estate where they were born, and labor services on the demesne as part of the land rent bring to mind similar arrangements in Europe east of the Elbe River. One exception to the East European model was crucial, however. The demesne land, that is the land worked directly under the estate, never made up more than nine percent of total land by the mid eighteenth century. Although some estate owners saw an interest in encroaching on peasant land, the state protected the latter as production units and, more importantly, as a tax base. Bonded labor was codified in the all-encompassing Danish Law of Christian V in 1683. It was further intensified by being extended, though under another label, to all Denmark during 1733-88, as a means for the state to tide the large landlords over an agrarian crisis. One explanation for the long life of such an authoritarian institution could be that the tenants were relatively well off, with 25-50 acres of land on average. Another reason could be that reality differed from the formal rigor of the institutions.

Following the Protestant Reformation in 1536, the Crown took over all church land, thereby making it the owner of 50 percent of all land. The costs of warfare during most of the sixteenth century could still be covered by the revenue of these substantial possessions. Around 1600 the income from taxation and customs, mostly Sound Toll collected from ships that passed the narrow strait between Denmark and today’s Sweden, on the one hand and Crown land revenues on the other were equally large. About 50 years later, after a major fiscal crisis had led to the sale of about half of all Crown lands, the revenue from royal demesnes declined relatively to about one third, and after 1660 the full transition from domain state to tax state was completed.

The bulk of the former Crown land had been sold to nobles and a few common owners of estates. Consequently, although the Danish constitution of 1665 was the most stringent version of absolutism found anywhere in Europe at the time, the Crown depended heavily on estate owners to perform a number of important local tasks. Thus, conscription of troops for warfare, collection of land taxes and maintenance of law and order enhanced the landlords’ power over their tenants.

Reform and International Market Integration, 1750-1870

The driving force of Danish economic growth, which took off during the late eighteenth century was population growth at home and abroad – which triggered technological and institutional innovation. Whereas the Danish population during the previous hundred years grew by about 0.4 percent per annum, growth climbed to about 0.6 percent, accelerating after 1775 and especially from the second decade of the nineteenth century (Johansen 2002). Like elsewhere in Northern Europe, accelerating growth can be ascribed to a decline in mortality, mainly child mortality. Probably this development was initiated by fewer spells of epidemic diseases due to fewer wars and to greater inherited immunity against contagious diseases. Vaccination against smallpox and formal education of midwives from the early nineteenth century might have played a role (Banggård 2004). Land reforms that entailed some scattering of the farm population may also have had a positive influence. Prices rose from the late eighteenth century in response to the increase in populations in Northern Europe, but also following a number of international conflicts. This again caused a boom in Danish transit shipping and in grain exports.

Population growth rendered the old institutional set up obsolete. Landlords no longer needed to bind labor to their estate, as a new class of landless laborers or cottagers with little land emerged. The work of these day-laborers was to replace the labor services of tenant farmers on the demesnes. The old system of labor services obviously presented an incentive problem all the more since it was often carried by the live-in servants of the tenant farmers. Thus, the labor days on the demesnes represented a loss to both landlords and tenants (Henriksen 2003). Part of the land rent was originally paid in grain. Some of it had been converted to money which meant that real rents declined during the inflation. The solution to these problems was massive land sales both from the remaining crown lands and from private landlords to their tenants. As a result two-thirds of all Danish farmers became owner-occupiers compared to only ten percent in the mid-eighteenth century. This development was halted during the next two and a half decades but resumed as the business cycle picked up during the 1840s and 1850s. It was to become of vital importance to the modernization of Danish agriculture towards the end of the nineteenth century that 75 percent of all agricultural land was farmed by owners of middle-sized farms of about 50 acres. Population growth may also have put a pressure on common lands in the villages. At any rate enclosure begun in the 1760s, accelerated in the 1790s supported by legislation and was almost complete in the third decade of the nineteenth century.

The initiative for the sweeping land reforms from the 1780s is thought to have come from below – that is from the landlords and in some instances also from the peasantry. The absolute monarch and his counselors were, however, strongly supportive of these measures. The desire for peasant land as a tax base weighed heavily and the reforms were believed to enhance the efficiency of peasant farming. Besides, the central government was by now more powerful than in the preceding centuries and less dependent on landlords for local administrative tasks.

Production per capita rose modestly before the 1830s and more pronouncedly thereafter when a better allocation of labor and land followed the reforms and when some new crops like clover and potatoes were introduced at a larger scale. Most importantly, the Danes no longer lived at the margin of hunger. No longer do we find a correlation between demographic variables, deaths and births, and bad harvest years (Johansen 2002).

A liberalization of import tariffs in 1797 marked the end of a short spell of late mercantilism. Further liberalizations during the nineteenth and the beginning of the twentieth century established the Danish liberal tradition in international trade that was only to be broken by the protectionism of the 1930s.

Following the loss of the secured Norwegian market for grain in 1814, Danish exports began to target the British market. The great rush forward came as the British Corn Law was repealed in 1846. The export share of the production value in agriculture rose from roughly 10 to around 30 percent between 1800 and 1870.

In 1849 absolute monarchy was peacefully replaced by a free constitution. The long-term benefits of fundamental principles such as the inviolability of private property rights, the freedom of contracting and the freedom of association were probably essential to future growth though hard to quantify.

Modernization and Convergence, 1870-1914

During this period Danish economic growth outperformed that of most other European countries. A convergence in real wages towards the richest countries, Britain and the U.S., as shown by O’Rourke and Williamsson (1999), can only in part be explained by open economy forces. Denmark became a net importer of foreign capital from the 1890s and foreign debt was well above 40 percent of GDP on the eve of WWI. Overseas emigration reduced the potential workforce but as mortality declined population growth stayed around one percent per annum. The increase in foreign trade was substantial, as in many other economies during the heyday of the gold standard. Thus the export share of Danish agriculture surged to a 60 percent.

The background for the latter development has featured prominently in many international comparative analyses. Part of the explanation for the success, as in other Protestant parts of Northern Europe, was a high rate of literacy that allowed a fast spread of new ideas and new technology.

The driving force of growth was that of a small open economy, which responded effectively to a change in international product prices, in this instance caused by the invasion of cheap grain to Western Europe from North America and Eastern Europe. Like Britain, the Netherlands and Belgium, Denmark did not impose a tariff on grain, in spite of the strong agrarian dominance in society and politics.

Proposals to impose tariffs on grain, and later on cattle and butter, were turned down by Danish farmers. The majority seems to have realized the advantages accruing from the free imports of cheap animal feed during the ongoing process of transition from vegetable to animal production, at a time when the prices of animal products did not decline as much as grain prices. The dominant middle-sized farm was inefficient for wheat but had its comparative advantage in intensive animal farming with the given technology. O’Rourke (1997) found that the grain invasion only lowered Danish rents by 4-5 percent, while real wages rose (according to expectation) but more than in any other agrarian economy and more than in industrialized Britain.

The move from grain exports to exports of animal products, mainly butter and bacon, was to a great extent facilitated by the spread of agricultural cooperatives. This organization allowed the middle-sized and small farms that dominated Danish agriculture to benefit from the economy of scale in processing and marketing. The newly invented steam-driven continuous cream separator skimmed more cream from a kilo of milk than conventional methods and had the further advantage of allowing transported milk brought together from a number of suppliers to be skimmed. From the 1880s the majority of these creameries in Denmark were established as cooperatives and about 20 years later, in 1903, the owners of 81 percent of all milk cows supplied to a cooperative (Henriksen 1999). The Danish dairy industry captured over a third of the rapidly expanding British butter-import market, establishing a reputation for consistent quality that was reflected in high prices. Furthermore, the cooperatives played an active role in persuading the dairy farmers to expand production from summer to year-round dairying. The costs of intensive feeding during the wintertime were more than made up for by a winter price premium (Henriksen and O’Rourke 2005). Year-round dairying resulted in a higher rate of utilization of agrarian capital – that is of farm animals and of the modern cooperative creameries. Not least did this intensive production mean a higher utilization of hitherto underemployed labor. From the late 1890’s, in particular, labor productivity in agriculture rose at an unanticipated speed at par with productivity increase in the urban trades.

Industrialization in Denmark took its modest beginning in the 1870s with a temporary acceleration in the late 1890s. It may be a prime example of an industrialization process governed by domestic demand for industrial goods. Industry’s export never exceeded 10 percent of value added before 1914, compared to agriculture’s export share of 60 percent. The export drive of agriculture towards the end of the nineteenth century was a major force in developing other sectors of the economy not least transport, trade and finance.

Weathering War and Depression, 1914-1950

Denmark, as a neutral nation, escaped the devastating effects of World War I and was even allowed to carry on exports to both sides in the conflict. The ensuing trade surplus resulted in a trebling of the money supply. As the monetary authorities failed to contain the inflationary effects of this development, the value of the Danish currency slumped to about 60 percent of its pre-war value in 1920. The effects of monetary policy failure were aggravated by a decision to return to the gold standard at the 1913 level. When monetary policy was finally tightened in 1924, it resulted in fierce speculation in an appreciation of the Krone. During 1925-26 the currency returned quickly to its pre-war parity. As this was not counterbalanced by an equal decline in prices, the result was a sharp real appreciation and a subsequent deterioration in Denmark’s competitive position (Klovland 1997).

Figure 2. Indices of the Krone Real Exchange Rate and Terms Of Trade (1980=100; Real rates based on Wholesale Price Index

Source: Abildgren (2005)

Note: Trade with Germany is included in the calculation of the real effective exchange rate for the whole period, including 1921-23.

When, in September 1931, Britain decided to leave the gold standard again, Denmark, together with Sweden and Norway, followed only a week later. This move was beneficial as the large real depreciation lead to a long-lasting improvement in Denmark’s competitiveness in the 1930s. It was, no doubt, the single most important policy decision during the depression years. Keynesian demand management, even if it had been fully understood, was barred by a small public sector, only about 13 percent of GDP. As it was, fiscal orthodoxy ruled and policy was slightly procyclical as taxes were raised to cover the deficit created by crisis and unemployment (Topp 1995).

Structural development during the 1920s, surprisingly for a rich nation at this stage, was in favor of agriculture. The total labor force in Danish agriculture grew by 5 percent from 1920 to 1930. The number of employees in agriculture was stagnating whereas the number of self-employed farmers increased by a larger number. The development in relative incomes cannot account for this trend but part of the explanation must be found in a flawed Danish land policy, which actively supported a further parceling out of land into small holdings and restricted the consolidation into larger more viable farms. It took until the early 1960s before this policy began to be unwound.

When the world depression hit Denmark with a minor time lag, agriculture still employed one-third of the total workforce while its contribution to total GDP was a bit less than one-fifth. Perhaps more importantly, agricultural goods still made up 80 percent of total exports.

Denmark’s terms of trade, as a consequence, declined by 24 percent from 1930 to 1932. In 1933 and 1934 bilateral trade agreements were forced upon Denmark by Britain and Germany. In 1932 Denmark had adopted exchange control, a harsh measure even for its time, to stem the net flow of foreign exchange out of the country. By rationing imports exchange control also offered some protection of domestic industry. At the end of the decade manufacture’s GDP had surpassed that of agriculture. In spite of the protectionist policy, unemployment soared to 13-15 percent of the workforce.

The policy mistakes during World War I and its immediate aftermath served as a lesson for policymakers during World War II. The German occupation force (April 9, 1940 until May 5, 1945) drew the funds for its sustenance and for exports to Germany on the Danish central bank whereby the money supply more than doubled. In response the Danish authorities in 1943 launched a policy of absorbing money through open market operations and, for the first time in history, through a surplus on the state budget.

Economic reconstruction after World War II was swift, as again Denmark had been spared the worst consequences of a major war. In 1946 GDP recovered its highest pre-war level. In spite of this, Denmark received relatively generous support through the Marshall Plan of 1948-52, when measured in dollars per capita.

From Riches to Crisis, 1950-1973: Liberalizations and International Integration Once Again

The growth performance during 1950-1957 was markedly lower than the Western European average. The main reason was the high share of agricultural goods in Danish exports, 63 percent in 1950. International trade in agricultural products to a large extent remained regulated. Large deteriorations in the terms of trade caused by the British devaluation 1949, when Denmark followed suit, the outbreak of the Korean War in 1950, and the Suez-crisis of 1956 made matters worse. The ensuing deficits on the balance of payment led the government to contractionary policy measures which restrained growth.

The liberalization of the flow of goods and capital in Western Europe within the framework of the OEEC (the Organization for European Economic Cooperation) during the 1950s probably dealt a blow to some of the Danish manufacturing firms, especially in the textile industry, that had been sheltered through exchange control and wartime. Nevertheless, the export share of industrial production doubled from 10 percent to 20 percent before 1957, at the same time as employment in industry surpassed agricultural employment.

On the question of European economic integration Denmark linked up with its largest trading partner, Britain. After the establishment of the European Common Market in 1958 and when the attempts to create a large European free trade area failed, Denmark entered the European Free Trade Association (EFTA) created under British leadership in 1960. When Britain was finally able to join the European Economic Community (EEC) in 1973, Denmark followed, after a referendum on the issue. Long before admission to the EEC, the advantages to Danish agriculture from the Common Agricultural Policy (CAP) had been emphasized. The higher prices within the EEC were capitalized into higher land prices at the same time that investments were increased based on the expected gains from membership. As a result the most indebted farmers who had borrowed at fixed interests rates were hit hard by two developments from the early 1980s. The EEC started to reduce the producers’ benefits of the CAP because of overproduction and, after 1982, the Danish economy adjusted to a lower level of inflation, and therefore, nominal interest rates. According to Andersen (2001) Danish farmers were left with the highest interest burden of all European Union (EU) farmers in the 1990’s.

Denmark’s relations with the EU, while enthusiastic at the beginning, have since been characterized by a certain amount of reserve. A national referendum in 1992 turned down the treaty on the European Union, the Maastricht Treaty. The Danes, then, opted out of four areas, common citizenship, a common currency, common foreign and defense politics and a common policy on police and legal matters. Once more, in 2000, adoption of the common currency, the Euro, was turned down by the Danish electorate. In the debate leading up to the referendum the possible economic advantages of the Euro in the form of lower transaction costs were considered to be modest, compared to the existent regime of fixed exchange rates vis-à-vis the Euro. All the major political parties, nevertheless, are pro-European, with only the extreme Right and the extreme Left being against. It seems that there is a discrepancy between the general public and the politicians on this particular issue.

As far as domestic economic policy is concerned, the heritage from the 1940s was a new commitment to high employment modified by a balance of payment constraint. The Danish policy differed from that of some other parts of Europe in that the remains of the planned economy from the war and reconstruction period in the form of rationing and price control were dismantled around 1950 and that no nationalizations took place.

Instead of direct regulation, economic policy relied on demand management with fiscal policy as its main instrument. Monetary policy remained a bone of contention between politicians and economists. Coordination of policies was the buzzword but within that framework monetary policy was allotted a passive role. The major political parties for a long time were wary of letting the market rate of interest clear the loan market. Instead, some quantitative measures were carried out with the purpose of dampening the demand for loans.

From Agricultural Society to Service Society: The Growth of the Welfare State

Structural problems in foreign trade extended into the high growth period of 1958-73, as Danish agricultural exports were met with constraints both from the then EEC-member countries and most EFTA countries, as well. During the same decade, the 1960s, as the importance of agriculture was declining the share of employment in the public sector grew rapidly until 1983. Building and construction also took a growing share of the workforce until 1970. These developments left manufacturing industry with a secondary position. Consequently, as pointed out by Pedersen (1995) the sheltered sectors in the economy crowded out the sectors that were exposed to international competition, that is mostly industry and agriculture, by putting a pressure on labor and other costs during the years of strong expansion.

Perhaps the most conspicuous feature of the Danish economy during the Golden Age was the steep increase in welfare-related costs from the mid 1960s and not least the corresponding increases in the number of public employees. Although the seeds of the modern Scandinavian welfare state were sown at a much earlier date, the 1960s was the time when public expenditure as a share of GDP exceeded that of most other countries.

