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Capital Ideas: The IMF and the Rise of Financial Liberalization

Author(s):Chwieroth, Jeffrey M.
Reviewer(s):Santos, Joseph M.

Published by EH.NET (June 2010)

Jeffrey M. Chwieroth, Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press, 2010.? xvii + 311 pp. $30 (paperback), ISBN: 978-0-691-14232-6.

Reviewed for EH.NET by Joseph M. Santos, Department of Economics, South Dakota State University.


In Capital Ideas, Jeffrey M. Chwieroth, a senior lecturer in the Department of International Relations at the London School of Economics and Political Science, attributes longstanding IMF support for capital-account liberalization to (endogenous) dynamics shaped largely by its staff, rather than to (exogenous) rules or incentives imposed on it by its member states.? As such, Chwieroth deemphasizes strict state-centric and principal-agent interpretations of how the International Monetary Fund works in this case.? Instead, he argues that IMF culture and intellectual norms in the economics profession have together constructed capital-account liberalization as desirable.

Chwieroth models the evolution of IMF culture as five so-called intra-organizational processes: professionalization, administrative recruitment, learning, adaptation, and entrepreneurship.? Taken together, professionalization and administrative recruitment describe how the economics profession, from which the IMF recruits almost exclusively, imbues the organization with practices and beliefs that prevail in the discipline for better or worse.? Once instilled, organizational beliefs about how the world should work ? so-called ?normative conceptualizations,? including the desirability of capital-account liberalization ? change slowly if at all.? Change of this sort requires learning ? a process that updates policy goals or ?desirable ends? ? as opposed to adaptation ? a process that updates policy instruments or ?desirable means.?? However, unlike adaptation, learning occurs infrequently because it requires an internal entrepreneur ? that rare staff member with strategic agency sufficient to exploit differences, however slight, in intra-organizational normative conceptualizations so as to reshape them.

In chapter two, Chwieroth builds this theoretical framework on extant sociological and constructivist analyses of how international organizations work and evolve.? Then, in the subsequent seven chapters and epilogue (on the subprime crisis), he substantiates his argument by applying this framework to what he demonstrates to be the interrelated histories of twentieth-century economic thought (and how it relates to capital controls) and the IMF.

Chwieroth explains that the IMF initially accepted and, indeed, supported capital controls as a permanent feature of the post-World War II international financial system.? As such, IMF policy reflected the Keynesian notion that market expectations (and the financial flows and market swings that they manifested) were divorced from market fundamentals ? an assumption that had prevailed in the economics profession at the IMF?s inception.? Of course, as economic thought shifted toward the neoclassical synthesis, which held that markets were efficient in the long run, the dominant normative conceptualization in the profession shifted as well: by the 1960s, long-run capital-account liberalization was desirable and, as such, the profession broadly supported only market-oriented and temporary controls on some short-term, speculative capital flows.? Later, new-classical economics and the rational-expectations revolution, which essentially asserted the efficiency of all speculative flows, further reinforced the profession?s belief in capital-account liberalization.

Chwieroth demonstrates how, from the late 1970s onward, IMF recruitment, learning, and internal-entrepreneurship patterns ultimately realigned the institution?s thinking about capital freedom with that of the profession?s.? Based on his earlier work, published in the 2007 volume of International Studies Quarterly, Chwieroth identifies academic departments most responsible for promoting, through their scholarship published from 1963 to 1980, the capital-freedom norm. And, based on original survey data, he concludes that economists trained in these so-called neoclassical departments ? other department categories include heterodox American, Keynesian, and Continental-European ? tended to subscribe throughout their careers to neo-classical norms.? This is important because these neoclassical departments are, with few exceptions, those from which the IMF has traditionally recruited.? Chwieroth explains that as the proportion of these neoclassical-trained economists at the IMF rose from the late 1970s onward, intra-organizational learning and internal-entrepreneurship patterns effectively fashioned institutional support for capital-account liberalization.

In his last chapter, Chwieroth examines how, in the wake of the Asian financial crisis, the IMF ? and, in particular, its seemingly unwavering support for capital-account liberalization ? engendered resentment in emerging and developing economies, prompting them to adopt export-led growth strategies and, in doing so, self-insure against future capital flight.? This outcome has, at best, diminished the relevance of the IMF ? an institution otherwise well suited to establish global standards for financial supervision ? and, at worst, fueled global imbalances that likely contributed to the recent financial crisis.? Chwieroth suggests reforming IMF governance so that emerging and developing economies gain significantly greater opportunities to shape intra-organizational processes and, so, IMF culture.? Doing so will, in his view, rightly enable the IMF to shift the focus of the capital-liberalization debate from means ? whether to liberalize all at once or gradually ? to ends ? whether to liberalize at all.

Hence, in Capital Ideas, Chwieroth artfully blends history, sociology, and economics to demonstrate convincingly that while developed Western states ? and, in particular, the United States and the United Kingdom ? do not direct the IMF to endorse capital-account liberalization, the intra-organizational processes that govern the institution and the segment of the economics profession from which it recruits do effectively inculcate the IMF with this and other such Western-associated economic-policy norms.

Nevertheless, Chwieroth dismisses rather easily the case for capital-account liberalization: for example, he states simply that, ?the case for capital freedom is based on an analogy with standard theoretical arguments for free trade in goods and services? (p. 44) and labels as ?hypothesis-confirming bias? the contention that disorders caused by capital-account liberalization result from unsound policies in the affected countries.? Though he need not have favored capital-account liberalization, readers may wish that he had analyzed, with the same comprehensive and theory-rich approach that he employs so successfully elsewhere in the book, specific instances where speculation divorced from sound macroeconomic fundamentals instigated destabilizing capital flight.? (In this regard, he mentions, though only in passing, South Korea in the late 1990s.)? Doing so would have strengthened the case for the IMF reforms that he recommends; reforms that would, in effect, allow the IMF to learn developing- and emerging-economy capital ideas.


Joseph M. Santos ( is Professor of Economics at South Dakota State University, where he teaches courses in macroeconomics and monetary policy.? His study of Canadian and U.S. agricultural policies during the interwar period, ?Going against the Grain: Why Do Canada and the United States Market Wheat So Differently?? appears in American Review of Canadian Studies (2010).

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

The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times

Author(s):Landes, David S.
Mokyr, Joel
Baumol, William J.
Reviewer(s):Blackford, Mansel G.

Published by EH.NET (May 2010)

David S. Landes, Joel Mokyr and William J. Baumol , editors, The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times. Princeton: Princeton University Press, 2010. xv + 566 pp. $49.50 (hardcover), ISBN: 978-0-691-14370-5.

Reviewed for EH.NET by Mansel G. Blackford, Department of History, Ohio State University.


The second volume published in the Ewing Marion Kauffman Foundation?s Series on Innovation and Entrepreneurship, this collection of eighteen essays explores entrepreneurship, innovation, and economic development in parts of the world from ancient times to the present.? This work, states William J. Baumol, an economist at New York University and one of the study?s editors, was designed to test three basic hypotheses: 1) ?that the practical utilization of inventions? and accompanying economic growth would be lower without the work of entrepreneurs; 2) that ?entrepreneurial activities are not always productive?;? and 3) that ?the direction taken by entrepreneurial activity depends heavily, at any particular time and in any particular society, on the prevailing institutional arrangements? (p. ix).? David Landes, another editor and an economic historian at Harvard University, argues further that ?the countries and regions that have done best are precisely those that have taken advantage of the opportunities offered by active trade and entrepreneurial freedom.?? Those areas, Landes claims, have been mainly in the West, with ?China and the Arabic Middle East? offering ?pungent case studies? of ?resistance to innovation?(p. 2) — surely an outdated assertion.? The essays comprising this volume bear out Baumol?s hypotheses, but not the statements made by Landes.[1]

Six essays investigate preindustrial entrepreneurship and innovation.? Michael Hudson explores the development of entrepreneurship and business enterprises in ancient Mesopotamia (3500-1200 BC), where the association of businesses with public temples and palaces led to a commercial take off.? Many of the business practices first created in Mesopotamia — the use of money, uniform weights and measures, price systems, interest charges, and profit-sharing — Hudson shows, then spread to the Mediterranean world, only to collapse in Roman times.? In an essay on the Neo-Babylonian Empire (626-539 BC), Cornelia Welch looks at family entrepreneurship in agriculture and trade.? Particularly valuable is her case study of the Egibi family, which left an archive of 2,000 cuneiform tablets spanning five generations.? ?The Egibi family represents,? she concludes, ?an outstanding example of Schumpeter?s idea that the main entrepreneurial opportunities for profit or quasi-rent lie in creating new business opportunities.?? The Egibi family had ?far-flung operations? based on a ?marketing plan that integrated agricultural production, tax payments, and the shipment of crops to cities along Babylon?s canal system? (p. 53).? Timur Kuran claims that Islam first spurred entrepreneurship and economic development in the Middle East by creating ?institutions well suited to personal exchange,? but later ?became a source of retardation with the transition to impersonal exchange.?? Islamic institutions, Kuran finds, ?supported small-scale entrepreneurship,? but ?inhibited larger-scale entrepreneurship? (p. 63).? James Murray suggests that the European Middle Ages ?deserve a special place in the history of entrepreneurship,? for by 1500 merchants ?came to direct many of society?s ?productive forces?? (p. 88).? John Munro then examines the ideas of Max Weber and Richard Tawney, about economic development.? He finds that the alterations in mindsets and institutions that Tawney claimed were needed as precursors to industrialization in Great Britain occurred in 1640-1740, not, as Tawney posited, a century earlier.? Oscar Gelderblom defines entrepreneurs broadly as ?not just merchants involved in long-distance trade, but also shipmasters, fishermen, millwrights, farmers, artisans, and shopkeepers,? in arguing for the importance of entrepreneurial actions as the sources of economic development in the Dutch Republic between 1580 and 1650 (p. 156).