As in other modern welfare states, important elements in the growth of the public sector during the 1960s were the expansion in public health care and education, both free for all citizens. The background for much of the increase in the number of public employees from the late 1960s was the rise in labor participation by married women from the late 1960s until about 1990, partly at least as a consequence. In response, the public day care facilities for young children and old people were expanded. Whereas in 1965 7 percent of 0-6 year olds were in a day nursery or kindergarten, this share rose to 77 per cent in 2000. This again spawned more employment opportunities for women in the public sector. Today the labor participation for women, around 75 percent of 16-66 year olds, is among the highest in the world.

Originally social welfare programs targeted low income earners who were encouraged to take out insurance against sickness (1892), unemployment (1907) and disability (1922). The public subsidized these schemes and initiated a program for the poor among old people (1891). The high unemployment period in the 1930s inspired some temporary relief and some administrative reform, but little fundamental change.

Welfare policy in the first four decades following World War II is commonly believed to have been strongly influenced by the Social Democrat party which held around 30 percent of the votes in general elections and was the party in power for long periods of time. One of the distinctive features of the Danish welfare state has been its focus on the needs of the individual person rather than on the family context. Another important characteristic is the universal nature of a number of benefits starting with a basic old age pension for all in 1956. The compensation rates in a number of schedules are high in international comparison, particularly for low income earners. Public transfers gained a larger share in total public outlays both because standards were raised – that is benefits became higher – and because the number of recipients increased dramatically following the high unemployment regime from the mid 1970s to the mid 1990s. To pay for the high transfers and the large public sector – around 30 percent of the work force – the tax load is also high in international perspective. The share public sector and social expenditure has risen to above 50 percent of GDP, only second to the share in Sweden.

Figure 3. Unemployment, Denmark (percent of total labor force)

Source: Statistics Denmark ‘50 års-oversigten’ and ADAM’s databank

The Danish labor market model has recently attracted favorable international attention (OECD 2005). It has been declared successful in fighting unemployment – especially compared to the policies of countries like Germany and France. The so-called Flexicurity model rests on three pillars. The first is low employment protection, the second is relatively high compensation rates for the unemployed and the third is the requirement for active participation by the unemployed. Low employment protection has a long tradition in Denmark and there is no change in this factor when comparing the twenty years of high unemployment – 8-12 per cent of the labor force – from the mid 1970s to the mid 1990s, to the past ten years when unemployment has declined to a mere 4.5 percent in 2006. The rules governing compensation to the unemployed were tightened from 1994, limiting the number of years the unemployed could receive benefits from 7 to 4. Most noticeably labor market policy in 1994 turned from ‘passive’ measures – besides unemployment benefits, an early retirement scheme and a temporary paid leave scheme – toward ‘active’ measures that were devoted to getting people back to work by providing training and jobs. It is commonly supposed that the strengthening of economic incentives helped to lower unemployment. However, as Andersen and Svarer (2006) point out, while unemployment has declined substantially a large and growing share of Danes of employable age receives transfers other than unemployment benefit – that is benefits related to sickness or social problems of various kinds, early retirement benefits, etc. This makes it hazardous to compare the Danish labor market model with that of many other countries.

Exchange Rates and Macroeconomic Policy

Denmark has traditionally adhered to a fixed exchange rate regime. The belief is that for a small and open economy, a floating exchange rate could lead to very volatile exchange rates which would harm foreign trade. After having abandoned the gold standard in 1931, the Danish currency (the Krone) was, for a while, pegged to the British pound, only to join the IMF system of fixed but adjustable exchange rates, the so-called Bretton Woods system after World War II. The close link with the British economy still manifested itself when the Danish currency was devaluated along with the pound in 1949 and, half way, in 1967. The devaluation also reflected that after 1960, Denmark’s international competitiveness had gradually been eroded by rising real wages, corresponding to a 30 percent real appreciation of the currency (Pedersen 1996).

When the Bretton Woods system broke down in the early 1970s, Denmark joined the European exchange rate cooperation, the “Snake” arrangement, set up in 1972, an arrangement that was to be continued in the form of the Exchange Rate Mechanism within the European Monetary System from 1979. The Deutschmark was effectively the nominal anchor in European currency cooperation until the launch of the Euro in 1999, a fact that put Danish competitiveness under severe pressure because of markedly higher inflation in Denmark compared to Germany. In the end the Danish government gave way before the pressure and undertook four discrete devaluations from 1979 to 1982. Since compensatory increases in wages were held back, the balance of trade improved perceptibly.

This improvement could, however, not make up for the soaring costs of old loans at a time when the international real rates of interests were high. The Danish devaluation strategy exacerbated this problem. The anticipation of further devaluations was mirrored in a steep increase in the long-term rate of interest. It peaked at 22 percent in nominal terms in 1982, with an interest spread to Germany of 10 percent. Combined with the effects of the second oil crisis on the Danish terms of trade, unemployment rose to 10 percent of the labor force. Given the relatively high compensation ratios for the unemployed, the public deficit increased rapidly and public debt grew to about 70 percent of GDP.

Figure 4. Current Account and Foreign Debt (Denmark)

Source: Statistics Denmark Statistical Yearbooks and ADAM’s Databank

In September 1982 the Social Democrat minority government resigned without a general election and was relieved by a Conservative-Liberal minority government. The new government launched a program to improve the competitiveness of the private sector and to rebalance public finances. An important element was a disinflationary economic policy based on fixed exchange rates pegging the Krone to the participants of the EMS and, from 1999, to the Euro. Furthermore, automatic wage indexation that had occurred, with short interruptions since 1920 (with a short lag and high coverage), was abolished. Fiscal policy was tightened, thus bringing an end to the real increases in public expenditure that had lasted since the 1960’s.

The stabilization policy was successful in bringing down inflation and long interest rates. Pedersen (1995) finds that this process, nevertheless, was slower than might have been expected. In view of former Danish exchange rate policy it took some time for the market to believe in the credible commitment to fixed exchange rates. From the late 1990s the interest spread to Germany/ Euroland has been negligible, however.

The initial success of the stabilization policy brought a boom to the Danish economy that, once again, caused overheating in the form of high wage increases (in 1987) and a deterioration of the current account. The solution to this was a number of reforms in 1986-87 aiming at encouraging private savings that had by then fallen to an historical low. Most notable was the reform that reduced tax deductibility of private interest on debts. These measures resulted in a hard landing to the economy caused by the collapse of the housing market.

The period of low growth was further prolonged by the international recession in 1992. In 1993 yet another shift of regime occurred in Danish economic policy. A new Social Democrat government decided to ‘kick start’ the economy by means of a moderate fiscal expansion whereas, in 1994, the same government tightened labor market policies substantially, as we have seen. Mainly as a consequence of these measures the Danish economy from 1994 entered a period of moderate growth with unemployment steadily falling to the level of the 1970s. A new feature that still puzzles Danish economists is that the decline in unemployment over these years has not yet resulted in any increase in wage inflation.

Denmark at the beginning of the twenty-first century in many ways fits the description of a Small Successful European Economy according to Mokyr (2006). Unlike in most of the other small economies, however, Danish exports are broad based and have no “niche” in the world market. Like some other small European countries, Ireland, Finland and Sweden, the short term economic fluctuations as described above have not followed the European business cycle very closely for the past thirty years (Andersen 2001). Domestic demand and domestic economic policy has, after all, played a crucial role even in a very small and very open economy.

References

Abildgren, Kim. “Real Effective Exchange Rates and Purchasing-Power-parity Convergence: Empirical Evidence for Denmark, 1875-2002.” Scandinavian Economic History Review 53, no. 3 (2005): 58-70.

Andersen, Torben M. et al. The Danish Economy: An international Perspective. Copenhagen: DJØF Publishing, 2001.

Andersen, Torben M. and Michael Svarer. “Flexicurity: den danska arbetsmarknadsmodellen.” Ekonomisk debatt 34, no. 1 (2006): 17-29.

Banggaard, Grethe. Befolkningsfremmende foranstaltninger og faldende børnedødelighed. Danmark, ca. 1750-1850. Odense: Syddansk Universitetsforlag, 2004

Hansen, Sv. Aage. Økonomisk vækst i Danmark: Volume I: 1720-1914 and Volume II: 1914-1983. København: Akademisk Forlag, 1984.

Henriksen, Ingrid. “Avoiding Lock-in: Cooperative Creameries in Denmark, 1882-1903.” European Review of Economic History 3, no. 1 (1999): 57-78

Henriksen, Ingrid. “Freehold Tenure in Late Eighteenth-Century Denmark.” Advances in Agricultural Economic History 2 (2003): 21-40.

Henriksen, Ingrid and Kevin H. O’Rourke. “Incentives, Technology and the Shift to Year-round Dairying in Late Nineteenth-century Denmark.” Economic History Review 58, no. 3 (2005):.520-54.

Johansen, Hans Chr. Danish Population History, 1600-1939. Odense: University Press of Southern Denmark, 2002.

Johansen, Hans Chr. Dansk historisk statistik, 1814-1980. København: Gyldendal, 1985.

Klovland, Jan T. “Monetary Policy and Business Cycles in the Interwar Years: The Scandinavian Experience.” European Review of Economic History 2, no. 3 (1998): 309-44.

Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001

Mokyr, Joel. “Successful Small Open Economies and the Importance of Good Institutions.” In The Road to Prosperity. An Economic History of Finland, edited by Jari Ojala, Jari Eloranta and Jukka Jalava, 8-14. Helsinki: SKS, 2006.

Pedersen, Peder J. “Postwar Growth of the Danish Economy.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo. Cambridge: Cambridge University Press, 1995.

OECD, Employment Outlook, 2005.

O’Rourke, Kevin H. “The European Grain Invasion, 1870-1913.” Journal of Economic History 57, no. 4 (1997): 775-99.

O’Rourke, Kevin H. and Jeffrey G. Williamson. Globalization and History: The Evolution of a Nineteenth-century Atlantic Economy. Cambridge, MA: MIT Press, 1999

Topp, Niels-Henrik. “Influence of the Public Sector on Activity in Denmark, 1929-39.” Scandinavian Economic History Review 43, no. 3 (1995): 339-56.


Footnotes

1 Denmark also includes the Faeroe Islands, with home rule since 1948, and Greenland, with home rule since 1979, both in the North Atlantic. These territories are left out of this account.

Citation: Henriksen, Ingrid. “An Economic History of Denmark”. EH.Net Encyclopedia, edited by Robert Whaples. October 6, 2006. URL http://eh.net/encyclopedia/an-economic-history-of-denmark/

Economic History of Premodern China (from 221 BC to c. 1800 AD)

Kent Deng, London School of Economics (LSE)

China has the longest continually recorded history in the premodern world. For economic historians, it makes sense to begin with the formation of China’s national economy in the wake of China’s unification in 221 BC under the Qin. The year 1800 AD coincides with the beginning of the end for China’s premodern era, which was hastened by the First Opium War (1839–42). Hence, the time span of this article is two millennia.

Empire-building

Evidence indicates that there was a sharp difference in the economy between China’s pre-imperial era (until 220 BC) and its imperial era. There can be little doubt that the establishment of the Empire of China (to avoid the term of “the Chinese Empire” as it was not always an empire by and for the Chinese) served as a demarcation line in the history of the East Asian Mainland.

The empire was a result of historical contingency rather than inevitability. First of all, before the unification, China’s multiple units successfully accommodated a mixed economy of commerce, farming, handicrafts and pastoralism. Internal competition also allowed science and technology as well as literature and art to thrive on the East Asian Mainland. This was known as “a hundred flowers blossoming” (baijia zhengming, literally “a grand song contest with one hundred contenders”). Feudalism was widely practiced. Unifying such diverse economic and political units incurred inevitably huge social costs. Secondly, the winner of the bloody war on the East Asian Mainland, the Qin Dukedom and then the Qin Kingdom (840–222 BC), was not for a long time a rich or strong unit during the Spring and Autumn Period (840–476 BC) and the following Warring States Period (475–222 BC). It was only during the last three decades of the Warring States Period that the Qin eventually managed to overpower its rivals by force and consequently unified China. Moreover, although it unified China, the Qin was the worse-managed dynasty in the entire history of China: it crumbled after only fifteen years. So, it was not an easy birth; and the empire system was in serious jeopardy from the start. The main justification of China’s unification seems to have been a geopolitical reason, hence an external reason – the nomadic threat from the steppes (Deng 1999).

Nevertheless, empire-building in China marked a major discontinuity in history. Under the Western Han (206 BC– 24 AD), the successor of the Qin, empire-building not only sharply reduced internal competition among various political and economic centers on the East Asian Mainland, it also remolded the previous political and economic systems into a more integrated and more homogeneous type characterized by a package of an imperial bureaucracy under a fiscal state hand in hand with an economy under agricultural dominance. With such a package imposed by empire-builders, the economy deviated from its mixed norm. Feudalism lost its footing in China. This fundamentally changed the growth and development trajectory of China for the rest of the imperial period until c. 1800.

It is fair to state that private landholding property rights, including free-holding (dominant in North China over the long run) and lease-holding (paralleled with freeholding in South China during the post-Southern Song, i.e. 1279–1840) in imperial China laid the very corner stone of the empire’s economy since the Qin unification. Chinese laws clearly defined and protected such rights. In return, the imperial state had the mandate to tax the population of whom the vast majority (some 80 percent of the total population) were peasants. The state also depended on the rural population for army recruits. Peasants on the other hand regularly acted as the main force to populate newly captured areas along the empire’s long frontiers. Such a symbiotic relationship between the imperial state and China’s population was crystallized by a mutually beneficial state-peasant alliance in the long run. China’s lasting Confucian learning and Confucian meritocracy served as a social bonding agent for the alliance.

It was such an alliance that formed the foundations of China’s political economy which in turn created a centripetal force to hold the empire together against the restoration of feudalism and political decentralization (Deng 1999). It also served as a constant drive for China’s geographic expansion and an effective force against run-away proto-industrialization, commercialization and urbanization. So, to a great extent, China’s political economy was circumscribed by this alliance. Occasionally, this state-peasant alliance did break up and political and economic turmoil followed. The ultimate internal cause for the break-up was excessive rent-seeking by the state, seen as a deviation from the Confucian norm. It was often the peasantry that reversed this deviation and put society back on its track by the way of armed mass rebellions which replaced the old regime with a new one. This pattern is known, superficially, as the “dynastic cycle” of China.

The Empire’s Expansion

China’s fiscal state and landholding peasantry both had strong incentives and tendencies to increase the land territory of the empire. This was simply because more land meant more resource endowments for the peasantry and more tax revenue for the state. The Chinese non-feudal equal-inheritance practice perpetuated such incentives and tendencies at the grass roots level: unless more and more land was brought in for farming, the Chinese farms faced the constant problem of a shrinking size. Not surprisingly, the empire gradually expanded in all directions from its hub along the Yellow River in the north. It colonized the “near south” (around the Yangtze Valley) and to the West (oases along the Silk Road) during the Western Han (206 BC – 24 AD). It reached the “far south,” including part of modern-day Vietnam, under the Tang (618–907). The Ming (1368–1644) annexed off-shore Taiwan. The Qing (1644–1911) doubled China’s territory by going further in China’s “far north” and “far west” (Deng 1993: xxiii). At each step of this internal colonization, landholding peasants, shoulder to shoulder with the Chinese army and bureaucrats, duplicated the cells of China’s agricultural economy. The state often provided emigrant farmers who resettled in new regions with material and finance aid, typically free passages, seed and basic farming tools and tax holidays. The geographic expansion of the empire stopped only at the point when it reached the physical limits for farming.

So, in essence, the expansion of the Chinese empire was the result of dynamics of the Chinese institutions characterized by a fiscal state and a landholding peasantry, as this pattern suited well with China’s landholding property rights and non-feudal equal-inheritance practice. Thus, one of the two growth dimensions of the Chinese agricultural sector was this extensive pattern in geographic terms.

Agrarian Success

In this context, the success of the geographic expansion of the Chinese empire was at the same time a success in the growth of the Chinese agricultural sector. Firstly, regardless of its ten main soil types, the empire’s territory was converted to a huge farming zone. Secondly, the agricultural sector was by far the single most important source of employment for the majority Chinese. Thirdly, taxes from the agricultural sector made up the lion’s share of the state’s revenue.