Eight essays probe entrepreneurship in Western Europe and the United States during industrial and post-industrial times.? Joel Mokyr, the third editor of this volume and a faculty member in history and economics at Northwestern University and Tel Aviv University, argues for the importance of institutions, especially informal ones such as codes of conduct, as stimuli for entrepreneurship in industrializing Great Britain.? In two jointly authored essays, Mark Casson and Andrew Godley debunk the idea that entrepreneurial failure retarded British economic development in the late-nineteenth and twentieth centuries — a well-worn topic.? They find that entrepreneurs rationally shifted their attentions from manufacturing to infrastructural projects and other undertakings (such as finance) in Great Britain and abroad, in which they were very successful.? Ulrich Wengenroth surveys the ?tortured? history of entrepreneurship in Germany from the early 1800s to the present, emphasizing the roles institutions (including educational ones) played in creating opportunities for innovation.? Pulling no punches, he also looks at anti-Semitism and the unbalanced nature of Germany?s economy, which he concludes became over-industrialized and lacking in service businesses.? Turning to France, Michael Hau presents a picture of varying regional developments and changing roles taken by the national government, concluding that after declining in importance for several decades after World War II ?entrepreneurs have greatly gained in power? in the present day (p. 323).? Louis Cain examines entrepreneurship in the antebellum United States, first exploring innovations in law, finance, and transportation that allowed entrepreneurship to flourish and then describing the processes of industrialization and the diffusion of products to American markets.? Discussing the United States between 1865 and 1920, Naomi Lamoreaux stresses the importance of institutions, including federal and state governments, and big businesses, which encouraged entrepreneurship.? In a particularly wide-ranging essay, Margaret Graham offers a nuanced picture of American entrepreneurship after 1920, looking at the varied roles played by people in companies of all sizes and in many sectors of the economy.

Three essays and a short conclusion complete the volume.? Susan Wolcott examines supplies of financial credit, especially ?informal? types, available to entrepreneurs in Colonial India.? She addresses issues about economic growth in India from the 1700s to the present, emphasizing the importance of family and ethnic networks defined, in part, by caste distinctions.? Wolcott concludes that, while such networks and the informal credit they commanded initially aided economic development, they ultimately limited business development — a finding similar to Kuran?s conclusions about the Islamic Middle East.? Wellington Chan looks at entrepreneurship and innovation in China from the late 1800s, emphasizing continuities in stressing the roles personal relationships and networks have played for business people throughout Chinese history.? ?Chinese entrepreneurship,? Chan concludes, ?has always been an inherent part of Chinese history and tradition? (p. 495).? Seiichiro Yonekura and Hiroshi Shimazu find entrepreneurship at the core of the development of zaibatsu in Japan before World War II and present accounts of the development of Mitsui and Mitsubishi, unfortunately ignoring the significant roles small and medium size business played in Japan?s economic development.? Finally, Baumol and Robert Strom (a director of the Kauffman Foundation) offer short concluding remarks underlining the importance of cultural developments and institutions for the evolution of entrepreneurship and innovation over time.

Anyone interested in entrepreneurship, innovation, and economic development will find much to ponder in this work, and extensive multilingual notes and bibliographies at the end of each essay will lead readers to additional sources.? However, even such an extensive volume as this one has limitations.? The focus is clearly on Western Europe and the United States.? Only a few essays examine developments in Asia and the Middle East, and none look at entrepreneurship in Latin America or Africa.? Then too, most of the essays approach entrepreneurship and innovation from the vantage points of economics and economic history.? The substantial contributions of business historians — Harold Livesay, Thomas McCraw, and William Lazonick, among many others, come to mind — are largely ignored.[2]? Moreover, the authors of the essays follow no commonly agreed-upon definition of entrepreneurship, making cross-national comparisons difficult.? Most of the authors bow in the direction of Joseph Schumpeter, but essentially fail to adopt a common approach.? I was disappointed that little effort was expended by the editors or authors to reach comparisons across boundaries of time or space.? For the most part, this study consists of fairly traditional national studies. ?Ironically for a book about innovation, this volume contains little in the way of conceptual breakthroughs.? The authors might well have explored more fully innovative business networks and industrial districts that often spread across national lines, especially in modern times.[3].? Even with these caveats, however, I think these essays deserve close consideration, as much for the questions they raise as for the answers they give about innovation and entrepreneurship.


1. On innovation in China, see for example, William T. Rowe, China?s Last Empire: The Great Qing (Cambridge, 2009); and Peter Zarrow, China in War and Revolution, 1895-1949 (London, 2005).? Landes? main source on Islamic developments is Bernard Lewis, _What Went Wrong? The Clash between Islam and Modernity in the Middle East_ (Oxford, 2002), a one-sided study.

2. Harold Livesay, American Made: Shapers of the American Economy (New York, 2007); William Lazonick, ?Business History and Economic Development,? in Geoffrey Jones and Jonathan Zeitlin, eds., The Oxford Handbook of Business History (Oxford, 2007), 67-95; and Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Cambridge, MA, 2007).

3. See, for example, Louis Galambos and Jane Eliot Sewell, Networks of Innovation: Vaccine Development at Merck, Sharpe & Dohme, and Mulford, 1895-1995 (Cambridge, 1995); and Charles Sabel and Jonathan Zeitlin, eds., World of Possibilities: Flexibility and Mass Production in Western Industrialization (Cambridge, 1995).


Mansel G. Blackford is a business historian at Ohio State University and, most recently, is the author of The Rise of Modern Business: Great Britain, the United States, Germany, Japan, and China Chapel Hill, 2008 (third edition).

Subject(s):Business History
Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Backwoods Consumers and Homespun Capitalists: The Rise of a Market Culture in Eastern Canada

Author(s):Craig, Béatrice
Reviewer(s):Gerriets, Marilyn

Published by EH.NET (January 2010)

B?atrice Craig, Backwoods Consumers and Homespun Capitalists: The Rise of a Market Culture in Eastern Canada. Toronto: University of Toronto Press, 2009. ix + 349 pp. $75 (cloth), ISBN: 974-0-8020-9317-2.

Reviewed for EH.NET by Marilyn Gerriets, Department of Economics, St. Francis Xavier University.

Backwoods Consumers is an excellent contribution to the literature exploring the social and economic structure of early settlements in North America. Craig studies the Madawaska region (in northwestern New Brunswick and northeastern Maine) from early settlement by Acadians and Canadiens in the late eighteenth century up to the last quarter of the nineteenth century. The book?s primary theme is the evolution of the relationship between rural people and markets. The theme is developed within the context of two literatures, the largely Canadian literature first dominated by the staples thesis and now exploring local exchange, and the largely American literature tracing the rise of market exchange and capitalism in early settlements. Her detailed description of the early process of settlement provides an excellent contribution to these literatures. The wealth and variety of source material enriches the study.

Madawaska was not as isolated as its location might suggest; settlers had connections through correspondence and travel that kept them aware of external market opportunities and of opportunities to settle elsewhere. Early settlers were drawn to the region by opportunities in the fur trade and on the excellent agricultural land along the Saint John River. Preference to live with people of their own culture also led Acadians to move to the area and Catholics from nearby parts of Quebec were comfortable to join them. Fur and wheat were the first goods exported from the region and from the earliest days settlers showed no reluctance to engage in market exchange. When rust and midges made wheat production impractical, farmers shifted to fodder crops for the timber shanty market. Fortunately, timber exports became viable in time to alleviate the difficulties caused by declining wheat production. Timber production created immigration, but an agricultural community was already well established before it began.

Local production of goods for local consumption was important. Sawmills built to produce lumber for export disappeared as soon as the timber industry declined, while custom saw mills providing boards for local construction persisted. Along with grist, carding and fulling mills, the custom mills provided a focal point for the emergence of villages. Craig?s sources enable her to determine that the charter families, the Acadians and Quebecois who first settled the region, invested in these mills. They carefully sought out land with water power when they acquired farm land, apparently recognizing the value of an opportunity to exploit water power with a mill.