Private property rights over land also created incentives for the ordinary farmers to produce more and better. In doing so, the agricultural total factor productivity increased. Growth became intensive. This was the other dimension in the Chinese agricultural sector. It is not so surprising that premodern China had at least three main “green revolutions.” The first such green revolution, the dry farming type, appeared in the Western Han Period (206 BC–24 AD) with the aggressive introduction of iron ploughs in the north by the state (Bray 1984). The result was an increase in the agricultural total factor productivity as land was better and more efficiently tilled and more marginal regions were brought under cultivation. The second green revolution took place during the Northern Song (960–1127) with the state promotion of early-ripening rice in the south (Ho 1956). This ushered in the era of multiple cropping in the empire. The third green revolution occurred during the late Ming throughout mid-Qing Period (Ming: 1368–1644; Qing: 1644–1911) with the spread of the “New World crops,” namely maize and sweet potatoes and the re-introduction of early-ripening rice (Deng 1993: ch. 3). The New World crops helped to convert more marginal land into farming areas. Earlier, under the Yuan, cotton was deliberately introduced by the Mongols as a substitute for silk in the Chinese consumption of clothing to save the silk for the Mongols’ international trade. All these green revolutions had high participation rates in the general population.

These green revolutions significantly and permanently changed China’s economic landscape. It was not a sheer accident that China’s population growth became particularly strong during and shortly after these revolutions (Deng 2003).

Markets and the Market Economy

With a fiscal state which taxed the economy and spent its revenue in the economy and with a high-yield agriculture which produced a constant surplus, the market economy developed in premodern China. By the end of the Qing, as much as one-third of China’s post-tax agricultural output was subject to market exchange (Perkins 1969: 115; Myers 1970: 12–13). If ten percent is taken as the norm for the tax rate born by the agricultural sector, the aggregate surplus of the agricultural sector was likely to be some forty percent of its total output. This magnitude of agricultural surplus was the foundation of growth and development of other sectors/activities in the economy.

Monetization in China had the same life span as the empire itself. The state mints mass-produced coins on a regular basis for the domestic economy and beyond. Due to the lack of monetary metals, token currencies made of cloth or paper were used on large scales, especially during the Song and Yuan periods (Northern Song: 960–1127; Southern Song: 1127–1279; Yuan: 1279–1368). Consequently, inflations resulted. Perhaps the most spectacular market phenomenon was China’s persistent importation of foreign silver from the fifteenth to nineteenth centuries during the Ming-Qing Period. It has been estimated that a total of one-third of silver output from the New World ended up in China, not to mention the amount imported from neighboring Japan (Flynn and Giráldez 1995). The imported silver consequently made China a silver-standard economy, eventually causing a price revolution after the market was saturated with foreign silver which in turn led to devaluation of the currency (Deng 1997: Appendix C).

Rudimentary credit systems, often of the short-term type, also appeared in China. Houses and farming land were often used as collateral to raise money. But there is no sign that there was a significant reduction of business risks for the creditor. Frequent community and/or state interference with contracts by blocking land transfers from debtors to creditors was counter-productive. So, to a great extent, China’s customary economy and command economy overruled the market one.

The nature of this surplus-based market exchange determined the multi-layered structure of the Chinese domestic market. At the grass-roots level, the market was localized, decentralized and democratic (Skinner 1964–5). This was highly compatible with the de facto village autonomy across the empire, as the imperial administration stopped at the county level (with a total number of roughly 1,000–1,500 such counties in all under the Qing). At the top of the market structure, the state controlled to a great extent some “key commodities” including salt (as during Ming and Qing), wine and iron and steel (as under the Han). Foreign trade was customarily under the state monopoly or partial monopoly, too. This left a limited platform for professional merchants to operate, a factor that ultimately determined the weakness of merchants’ influence in the economy and state politics.

So, paradoxically, China had a long history of market activities but a weak merchant class tradition. China’s social mobility and meritocracy, the antitheses of a feudal aristocracy, directed the talent and wealth to officialdom (Ho 1962; Rawski 1979). The existence of factor markets for land also allowed merchants to join the landholding class. Both undermined the rise of the merchant class.

Handicrafts and Urbanization

The sheer quantities of China’s handicrafts were impressive. It has been estimated that in the early nineteenth century, as much as one-third of the world’s total manufactures were produced by China (Kennedy 1987: 149; Huntington 1996: 86). In terms of ceramics and silk, China was able to supply the outside world almost single-handedly at times. Asia was traditionally China’s selling market for paper, stationary and cooking pots. All these are highly consistent with China’s intake of silver during the same period.

However, the growth in China’s handicrafts and urbanization was a function of the surpluses produced from the agricultural sector. This judgment is based on (1) the fact that not until the end of the Qing Period did China begin importing moderate quantities of foodstuffs from outside world to help feed the population; and (2) the fact that the handicraft sector never challenged agricultural dominance in the economy despite a symbiotic relationship between them.

By the same token, urbanization rarely exceeded ten percent of the total population although large urban centers were established. For example, during the Song, the northern capital Kaifeng (of the Northern Song) and southern capital Hangzhou (of the Southern Song) had 1.4 million and one million inhabitants, respectively (Jones et al. 1993: ch. 9). In addition, it was common that urban residents also had one foot in the rural sector due to private landholding property rights.

Science and Technology

In the context of China’s high yield agriculture (hence surpluses in the economy which were translated into leisure time for other pursuits) and Confucian meritocracy (hence a continued over-supply of the literate vis-à-vis the openings in officialdom and persistent record keeping by the premodern standards) (Chang 1962: ch. 1; Deng 1993: Appendix 1), China became one of the hotbeds of scientific discoveries and technological development of the premodern world (Needham 1954–95). It is commonly agreed that China led the world in science and technology from about the tenth century to about the fifteenth century.

The Chinese sciences and technologies were concentrated in several fields, mainly material production, transport, weaponry and medicine. A common feature of all Chinese discoveries was their trial-and-error basis and incremental improvement. Here, China’s continued history and large population became an advantage. However, this trial-and-error approach had its developmental ceiling. And, incremental improvement faced diminishing returns (Elvin 1973: ch. 17). So, although China once led the world, it was unable to realize what is known as the “Scientific Revolution” whose origin may well have been oriental/Chinese (Hobson 2004).

Living Standards

It has been argued that in the Ming-Qing Period the standards of living reached and stayed at a high level, comparable with the most wealthy parts of Western Europe by 1800 in material terms (Pomeranz 2000) and perhaps in education as well (Rawski 1979). Although the evidence is not conclusive, the claims certainly are compatible with China’s wealth in the context of (1) the rationality of private property rights-led growth, (2) total factor productivity growth associated with China’s green revolutions from the Han to the Ming-Qing and the economic revolution under the Song, and (3) China’s export capacity (hence China’s surplus output) and China’s silver imports (hence the purchasing power of China’s surplus).

Debates about China’s Long-term Economic History

The pivotal point of the debate about China’s long-term economic history has been why and how China did not go any further from its premodern achievements. Opinions have been divided and the debate goes on (Deng 2000). Within the wide spectrum of views, some are regarded as Eurocentric; some, Sinocentric (Hobson 2004). But a great many are neither, using some universally applicable criteria such as factor productivity (labor, land and capital), economic optimization/maximization, organizational efficiency, and externalities.

In a nutshell, the debate is whether to view China as a bottle “half empty” (hence China did not realize its full growth potential by the post-Renaissance Western European standard) or “half full” (hence China over-performed by the premodern world standard). In any case, China was “extra-ordinary” either in terms of its outstanding performance for a premodern civilization or in terms of its shortfall for modern growth despite its possession of many favorable preconditions to do so.

The utility of China’s premodern history is indeed indispensable in the understanding of how a dominant traditional economy (in terms of its sheer size and longevity) perpetuated and how the modern economy emerged in the world history.

References

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Citation: Deng, Kent. “Economic History of Premodern China”. EH.Net Encyclopedia, edited by Robert Whaples. November 7, 2004. URL
http://eh.net/encyclopedia/economic-history-of-premodern-china-from-221-bc-to-c-1800-ad/

The Economy of Ancient Greece

Darel Tai Engen, California State University – San Marcos

Introduction 1

The ancient Greek economy is somewhat of an enigma. Given the remoteness of ancient Greek civilization, the evidence is minimal and difficulties of interpretation abound. Ancient Greek civilization flourished from around 776 to 30 B.C. in what are called the Archaic (776-480), Classical (480-323), and Hellenistic (323-30) periods.2 During this time, Greek civilization was very different from our own in a variety of ways. In the Archaic and Classical periods, Greece was not unified but was comprised of hundreds of small, independent poleis or “city-states.” During the Hellenistic period, Greek civilization spread into the Near East and large kingdoms became the norm. Throughout these periods of ancient Greek civilization, the level of technology was nothing like it is today and values developed that shaped the economy in unique ways. Thus, despite over a century of investigation, scholars are still debating the nature of the ancient Greek economy.

Moreover, the evidence is insufficient to employ all but the most basic quantitative methods of modern economic analysis and has forced scholars to employ other more qualitative methods of investigation. This brief article, therefore, will not include any of the statistics, tables, charts, or graphs that normally accompany economic studies. Rather, it will attempt to set out the types of evidence available for studying the ancient Greek economy, to describe briefly the long-running debate about the ancient Greek economy and the most widely accepted model of it, and then to present a basic view of the various sectors of the ancient Greek economy during the three major phases of its history. In addition, reference will be made to some recent scholarly trends in the field.

Sources of Evidence

Although the ancient Greeks achieved a high degree of sophistication in their political, philosophical, and literary analyses and have, therefore, left us with a significant amount of evidence concerning these matters, few Greeks attempted what we would call sophisticated economic analysis. Nonetheless, the ancient Greeks did engage in economic activity. They produced and exchanged goods both in local and long distance trade and had monetary systems to facilitate their exchanges. These activities have left behind material remains and are described in various contexts scattered throughout the extant writings of the ancient Greeks.

Most of our evidence for the ancient Greek economy concerns Athens in the Classical period and includes literary works, such as legal speeches, philosophical dialogues and treatises, historical narratives, and dramas and other poetic writings. Demosthenes, Lysias, Isokrates, and other Attic Orators have left us with numerous speeches, several of which concern economic matters, usually within the context of a lawsuit. But although these speeches illuminate some aspects of ancient Greek contracts, loans, trade, and other economic activity, one must analyze them with care on account of the biases and distortions inherent in legal speeches.

Philosophical works, especially those of Xenophon, Plato, and Aristotle, provide us with an insight into how the ancient Greeks perceived and analyzed economic matters. We learn about the place of economic activities within the Greek city-state, value system, and social and political institutions. One drawback of such evidence, however, is that the authors of these works were without exception members of the elite, and their political perspective and disdain for day-to-day economic activity should not necessarily be taken to represent the views of all or even the majority of ancient Greeks.

The ancient Greek historians concerned themselves primarily with politics and warfare. But within these contexts, one can find bits of information here and there about public finance and other economic matters. Thucydides, for example, does takes care to describe the financial resources of Athens during the Peloponnesian War.

Poems and dramas also contain evidence concerning the ancient Greek economy. One can find random references to trade, manufacturing, the status of businessmen, and other economic matters. Of course, one must be careful to account for genre and audience in addition to the personal perspective of the author when using such sources for information about the economy. The plays of Aristophanes, for example, make many references to economic activities, but such references are often characterized by stereotyping and exaggeration for comedic purposes.

One of the most extensive collections of economic documents is the papyri from Greek-controlled Egypt during the Hellenistic period. The Ptolemaic dynasty that ruled Egypt developed an extensive bureaucracy to oversee numerous economic activities and like all bureaucracies, they kept detailed records of their administration. Thus, the papyri include information about such things as taxes, government-controlled lands and labor, and the unique numismatic policies of the Ptolemies.

Epigraphic evidence comes in the form of stone inscriptions from public and private institutions. Boundary markers placed on land used as security for loans, called horoi, were often inscribed with the terms of the loans. States such as Athens inscribed honorary decrees for those who had done outstanding services for the state, including economic ones. States also inscribed accounts for public building projects and leases of public lands or mines. In addition, religious sanctuaries frequently inscribed accounts of monies and other assets, such as produce, land, and buildings, under their control. Although accounts tend to be free of human biases, honorary decrees are much more complex and the historian must be careful to consider the perspective of their issuing institutions when interpreting them.

Archaeological evidence is free of some of the representational complexities of the literary and epigraphic evidence. Pottery finds can tell us about pottery manufacture and trade. The vase types indicate the goods they contained, such as olive oil, wine, or grain. The distribution of finds of ancient pottery can, therefore, tell us the extent of trade in various goods. Finds of hoarded coins are also invaluable for the information they reveal about the volume of coins minted by a given state at a given time and the extent to which a state’s coinage was distributed geographically. But such archaeological evidence is not without its drawbacks as well. The same “muteness” that frees such evidence from human biases also makes it incapable of telling us who traded the goods, why they were traded, how they were traded, how much they cost, and how many middlemen they went through before reaching their find spots. Furthermore, it is always dangerous to attempt to extrapolate broad conclusions about the economy from a small number of finds, since we can never be sure if those finds are representative of larger phenomena or merely exceptional cases that archaeologists happened to stumble upon.

Some of the most spectacular and informative finds in recent years have been made under the waters of the Mediterranean, Aegean, and Black Seas by what is known as marine (or nautical) archaeology. Ancient shipwrecks containing goods for trade have opened new doors to the study of ancient Greek merchant vessels, manufacturing, and trade. Although the field is relatively new, it has already yielded much new data and promises great things for the future.

The Debate about the Ancient Greek Economy

As stated above, the ancient Greek economy has been the subject of a long-running debate that continues to this day. Briefly stated, the debate began in the late nineteenth century and revolved around the issue of whether the economy was “primitive” or “modern.” These were a poor choice of terms with which to conceptualize the ancient Greek economy and are to a great extent responsible for the intractability of the debate. These terms are clearly normative in character so that essentially the argument was about whether the ancient Greek economy was like our “modern” economy, which was never carefully defined, but apparently assumed to be a free enterprise, capitalistic one with interconnected price-making markets. In addition, confusion arose over whether the ancient Greek economy was like a modern economy in quantity (scale) or quality (its organizing principles). Lastly, such terms clearly attempt to characterize the ancient Greek economy as a whole and do not distinguish differences among regions or city-states of Greece, time periods, or sectors of the economy (agriculture, banking, long distance trade, etc.).

Seeing extensive trade and use of money in Greece from the fifth century B.C. onward, the modernists extrapolated the existence of a market economy in Classical Greece. On the other hand, seeing traditional Greek social and political values that disdained the productive, impersonal, and industrial nature of modern market economies, the primitivists downplayed the existence of extensive trade and the use of money in the economy. Neither primitivists nor modernists could conceive of the existence of extensive trade and the use of money unless the ancient Greek economy was organized according to market principles. Moreover, neither side in the debate could call activities “economic” unless such activities were productive and aimed at growth.

Historical methods were also a factor in the debate. Traditional ancient historians who relied on philology and archaeology tended to side with the modernist interpretation, whereas historians who employed new methods drawn from sociology and anthropology tended to hold to the primitivist view. For example, Michael Rostovtzeff assembled a wealth of archaeological data to argue that the scale of the ancient Greek economy in the Hellenistic period was so great that it could not be considered primitive. On the other hand, Johannes Hasebroek used sociological methods developed by Max Weber to argue that the ancient Greek citizen was a homo politicus (“political man”) and not a homo economicus (“economic man”) – he disdained economic activities and subordinated them to traditional political interests.

A turning point in the debate came with the work of Karl Polanyi who drew on anthropological methods to argue that economies need not be organized according to the independent and self-regulating institutions of a market system. He distinguished between “substantivist” and “formalist” economic analysis. The latter, which is typical of economic analysis today, is appropriate only for market economies. Market economies operate independently of non-economic institutions and their most characteristic feature is that prices are set according to an aggregate derived from the impersonal forces of supply and demand among a group of interconnected markets. But material goods may be produced, exchanged, and valued by means other than market institutions. Such means may be tied to non-economic social and political institutions, including gift exchange or state-controlled redistribution and price-setting. Hence, other tools of analysis, namely “substantivist” economics, must be employed to understand them. Polanyi concluded that ancient Greece did not have a developed market system until the Hellenistic period. Before that time, the economy of ancient Greece did not comprise an independent sphere of institutions, but rather was “embedded” in other social and political institutions. Thus, Polanyi opened the door through which scholars could begin to examine the ancient Greek economy free from the normative parameters originally imposed on the debate. Unfortunately, the grip of the old parameters has been very strong and the debate has never completely freed itself from their influence.

The Finley Model and Its Aftermath

At present the most widely accepted model of the ancient Greek economy is that which was first set forth by Moses Finley in 1973. This view owes much to the Weber-Hasebroek-Polanyi line of analysis and holds that the ancient Greek economy was fundamentally different from the market economy that predominates in most of the world today. Not only was the ancient Greek economy much smaller in scale than economies today, it also differed greatly in quality.

Although the ancient Greek word oikonomia is the root of our modern English word “economy,” the two words are not synonymous. Whereas today “economy” refers to a distinct sphere of human interactions involving the production, distribution, and consumption of goods and services, oikonomia meant “household management,” a familial activity that was subsumed or “embedded” in traditional social and political institutions. True, the Greeks produced and consumed goods, engaged in various forms of exchanges including long-distance trade, and developed monetary systems employing coinage, but they did not see such activities as being part of a distinct institution which we call the “economy.”

According to Finley’s model, the subordination of economic activities to social and political ones was a byproduct of a Greek value system that emphasized the wellbeing of the community over that of the individual. Economic activity was necessary in this system only in so far as the individual male citizen had to provide sustenance for himself and his family. This could be accomplished simply by farming a small plot of land. Beyond that, the male citizen was expected to devote himself to the wellbeing of the community by participating in the public religious, political, and military life of the polis.

On the other hand, ancient Greek values held in low esteem economic activities that were not subordinated to the traditional activities of managing the family farm and obtaining goods for necessary consumption. So-called banausic work, which included manufacturing, business, and trade (which were not tied to the land and the family farm), and what we would call “capitalism” (investing money to make more money) were considered to be incompatible with active participation in the affairs of the polis and even as unnatural and morally corrupting. A life on the land, farming to produce only so much as was needed for consumption and leaving enough leisure time for active participation in the public life of the polis, was the social ideal. Production and exchange were to be undertaken only for personal need, to help out friends, or to benefit the community as a whole. Such activities were not to be undertaken simply to make a profit and certainly not to obtain capital for future investment and economic growth.

Given the limits put on economic activity by traditional values and the absence of a modern conception of the economy, agriculture comprised the bulk of production and exchange. Most production, therefore, was carried out in the countryside and cities were net consumers rather than producers, living off the surplus of the countryside. With limited technology and no understanding of economies of scale, cities were not hubs of industry, and manufacturing existed only on a small scale. Cities were mainly places for people to live as well as religious and governmental centers. Their contribution to the economy was only to demand the surplus produce of the countryside, manufacture limited amounts of goods, and provide market places and ports of trade for the exchange of goods.

Since the bulk of economic wealth was produced from the land and banausic occupations were not esteemed, the elite of ancient Greek society were landowners who consequently dominated politics, even in democratic poleis like Athens. Such men had little interest in manufacturing, business, and trade and, like their society as a whole, did not consider the economy as a distinct sphere separate from social and political concerns. Thus, their official policies with regard to the economy were much different from that of modern states.

Modern states undertake policies with specifically economic goals, desiring in particular to make their national economy more productive, to expand or grow, thereby increasing the per capita wealth of the state. Ancient Greek city-states, on the other hand, had an interest and involvement in what we would call economic activities (trade, minting coins, production, etc.) that, like oikonomia on the household level, were consumptive in nature and fulfilled traditional social and political needs, not strictly economic ones.

Finley’s model also holds that there was neither a “market mentality” nor interconnected markets that could operate according to impersonal price-setting market mechanisms. Individual city-states certainly had “market places” (agorai), but such markets existed largely in isolation with minimal connections among them. Thus, prices were set according to local conditions and personal relationships rather than in accordance with the impersonal forces of supply and demand. This was so in part because of the Greek socio-political emphasis on self-sufficiency (autarkeia), but also because the physical environment and industry of the eastern Mediterranean tended to produce similar goods, so that there were few items that a city-state needed which could not be obtained from within its own boundaries.

Moreover, according to Finley’s model, the interests of Greek city-states in trade were likewise limited by traditional political concerns to the consumptive goals of ensuring the import of adequate supplies of “material wants,” such as food at reasonable prices for their citizens, and revenue which could be obtained from taxes on trade. The former goal could be fulfilled by making laws that required or provided incentives for traders to bring grain into the city. Laws such as these were merely extensions of traditional political policies, like conquest and plunder, but in which a less violent form of acquisition would now be undertaken. But though the means had changed, the ends were still political; there was no interest in the economy per se. The same holds true for the traditional need of city-states for revenue to pay for public projects, such as temple building and road maintenance. Here again, old and often violent methods of obtaining revenue were augmented through such things as taxes on trade.

Finley’s model has had a great impact on those who study the ancient Greek economy and is still widely accepted today. But although the general picture it presents of the ancient Greek economy has not been superceded, the model is not without flaws. It was inevitable that Finley would overstate his model, since it attempted to encompass the general character of the ancient Greek economy as a whole. Thus, the model makes little distinction between different regions or city-states of Greece, even though it is clear that the economies of Athens and Sparta, for example, were quite different in many respects. Finley also treats the various sectors of the economy (agriculture, labor, manufacturing, long-distance trade, banking, etc.) as if they were all governed equally in accordance with the general tenets of the model, despite the fact that, for example, there were significant differences between the values that applied in the landed economy and those that prevailed in overseas trade. Lastly, Finley’s model is synchronic and hardly acknowledges changes in both the quantity and the quality of the economy over time.

Some close examinations of the various sectors of the ancient Greek economy in different places and at different times have supported Finley’s model in its general outlines. But they have been matched by just as many studies that have revealed exceptions to the model. Thus, one recent trend in the scholarship has been to try to revise the Finley model in light of focused studies of particular sectors of the economy at specific times and places. Another trend has been simply to ignore the Finley model and bypass the old debate altogether by examining the ancient Greek economy in ways that make them irrelevant. Basically, given the quantity and the quality of the available evidence, our attempts to understand the ancient Greek economy are greatly affected by the perspective from which we approach it. We can choose to try to characterize the entire ancient Greek economy in general, to see the forest as it were, and debate whether it was more or less similar to our own. Or we can focus in on the trees and undertake narrow studies of particular sectors of the ancient Greek economy at specific times and places. Both approaches are useful and not necessarily mutually exclusive.

The Archaic Period

Finley’s model holds most true for the Archaic period (c. 776-480 B.C.) of ancient Greek history. Archaeological evidence and literary references from such works as the epic poems of Homer (the Iliad and the Odyssey), the Works and Days of Hesiod, and the works of the lyric poets attest to an economy that was generally small in scale and centered on household production and consumption. This is not surprising, since it was during the Archaic period that Greek civilization was re-emerging from a “Dark Age” of upheaval and forming its basic social, legal, political, and economic institutions. The fundamental political unit, the polis or independent city-state, appears at this time as do non-monarchal governments allowing for at least some degree of political participation among a broad swath of citizens.

For the most part, governments did not actively involve themselves in economic matters, except during the occasional political upheavals between “haves” and “have-nots” in which land might be confiscated from the few and redistributed to the many. Despite the fact that much of the Greek mainland is mountainous and the rivers generally small, there was enough fertile land and winter rainfall so that agriculture could account for the bulk of economic production, as it would in all civilizations before the modern industrial era. But unlike the large kingdoms of the Near East, Greece had a free-enterprise economy and most land was privately owned. Agriculture was carried out primarily on small family farms, though the Homeric epics indicate that there were also some larger estates controlled by the elite and worked with the help of free landless thetes whose labor would be needed especially at harvest time. Slaves existed, but not in such large numbers as to make the economy and society dependent on them.

As the populations of cities were fairly small, crafts and manufacturing were largely carried out within households for internal consumption. Both literary accounts and material remains, however, indicate that there was a certain amount of specialization. Artisans are referred to in the Homeric epics and the level of craftsmanship seen on items, such as metal work and painted pottery, was not likely to have been accomplished by non-specialists. Nevertheless, without large-scale manufacturing, safety from brigands on land and pirates at sea, and a monetary system employing coinage (until late in the sixth century), markets were necessarily small, devoted to local products, and certainly not interconnected into a price-setting market economy. Trade was limited mostly to local exchanges between the countryside and the urban center of city-states. Farmers might load up their surplus goods on a small ship to sell them in a neighboring city, as Hesiod attests, but long-distance sea-borne trade was devoted almost exclusively to luxury items, such as precious metals, jewelry, and finely-painted pottery. Moreover, gift exchanges in accordance with social traditions were as prominent if not more so than impersonal exchanges for profit. In general, those who engaged in banausic occupations on more than a part-time basis and sought profit from such activities were looked down on and did not hold positions of prestige in society or government.

Nevertheless, it cannot be denied that the scale of the Greek economy grew during the Archaic period and if not per capita, at least in proportion to the clear growth in population. Population increases and the desire for more land were the primary impetuses for a colonizing movement that established Greek poleis throughout the Mediterranean and Black Sea regions during this period. These new city-states put more land under cultivation, thereby providing the agriculture necessary to sustain the growing population. Moreover, archaeological evidence for the dispersal of Greek products (particularly pottery) over a wide area indicate that trade and manufacturing had also expanded greatly since the Dark Age. It is probably no coincidence that the end of the Archaic period witnessed for the first time a divergence between the designs of merchant vessels and warships, a distinction that would become permanent. Also, after the invention of coinage in Asia Minor in the early sixth century B.C., even though various other forms of money and barter continued to be employed throughout the course of ancient Greek history, the Greeks were quick to adopt coinage and it became the predominant means of exchange from the end of the sixth century onward. The aforementioned economic trends are traced in an important recent book by David Tandy, who argues that they had a fundamental impact on the development of the social and political organization and values of the Archaic polis.

Key Economic Sectors of the Classical Period

During the Classical period of ancient Greek history (480-323 B.C.), continued increases in population as well as political developments influenced various sectors of the economy to the extent that one can see a growing number of deviations from the Finley model. Evidence concerning the economy also becomes more abundant and informative. Thus, a more detailed description of the economy during the Classical period is possible and more attention to the distinctions between its various sectors is also desirable.

In light of the cautionary statements made earlier in this article about overgeneralization, it is important to note that great variation existed among the regions and city-states of the ancient Greek world, especially during the Classical period. Athens and Sparta are famous examples of two almost polar opposites in their social and political organizations and this is no less true with regard to their economic institutions. Given, however, the fact that Athens is the best documented and most studied place in ancient Greek history, the various sectors of the ancient Greek economy during the Classical period will be discussed primarily as they existed in Athens, despite the fact that it was in many ways exceptional. Significant variations from the Athenian example will be noted, however, as will some recent trends in scholarship.

Public and Private Economic Sectors

It is first necessary to distinguish between the public and private sectors of the economy. Throughout most of ancient Greek history before the Hellenistic period, a free enterprise economy with private property and limited government intervention predominated. This places Greece in sharp contrast to most other ancient civilizations, in which governmental or religious institutions tended to dominate the economy. The main economic concerns of the governments of the Greek city-states were to maintain harmony within the private economy (make laws, adjudicate disputes, and protect private property rights), make sure that food was available to their citizenries at reasonable prices, and obtain revenue from economic activities (through taxes) to pay for government expenses.

Athens had numerous laws to protect private property rights and had officials and law courts to enforce them. In addition, there were officials who oversaw such things as weights, measures, and coinage to make sure that people were not cheated in the market place. Athens also had laws to ensure an adequate supply of grain for its citizens, such as a law against the export of grain and laws to encourage traders to import grain. Athens even had agreements with other states in which the latter gave favorable treatment to traders bound for Athens with grain.

On the other hand, Athens did not tax its citizens directly except in cases of state emergencies (eisphorai) and in requiring the wealthiest citizens to perform public services (liturgies). Most taxes were indirect: market taxes, port taxes, import-export taxes, and taxes on foreigners who took up long-term residence in Athens. Taxes were collected by companies of private tax farmers who bid on contracts issued by the state. In addition to taxes, Athens obtained revenue from leases of publicly owned lands and mines. Revenue was necessary for various government expenditures, including administrative costs, public festivals, and maintenance of widows and orphans of soldiers who died in battle as well as building ships’ hulls for the navy, walls for the city, and temples for the gods. Such state expenditures could have a significant impact on the economy, as is clear from the large quantities of money and labor that appear in the inscribed accounts of the building projects on the Athenian acropolis.

Although the Finley model is right in many respects with regard to the limited interest and involvement of the state in the economy, one recent trend has been to show through carefully focused examinations of specific phenomena that Finley pressed his case too far. For example, Finley drew too sharp a distinction between the interests of non-citizen (and, therefore, non-landowning) traders and the landed citizens who dominated Athenian government. It is true that the latter might not have exactly the same economic interests as the former, but the interests of the two were nevertheless complementary, for how could Athens get the grain imports it required without making it in the interest of traders to bring it to Athens?. Moreover, it has been argued that the policies of Athens with regard to its coinage betray a state interest in the export of at least one locally produced commodity (namely silver), something completely discounted by the Finley model.

But again, Finley was probably right to argue that during the Archaic and Classical periods the vast majority of economic activity was left untouched by government and carried out by private individuals. On the other hand, by the Classical period a self-sufficient household economy was an ideal that was becoming increasingly difficult to maintain as the various sectors of economic activity became more specialized, more impersonal, and more profit oriented as well.

Land

As in the Archaic period, the most important economic sector was still tied to the land and the majority of agriculture continued to be carried out on the subsistence level by numerous small family farms, even though the distribution of land among the population was far from equal. Primary crops were grains, mostly barley but also some wheat, which were usually sown on a two-year fallowing cycle. Olives and grapes were also widely produced throughout Greece on land unsuitable for grains. Animal husbandry focused on sheep and goats, which could be moved from their winter lowland pasturage to the moister and cooler mountainous regions during the hot summer months. Cattle, horses, and donkeys, though less numerous, were also significant. While usually sufficient to support the population of ancient Greece, unpredictable rainfall made agriculture precarious and there is much evidence for periodic crop failures, shortages, and famines. Consequently, competition for fertile land was a hallmark of Greek history and the cause of much social and political strife within and between city-states.

One recent trend in the study of ancient Greek agriculture is the use of ethnoarchaeology, which attempts to understand the ancient economy through comparative data from better-documented modern peasant economies. In general, studies employing this method have supported the prevailing view of subsistence agriculture in ancient Greece. But caution is necessary, since there have been changes in the physical environment of and settlement patterns in Greece over time that can skew comparative analyses. Ethnoarchaeology has also been used to show that Greek farmers in both ancient and modern times have had to be flexible in their responses to wide variations in local topographical and climatic conditions and, thus, varied their crops and fallowing regimes to a significant degree. Rational exploitation of fluctuations in production brought on by such variations might have been the means by which some farmers were able to obtain enough wealth to rise above their peers and become members of a landed elite and this might point to a productive mentality at odds with the Finley model.

Metals were another important landed resource of Greece and so mining occupied an important place in the economy. Ancient Greeks typically used bronze and iron tools and weapons. There is little evidence that copper, the principal metal in bronze, was ever mined in abundance on mainland Greece. It had to be imported from the island of Cyprus, where it existed in large quantities, and other more distant regions. Tin, the other metal in bronze, was also rare in Greece and had to be imported from as far away as Britain. Iron is relatively plentiful throughout Greece and there is archaeological evidence of iron mining; however, literary references to it are few and so we know little about the process.

Precious metals were used in jewelry, art, and coinage. Athens had an abundance of silver and we know much about its mining industry from surviving inscriptions of government mine leases to private entrepreneurs. The mines were extremely productive, providing Athens with an income of 200 talents per year for twelve years from 338 B.C. onward. One talent was the equivalent of around nine year’s worth of wages for single skilled laborer working five days a week, 52 weeks a year, according to the wage rates we know from 377 B.C. Though productive in silver, ancient Greece was not as rich in gold, which was found primarily in Thrace and on the islands of Thasos and Siphnos.

Recent scholarship continues to focus on the silver mines of Athens, drawing not only on the inscribed mine leases, but also on extensive archaeological investigation of the mines themselves. They tend to indicate that, contrary to the Finley model, mining in Athens was specialized enough and extensive enough to constitute an “industry” in the modern sense of the word and one geared toward growth. In a study of mine-leasing records Kirsty Shipton has shown that the elite of Athens preferred mines leases, with their potential for greater profits, to land leases. Thus, the traditional preference of the elite for the consumptive acquisition of land and disdain for productive investments for profit postulated by the Finley model might be a characteristic feature of the ancient Greek world as a whole, but it does not entirely hold for Athens in the Classical period.