Craig traces changes in patterns of consumption as well as in patterns of production. Initially, general store purchases were confined to inputs to production such as tools or cotton warps used in the weaving of homespun. By the early 1860?s new consumption patterns had emerged. Rather than acquiring a cotton gown ?for ever,? less durable items in the current style were desired. Young men purchased red flannel for shirts and black silk neckerchiefs. Tea, oil lamps and chamber pots became important household items. The ?world of goods? had clearly emerged by the 1860?s.

While her work clearly supports more recent Canadian research that stresses the importance of local exchange, Craig argues that the staples trades were important to the growth of the region. Timber workers? families provided good markets for a wide variety of agricultural goods. Access to the shanty market for fodder was very important to settlers? standard of living when surpluses of wheat could no longer be produced. The timber industry helped to provide the income that permitted the growth of consumption.

Craig?s pragmatism and common sense enables her to provide an accurate description of markets and of commercialization in Madawaska. Settlers eagerly engaged in market exchange from the first days of settlement; both store owners and farmers preferred payment in cash to payment in goods. Craig argues that Madawaskan residents did not enter markets to resist change, as others have argued, but they entered the market in order to become ?individualistic consumers.? The issue of the emergence of market exchange and of capitalism has been a contentious in the American literature. Craig argues that much of the contention has arisen from misconstruing definitions. She carefully sets out her own definitions of a capitalist and of capitalism, drawing on Fernand Braudel. I found no definition of capital, and she appears to equate financial assets with capital, an equivalence offensive to any economist. This economist finds Braudel?s definitions peculiar, and would prefer reliance on standard economics for a definition of capital, Karl Marx for a definition of capitalism and Karl Polanyi for discussion of the emergence of market institutions.

Better definitions might enable her to see more deeply into the extent and the limits of capitalism in Madawaska. Nonetheless she has done very well describing changes in the role of markets. In particular, she discusses how in the early days of settlement, patronage and government favoritism were important to securing access to farm land, access to locations for inns or trading posts and to government appointments. By the end of the period, political and economic activity had become more separate. To use Polanyi?s term, the economy was becoming disembeded from society at large.

The book is very rich and addresses many additional topics. Readers have good reason to pursue her discussion of the homespun textile industry, the divisions of Madawaskan society into groups defined by religion and date of settlement and the impact of the dispute over and the creation of a border between Maine and New Brunswick. The study is unique in its linking of individuals and families to the evolution of the economy and society. Craig has done an excellent job of examining the economic and social history of a neglected region.

Marilyn Gerriets, an economic historian and a professor in the Department of Economics at St. Francis Xavier University, Nova Scotia, is interested in the origins of differences in the paths of development of the Maritimes and Central Canada. She has written about agricultural resources and settlement, tariffs and trade and coal mining in Nova Scotia.

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

Across the Borders: Financing the World’s Railways in the Nineteenth and Twentieth Centuries

Author(s):Roth, Ralf
Dinhobl, Gunter
Reviewer(s):Bogart, Dan

Published by EH.NET (September 2009)

Ralf Roth and Gunter Dinhobl, editors, Across the Borders: Financing the World’s Railways in the Nineteenth and Twentieth Centuries. Aldershot, UK: Ashgate, 2008. xxxviii+ 323 pp. ?65 (hardback), ISBN: 978-0-7546-6029-3.

Reviewed for EH.NET by Dan Bogart, Department of Economics, University of California ? Irvine.

Railways were one of the key sectors driving international capital flows during the late nineteenth and early twentieth centuries. In this period, investors subscribed to foreign railway stocks and bonds on a scale that would have been unimaginable in previous generations. The implications for the global economic and political system were enormous. Markets were extended, new sectors and economic regions were developed, and nation states were forged in large part because foreign investors were willing to take the risk of investing in railways far from their home country.

Across the Borders documents the flow, the character, and the timing of foreign railway investment from the mid-nineteenth century to World War I and beyond. In a refreshing approach, specialists on the main capital exporting and importing countries go beyond nationalistic accounts of railway investment and emphasize the interactions between individuals and interests in different countries or continents. Railway buffs will revel in the detailed treatment of entrepreneurs, investors, and the success or failings of individual railways. Economic historians will also benefit from the numerous tables (and detailed sources) describing cross-country capital flows and financial structures. The chapters also offer insights into nature of transaction costs in railway finance.

Several chapters document the volume and direction of capital flows from Western Europe. Not surprisingly Britain is shown to be the leading railway investor by 1913. The British financed railways in the U.S., Western Europe, South America, and colonies like India. The Dutch, French, and Germans also invested heavily in foreign railways but each tended to concentrate their portfolios in particular countries. The Dutch, for example, invested heavily in U.S. railways, while the French and Germans invested in Italy, Spain, Russia, and the Ottoman Empire.

The economic logic and institutions underlying foreign investment in railways are illustrated in several chapters. It is clear that investors were attracted by higher returns on foreign railways, but they were reluctant because of the risk and uncertainty involved. The size of the industries and the income of individuals using railway services were not necessarily known to distant investors in advance of their subscription. Moreover the profitability of railways often depended on the growth of economic activity, which was highly uncertain. Government guarantees on railway securities emerged as a solution. Guarantees offered investors the prospect of a four to six percent return on their capital regardless of the financial performance of the railway. In return the government hoped to reap the fiscal and political benefits from an extensive railway network. The discussion in several chapters suggests that without guarantees investors were unwilling to subscribe or buy shares in private railway companies, especially those operating in emerging markets. Even if this was the case, guarantees should not be viewed as entirely efficacious. A chapter on Brazil illustrates that guarantees could contribute to fiscal problems, as governments were forced to make payments to private railways at unfavorable exchange rates or in periods of economic stringency.

Private railway companies were formed through charters or concessions granted by governments. The chapters illustrate that in countries with more developed economic and political systems the promoters were often domestic capitalists who obtained a substantial portion of their funding from foreign investors. With some exceptions the aim of promoters and investors was to profit from an existing or emerging trade by providing an improved transport service. In less developed countries the promoters were often foreigners with domestic capitalists playing a more minor role. Two chapters on the Ottoman Empire and China illustrate how the ?hunt? for foreign railway concessions was often intertwined with European colonization and their aims to strengthen claims on resources for future exploitation. The chapters also illustrate that domestic political actors had their own objectives in granting foreign concessions. In the Ottoman government courtiers sought to extract rents from granting railway monopolies. In China groups within the imperial and provincial government allied with French and Belgian companies in the hopes of modernizing their economy. More broadly there is a suggestion that political factors played a greater role in the establishment and control of railways in less developed countries. Belgium provides a counter-example to this trend, as Dutch investors were discouraged for political reasons from investing in Belgian railways, but even in this case foreign investment flows were largely directed by economic considerations.

The chapters also illustrate that markets for foreign railway investment were not impersonal. The Pereires and the Rothschilds provided substantial financing for European railways, as did other large banks and wealthy families. Foreign investors were often lured by entrepreneurs like Bethel Henry Strousberg. Strousberg developed a system for evading legal restrictions on corporations in Prussia and developed a vertical trust combining different enterprises. The significance of individuals and social networks is strongly suggested by several authors. Ralf Roth argues that Bethel Henry Strousberg’s most valuable asset was the “trust that his investors had in his business acumen and abilities? (p. 42). Trust was arguably crucial for foreign railway investments because incomplete information was common. Investors were more likely to devote their savings to railway projects if they received the seal of approval from a prominent individual or group. These entrepreneurs, in turn, discovered new projects and monitored their performance. Only a few markets for foreign railway investment achieved some degree of impersonality. Augustus Veenendaal argues that Dutch investors relied on the financial press to obtain information about U.S. railroad projects in addition to receiving reports from Dutch emigrants and promoters.

Several chapters deal with the financial success of foreign railway investments. The general picture was mixed as there were wildly successful and unsuccessful foreign railway projects. What is clear though is that foreign railway investments must have generated similar or greater returns as other investments after adjusting for risk because otherwise the substantial cross-border flows should have stopped.

The effects of railways on economic development are briefly touched upon in several chapters. Railways are credited with increasing exports in the Ottoman Empire, but they are also blamed for increasing foreign competition in interior districts. A related and unresolved issue concerns the net effect of government subsidies like guarantees. If railways had large developmental effects then it may have been worthwhile for governments to subsidize foreign investors. On the other hand, if railways responded to development or if they created political and economic unrest then guarantees should be considered a failed policy.

Dan Bogart is an assistant professor in the economics department at the University of California ? Irvine. His current research analyzes the role of state ownership and railway performance from a comparative perspective.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

The Ascent of Money: A Financial History of the World

Author(s):Ferguson, Niall
Reviewer(s):Horesh, Niv

Published by EH.NET (July 2009)

Niall Ferguson, The Ascent of Money: A Financial History of the World. New York: Penguin, 2008. v + 441 pp. $30 (hardcover), ISBN: 1594201929.

Reviewed for EH.NET by Niv Horesh, Faculty of Arts and Social Sciences, University of New South Wales.

Harvard?s Niall Ferguson is perhaps best known for his magisterial history of the House of Rothschild and, more recently, his exhortation against the risks of unbridled government borrowing and nebulous stimulus packages ostensibly designed to avert what is often termed the worst global economic crisis since the Great Depression. In the Ascent of Money he harnesses his narrative skills to offer lay readership a captivating account of global monetary history from time immemorial to the twenty-first century. The book?s release coincided with an eponymous television series that has already been broadcast in much of the English-speaking world. Both the series and the book are immensely entertaining and readily accessible, but the latter arguably makes for a more convenient platform from which academics can approach Ferguson?s many insights.

The Introduction (pp. 1-17) prepares readers for what Ferguson perceptively identifies as the core stories attending the evolution of money over the last four millennia. These are many and varied, as one would expect. He is concerned with, inter alia, the ?recurrent hostility? to financial intermediaries and religious minorities associated with them in early-modern European history; the triumph of the Dutch Republic over the Hapsburg Empire, the latter?s possession of silver mines in South America notwithstanding; the spread of paper money, fiat currency and invisible means of payment in the twentieth century; right through to the possible eclipse of American global primacy in the next two decades.

Titled ?Dreams of Avarice,? Chapter One sets course by recounting how the Incas were flabbergasted by the ?insatiable lust for gold and silver? that seemed to grip the Spanish conquistadors (p. 21). It then lays out with humor and verve the well-known story of Potos?, now a fairly sleepy town in the Bolivian Andes, which once provisioned Spain with untold amounts of silver. In the same breath, the chapter goes on to offer an overview of coinage since the seventh century BC. Notably, Ferguson sees the flow of silver from the Andes to Europe as a ?resource curse? which removed the incentives for more productive economic activity, while strengthening ?rent-seeking autocrats? in seventeenth-century Spain. Contrary to criticism of Eurocentrism often leveled at him, Ferguson carefully emphasizes here the contribution other peoples have made to modern finance: ?… economic life in the Eastern world ? in the Abassid caliphate or in Song China ? was far more advanced? at least until Fibonacci introduced Indian algebraic precepts in early thirteenth-century Italy (p. 32); these were later reified by the Medicis into double-entry bookkeeping in the Florentine republic (p. 43).

By the early seventeenth-century, European financial innovation had shifted from the Italian city-states to the Low Countries, though it was still driven by the exigencies of costly and recurrent warfare and ambitions of monopolizing trade with the East (p. 48-49). This spurt of European financial innovation had actually long ?preceded the industrial revolution,? a complex but much better-studied spate of events (p. 52). The financial and industrial revolutions then converged with the spread of joint-stock companies and proto-types of central banks in the latter half of the nineteenth century.

Subsequent chapters flesh out Ferguson?s analysis. Titled ?Of Human Bondage,? Chapter Two (pp. 65-118) explores, for example, the distinctness of the European economic trajectory, beginning with how the majority of Florentine citizenry partook of financing the Republic?s debt in the fourteenth century. In the seventeenth-century, the United Provinces of the Netherlands combined the borrowing techniques of an Italian city-state ?… with the scale of a nation-state.? The Dutch were able to finance their wars by pitching Amsterdam ?as the market for a whole range of new securities? (p. 75). The eighteenth and nineteenth centuries are characterized by Anglo-French friction, but here Ferguson sees a yawning gap between protestant Britain where public debt defaults became rarer and public debt itself increased many-fold and the powers of landed aristocracy diminished while a professional civil service became more influential ? and Catholic France where public offices were often sold to raise money, tax collection was farmed out and government bond issues lost credibility. Notably, the incremental spread of, and popular faith in, British government bonds allowed Whitehall to borrow overseas as well, much to the detriment of Napoleon?s armies. Ferguson similarly believes that (p. 97) the reluctance of European investors to buy into Confederate bonds during the American Civil War doomed the South?s endeavors. This historic lesson is invoked toward the end of the chapter when discussing, in passing, the Bush Administration?s large budget deficits.

Chapter Three (?Blowing Bubbles,? pp. 119-178) zooms in on arguably the most significant economic entity of our time: the joint-stock company. Ferguson aptly dubs it ?perhaps the single greatest Dutch invention of all.? Here, he elides earlier ? though fairly short-lived ? occurrences of comparable entities both in Europe and in pre-modern Asia. But there can be little doubt that the establishment of the Dutch VOC (1602) marked a veritable turning point, not least because it underlay the growth of the world?s first bourse. Indeed, the establishment of royally-chartered companies principally aimed at trade with Asia seems to have underpinned the rise of stock exchanges and public debt in Europe?s Northeast as a whole. The rise of public debt and publicly-listed equity was beset by frequent speculative bubbles, from which emerged a more sophisticated British credit economy.

Chapter Four (?The Return of Risk,? pp. 176-229) takes up a swag of issues from the impact of Hurricane Katrina on the U.S. psyche, through how the Great Fire of London (1666) created demand for insurance policies, to Japan?s welfare system and Milton Friedman?s mentorship of Latin American finance ministers. By comparison, Chapter Five (?Safe as Houses,? pp. 230-82) is more singularly framed around what Ferguson perceptively calls ?the passion for property? in the home-owning democracies of Anglo-Saxondom. He aptly reminds us (p. 233, 241) that as recently as the 1930s, little more than two-fifths of U.S. households owned their home compared with over 65% today, and traces back this staggering social transformation to the New Deal and the Civil Rights Movement. The expansion of home ownership was facilitated in the late 1930s by then-novel institutions like Fannie Mae, which are at the heart of the recent sub-prime meltdown. In that sense, but not in that sense only, Ferguson does a wonderful job of explaining well beyond clich?s the linkages between the Great Depression to today?s global finance crisis. He then points the finger (p. 269) at rating agencies such as Moody?s and Standard & Poor?s for obfuscating the precariousness of collateralized sub-prime mortgages, which financial ?alchemists? turned into tradable debt obligations.

In essence, the last chapter (?From Empire to Chimerica,? pp. 283-340) is dedicated to China?s resurgence in the twenty-first century, and subtly considers whether this might ultimately result in a catastrophic Sino-American military confrontation. From a China specialist?s perspective, it is perhaps a pity that a scholar of Ferguson?s wisdom and insight stops short of opining whether we are witnessing at present the rise of a new form of capitalism with Chinese characteristics (e.g. capitalism without democracy) or simply gradual Chinese adaptation to Western market norms. Academic pedants might also quip that Ferguson draws heavily on Kenneth Pomeranz?s path-breaking book, The Great Divergence, when writing that living standards in Europe and China were on par as late as the eighteenth-century (p. 285). This might have called for a more detailed discussion, given that earlier parts of the book allude to the Italian city-states (fourteenth century) as the progenitors of Europe?s financial revolution. Similarly, Ferguson?s assertion that the ?… ease with which the [Chinese] Empire could finance its deficits by printing money discouraged the emergence of European-style capital markets? (p. 286) might sound a little facile to specialists, not least because note issuance was all but abandoned by late-Imperial dynasties.

However, these are minor criticisms that do not detract in any way from the wonderful feat of storytelling which Ferguson has again pulled off. This book makes for a bold and original attempt to provide a comprehensive history of what, some say, makes the world go around. It is likely to turn into a best-selling classic, and a must-read item in countless undergraduate courses.

Niv Horesh is Lecturer in Chinese Studies at the School of Languages and Linguistics, University of New South Wales, Sydney, Australia. His first book, Shanghai’s Bund and Beyond (Yale University Press, 2009), is the first comparative study in English of foreign banks and banknote issuance in pre-war China. His second book (forthcoming in 2010), is a comprehensive socio-economic account of Shanghai?s rise to prominence (1842-2010).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):General or Comparative

How Cities Won the West: Four Centuries of Urban Change in Western North America

Author(s):Abbott, Carl
Reviewer(s):Smith, Fred H.

Published by EH.NET (May 2009)

Carl Abbott, How Cities Won the West: Four Centuries of Urban Change in Western North America. Albuquerque: University of New Mexico Press, 2008. x + 347 pp. $35 (cloth), ISBN: 978-0-8263-3312-4.

Reviewed for EH.NET by Fred H. Smith, Department of Economics, Davidson College.

?The West? is a term that evokes a wide range of images ? the splendor of the Pacific coast, majestic National Parks, sweeping plains joined to endless skies, and the stark beauty of desert terrain. Yet, many Americans fail to remember one of the region?s greatest resources when they think of ?the West?: They forget its cities. In How Cities Won the West Carl Abbott makes the case that to understand the West one must understand its cities.