Stone for building and sculpture was another valuable natural resource of Greece. Limestone was available in abundance and fine marble could be found in Athens on the slopes of Mount Pentelikos and on the island of Paros. The former was used in building the Parthenon and the other structures of the Athenian acropolis while the latter was often used for the most famous ancient Greek free-standing and relief sculptures.

Labor

It is notoriously difficult to estimate the population of Athens or any other Greek city-state in ancient times. Generally accepted figures for Athens at the height of its power and prosperity in 431 B.C., though, are in the range of approximately 305,000 people, of which perhaps 160,000 were citizens (40,000 male, 40,000 female, 80,000 children), 25,000 were free resident foreigners (metics), and 120,000 were slaves. Athens was the largest polis and the populations of most city-states were probably much smaller. Citizens, metics, and slaves all performed labor in the economy. In addition, many city-states included forms of dependent labor somewhere in between slave and free.

As stated above, much of the agriculture of ancient Greece was carried out by small farmers who were exclusively free citizens, since non-citizens were barred from owning land. But although being a farmer was the social ideal, good land was scarce in Greece and it is estimated that in Athens about a quarter of the male citizens did not own land and had to take up other occupations for their livelihoods. Such occupations existed in the manufacturing, service, retail, and trade sectors. These “business” occupations were not only socially disesteemed, but they also tended to be small scale. Wage earning was very much looked down upon, since working for another person was thought of as an impingement on freedom and akin to slavery. Thus, free men doing the same work side by side with metics and slaves on the Acropolis building projects earned the same wages. Yet wages appear to have been adequate to make a living. In Athens the typical wage for a skilled laborer was one drachma per day at the end of the fifth century and two and a half drachmai in 377. In the fifth century a Greek soldier on campaign received a ration of 1 choinix of wheat per day. The price of wheat in Athens at the end of the fifth century was 3 drachmai per medimnos. There are 48 choinices in a medimnos. Thus, one drachma could buy enough food for 16 days for one person, four days for a family of four.

One thing that made up for the limited number of free citizens who were willing or had to become businessmen or wage earners was the existence of metics, foreign-born, free non-citizens who took up residence in a city-state. It is estimated that Athens had about 25,000 metics at its height and since they were barred from owning land, they engaged in banausic occupations that tended to be looked down upon by the free citizenry. The economic opportunities afforded by such occupations in Athens and other port cities where they were particularly abundant must have been significant. They attracted metics despite the fact that metics had to pay a special poll tax and serve in the military even though they could not own land or participate in politics and had to have a citizen represent them in legal matters. This is confirmed by the numerous metics in Athens who became wealthy and whose names we know, such as the bankers Pasion and Phormion and the shield-maker Cephalus, the father of the orator, Lysias.

Foreign-born, free non-citizen transients known as xenoi also played an important role in the ancient Greek economy, since it is apparent that many, though certainly not all, those who carried out long-distance trade were such men. Like metics, they too were subject to special taxes, but few rights.

Slaves comprised an undeniably large part of the labor force of ancient Greece. In fact, it is fair to say, as Finley did, that ancient Greece was a “slave dependent society.” There were so many slaves; they were so essential to the economy; and they became so thoroughly embedded into the every day life and values of the society that without slavery, ancient Greek civilization could not have existed in the manner it did. In Classical Athens it has been estimated that there were around 120,000 slaves. Thus, slaves comprised over a third of the total population and outnumbered adult male citizens by three to one.

The slaves of Athens were chattel, that is the private property of their owners, and had few, if any, rights. The demand for them was high as they performed almost every kind of work imaginable from agricultural labor to mining labor to shop assistants to domestic labor even to serving as the police force and secretaries for the government in Athens. About the only thing slaves did not normally do was military service, except in emergencies, when they did that too.

Slaves were supplied by a variety of sources. Many were war captives. Some were enslaved for failure to pay debts, though this was outlawed in Athens in the early sixth century B.C. Some were foundlings, abandoned children rescued and reared in return for their labor as slaves. Of course, the children of slaves would also be slaves. In addition, there was an extensive and regular slave trade that trafficked in people who had become slaves by all the means mentioned previously.

In part because of the diverse means by which slaves were supplied, there was no particular race that was singled out for enslavement. Anyone could become a slave if unfortunate enough, including Greeks. It does appear, however, that a large percentage of slaves in Greece originated in the Black Sea and Danubian regions. In most cases they were probably captives from internecine tribal wars and sold to slave traders who shipped them to various parts of the Greek world.

The treatment of chattel slaves varied, depending on the whims of individual slave owners and the types of jobs done by the slaves. Slaves who worked in the silver mines of Athens, for example, worked in dangerous conditions in large numbers (as many as 10,000 at a time) and had virtually no contact with their owners that could result in human bonds of affection (they were usually leased out). On the other hand, slaves who worked in households assisting the matron of the family in her household tasks were probably treated much better as a rule. Their labor was less strenuous and since they worked in close proximity with their owners’ families, at least some human bonds of affection were likely to form between them and their owners. Some slaves even lived on their own and ran their owners’ businesses largely unsupervised.

One aspect of ancient Greek slavery that is often cited as evidence for it being more “humane” than other slavery regimes is manumission. There is enough evidence for slaves being freed to make us believe that manumission was not uncommon and many slaves could probably hope for freedom, even if most of them never actually obtained it. But manumission was quite self-serving for slave owners, since it made slaves much less likely to risk rebellion in the hope that they might some day be given their freedom. As it turns out, there were only two noteworthy large-scale rebellions of chattel slaves in the history of ancient Greece. Moreover, inscriptions from the religious sanctuary of Delphi from the Hellenistic period show that slaves almost always had to compensate their owners for their freedom, either in the form of cash or some other valuable commodity, like their own children, who would also be slaves of the master and eventually replace their aging parents with young labor. So it is a dubious matter to say that the manumission of slaves is a testament to the humanity of ancient Greek slavery. Individual slaves might benefit, but the practice allowed the institution of slavery to flourish throughout Greek history.

When slaves were freed, they did not become citizens, but rather metics. Yet even though they still could not possess the full rights and privileges of citizens, they could prosper economically, just as other metics could. In Athens the prominent and wealthy metic banker, Pasion, for example, was originally a slave who assisted his masters Antisthenes and Archestratus. By the terms of his will, Pasion in turn manumitted his own slave assistant, Phormion, and not only left him his bank, but also stipulated that Phormion marry his widow and manage the inheritance of his son, Apollodorus.

In addition to chattel slavery, there were other forms of dependent labor in the ancient Greek world. One famous example is helotry, known principally from the city-state of Sparta. The helots of Sparta were agricultural serfs, indigenous peoples conquered by the Spartans and forced to work their former lands for their Spartan overlords. They were not the private property of the individual Spartans, who were allotted the former lands of the helots, and could not be bought or sold. But their mobility was completely restricted; they had very few rights; they had to turn over a large percentage of their produce to their Spartan overlords; and they were routinely terrorized as a matter Spartan state policy. The one drawback for the Spartans of using helot labor, though, was that the helots, living still on their former homeland and having a sense of ethnic unity, were prone to revolt and did so on several occasions at great cost both to themselves and to the Spartans.

With the exception of Sparta and a few other city-states, women in ancient Greece, free citizens or otherwise, could not control land. They could own it in name only and were not allowed to dispose of it as they saw fit, but were legally obliged to yield control of it to a male representative. Since land was the chief source of wealth in the ancient Greek economy, the inability to control it severely constrained the economic role of women. The ideal was for women to get married, have children, raise them, and carry out the indoor tasks of the household, such as cooking and textile production.

Of course, not all women could live up to such an ideal at all times. Women undoubtedly helped outdoors on the farm during harvest time. Those of poorer families might by necessity have to sell in the market place what little surplus produce their households could generate or perform service-oriented jobs for others for wages. Female metics and slaves did similar work and also comprised the majority of the prostitutes of Athens, which was a legal profession. Prostitutes, though, ranged from lowly brothel workers to high-class call girls, the latter of which, such as Aspasia, sometimes obtained prominence in Athenian society.

Despite their disdain for certain types of work and their dependence on slave labor, most Greeks had to work hard to make a living. Yet they did not develop a “work ethic” and did not consider work to be ennobling, but simply necessary. Hence, if one could afford a slave to do one’s work, then one bought a slave. The availability of cheap slaves was a major factor in Greek attitudes toward labor and may also explain why there were no labor unions in Greece. For how could wage-earners pressure their employers for better conditions or wages when the latter could always replace them with slaves if necessary?

Manufacturing

Slavery also affected manufacturing in ancient Greece. It is often said that technology and industrial organization stagnated in ancient Greece because the availability of cheap slave labor obviated any imminent need to improve them. If one wanted to produce more, one merely bought a few more slaves. Thus, most manufactured products were literally hand-made with simple tools. There were no assembly lines and no big factories. The largest manufacturing establishment we know of was a shield factory owned by the metic, Cephalus, the father of the orator, Lysias, which employed 120 slaves. Most manufacturing was carried out in small shops or within households. Hence, in comparison with agriculture, manufacturing comprised a small part of the ancient Greek economy.

Nevertheless, documentary and archaeological evidence attests to a wide variety of manufactured items and some in large quantities. Among the most extensively manufactured products was clay pottery, the remains of which archaeologists have found scattered throughout the Mediterranean world. The wheel-made pots took many shapes appropriate for their contents and use, which ranged from hydria for water to amphorae for olive oil and wine to pithoi for grain to aryballoi for perfume to kylikes for drinking cups. Finely painted vases were also manufactured for decorative and ritual purposes. The finest, most numerous, and widely dispersed of these were made in Corinth, Aegina, Athens, and Rhodes.

Literary accounts as well as scenes from painted vases make it clear that the ancient Greeks left textile production largely to women. The principal material they worked with was wool, but linen from flax was also common. Textiles were used in turn in the manufacture of clothing. Again, women were largely responsible for this and it was done primarily within the household. Textiles were often dyed, the most desirable dye being a reddish purple color derived from aquatic murex snails. These had to be harvested, mashed into a jelly, and then boiled to extract the dye.

Although the trees of Greece were for the most part not particularly good for woodworking materials and especially not for large-scale building, the Greeks did use wood extensively and, therefore, had to import good timber from places like Macedonia, the Black Sea region, and Asia Minor. Given the countless islands of Greece, it is not surprising that shipbuilding was an important sector of manufacturing. Vessels were needed for commercial as well as military uses. In Athens the state obtained the necessary timber for the ships (and oars) of its navy, but it contracted with carpenters who worked under the supervision of state officials to craft the timber into the warships that were so vital for Athenian power in the Classical period.

Buildings ranged from private houses to monumental stone temples. The former tended to be rather humble, made of unbaked mud brick laid on a stone foundation and covered by a thatched or tiled roof. On the other hand, the great temples of ancient Greece required much organization, many resources, and incredible technical skill. As is evidenced by the extant accounts for the construction of the buildings of the Athenian acropolis, the work was normally contracted out in small units to private individuals who either worked alone or in charge of others to do anything from quarrying marble to transporting wooden beams to sculpting facades. The degree of specialization varied. In some cases we see contractors carrying out a variety of tasks, whereas in others we see them specializing in only one.

Metal crafts were highly specialized. The Greeks smelted iron, but only in wrought form. They were unable to achieve furnace temperatures high enough to make pig iron and did not have the technical know-how to add carbon to the smelting process with enough precision to make steel with any consistency. Blacksmiths crafted body armor, shields, spears, swords, farm implements, and household utensils. Bronze casting reached the level of fine art in Classical Greece. Sculptors used the lost-wax method, in which they first made a clay model of a statue, then covered the model with a layer of wax, which they then covered again with another layer of clay. Small openings were left in the outer clay covering, into which molten bronze was poured. The hot molten bronze melted the wax, which then flowed out another opening in the outer clay covering. After the bronze cooled the outer clay covering was broken off, leaving the cast bronze.

It is clear that in the Classical period in Athens there was much specialization in manufacturing and that the quantity of goods was far greater than that which could have been produced in a purely “household economy.” At the same time, however, the scale and organization of manufacturing was a far cry from those of industrialized civilizations of recent centuries.

Markets and Prices

According to the Finley model, there was no network of interconnected markets to form a price-setting market economy in the ancient Greek world. Although this is true for the most part, like other aspects of the Finley model, the case is overstated. There do, for example, appear to be connections between markets for some commodities, such as grain and probably precious metals as well. In the case of grain, it can be shown that supply and demand over long-distances did have an impact on prices and traders sought to take advantage of the lag-time between price adjustments in order to make a profit. Obviously, though, this is nothing like the modern world in which the price of crude oil changes instantly worldwide in reaction to a change in supply from one of the major producers. For the most part in ancient Greece, prices were set in accordance with local conditions, personal relationships, and haggling.

Government price-fixing was limited. Although there is evidence that Athens, for example, fixed the retail price of bread in proportion to the wholesale price of grain, there is no evidence that it fixed the price of the latter. Even in times of severe grain shortages, Athens was content to allow traders bringing grain to Athens to charge the going rate. In such cases, the state alleviated the crises for its citizens by paying the going rate for the grain and then reselling it to its citizenry at a lower price.

Despite the general absence of interconnected markets, however, there were market places. Each city-state had at least one market place (agora) in the heart of city and a port market (emporion) as well, if it had a good harbor. The agora was a place of much activity, serving not only as a center of economic exchange, but also as a political, religious, and social center. In the agora one could find law courts, offices for public officials, and coin mints as well as shrines and temples. In fact, agorai were considered sacred places to the degree that they were marked off with boundary stones across which no one who had the stain of religious pollution could cross. Within the agora economic activities were segregated by types of goods, services, and labor so that there were specific places where one could regularly find the fishmongers, blacksmiths, money changers, and so on.

Ancient Greek city-states regulated the economic activities that took place in their markets to a certain degree. Public officials oversaw weights, measures, scales, and coinage to limit and resolve disputes in exchanges as well as to ensure state interests. For example, Athens employed a publicly owned slave to check coins and guard against counterfeiters. In this way, Athens protected the integrity of its own coinage as well as the interests of buyers and sellers. The state ensured the affordability of key goods, such as bread, by fixing its retail prices relative to the wholesale price of grain. Various activities in the market place were also taxed by the state. Port and transit taxes affected exchanges in emporia like the Piraeus of Athens and xenoi had to pay a special tax for engaging in transactions in the agora.

Trade

Local trade between countryside and urban center and on the retail level within cities continued largely as it had in the Archaic period. But rather than producers transporting and selling their surplus goods directly in city markets, specialized retailers (kapeloi) who profited as middlemen between producers and consumers became more the norm. Local trade goods could be probably transported over short distances on land. But long-distance trade over land was difficult and time consuming, given the mountainous topography of Greece and the fact that the fragmented city-states of Greece never built an extensive system of paved roads that tied them together in the manner of the Roman Empire. Most “roads” between cities were single track and suitable only for pack animals, though there were some on which wheeled carts could be pulled by oxen, donkeys, or mules.

Long-distance trade was primarily done by merchant ships over the waters of the Aegean, Mediterranean, and Black Seas. Evidence from the Attic Orators indicates that during the Classical period overseas trade developed into a specialized and important sector of the economy. Trade was carried out by private individuals and not organized by the state. A typical trading venture involved a non-citizen trader (emporos) who either owned his own ship or rented space on a ship owned by another (naukleros). In most cases described by the orators, the traders typically borrowed money from a citizen lender to finance the venture. There is some dispute among scholars whether such loans constituted productive borrowing on the part of the traders or were just a type of insurance, because the loans would only have to be repaid if the ship and cargo reached their contracted destinations. From the perspective of the lenders, the loans were certainly productive, since they charged interest at a rate much higher than that which applied to loans on the security of land, anywhere from 12 to 30%.