Abbott organizes the book around three central themes. He asserts that he intends to ?… emphasize the ubiquity of the city-building imagination and city building impulse in shaping western North America,? to draw attention to the ?cumulative rebalancing of western North America,? and to establish that western cities have transitioned from being ?imitators? of eastern culture to being innovators in their own right (p. 8-10). To facilitate the exploration of these themes, the book is split into two sections. After two introductory chapters and a ?transition? chapter, the book contains eight chapters dedicated to the history of western cities before 1940. A second ?transition? chapter separates the pre-war chapters from the final seven chapters, which cover the post World War II period and offer concluding remarks.

In the first section, Abbott classifies cities according to their location and/or their reason for coming into existence. Chapter two discusses the cities of the Mississippi River region, chapter three focuses on the cities of the Pacific Rim, and chapter four concentrates on ?inland empires? (cities like Salt Lake City and Denver). Chapters five through nine focus on central themes such as access to water, industrialization, and tourism.

The second section of the book focuses on the growth and transformation of western cities in the post World War II era. These chapters focus on themes such as the importance of the military industrial complex, the significance of race and ethnicity, globalization, and urban spatial structure.

Taken as a whole, Abbott?s book is successful in convincing the reader that to understand the West one must understand the region?s cities. At its best, chapters two and three –?Across the Wide Mississippi? and ?The First Pacific Century? ? provide the reader with an excellent introduction to the cities of the Mississippi River region and the Pacific Rim. Chapter thirteen, ?Reshaping the Metropolis,? the book?s most effective, does an outstanding job of describing the urban spatial structure of the modern western city to an uninformed reader. Western cities are not the sprawling, low-density monstrosities that many residents of the East Coast might imagine them to be. While western cities are sprawling, they are sprawling because they are massive, not because they are low density. In fact, ten of the twelve most densely populated U.S. cities are in the West (p. 230).

Abbott?s book also succeeds because it is written in a lively, engaging style that grabs the reader?s attention ? even when a chapter may lose its focus. Indeed, it is unclear how some of the chapters fit into the book?s thesis. Chapter eleven, ?Progress and Prejudice,? is interesting and well written, but it leaves one wondering what in the chapter is unique to western cities. It would have been useful to contrast the experiences of San Jose, Salt Lake City, and the other western cities with the experiences of cities from the South, the East, or the Midwest.

While I would recommend it enthusiastically to anyone looking for a better understanding of urbanization in the West, I would caution a prospective reader about Abbott?s book on three counts. First, the book is not always focused on economic history. To be fair, the book does not sell itself as an economic history of the urban West. However, for a reader who is interested in economic history there are chapters that may not be of great interest. Moreover, topics that would be of particular interest to an economic historian may not be covered in the desired depth. An economic historian would surely point to the rise of the automobile and the importance of water as two of the key issues that must be fully explored in order to understand western cities.

Chapter nine addresses the importance of water and water rights in the development of the West. Abbott writes, ?The San Francisco and Los Angeles stories epitomize the physical appropriation of the empty West by the urban West? (p.155). Yet, given the incredible challenges that western cities face in maintaining adequate water supplies, it seems that this chapter deserves more than the eleven pages Abbott has written. Specifically, I would like to have seen an in depth discussion of Phoenix and Las Vegas.

Chapter thirteen does a very good job of addressing issues pertaining to urban spatial structure and the way that the automobile has affected the development of western cities. While the treatment of the topic is very good, it comes as a surprise that the auto?s importance in shaping the urban West doesn?t come until the thirteenth chapter. Hasn?t the car fundamentally altered the urban landscape in the West in a way that has affected nearly every facet of western urban life? And, if that is the case, doesn?t the automobile deserve more prominent place in the book?

A second word of caution I would offer a prospective reader: The book promises to address a fourth theme, but it does so only tangentially. In the first ?transition? chapter Abbott brings up the topic of urban rivalry. Effectively, he poses the following question: Why does one city thrive while another shrinks and disappears from our consciousness? This is a question that is of great interest to urban economists and economic historians. For some cities the answer to this question may be obvious: Geography. Yet, in reading Abbott?s book one isn?t always left with a clear answer about why some cities (Phoenix, Denver) have truly thrived. This is partly due to the book?s structure. It focuses on themes as opposed to dedicating each chapter to a city or a collection of cities. While this may make the book more readable, it also makes it more difficult to figure (for example) why Denver has emerged as one of the West?s great cities.

The final word of caution I would offer a prospective reader has to do with the author?s writing style. Abbott does write in an entertaining, lively style, and the book is an easy read. However, the individual chapters often lack a clear introduction or conclusion that allow the reader to easily identify how the chapter fits into the text?s larger themes. In a few places, notably chapters eight, eleven, twelve, and fifteen, I found that it was necessary for me to re-read large chunks of material in order to see how the chapter contributed to my understanding of ?how cities won the West.?

Abbott?s goals are truly ambitious and his book doesn?t succeed in every one of its aims. It doesn?t, for example, leave the reader with a clear sense of why certain cities in the West have succeeded when others have not. However, given the scope of the topic, Abbott?s contribution to our understanding of the urban West is truly impressive. In the end, the book caries through on its central promises: It makes it clear how western cities have evolved to be different than their eastern counterparts, it very effectively traces out the ?rebalancing of western North America,? and it certainly makes it very clear how important cities have been in shaping the West.

Fred Smith is an associate professor of economics at Davidson College. His most recent paper (with Bill Collins of Vanderbilt University) is ?A Neighborhood-Level View of Riots, Property Values, and Population Loss: Cleveland 1950-1980? in Explorations in Economic History.

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

Power and Plenty: Trade, War and the World Economy in the Second Millennium

Author(s):Findlay, Ronald
, Ronal

Published by EH.NET (August 2008)

Ronald Findlay and Kevin H. O?Rourke, Power and Plenty: Trade, War and the World Economy in the Second Millennium. Princeton: Princeton University Press, 2008. xxvi + 619 pp. $39.50 (cloth), ISBN: 978-0-691-11854-3.

Reviewed for EH.NET by ?evket Pamuk, London School of Economics and Bogazi?i-Bosphorus University.

Ronald Findlay of Columbia University and Kevin H. O?Rourke of Trinity College, Dublin have written a magisterial account of the history of international trade during the last millennium. They provide a theoretically coherent account of the interaction between the patterns and evolution of inter-regional trade, on the one hand, and long-term global economic and political developments, on the other. The two way interaction between power and plenty as formulated by Jacob Viner but going back much earlier in its origins, constitutes the analytical backbone of the volume. Findlay and O?Rourke argue convincingly that no history of international trade can ignore conflict, use of force, military exploits, and in turn, geopolitics. They draw upon a large volume of secondary historical and political literature as well as economic theory and succeed in integrating a vast amount of detail as well as their own research into their conceptual framework.

A large part of the exposition and analysis of the major developments in international trade proceeds in terms of the interaction between the seven regions of Eurasia as defined by the authors and the contributions arising from these interactions, in terms of the movements of people, crops, ideas, and techniques as well as commodities. A good deal of emphasis is placed on the importance of geography in explaining the interactions between the seven regions with very different physical features and endowments. This skillfully written volume is a work of extraordinary scope, a major achievement.

For the first half of the millennium, the authors should be commended for focusing on two key events, the Pax Mongolica and the Black Death, both of which involved most, if not all, of the seven regions. The unification of the central Eurasian landmass by the Mongols in the thirteenth and early fourteenth centuries facilitated the interaction of Western Europe and different regions of Asia from the Atlantic to the Pacific Ocean. Mongols encouraged trade and made the routes across Eurasia safer and busier. Arguably, this was the first episode of globalization in history. Moreover, it was the disintegration of the Pax Mongolica and the shift of the trade to the southern routes across the Indian Ocean and the Middle East that led to the search for alternative ways of reaching Asia by western Europeans. As the authors point out, the ultimate legacy of the Pax Mongolica was not, perhaps, the increase in the interaction between Europe and Asia but the mutual discovery of Europeans and native Americans.

The Black Death, which originated in Mongol-controlled Asia but ended up in the Middle East and Europe, brought about far-reaching consequences for these regions. The sharp decline in the population led to an even sharper rise in wages. This high-wage environment, which lasted for at least two centuries, brought about very different demographic, economic, social and other responses not only between Europe and Asia but also within Europe, between the northwest and the south. As the authors make clear, the long-term consequences of the Black Death have not been fully analyzed and deserve more attention from economic historians.

For the second half of the millennium the focus of the volume is on the rise of an international economy and its contribution to the Industrial Revolution. The authors see the Industrial Revolution as the culmination of a long historical process involving the interaction of all the world?s regions through trade and transfer of technology. Findlay and O?Rourke emphasize that any account of the ?Rise of the West? that focuses purely on domestic developments ? such as western institutions, cultural attributes or endowments and ignores the vast web of interrelationships between Western Europe and the rest of the world ? is hopelessly inadequate. They argue that the Industrial Revolution needs to be understood as the outcome of a historical process with multiple causes going back to the medieval era in which international movements of commodities, warriors, microbes and technologies all played important roles. They also make clear that the Industrial Revolution not only transformed the international trading system but also gave rise to huge disparities around the globe as the spread of industrialization has been very uneven in the two centuries since.