Marine archaeology has recently increased our knowledge of merchant vessels and their cargoes tenfold by the discovery of several ancient shipwrecks. The ships appear to have been generally small by modern standards. In 1968 the well-preserved wreck of a merchant ship from c. 300 B.C. was found off the coast of Kyrenia in Cyprus. Being only 35 feet long and 15 feet wide with a capacity of 30 tons, it is probably the kind of merchant vessel that made short hauls and kept within sight of the coastline. But other shipwrecks as well as evidence from the Attic Orators seem to indicate that the typical capacity of merchant vessels that traveled over long distances on the open sea was some 80 tons.

Many of the goods traded throughout ancient Greek history were luxury goods, manufactured items, such as jewelry and finely painted vases, as well as specialty agricultural products like fine wine and honey. Necessities were also traded, however, for without long-distance trade, many Greek cities would not have been able to obtain metals, timber, wine, and slaves. One of the most extensively traded necessity items was grain, which came to Athens typically from the Black Sea region, Thrace, and Egypt. According to the orator, Demosthenes, Athens imported some 400,000 medimnoi (approximately 4,800,000 liters) of grain per year in the late fourth century from the Crimean kingdom of the Bosporus alone.

Chiefly because of the need for certain imports, such as grain and timber, and for revenue drawn from taxes on trade, many cities did have an interest and involvement in overseas trade. Athens in particular made laws that prohibited the export of grain produced in Athens and required that loans on trading ventures be for cargoes of grain and that ships bringing grain into the Piraeus sell one-third of it on the spot and the remaining two-thirds in Athens. Athens also instituted special courts to expedite the adjudication of disputes involving traders, granted honors and privileges to anyone who performed extraordinary services relating to trade for the city, and made agreements with other states to obtain favorable conditions for those bringing grain to Athens.

In all the aforementioned examples Athens’ chief interest was to supply itself with imported grain so that its citizenry could obtain food at reasonable prices. Athens was not particularly concerned with helping traders and enhancing their profits per se or in obtaining a trade surplus or to protect home produced goods against imported foreign ones. To this extent, then, the Finley model holds true, even if it is clear that the Athenian state recognized that its interests were complementary with those of foreign traders and, thus, had to help them in order to help itself.

Moreover, it does appear that Athens had some concern about its home produced products as well, at least in the case of silver. Xenophon, an Athenian writer from the fourth century, noted that Athens could always be assured of traders bringing their goods into Athens, because traders knew they could always get a valuable trade commodity, namely silver in the form of Athenian coinage, in exchange. To ensure the demand for its silver, Athens took great care to maintain the reputation of its coinage for high quality and to associate that reputation with a familiar design that went unchanged for several centuries. Such a policy attests to a state interest in production and exports, at least in this sector of the economy.

Athens was also motivated to encourage trade to obtain revenue from taxes. Both transient and resident foreigner traders had to pay poll taxes in Athens that citizens did not. Athens also had various port, transit, and market taxes that would benefit by increased trade, including a two percent tax on all imports and exports.

Money and Banking

With few exceptions (Sparta being the most famous), the Greeks of the Classical period had a thoroughly monetized economy employing coinage whose value was based on precious metals, principally silver. The value of the coinage was commensurate to the value of the precious metal it contained with a small mark-up, since the value of the metal was guaranteed by its issuing state. The tie of the Greek monetary system to the supply of precious metals limited the ability of governments to influence their economies through the manipulation of their money supplies. However, we do know of cases when states debased their coinages for such purposes.

Ancient Greek coins are similar in appearance to modern ones. But like other manufactured products in ancient Greece, they were made by hand. A blank metal circular “flan” was placed on an obverse die that rested on an anvil and then was struck with a hammer bearing a reverse die. The nature of the process naturally produced coins in which the image was often poorly centered on the flan. Nevertheless, the issuing authority, usually a government, was clear as the designs or “types” of the coins expressed an image symbolic of the issuing authority and were often augmented by a “legend” of letters that spelled out an abbreviation of the issuing authority’s name.

Coinage was issued in a variety of denominations and weight standards by various city-states. The chief weight standards of the Classical period were the Attic, Aeginetan, Euboiic, and Corinthian. The basis of the Attic standard was the silver tetradrachm of 17.2 grams, which retained the design of the head of Athena on the obverse and her symbolic owl on the reverse throughout the Classical period. It was the most widely circulated coinage during this time and appears in large numbers of hoards found throughout the Greek world and beyond. This was due not only to the far reach of Athenian trade, but also to Athenian imperialism. Athens used its coinage to pay for its military operations abroad and even issued the “Standards Decree,” which for a few decades of the fifth century required the many cities of the Aegean Sea under its control to discontinue their local types and use only Athenian coinage. The local coinage had to be turned in, melted down, and re-struck as Athenian coinage for a fee. Unlike that of Athens, most city-states’ coinages circulated only locally. When such local issues were taken abroad, they were probably treated as bullion, as can be inferred from test-cuts often found on them.

A recent debate among scholars concerns the degree to which coinage was an economic or a political phenomenon in the ancient Greek world. Finley’s model, of course, holds that coinage had strictly political functions. Finley believed that coinage was merely a tool designed to reinforce and project a city-state’s civic identity. States minted coins not to facilitate economic transactions among their citizens, but merely for state purposes so that, for example, it had a convenient medium through which to collect taxes or make state expenditures. Athens’ “Standards Decree” was not undertaken for economic gain, but for political purposes to facilitate tribute payments and to show Athens’ subjects who was boss.

But here again Finley goes too far. Although the type of a Greek coin certainly expressed political symbols and could, therefore, serve as a political tool, such symbolism was largely lost on people who used the coins in places like Egypt, the Levant, Asia Minor, and Mesopotamia, where hoards of Greek coins have been found in abundance. The fact that they could use the coins independently of their original political context (and for what else besides economic purposes then?) is a good reason to believe that the Greeks could do so as well. Moreover, as Henry Kim has recently argued, the minting of large quantities of small-denomination coinage from the outset in Greece shows that the state did have a concern for the wide use of coinage at the micro-level by common people in day-to-day economic exchanges, not just for large-scale public and political purposes.

Nevertheless, one of the most active areas of research on ancient Greek money and coinage today concerns its representational nature and place within sectors other than the economy, including religion, society, and politics. Both Leslie Kurke and Sitta von Reden have argued that the advent of a monetized economy employing coinage need not have undermined traditional values or led to a disembedding of the economy. Rather, the symbolic aspect of coinage could be manipulated to reinforce traditional social and religious practices that were non-economic in the modern sense. In her analysis of the poetry of Pindar, for example, Kurke argues that the poet re-embedded money within traditional social values, thereby allowing the landed aristocratic elite to embrace money and its potential for de-personalizing social interactions without discarding the old social ties and values that bolstered their privileged place in society. Although von Reden believes that the use of coinage arose within an embedded economic context and, therefore, did not have to be re-embedded, she has argued that coinage and other forms of money did not have an intrinsically economic use or meaning in ancient Greece, but rather multiple meanings that were determined by the context within which they were used, which could be social, religious, or political as well as economic.

Given that the ancient Greeks did have a monetized economy, it is not surprising that they also developed banking and credit institutions. It is generally agreed that at the very least, bankers, who were metics as a rule (note Pasion and Phormion above), performed various functions from money-changing to securing deposits in cash and other assets. The question whether bankers lent out money deposited by others at interest, however, is the subject of some debate. Paul Millett, a student of Finley, not surprisingly argues in his book, Lending and Borrowing in Ancient Athens, that bankers did not loan out other peoples money for interest and he formulates a model in which lending and borrowing were predominantly done for consumptive purposes and, therefore, thoroughly embedded in traditional social relations. In contrast, Edward Cohen’s book, Athenian Economy and Society: A Banking Perspective, employs a close philological analysis of the evidence in his assertion that productive lending and borrowing, divorced from concerns for personal relationships, were common in Classical Athens and that bankers did indeed lend out deposited money at interest. Although Millett may be right that much of the lending and borrowing in Athens was for consumptive purposes, particularly those secured by landed property, it is hard to deny that the evidence of productive lending and borrowing from banking practices, numerous maritime loans, and even temple loans in the Classical period constitute something more than just exceptions to the rule.

Economic Changes during the Hellenistic Period

In large part owing to the Near Eastern conquests of Alexander the Great, but also because of social and economic changes that had already been occurring during the Classical period, the economy of the Hellenistic period (323-30 B.C.) grew immensely in scale. The Finley model is probably right in general to hold that the essentially consumptive nature of the economy in the traditional Greek homelands changed little during this time. But it is clear that there were significant innovations in some places and sectors on account of the collision and fusion of Greek notions of the economy with those of the newly won lands of the Near East. Thus, we see greatly increased government control over the economy, as evidenced most strikingly in the surviving papyrus records of the Greek Ptolemaic dynasty that ruled Egypt.

A large percentage of the land and, therefore, agriculture, was controlled by the Greek royal dynasties that ran the Hellenistic kingdoms. Peasants whose status lay somewhere between slave and free not only worked the king’s lands, but were also often required to labor on other royal projects. The Ptolemies of Egypt dominated agriculture to such an extent that they instituted an official planting schedule for various crops and even loaned out the tools used by farmers on state-owned lands. Almost all produce from these estates was turned over to the government and redistributed for sale to the population. Some crown lands, however, were assigned to government officials or soldiers and though technically still the property of the state, they often came to be treated as de facto private property.

The Ptolemaic state also involved itself in various manufacturing processes, such as olive oil production. Not only were the olives cultivated on state-controlled lands by peasant labor, but the oil was extracted by contracted labor and sold at the retail level by licensed dealers at fixed prices. However, the state probably had no intention to improve efficiency or to provide better quality olive oil at lower prices to its citizens. The Ptolemies instituted a tax on imported olive oil of 50 percent that was essentially a protective tariff. The goal of the government seems to have been to protect the profits of its state-run business.

Yet for all its interference in the economy, the Ptolemaic government did not assemble a state merchant fleet and instead contracted with private traders to transport grain to and from public granaries. It also left it up to private traders to import the few goods that Egypt needed from abroad, including various metals, timber, horses, and elephants, all of which were essential for the Ptolemies’ standing mercenary army and fleet. But although the Ptolemies also exported wheat and papyrus, for the most part, the economy of Egypt was a closed one. Unlike the other Hellenistic kingdoms, Egypt minted coins on a lighter standard than the Attic one universalized by Alexander the Great. Moreover, in 285, the Ptolemies barred the use of foreign coins in Egypt and required them to be turned in to government officials, melted down, and re-minted as Egyptian coinage for a fee. Although Egypt controlled gold mines in Nubia, it did not produce silver and had chronic shortages of silver coins for daily transactions. Thus, many exchanges were performed in kind rather than in cash, even though value was always expressed in cash equivalents.

Despite its chronic shortages of silver coins and its closed coinage system, Egypt still had a coin-based economy largely because of Alexander the Great, who flooded the economies of the eastern Mediterranean with coins and monetized some places in the Near East for the first time. Along with coinage, Greek banking practices also made their way into these areas. Thus, the general scale of economic activities increased as large kingdoms of the Near East and the Greek mainland and islands became more interconnected. Although this was offset to some degree by political instability and warfare during the Hellenistic period, in general we do see economic activity on a larger scale and increased specialization as some places, such as Tyre and Sidon in Phoenicia, became renowned for particular products, in this case purple dye and glassware respectively. Moreover, thousands of amphorae whose handles were stamped with names of issuing magistrates have been found that, if nothing else, reveal a very high volume of pottery production and may also allow scholars some day to reconstruct in more detail other aspects of the economy, such as agricultural production, land tenure, and trade patterns.

The Hellenistic period is known for its technological innovation and some new technologies did have an impact on the economy. Archimedes’ screw-like pump was used to remove water from mines and to improve irrigation for agriculture. In addition, new varieties of wheat and the increased use of iron ploughs improved yield while better grape and olive presses facilitated wine and oil production. Unfortunately, some of the most impressive technological innovations of the Hellenistic period, such as Heron’s steam engine, were never applied in any significant way. Thus, most production continued to be low tech and labor intensive.

All in all, then, although the scale of the economy increased during the Hellenistic period, consumption still seems to have been the primary goal. Technology was not applied as much as it might have been to increase production. States were much more involved in economic affairs, both in controlling production and in collecting taxes on countless items and activities, but mostly just to extract as much revenue from them as possible. The revenue was spent in turn in royal benefactions (euergetism), but mostly only for ostentatious display that threw money into non-productive sink holes.

Conclusion

The foregoing survey shows that the Finley model provides a reasonable, if simplified, general picture of the ancient Greek economy. Overall, the ancient Greek economy was very different from our own. It was much smaller in scale and differed in quality as well, since it generally lacked the productive growth mentality and the interconnected markets that are so characteristic of most of the world economy today. With regard to the details, however, recent studies are showing that the Finley model does at least need to be revised. As more research is done, it may even be necessary to replace the Finley model altogether in favor of one that fits the evidence better. In the meantime, though, we can still use Finley’s model as a basic description while being careful to acknowledge the contradictory evidence provided by recent studies and continuing to investigate the various sectors of the ancient Greek economy at various times and places.

Select Annotated Bibliography

The bibliography on the ancient Greek economy is enormous and it would be counterproductive to list all works here. Therefore, I list only a selection of the essential primary and secondary works, preferring more recent works in English for the sake of students. Further and more specialized works may be found within the bibliographies of the works listed below.

Primary Sources

Literary Works

Many of the literary works listed below are available in the Loeb Classical Library and Penguin Classics series in English translations.

Aristotle, Politics (particularly 1.1258b37-1.1259a5)

In his study of the polis, Aristotle devotes this section to modes of acquisition and criticizes what we would call “capitalism.”

[Aristotle], Oikonomikos (Economics – “household management”)

Book 2 shows how states obtain revenues. The methods are largely coercive, not productive, such as cornering the market in grain during a famine, debasing coinage, etc.

Demosthenes and [Demosthenes], speeches

Especially useful are several speeches for lawsuits involving economic matters.

Hesiod, Works and Days

A poem containing advice and attitudes about farming in the early Archaic period, c 700 B.C.

Homer, Iliad and Odyssey

Two great epic poems with much information about economic practices at the outset of the Archaic period, c. 800-750 B.C.

Isokrates, speeches (especially Trapezitikos and On the Peace)

On the Peace argues for economic activity rather than warfare as a means of obtaining revenues for the state. Trapezitikos concerns a lawsuit involving trade and banking.

Lysias, speeches (especially On the Grain Retailers)

Plato, Republic and Laws

These two dialogues concern the organization of the polis. Although the Republic represents the ideal city-state and the Laws presents a more realistic picture, both betray an elitist disdain for non-landed economic activities.

Xenophon, Oikonomikos (Economics – “household management”) and Poroi (Revenues)

Two extended essays on household management and the means by which the state may obtain more revenues, respectively. The latter is one of the most important documents concerning state interests in trade and mining.

[Xenophon] “The Old Oligarch” (or “Constitution of the Athenians”)

This is an anonymous mid-fifth-century B.C. political pamphlet that argues that the life-blood of Athenian democracy is the economic exploitation of the so-called “allies” of Athens.

Collections of Primary Sources: Documentary, Epigraphic, and Material

Burstein, S.M. The Hellenistic Age from the Battle of Ipsos to the Death of Kleopatra VII. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Fornara, C.W. From Archaic Times to the End of the Peloponnesian War, second edition. Cambridge: Cambridge University Press, 1983.

A collection of documents, including inscriptions, translated into English.

Harding, P. From the End of the Peloponnesian War to the Battle of Ipsus. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Meijer, F. and O. van Nijf. Trade, Transport, and Society in the Ancient World. New York and London: Routledge, 1992.

A sourcebook of documents translated into English.

Thompson, M., O. Mørkholm, and C.M. Kraay, editors. An Inventory of Greek Coin Hoards. New York: American Numismatic Society, 1973.

Essential listing of all discovered hoards of ancient Greek coins up to 1973.

Wiedemann, T. Greek and Roman Slavery. Baltimore: Johns Hopkins University Press, 1981.

Excellent collection of documents on Greek and Roman slavery translated into English.

Secondary Sources

General Works and Surveys

Austin, M.M. and P. Vidal-Naquet. Economic and Social History of Ancient Greece. Berkeley: University of California Press, 1977.

Provides both a survey of the subject and excerpts from the primary sources of evidence. It adheres to the Finley model in general.