Plunder or primitive accumulation may not have fueled the Industrial Revolution directly, but the authors emphasize that by expanding markets and ensuring the supply of raw materials, mercantilism and imperialism were an important part of the story. Violence did matter and often shaped the environment in which this exceptional event took place. The authors acknowledge that Asians and those from other regions of the world were not passive actors. They also ask two key questions with regard to the Industrial Revolution: why Britain and why Europe? The answers to both include not only the domestic factors but also control of long distance trade, overseas markets and raw materials. They emphasize in many parts of the text the key role played by the British navy in a world in which nations systematically excluded their enemies from protected markets.

The remaining chapters of the book are devoted to the analysis of the unprecedented expansion of international trade during the last two centuries, based on the ?Great Specialization? (manufactures vs. agriculture) that emerged in the aftermath of the Industrial Revolution and remained in place until recently. The ratio of world trade to GDP is sharply higher today than it was two centuries ago, but this rise has not been continuous. The powerful trend for globalization during the nineteenth century was followed by the collapse of world trade or deglobalization after 1914 and a more or less steady expansion of trade once more or reglobalization since the end of World War II.

One theme that is conspicuously absent in this volume is institutions ? which have occupied center stage not only in the economic history literature but also in economic theory in recent years ? and their impact on trade and economic development. While the authors emphasize the importance of international trade for the ?Rise of the West,? they could have focused more explicitly on the linkages between international trade and institutional change. One can think of at least two major channels through which long distance trade facilitated institutional change in Europe. During the period before 1000 and even until 1500, trade with other regions allowed Europe to learn about and then adapt some commercial, monetary and financial institutions. The transmission of the Islamic institution of business partnership or the mudaraba to the north of the Mediterranean in the form of the commenda is an important example of such borrowing and adaptation. These exchanges were very important for the development of western European institutions and the authors mention some of them. In the early modern era (that is after 1500) trade with other regions of the world led to institutional change in Europe through another mechanism. By giving greater power to merchants, long distance trade enabled them to shape the institutions in early modern Europe more forcefully in the direction of capitalism, as Acemoglu, Johnson and Robinson have recently emphasized. Arguably, greater political as well as economic power for merchants is an important characteristic that sets Europe apart from the other regions. It also provides another dimension to Viner?s power and plenty couple which is at the analytical center, as well as the title, of this book.

This is a well researched volume which is simply delightful to read. In most of the topics about which I have some knowledge, I found the analyses and the judgments offered by the authors both balanced and insightful. I expect this book will remain the standard text for many years to come.

?evket Pamuk teaches economic history and political economy at the London School of Economics and Political Science and Bogazi?i-Bosphorus University, Istanbul. His recent publications include A Monetary History of the Ottoman Empire (Cambridge University Press, 2000) and ?The Black Death and the Origins of the Great Divergence inside Europe, 1300-1600,? European Review of Economic History, 2007.

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):Medieval

Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Financial Markets

Author(s):Hoffman, Philip T.
Postel-Vinay, Gilles
Rosenthal, Jean-Laurent
Reviewer(s):Bodenhorn, Howard

Published by EH.NET (July 2007)

Philip T. Hoffman, Gilles Postel-Vinay and Jean-Laurent Rosenthal, Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Financial Markets. Cambridge, MA: Harvard University Press, 2007. viii + 263 pp. $28 (hardcover), ISBN: 978-0-674-02469-4.

Reviewed for EH.NET by Howard Bodenhorn, Department of Economics, Lafayette College.

Those of us who knew some financial history were not surprised by the Enron and WorldCom collapses in 2001 and 2002. We may have been taken aback by the magnitude of the losses and empathized with Enron employees who saw comfortable retirements evaporate before their eyes, but I can recall more than one dire prediction as Y2K approached and not because anyone really believed that confused computers would turn out the lights. Rather, some of us had genuine concerns that the equity market mania in 1999 resembled that of 1929 and hoped that the Fed would get it right the second time around. Optimism reigned at cocktail parties, however, and statements about unsustainably high equity prices were casually dismissed as just one more example of economists’ collectively predicting 11 of the past 10 recessions. History warned us that the collapse was not a matter of “if.” It was a matter of “when.” While this sense of inevitability now sounds like so much “I-told-you-so” hindsight, Surviving Large Losses makes a case that the then minority opinion was reasonable. The book makes the case that financial crises are inevitable. What is not inevitable is how societies respond as the pieces are picked up after the crisis.

Philip T. Hoffman (Caltech), Gilles Postel-Vinay (?cole des Hautes ?tudes en Sciences Sociales) and Jean-Laurent Rosenthal (Caltech) recognize their debts to the finance-growth literature, exemplified by Ross Levine’s many and influential cross-country studies, and the equally influential La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV) “law and finance” literature, which holds that a country’s financial system is heavily influenced by the legal protections offered to equity and debt holders.[1] As influential as the related Levine and LLSV literatures are, cross-country analyses labor under two fundamental shortcomings. First, they ignore the powerful historical forces that shape a country’s financial institutions and infrastructure, the “colonial origins” argument at the center of LLSV notwithstanding. For a host of reasons, many of which are explored in this book, countries become prisoners of their own pasts, but the story is far more complex than colonial origins. Second, both literatures identify, but cannot explain a growth nexus, though some progress on that front has recently appeared.[2] That is, the size and structure of a country’s financial system matters for long-run growth, but the analyses fail to explain why and how they matter and, more importantly, why and how they change. If success can be had by simply copying the successful, why have so many economies failed to do so? The short answer, of course, is that institutional change is not costless. No matter how inefficient an existing financial system, its costs and benefits are capitalized by economic actors who will resist change absent some outside impetus that alters the calculus.

Surviving Large Losses provides an original and provocative hypothesis that offers an interpretation of financial reform: historically, one of the most important moving forces behind financial evolution has been the financial crisis. It is a fact that financial crises are virtually inevitable in modern economies ? a source of sleepless nights, if not outright dread, for even the most sophisticated, well-hedged investor. Despite the enormous human costs of financial crises, “they often prove to be turning points in the evolution of financial markets and long-term economic growth” (p. 2). Because crises are followed by searches for culprits and insistent calls for change, they afford politically opportune moments to reform financial institutions. In the U.S., for example, the Federal Reserve System and the Federal Deposit Insurance Corporation, two fundamental building blocks of the twentieth century U.S. banking edifice, emerged as post-crisis reforms. These reforms demonstrate that something new and functional can be built on the ashes of the old and broken.

Although the authors offer a political economy model of post-crisis financial reform, they do not arrive at their conclusions by analyzing historical data ? though they have performed such analyses elsewhere. Instead, they take a decidedly low-tech, narrative approach to appeal to the widest possible audience. After providing a verbal explanation of their political economy model, the authors rely on their extensive historical knowledge of about four centuries of financial crises to support their interpretations.

The substantive chapters of the book open with a fundamental question: Why is it that some states protect savers and investors while others plunder? Every state, no matter how wealthy or democratic is capable of plunder, but those that resist grow over the long term. What increases the probability of plunder is the size of the public debt relative to the state’s ability to service it. Countries with small debts and low taxes relative to GDP are less likely to prey on financial markets (p. 12-13). Countries mired in public debt and with already heavy tax burdens have few politically viable options during a crisis other than default or confiscation. In many societies, preying on the military or a hungry electorate instead of the rentiers is a sure ticket for a short reign (p. 14-15).

In issuing public debt the state plays a critical role at the extremes. At one extreme is the state whose issuance of debt leads to the emergence of debt markets with institutions suitable to and organizations capable of trading private claims. So long as the state restrains itself, an entrepreneurial class gains access to an expanding web of finance with positive consequences for long-term economic development.[3] At the other extreme is the state that piles up enormous debts and pays for them by preying on financial markets. To avoid the predator, investment capital hides or flees with obvious negative consequences for long-term growth.

How do crises matter in this process? Financial markets shrink during a crisis and investors call for change in the aftermath. Whether change occurs, how change is initiated, and who initiates it ? government or private actors ? are issues determined through the interaction of political economy and historical accident. Part of the answer depends on who demands post-crisis change and whether the demands for change are translated into productive and efficient institutions (the preferred outcome) or whether losers use the political system to confiscate from winners however defined (the undesirable outcome) or something in between.

Hoffman, Postel-Vinay and Rosenthal argue that the outcome turns on the behavior of three actors ? the middle class, financial intermediaries, and the government. Casual observers might think that the wealthy would be the driving force behind post-crisis reform. But, as the authors note, it is a broad, relatively egalitarian middle that drives financial development, as well as the political economy of reform. Entrepreneurs tend to emerge from the middle. The middle has collateral. The middle relies on local financial institutions. The middle is most vulnerable to crises.

Although the middle’s favored short-term post-crisis strategy might be a bailout and redistribution, enough members of the group usually recognize that institutional reforms that strengthen the financial system and insulate it from transient shocks are the preferable long-term strategy. A more vibrant, more efficient financial system benefits them directly (diversification) and indirectly (spurring macroeconomic growth). Whether the middle class realizes their calls for reform depends on its size and its political clout relative to the wealthy. Egalitarian societies with a broad middle are most likely to initiate useful reform because the benefits of confiscation are small ? mostly because the middle will be confiscating from itself ? and because the benefits of crisis-averting innovation are large.

Whether the middle succeeds depends on the objectives of the second principal player: financial intermediaries. It is in this arena that a society’s wealthy play an important role. Because the wealthy have (very nearly by definition) large portfolios, they are able to spread the fixed costs of innovative new products across a raft of customized financial products. But once financial intermediaries have designed products for the wealthy, it is only a matter of time before they are made available to consecutively less wealthy investors until they are eventually redesigned to suit the needs of the middle. A recent example of increasing regulatory concern is the growing upper-middle class fascination with hedge funds.

Crises, as Hoffman, Postel-Vinay and Rosenthal note, have many causes, including government predation, herd behavior, asymmetric information, and inadequate diversification. If intermediaries see post-crisis profit opportunities and can expect governmental or legal support for reforms and new products that reduce the negative consequences of information asymmetries (i.e., new reporting requirements imposed by stock exchanges for listing companies) and enhance diversification (i.e., mutual funds), they will push for reform.

Government is the third principal player in the drama. Government differs from private actors because a private actor must realize a profit from any innovation or it will be driven from the market. Governments face no such constraint and can, in fact, impose taxes and other regulatory costs to pursue the changes it deems appropriate. Government has a prominent role in financial markets ? from enforcing contracts to subsidizing deposit insurance to overcoming some types of market failures ? but there is a constant fear of governmental overreach, predation, and the encouragement of rent seeking. Governmental intervention is successful when the net social benefits of a proposed reform outweigh its costs and when the rents created are small relative to the benefits of resolving the market failure (p. 169).

What is the authors’ interpretation of massive state intervention in financial markets in modern Western-style economies? They argue that it was an outgrowth of the bloody and tumultuous twentieth century. Governments intervened on a modern scale during the First World War when national survival seemingly demanded planning boards, rationing and conscription of men and materiel, including middle-class savings. The Great Depression induced a second wave of massive intervention and regulation. The Second World War, post-war reconstruction and the Cold War elicited even greater government intervention. Thus, the period between 1914 and 1990 was one of massive and increasing governmental regulation.

How did the Western-style economies realize their remarkable rates of growth in the twentieth century if financial markets labored under the ever increasing weight of government regulations? The authors argue that these countries “got away with it” because, as the century opened, they already had good institutions in place and governments, while highly regulatory, were rarely predatory. Low-income and low-growth developing countries that copied, or tried to copy, the regulatory structures of the West failed because they did not begin with the same pro-growth institutions.

In the end, then, Surviving Large Losses, while more historically nuanced than the finance-growth and law-and-finance literatures from which it springs leaves us in much the same place. Political economy takes us only so far. A large part of the story of good finance is historical contingency, which makes for a less parsimonious tale than that offered by LLSV and others, but one more satisfying to economic historians. Nevertheless, we are left to wonder how the financial institutions that matter emerge and thrive. The authors’ explanation hangs mostly on the existence of a middle class but that, too, depends on a preexisting set of “good” social, political, economic and governmental institutions. Surviving Large Losses is, therefore, probably best viewed as a low-tech contribution to the literature attempting to unbundle institutions. It is certainly thought provoking and leaves as many questions as answers. Before its interpretations carry the day, however, much more theoretical and empirical work will need to be done. Although the conclusions drawn from many historical episodes will appeal to economic historians and general readers, I suspect that mainstream banking and finance types will withhold judgment until many more formal tests are provided. I look forward to seeing those tests and expect the authors of Surviving to be notable contributors.

Notes: 1. See Ross Levine, “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature 35:2 (June 1997), 688-726 and Ross Levine and Thorsten Beck, “Stock Markets, Banks and Growth: Panel Evidence,” Journal of Banking and Finance 28:3 (March 2004), 423-42; Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny, “Law and Finance,” Journal of Political Economy 106:6 (December 1998), 1113-55.

2. Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine, “Law and Finance: Why Does Legal Origin Matter?” Journal of Comparative Economics 31:4 (December 2003), 653-75; and Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “What Works in Securities Laws,” Journal of Finance 61:1 (February 2006), 1-32.

3. Richard Sylla, “U.S. Securities Markets and the Banking System, 1790-1840,” Federal Reserve Bank of St. Louis Review 80:3 (May 1998), 83-98 makes the case for the early U.S.

Howard Bodenhorn, professor of economics at Lafayette College and Research Associate at NBER, has written extensively on banking history. Among his recent articles is “Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from the Nineteenth Century,” Explorations in Economic History (2007).

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century

Russia’s Foreign Trade and Economic Expansion in the Seventeenth Century: Windows on the World

Author(s):Kotilaine, J. T.
Reviewer(s):Lazarev, Valéry L

Published by EH.NET (April 2006)

J.T. Kotilaine, Russia’s Foreign Trade and Economic Expansion in the Seventeenth Century: Windows on the World. Leiden: Brill Academic Publishers, 2005. xvii + 611 pp. $198 (hardback), ISBN: 90-04-13896-X.

Reviewed for EH.NET by Val?ry Lazarev, School of Business, University of Houston, Clear Lake.

This book by Jarmo Kotilaine offers a comprehensive study of the development of Russian foreign trade in the seventeenth century. The 600-page volume has absorbed an immense amount of material from both primary sources and non-English language research literature, often completely inaccessible in the West. The author worked through numerous archives in fourteen countries — from England to Russia — and hundreds of titles in eight (or more? — I lost count) languages to create a study that expands the literature on seventeenth-century Russia tremendously — not only its trade but also its government, diplomacy, and economic development in general.

The economic history of pre-Petrine Russia is largely unexplored territory (the work of Richard Hellie is a notable exception), in part due to the perception of the “old” Russia-Muscovy as a stagnant and autarkic entity that was passively waiting for the great czar-westernizer Peter I (1689-1725) to come and — as the famous Pushkin’s verse puts it — “cut the window into Europe.” The book’s title suggests immediately that Kotilaine is going to assail this stereotype: it was international trade that created Russia’s “windows” — and not only on Europe but on Asia as well — in the seventeenth century. In fact, points out the author, “the Petrine transformation was only possible after some of the key developments described here” (p. vii). Seventeenth-century Russia appears in an unusual perspective in this book: as a vibrant proto-industrial economy increasingly integrated into the European economy.

The “Windows on the World” metaphor organizes the heterogeneous information collected by the author in an efficient and reader-friendly manner. After a brief introduction, Chapter 2, “Russia’s Outlets to the World Markets,” takes us on a tour along the Russian border starting with the North — the sea routes originating in Arkhangelsk — and going counterclockwise all the way to Eastern Siberia — the overland routes between the expanding Russian frontier and China. While the purpose of this chapter is primarily to present the geographical background of the study, Chapters 5 through 8 repeat the same movement describing the evolution of trade in the North (Ch. 5), the Baltic trade (Ch. 6), the cross-border trade with Poland-Lithuania (Ch. 7), and growing commercial interactions with the Ottoman Empire, Persia, Central Asian khanates, and Qing China (Ch. 8). In addition to foreign trade per se, we learn about the growth of the nationwide domestic trade network that connected the key producing regions with Arkhangelsk in the North, Baltic ports in the West, and with Astrakhan in the South. The author aptly connects the dots to make far-reaching conclusions. The patterns of trade, he argues, suggest that the North-South axis (Arkhangelsk-Astrakhan) was critically important for Russia’s integration into the world economy. This is to a large extent due to the importance of Russia’s role as intermediary in trade between Asia and Europe, which arguably lies behind its Siberian expansion. At the same time, it was the growing importance of Western (Baltic) trade routes in the later decades of the seventeenth century that prompted Peter I to attack Sweden in 1700 and eventually defeat it, ending the Swedish domination in Northern and North Central Europe — not the other way around as the traditional view holds. Merchants therefore “can claim a great deal of the credit typically attributed to Peter I for opening Russia’s window on Europe” (p. 354).