Austin, M.M. 1988. “Greek Trade, Industry, and Labor.” In Civilization of the Ancient Mediterranean: Greece and Rome, volume 2, edited by M. Grant and R. Kitzinger, 723-51. New York: Scribner’s.

Often insightful overview of the ancient Greek economy primarily from the Finley perspective.

Cambridge Ancient History (CAH), second edition. Several volumes. Cambridge: Cambridge University Press.

The standard encyclopedia of ancient history with entries on various subjects, including the ancient Greek economy at different periods, by leading scholars.

Finley, M. I. The Ancient Economy, second edition. Berkeley: University of California Press. 1985. (Now available in an “Updated Edition” with a foreword by Ian Morris. Berkeley: University of California Press, 1999.)

The most influential book on the subject since its initial publication in 1973. It takes a synchronic approach to the Greek and Roman economies and argues that they cannot be analyzed or understood in terms appropriate for modern economic analysis. In general, the ancient Greek economy was “embedded” in “non-economic” social and political values and institutions. Heavily influenced by Weber, Hasebroek, and Polanyi.

Hasebroek, J. Trade and Politics in Ancient Greece. Translated by L.M. Fraser and D.C. MacGregor. Reprint. London, 1933. (Originally published as Staat und Handel im alten Griechenland [Tübingen, 1928].)

A classic that greatly influenced Finley.

Hopper, R.J. Trade and Industry in Classical Greece. London: Thames and Hudson, 1979.

Survey of various aspects of the ancient Greek economy in the Classical period.

Humphreys, S.C. “Economy and Society in Classical Athens.” Annali della Scuola Normale Superiore di Pisa 39 (1970):1-26.

An important survey that also argues for focused studies on individual sectors of the ancient Greek economy at particular times and places.

Lowry, S.T. “Recent Literature on Ancient Greek Economic Thought.” Journal of Economic Literature 17 (1979): 65-86.

Michell, H. The Economics of Ancient Greece, second edition. Cambridge: W. Heffer, 1963.

Slightly dated, but useful survey.

Morris, Ian. “The Ancient Economy Twenty Years after The Ancient Economy.” Classical Philology 89 (1994): 351-366.

Excellent survey of new approaches to the study of the ancient Greek and Roman economies since Finley, to whose model the author is generally sympathetic.

Oxford Classical Dictionary (OCD), third revised edition, edited by S. Hornblower and A. Spawforth. Oxford: Oxford University Press, 2003.

Includes brief entries by leading scholars on various aspects of the ancient Greek economy.

Pearson, H.W. “The Secular Debate on Economic Primitivism.” In Trade and Market in the Early Empires, edited by K. Polanyi, C.M. Arensberg, and H.W. Pearson, 3-11. Glencoe, IL: Free Press, 1957.

A concise statement of the influential ideas of Karl Polyani about the ancient Greek economy.

Rostovtzeff, M. The Social and Economic History of the Hellenistic World. Oxford: Oxford University Press, 1941.

Monumental “modernist” approach to a wealth of archaeological evidence about the economy during the Hellenistic period.

Samuel, A.E. From Athens to Alexandria: Hellenism and Social Goals in Ptolemaic Egypt. Lovanii, 1983.

A good survey with an important discussion of ancient Greek attitudes toward economic growth.

Starr, C.G. The Economic and Social Growth of Early Greece, 800-500 B.C. Oxford: Oxford University Press, 1977.

Modernist survey.

Weber, M. Economy and Society. Translated by E. Fischoff et al. Edited by G. Roth and C.

Wittich. Berkeley: University of California Press, 1968. (Originally published as Wirtschaft und Gesellschaft [Tübingen, 1956].)

A classic that greatly influenced Hasebroek and Finley.

Collections

Archibald, Z.H., J. Davies, and G. Oliver. Hellenistic Economies. London: Routledge, 2001.

Collection of articles that take the study of the economy in the Hellenistic period beyond Rostovtzeff.

Cartledge, P., E.E. Cohen, and L. Foxhall. Money, Labour, and Land: Approaches to the Economies of Ancient Greece. London: Routledge, 2002.

Finley, M.I. Economy and Society in Ancient Greece. Edited by B.D. Shaw and R.P. Saller. New York: Viking, 1982.

Garnsey, P. Non-Slave Labour in the Graeco-Roman World. Cambridge: Cambridge Philological Society, 1980.

Garnsey, P., K. Hopkins, and C.R. Whittaker. Trade in the Ancient Economy. Berkeley: University of California Press, 1983.

A collection of articles along Finley lines.

Mattingly, D.J. and J. Salmon. Economies beyond Agriculture in the Classical World. London: Routledge, 2001.

A collection of articles that focuses on the non-agrarian sectors of the ancient Greek and Roman economies with a mind to revising the Finley model.

Meadows, A. and K. Shipton. Money and Its Uses in the Ancient Greek World. Oxford: Oxford University Press, 2001.

A collection of articles on the use of money and coinage in ancient Greece.

Parkins, H. and C. Smith. Trade, Traders, and the Ancient City. London: Routledge, 1998.

Scheidel, W. and S. von Reden. The Ancient Economy. London: Routledge, 2002.

An excellent collection of some of the most important articles on the ancient Greek and Roman economy from the last 30 years with a helpful introduction, notes, and glossary. Especially useful is their “Guide to Further Reading,” pp. 272-278.

Specialized Works

Brock, R. “The Labour of Women in Classical Athens.” Classical Quarterly 44 (1994): 336-346.

Burke, E.M. “The Economy of Athens in the Classical Era: Some Adjustments to the Primitivist Model.” Transactions of the American Philological Association 122 (1992): 199-226.

A good argument that attempts to adjust the Finley model.

Carradice, I. and M. Price. Coinage in the Greek World. London: Seaby, 1988.

A brief, accessible survey.

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

A close philological study of the evidence for banking practices in Classical Athens that argues for a disembedded economy with productive credit transactions.

Engen, D.T. Athenian Trade Policy, 415-307 B.C.: Honors and Privileges for Trade-Related Services. Ph.D. dissertation, UCLA, 1996. (This dissertation is currently being revised for publication as a book tentatively entitled, Honor and Profit: Athenian Trade Policy, 415-307 B.C.E.)

Examines Athenian state honors for those performing services relating to trade and argues for a revision of some aspects of the Finley model.

Engen, D.T. “Trade, Traders, and the Economy of Athens in the Fourth Century B.C.E.” In Prehistory and History: Ethnicity, Class, and Political Economy, edited by David W. Tandy, 179-202. Montreal: Black Rose, 2001.

Argues for the diversity of those responsible for trade involving Classical Athens.

Engen, D.T. “Ancient Greenbacks: Athenian Owls, the Law of Nikophon, and the Ancient Greek Economy.” Historia, forthcoming(a).

Argues that the numismatic policies of Athens may indicate a state interest in exports.

­­­­­Engen, D.T. “Seeing the Forest for the Trees of the Ancient Economy.” Ancient History Bulletin, forthcoming(b).

A review article of Meadows and Shipton, 2001, and Scheidel and von Reden, 2002, that argues for the mutual compatibility of broad and detailed studies of the ancient Greek and Roman economies.

Finley, M.I. The World of Odysseus, revised edition. Harmondsworth: Penguin, 1965.

A brief and highly readable survey of the early Archaic period.

Fisher, N.R.E. Slavery in Classical Greece. London: Bristol Classical Press, 1993.

A brief survey.

Garlan, Y. Slavery in Ancient Greece, revised edition. Ithaca: Cornell University Press, 1988.

The standard survey of slavery in ancient Greece.

Garnsey, P. Famine and Food Supply in the Greco-Roman World. Cambridge: Cambridge University Press, 1988.

Examines private and public strategies to ensure food supplies.

Isager, S. and J.E. Skydsgaard. Ancient Greek Agriculture: An Introduction. London: Routledge, 1992.

Kim, H.S. “Archaic Coinage as Evidence for the Use of Money.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 7-21. Oxford: Oxford University Press, 2001.

Argues that the existence of large quantities of small-denomination coins from the earliest of coinage in ancient Greece is evidence of the economic use of coinage.

Kraay, C.M. Archaic and Classical Greek Coins. Berkeley: University of California Press, 1976.

Long the standard survey of ancient Greek coinage.

Kurke, L. The Traffic in Praise: Pindar and the Poetics of Social Economy. Ithaca: Cornell University Press, 1991.

Takes the new cultural history approach to analyzing the poetry of Pindar and how it represents money within the social and political value system of ancient Greece.

Kurke, L. Coins, Bodies, Games, and Gold: The Politics of Meaning in Archaic Greece, 1999. Princeton: Princeton University Press.

Millett, P. Lending and Borrowing in Ancient Athens. Cambridge: Cambridge University Press, 1991.

Reinforces the Finley model by arguing that lending and borrowing was primarily for consumptive purposes and embedded among traditional communal values in Athens.

Osborne, R. Classical Landscape with Figures: The Ancient Greek City and Its Countryside. London: George Philip, 1987.

Explores rural production and exchange within political and religious contexts.

Sallares, R. The Ecology of the Ancient Greek World. London: Duckworth, 1991.

Interdisciplinary analysis of a massive amount of information on a wide variety of aspects of the ecology of ancient Greece.

Schaps, David M. The Invention of Coinage and the Monetization of Ancient Greece. Ann Arbor: University of Michigan Press, 2004.

Shipton, K. “Money and the Elite in Classical Athens.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 129-44. Oxford: Oxford University Press, 2001.

Argues that the elite of Athens preferred leasing high-profit silver mines to public land.

Tandy, D. Warriors into Traders: The Power of the Market in Early Greece. Berkeley: University of California Press, 1997.

Traces developments in the economy of the Archaic period and argues that they had an important impact in the formation of the basic social and political institutions of the polis.

Von Reden, S. Exchange in Ancient Greece. London: Duckworth. 1995.

Employs the methods of new cultural history to argue that exchange in ancient Greece was thoroughly embedded in non-economic social, religious, and political institutions and practices.

Von Reden, S. “Money, Law, and Exchange: Coinage in the Greek Polis.” Journal of Hellenic Studies 107 (1997): 154-176.

A cultural historical study of the representational uses of coinage in the social, political, and economic life of ancient Greece at the advent of the use of coinage.

White, K.D. Greek and Roman Technology. London: Thames and Hudson, 1984.

1 Portions of this article have or will appear in other forms in Engen, 1996, Engen, 2001, Engen, Forthcoming(a), and Engen, Forthcoming(b).

2 This article will not discuss the preceding Mycenaean period (c. 1700-1100 B.C.) and “Dark Age” (c. 1100-776 B.C.E.). During the Mycenaean period, the ancient Greeks had primarily a Near Eastern style palace-controlled, redistributive economy, but this crumbled on account of violent disruptions and population movements, leaving Greece largely in the “dark” and the economy depressed for most of the next 300 years.

Citation: Engen, Darel. “The Economy of Ancient Greece”. EH.Net Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/the-economy-of-ancient-greece/

Agricultural Tenures and Tithes

David R. Stead, University of York

The Tenurial Ladder

Agricultural land tenures, the arrangements under which farmers occupied farmland, continue to be the subject of extensive study by agricultural historians and economists. They have identified a “ladder” of tenures broadly classified by the degree of independence each type offered the farmer. Some of the key features of the main forms of tenurial agreements are briefly described below. In practice, though, the characteristics of these different tenures shaded into one another and they often had their own particular local features, ensuring that the distinctions among them were frequently blurred.

At the top of the tenurial ladder was owner occupation, where the farmer owned and farmed his property as a peasant proprietor or capitalist producer. All other types of tenure involved a separation between the ownership and the use of land. On the next rung were hereditary tenures, which gave the occupant quasi-ownership of the farm. The hereditary tenant had a lifelong right to cultivate the holding, and was allowed to bequeath it to his direct heirs. However, his freedom of action was subject to various restrictions imposed by the superior landowner, whose permission may have been needed to adopt a new course of husbandry, for example, and who might have levied a payment when the farm changed hands. Under some circumstances the landlord could also possess the right to evict the hereditary tenant, for instance if the property was not kept in a good state of maintenance.

After owner occupation and hereditary tenures was leasehold, where the tenant occupied under a lease either lasting until a number of persons named in the contract had died, or for some certain term of years (for example, “tacks” for nineteen years were prevalent in Scotland around the turn of the nineteenth century). In the former case the names stated were often those of the farmer, his wife and son, and thus this kind of lease approached hereditary tenure. The typical leaseholder for years was charged a fixed cash rent per annum which was equal or close to the yearly economic value of the land (a rack rent). In contrast, the typical leaseholder for lives paid a small annual rent that was well below the rack rent, together with a much larger “fine” levied when the landlord granted a new lease or when the sitting tenant wished to add another name to the contract after an existing life had ended.

On a lower rung of the tenurial ladder was sharecropping (the modern preference is for “cropsharing”). Here, the landlord took the rent in kind, instead of in cash, as some share of the farm’s annual produce (predominately one half). The sharecropping landlord tended to be closely involved in the management of farming operations, and met part of the production costs. Tenancy-at-will was the next broad category of tenure. The farmer did not have a written lease but instead held from year to year at the will of the landowner, who in theory could evict the occupant at short notice for no reason. In practice, however, many landlords tended to leave tenants-at-will undisturbed so long as their husbandry was satisfactory. Changing tenants was costly for the landowner if only because the incumbent occupier possessed specialist knowledge of the idiosyncrasies of the farm’s soil, which would take a newcomer time to learn.

Serfdom and slavery were on the lowest rungs of the tenurial ladder because under these tenures the farmer was compelled to till the soil and often received little of the returns from his labors. In the feudal system in medieval Europe, even servile peasants were not the property of their manorial lord (unlike slaves), but they were – to varying degrees – bound to the land because they usually could not move (or marry) without their lord’s permission. Feudal tenants were generally required to pay some form of rent and also render personal labor services to their lord, most commonly working on his land a few days a week. Over time, these labor services were gradually commuted to a money payment. Finally, it is probably not unreasonable to include most communal forms of land tenure near the bottom of the tenurial ladder. Where land was owned or used by multiple persons, as on the village common and under Soviet collectivization, the communal nature of decision-making must have curbed the freedom of action of the enterprising farmer.

Tenurial Choice

It is possible to identify, as a very rough worldwide generalization, at least three main changes over the centuries in the types of tenure employed. First, with the gradual decline or abolition of communism, feudalism and slavery, there has been a shift towards tenurial systems based on market relations rather than collectivism or coercion. The second change has been the progressive substitution of leases for lives with leases for years, and the third has been a move towards owner occupation and fixed rent leasing at the expense of sharecropping. These shifts have occurred at different rates in different regions, and the progression has not always been linear, but sometimes characterized by reversals. This has produced enormous variation in the popularity of the various tenures. For example, in the eighteenth century sharecropping was common throughout much of the European Continent but was almost unknown in England and Ireland. Indeed, it was not uncommon for multiple forms of tenure to co-exist in the same village at the same time. After the emancipation of slaves in the American South, for instance, a diverse mix of tenures was employed: the traditional assertion that sharecropping replaced slavery in the postbellum countryside is an oversimplification.

Of the tenures listed above, it is the choice of sharecropping that has most fascinated agricultural economists. Its popularity appeared puzzling after many eighteenth and nineteenth century writers argued that this arrangement acted as a check on agrarian improvement because the farmer did not receive the full amount of any increase in farm output. More recently, however, the benefits of share tenancy have been recognised. For example, by dividing the crop, the sharecropping landlord shared the risks of a bad harvest with the tenant, thereby providing partial insurance to farmers who disliked being exposed to risk whilst still preserving some incentive for the occupier to undertake improvements. (By contrast, the fixed rent tenant contracted to pay the same amount irrespective of whether the harvest was profitable or poor.) Another sharecropping puzzle was why the output split was predominately 50/50 – indeed the French and Italian words for share tenancy, metayage and mezzadria respectively, mean splitting in half – when it might be expected that the landlord’s cut would have varied far more from farm to farm. This “easy” and “fair” fraction appears to have been a natural focal point that landlords and tenants were drawn to, thereby avoiding potentially protracted haggling that might have scarred their subsequent relationship.

Tenurial choice over the past century or so can be described using the (albeit imperfect) available body of statistics. Table 1 provides benchmarks of the percentage of agricultural land leased by farmers in several western European countries since the late nineteenth century (land not leased was owner occupied). Almost all farmland in England and Wales and Ireland at the beginning of the period covered by the table was owned by large landowners who divided their estates into farm-sized pieces which were rented out. The farm tenancy sectors of the three Continental countries in 1880 were noticeably smaller. One common factor among the various possible explanations for this was the 1804 Napoleonic Code, introduced in France and the then French empire which included Belgium and the Netherlands. The Code created inheritance laws that split the deceased’s landholdings equally among all heirs rather than, as elsewhere, the eldest son inheriting the whole property. This legal pressure for the fragmentation of landownership helped to produce a sizeable class of small owner occupying farmers on the Continent.

Table 1

Share of Land Leased by Tenant Farmers
in Selected Western European Countries, 1880-1997
(% of total agricultural land)

Belgium England & Wales France Ireland Netherlands
1880 64 85a 40 96b 40
1910 72 89 n/a 42 53
1930 62 63 40 6 49
1950 67 62 44 5 56
1980 71 47 51 8 41
1997 68 33 58 13 34

Source: Swinnen (2002), table 2.
Notes: a figure for 1885; b figure for 1870. Land not leased was owner occupied.

The most striking change since the late nineteenth century has been the rapid shrinkage of the English and Welsh, and especially Irish, tenancy sectors by 1930. In England and Wales, higher taxation (including increased death duties) combined with the legacy of an agricultural depression and the deaths of many landlords or their heirs in World War One to produce a situation where numerous owners were forced to sell to tenant farmers who had profited during the wartime agricultural boom. The even more dramatic decline of tenancy in Ireland was chiefly due to a series of state legislation beginning in 1870 that provided subsidized government loans – made on increasingly favorable terms – to help tenants purchase their holdings: the 1923 Land Act made such sales compulsory. Since the Second World War, most of the countries covered by Table 1 have enacted legal changes increasing rent controls and especially the security of leases. These restrictions have made tenancy more attractive for tenants but more importantly less so for landowners, which helps explain the post-war shrinkage of the tenancy sectors in England and Wales and the Netherlands. By contrast, in France the proportion of land leased has risen in recent years partly in response to government policies encouraging leasing, such as lower taxes on land rents.

The general prevalence of owner occupation in the second half of the twentieth century suggested by Table 1 is supported by Figure 1, which gives a snapshot of the global situation in 1970 using data from the world census of agriculture. The first of each pair of columns shows the percentage of all farmland in each region held under owner occupation. Usually the majority of land was cultivated by its owner, although in Africa communal tenures were more widespread. The second of each pair of columns shows the proportion of land in just the tenancy sector of each region that was let under a sharecropping contract. Despite its traditional association with poverty, sharecropping remains persistently popular even in modern advanced farming sectors, notably in North America where nearly a third of tenanted land in 1970 was occupied by sharecroppers.

Figure 1
Percentage of Total Farmland Held under Owner Cultivation, and the Percentage of Tenanted Land Held under Sharecropping, Various Regions, 1970

Source: Otsuka et al. (1992), table 1

The Historical Role of the Lease

A number of contemporaries and historians have suggested that the lease played an important role in influencing farming practices. Short leases, especially tenancies at will, were loudly criticized by the eighteenth-century English writers Arthur Young and William Marshall on the grounds that these contracts did not provide the tenant with sufficient security to make long-term investments to the farm, such as draining the land. If the benefits from these types of expenditures were not fully realized until after the original lease expired, then there was a danger that the tenant would lose part of his investment returns if the landlord acted opportunistically by evicting him, or by renewing his lease but at a higher rent. Tenants may therefore have been wary of making large expenditures for fear of the later consequences, inhibiting agricultural improvement. How serious a problem the potential insecurity of short leases was in practice is a moot point. Landlords not lessees undertook much of the long-term investments, and for those expenditures that were made by tenants, legal or customary rights existing outside the tenancy agreement might have provided at least some security. Outgoing farmers, for instance, could be due compensation for their “unexhausted improvements,” as under Ulster (Ireland) and English tenant right, and some landlords might have been able to establish a reputation for not unfairly treating their tenantry. Furthermore, when the economic conditions faced by farmers were depressed or uncertain, many tenants actually preferred a short lease because this ensured that they were not tied to the holding if it turned out to be unprofitable.

Leases could have promoted innovative, or at least best practice, farming if the landowner had used these documents to insist on the tenantry adopting certain types of crops and crop rotations. Evidence from England during the long eighteenth century, however, indicates that the husbandry clauses written into leases were primarily designed to restrict tenants from engaging in a course of farming that would be deleterious to long-term soil fertility, rather than stipulating that the latest agricultural methods be employed. Thus instead of demanding that (say) turnips be cultivated, popular covenants in English leases included those prohibiting the growing of more than two successive cereal crops on the same field or the plowing of pasture land without the landowner’s prior written consent.

Tithes

Landlords and tenants were not the only parties with a close interest in the produce of the soil. Farmers frequently had to pay tithe, a tax payable for the support of the church. Probably originating as a voluntary payment in early Christian communities, tithes became a legally enforced obligation in many countries – particularly in western Europe – during the Middle Ages. The tithe was supposedly levied at one tenth of the gross value of the farm’s annual produce and was traditionally paid in kind, whereby the clergyman would claim every tenth sheaf of corn (etc.). In practice, a complex combination of case law and custom exempted various types of land and products. Moreover, frequently the tithe owner was not actually a member of the clergy, often because a layperson had purchased church-owned land that had tithing rights attached to it. Many contemporary agricultural writers, not without some justification, criticized tithes in kind on the grounds that they acted as a disincentive to agrarian improvement because, as with a sharecropping agreement, the farmer did not receive the full amount of any rise in farm output. Payment of tithes in kind also offered substantial scope for friction between tithe payers and collectors, for example over whether new crops, such as potatoes, were titheable. To thwart those farmers who sought to under-report their produce, or give poor quality products as tithe (one milkmaid urinated in the tithe milk), the tithing man typically collected his due from the fields rather than allowing the payer to deliver it to the tithe barn.

On account of these disputes and inconveniences, tithes in kind were often commuted to a fixed or variable annual cash payment. Alternatively an allotment of land or a lump sum might be given in return for the church extinguishing tithes. Many of these substitutions were achieved under government legislation, such as the 1836 and 1936 Tithe Acts in England. Yet cash payment was far from being free from conflict arising, for instance, when the church attempted to annul a fixed money charge that, owing to inflation, had fallen to a trifling amount. The underlying friction peaked in so-called tithe wars, which were characterized by demonstrations by payers and varying degrees of violent clashes with collectors; examples include Ireland in the 1830s and England and Wales in the 1930s. In short, the multiplicity of tithing customs and seemingly endless disputes over payment suggest that some tithe owners at some times got closer to obtaining their tenth than others.

Bibliography

Alston, Lee J. and Robert Higgs. “Contractual Mix in Southern Agriculture since the Civil War: Facts, Hypotheses, and Tests.” Journal of Economic History 42 (1982): 327-53.

Blum, Jerome. The End of the Old Order in Rural Europe. Princeton: Princeton University Press, 1978.

Brinkman, Carl, Heinrich Cunow, Fritz Heichelheim, Robert H. Lowie, George McCutchen McBride, David Mitrany, Radha Kamal Mukerjee, Peter Struve and Yosaburo Takekoshi. “Land Tenure.” In The Encyclopaedia of the Social Sciences, Volume 9, 73-127. London: Macmillan, 1933.

Cameron, Rondo and Larry Neal. A Concise Economic History of the World: From Paleolithic Times to the Present. Oxford: Oxford University Press, fourth edition, 2003.

Carmona, Juan and James Simpson. “The ‘Rabassa Morta’ in Catalan Viticulture: The Rise and Decline of a Long-Term Sharecropping Contract, 1670s-1920s.” Journal of Economic History 59 (1999): 290-315.

Evans, Eric J. The Contentious Tithe: The Tithe Problem and English Agriculture, 1750-1850. London: Routledge and Kegan Paul, 1976.

Harvey, Barbara. “The Leasing of the Abbot of Westminster’s Demesnes in the Later Middle Ages.” Economic History Review 22 (1969): 17-27.

Le Roy Ladurie, Emmanuel and Joseph Goy. Tithe and Agrarian History from the Fourteenth to the Nineteenth Centuries. Cambridge: Cambridge University Press, 1982.

O Grada, Cormac. Ireland: A New Economic History, 1780-1939. Oxford: Oxford University Press, 1994.

Otsuka, Keijiro, Hiroyuki Chuma and Yujiro Hayami. “Land and Labor Contracts in Agrarian Economies: Theories and Facts.” Journal of Economic Literature 30 (1992): 1965-2018.

Overton, Mark. Agricultural Revolution in England: The Transformation of the Agrarian Economy, 1500-1850. Cambridge: Cambridge University Press, 1996.

Stead, David R. “Crops and Contracts: Land Tenure in England, c. 1700-1850.” D.Phil. thesis, University of Oxford, 2002.

Swinnen, Johan F. M. “Political Reforms, Rural Crises and Land Tenure in Western Europe.” Food Policy 27 (2002): 371-94.

Wade Martins, Susanna and Tom Williamson. “The Development of the Lease and Its Role in Agricultural Improvement in East Anglia, 1660-1870.” Agricultural History Review 46 (1998): 127-41.

Whyte, Ian D. “Written Leases and Their Impact on Scottish Agriculture in the Seventeenth Century.” Agricultural History Review 27 (1979): 1-9.

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Citation: Stead, David. “Agricultural Tenures and Tithes”. EH.Net Encyclopedia, edited by Robert Whaples. January 25, 2004. URL http://eh.net/encyclopedia/agricultural-tenures-and-tithes/

The Institutional Framework of Russian Serfdom

Author(s):Dennison, Tracy
Reviewer(s):Nafziger, Steven

Published by EH.Net (July 2013)
?
Tracy Dennison, The Institutional Framework of Russian Serfdom. Cambridge: Cambridge University Press, 2011. xx + 254 pp. $99 (hardcover), ISBN: 978-0-521-19448-8.

Reviewed for EH.Net by Steven Nafziger, Department of Economics, Williams College.

In late 2011, this reviewer completed an early analysis of Dennison?s important monograph on serfdom on one relatively large estate in a north-central province of European Russia (Nafziger 2012). Since then, roughly a dozen reviews of this book have been published in English in various historical journals by a number of prominent scholars of Russian history. Overall, these scholars applaud Dennison?s skilled employment of myriad archival sources to describe how the estate of Voshchazhnikovo functioned, and they are mostly sympathetic with her argument that the variation in serfdom was largely the result of the heterogeneity in the institutions set up by estate owners. The Sheremetev family, who owned more serfs than any other noble family in Russia, controlled Voshchazhnikovo and relied on a particular set of administrative practices, property rights, judicial structures, and customary norms to extract rents while allowing considerably economic flexibility to engage in markets among their peasants. Dennison explores this setting in a series of thematic chapters that investigate the interaction between institutional structures (as fostered by the Sheremetevs) and peasant demographic and economic actions from 1750 until emancipation in 1861. After considering the book for a second time, my admiration has only grown for the detailed empirical work Dennison has done in depicting the operations of this particular estate to show how these structures influenced individual, household, and communal decision-making among the serfs.??

What other reviewers have found problematic in Dennison?s study concerns the broader framework and conclusions laid out in the first two and the last chapters. Section 1.1, entitled ?The Peasant Myth? (pp. 6-17), asserts that scholars of the Imperial Russian peasantry have frequently misunderstood their subject matter and overemphasized the persistence of a distinct moral economy among serfs (and the Russian peasantry more broadly) that was grounded in cultural and geographic factors. In critiquing Dennison?s study, the influential historian Steven Hoch (2012) appears guilty of fostering this very myth by claiming that because the serfs of Voshchazhnikovo were evidently involved in a variety of factor and goods markets, they were not really peasants at all, since, according to his interpretation, the peasant economy was antithetical to market relations. As pointed out by David Moon (2013) in another review of Dennison?s book, Hoch?s work considered a labor-service serf estate in an agricultural region to the south of Russia, and so it is perhaps not surprising that the structures created by the serf owners (the Gagarin family in his case) were more coercive and less conducive to peasant involvement in local markets. This is something Dennison is well aware of in emphasizing the heterogeneity of serfdom, but neither her work, nor that of Hoch, nor anyone else?s research for that matter, gives us a good sense of the overall distribution of serf estates along the relevant dimensions of institutional constraints, demographic practices, or market involvement. Just what ?serfdom? was for the modal estate, or for estates in very different geographic and economic circumstances than the ones studied by Dennison, Hoch, and the small number of other practitioners of the case study (who tend to focus on similar sets of archival records for estates in similar locations), demands further research.

This reviewer is mostly comfortable with the use of the ?peasant myth? as a focal point for Dennison?s analysis, especially given the persistence of that viewpoint in the work of Hoch and others. Dennison puts forth Alexander Chaianov (1986) as one of the main perpetuators of the Russian peasant myth, because he assumed away several dimensions of market involvement and utility maximization in proposing the existence of a unique peasant economy. Chaianovian ideas were adopted by scholars such as Theodore Shanin (1972) and James C. Scott (1976), who, in turn, influenced the work of historians such as Hoch. However, development economists have incorporated behavioral richness, various forms of market imperfections, and institutional constraints into the basic agricultural household model (which owes a lot to Chaianov?s initial insights about the relationships between consumption and production decisions of rural households) to show that standard tools of utility and profit maximization do go most of the way towards explaining the economic decisions made by peasants in developing economies. Much of Dennison?s success in this historical work is to incorporate insights from these and other modern social science ?models? to interpret her empirical findings in illuminating ways.?

Other reviewers (particularly Melton 2012; and Wirtschafter 2012) have emphasized one aspect of Dennison?s use of the ?peasant myth? as a foil that is perhaps more problematic for her study?s broader message. They note that late Imperial and Soviet scholarship on serfdom, while ideologically blinkered and limited in their own ways, was not wedded to the peasant myth, but instead emphasized and empirically documented considerable market involvement by serfs, especially in the region where Voshchazhnikovo was located. As such, they view the myth that Dennison focuses on to be something of a straw man. Dennison does cite these earlier studies of serfdom, but she does not really draw on the archival and quantitative evidence they present to make her argument. A more complete analysis of serfdom as a varied set of institutional conditions that affected market development and peasant economic behavior would benefit from further consideration of these and other available facts to really get at the different ?distributions? of the serf experience, as noted above.?

These few caveats should not detract from what is truly a paradigmatic new work on the economic history of Tsarist Russia. The boom in empirical research on the economic histories of societies that fell behind during the Great Divergence has mostly left Tsarist Russia behind. This reviewer modestly hopes that his comments and the reviews of others might help spur not only further work on serfdom and related topics by Dennison, but additional scholarship by others on the full set of institutional factors that underlay Russia?s development experience prior to 1917.?

References:

Alexander Chaianov. The Theory of the Peasant Economy. Ed. by David Thorner, Basile Kerblay, and R.E.F. Smith. Madison, WI: University of Wisconsin Press, 1986.

Steven Hoch. ?Review of Tracy Dennison?s The Institutional Framework of Russian Serfdom.? American Historical Review 117, no. 3 (2012): 966-967.

Edgar Melton. ?Review of Tracy Dennison?s The Institutional Framework of Russian Serfdom.? Journal of Interdisciplinary History 43, no. 1 (2012): 109-111.

David Moon. ?Review of Tracy Dennison?s The Institutional Framework of Russian Serfdom.? Slavonic and East European Review 91, no. 2 (2013): 367-369.

Steven Nafziger. ?Review of Tracy Dennison?s The Institutional Framework of Russian Serfdom.? Economic History Review 65, no. 4 (2012): 1597-1598.

James C. Scott. The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia. New Haven, CT: Yale University Press, 1976.

Teodor Shanin. ?The Nature and Logic of the Peasant Economy.? Journal of Peasant Studies 1 (1973): 63-80.

Elise Wirtschafter. ?Review of Tracy Dennison?s The Institutional Framework of Russian Serfdom.? Slavic Review 71, no. 3 (2012): 693-694.

Steven Nafziger is an Associate Professor of Economics at Williams College. He is currently embarking on a book-length study of the development consequences of Russian serf emancipation.

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Subject(s):Agriculture, Natural Resources, and Extractive Industries
Servitude and Slavery
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century