Chapters 3 and 4, as well as the concluding Chapter 9, which largely elaborates on the themes of the former two chapters, fall out of the “windows” structure and present the evidence to support the major interpretative statement of the study, reiterated throughout the book in various contexts: Russia’s trade was driven by the growing international (primarily West European) demand for certain commodities that were or could be produced in Russia; this demand fueled the economic expansion in Russia in the seventeenth century, causing the domestic “supply response”; the engine of change was the entrepreneurship of foreign merchants. In the last chapter, the latter are nominated as the “midwives of an empire” for their decisive role in the integration of “the Muscovite economy in a global system of commerce” (p. 504), stimulating Russian manufacturing, supplying the Russian government with specie and arms, and helping to monetize the Russian economy on the whole. The instrumental role of Western merchants (primarily Dutch, thanks to their weaker attachment to silver than that of their mercantilist English competitors) is demonstrated convincingly in the book. However the inferred explanation of Russia’s economic expansion as driven by the growing world demand is deficient in a number of ways.

The author provides data on the growing volume of trade in certain commodities. But how can we tell whether this quantity growth was due to a shift in demand or supply? By looking at prices: the rising prices of Russian exports would support the thesis of the “demand-driven trade,” while the opposite dynamic would suggest that a positive supply shock underlies the expansion of trade. However discussion of prices is practically absent from the book. If reliable price data are unavailable, indirect evidence of the growing world demand for Russian products would support the author’s thesis. Chapter 3, “Demand-driven Trade,” is the place where we would expect to find it. It provides, indeed, a lot of valuable information on the parties involved in Russian trade with the rest of the world, trade-related diplomacy, and the policies of Russian government, but it turns out that the main indicator of the “growing demand” is the increasing volume of goods shipped by foreign merchants. From the standpoint of economic theory, this is irrelevant. If foreign merchants chose to naturalize in Russia — that is what increasing numbers of them were doing starting in the late seventeenth century — or if Russian-born merchants took over from the foreigners, would that automatically make Russian foreign trade “supply-driven”? Of course not. It was probably the government’s demand for revenue that resulted in pro-trade policies, no matter who the agents were. In some cases, the government found it convenient to sell licenses to foreign merchants; in others, it resorted to the tax farming services of domestic agents. The only instance of growing world demand discussed at length in the book is the demand for Russian grain resulting from the rising grain prices in Europe in the 1620-30s, but it does not yield support to the demand-side hypothesis: the author shows that Russia did not become a significant grain exporter. Production and exports of some commodities such as tar and potash was stimulated indeed by the demand of West European manufacturing, but the data provided by the author show that these goods did not account for a large share of Russian exports.

The lack of price data is probably the major shortcoming of the study, and this is very unfortunate since such data should be present in or at least could be estimated from the sources used by the author or may be available elsewhere. The author mentions in passing “extensive price data collected by R. Hellie” (p. 507; no citation is provided), which show that the “expansion of export trade resulted in virtually no inflationary pressures, suggesting that supply managed to keep up with demand.” This is certainly a possibility but other explanations are possible as well. First, the extent of foreign trade may have remained too low to affect domestic prices substantially. The author emphasizes the cases when export-oriented enterprises were launched, but there is no evidence that exports claimed a substantial share of output in many industries. Even in what seems to be the quintessential Russian exports — furs — the author estimates that only about one-third of the total was exported. Second, and more importantly, a supply shift is as likely to drive a constant-price economic expansion as a demand shift. Clearly, Russia was not the land of innovation, and foreign investment remained very limited throughout the century, and yet positive supply shifts could be realized in seventeenth-century Russia.

The seventeenth century was a period of sweeping political-economic change in Russia. A group of related institutional factors could have contributed substantially to cost reduction in many industries and the national economy on the whole. First, the enthronement of Mikhail, the first Romanov, in 1613 ended the turbulent decade of Smuta (“Times of Troubles”). In fact, the country rapidly reached the level of stability it had not seen for half a century since Ivan IV (“the Terrible”) had engaged in disastrous military adventures and domestic policies. The author shows that the costs of doing business in Russia had been almost prohibitively high for foreign merchants during Smuta due to robbery and government defaults, while the situation improved significantly afterwards. The stabilization, beneficial overall, could have had a profound impact on “high-tech” domestic industries such as the manufacturing of quality leather, iuft, which is shown to be the single largest export item (in value terms) in Russia’s Baltic trade. The author describes the iuft production as a success story that resulted from the increase in export demand. There is no obvious reason, however, why the European demand for this peculiar Russian product should have increased in the seventeenth century. At the same time, it easy to observe that a production process that takes weeks to complete is associated with high risk, and therefore political and macroeconomic stabilization in seventeenth-century Russia might have been the primary factor responsible for the expansion in this industry. Second, the seventeenth century was the time when serfdom was consolidated in Russia. Unlike the slave-like condition in which Russian serfs found themselves by the late eighteenth century, the milder seventeenth-century serfdom, by reducing transaction costs in agriculture without immobilizing labor completely, could have resulted in a growing supply of Russian export staples — flax and hemp. Finally, possible changes in Russian supply conditions should be considered against the backdrop of production possibilities that existed elsewhere. In other words, a discussion of Russia’s comparative advantage is needed. The author touches upon this matter, for example, when mentioning that the relative deforestation of Western Europe was adding to Russia’s comparative advantage in forestry-related products but a systematic discussion of this important issue is lacking. In fact, I never came across the term “comparative advantage” in the pages of the book.

It is impossible, therefore, to substantiate one of the central conjectures of the book without a more rigorous analysis of Russian markets, complemented by a discussion of contemporaneous market conditions in Western Europe. It is noteworthy, however, that despite the apparent strong belief in the demand-side interpretation, the author takes care to delineate historical evidence and the interpretation. Kotilaine supplies us with an enormous amount of information, which we are free to process ourselves and agree or disagree with the author. In two respects, the author leaves probably too much for the reader to accomplish: literature and data presentation. Readers of the book, especially students, would certainly benefit from a literature review in the beginning. Some sort of aggregation of trade statistics for the whole country — rather than just raw data by “window” (port or customs) — would clearly help the reader to see the big picture.

Summing up, this book by Jarmo Kotilaine is an outstanding piece of scholarship that has no analogs. Certain problematic positions notwithstanding, it is a great contribution to the economic history of Russia and has a broader relevance as a study of the role of international trade in modernization. This is a must-read for anyone interested in the history of trade, economic history of early modern times, and, of course, Russian history.

Val?ry Lazarev is Assistant Professor of Economics in the School of Business at the University of Houston, Clear Lake. His recent publications include The Economics of Forced Labor: The Soviet Gulag (co-editor and contributor) and articles in the Economic History Review, the Journal of Comparative Economics, and Comparative Economic Studies.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Europe
Time Period(s):17th Century

An Economic History of Imperial Madagascar, 1750-1895: The Rise and Fall of an Island Empire

Author(s):Campbell, Gwyn
Reviewer(s):Worden, Nigel

Published by EH.NET (December 2005)

Gwyn Campbell, An Economic History of Imperial Madagascar, 1750-1895: The Rise and Fall of an Island Empire. Cambridge: Cambridge University Press, 2005. xvii + 413 pp. $90 (cloth), ISBN: 0-521-83935-8.

Reviewed for EH.NET by Nigel Worden, Department of History, University of Cape Town.

Over the past twenty years Gwyn Campbell’s numerous articles on Madagascar have provided refreshing new insights into a region whose historiography is largely unknown in the Anglophone world (“a well-guarded Gallic secret,” as he describes it). This book is thus a long awaited publication which fully fulfills the expectations that Campbell’s previous work has raised. Its significance goes much further than its title might suggest.

At one level the book is indeed a meticulously documented economic history of nineteenth-century Madagascar. In this it is a model for historians of pre-colonial African and Indian Ocean societies. The historian of Madagascar is perhaps fortunate in that written records survive from both pre-colonial administrators and from the accounts of traders, merchants, diplomats and missionaries. These enable the production of data on population, trade and production at a level of detail and accuracy unparalleled in pre-colonial African studies.

Campbell is not only fluent in Malagasy, but also in the less familiar European languages (Welsh, Norwegian) in which some of these records are written. He uses them to reconceptualize the whole history of late pre-colonial Madagascar, and to integrate the island into the broader context of the western Indian Ocean world. In this he transforms the historiography of the region.

Campbell’s central argument is that the nineteenth century saw the rise and collapse of a centralizing Merina economy that underpinned what he describes as a Merina empire. This challenges existing orthodoxy in fundamental ways. Firstly it devastatingly destroys the Malagasy nationalist argument that Madagascar was a single state before colonial conquest, unified by a common language, culture and political system. Secondly, Campbell argues that the conquest of the French in the 1890s was not simply the product of European scramble politics but was directly linked to the internal collapse of the Merina economy.

The first section of the book examines the nature of the “traditional economy” between the mid-eighteenth century and c.1820. A key element was the impetus given to the Malagasy economy by the demand for provisions and for slave labor in the neighboring plantation economies of Reunion and Mauritius and the links further afield (such as the Cape and the Swahili coast). An indigenous plantation economy and the spectacular growth of rice cultivation emerged. By the 1820s long-distance trade, a commercial infrastructure and a market system intersected with these developments to underpin the power of the Merina state of the central regions. By the 1820s, the Merina had conquered the eastern parts of the island and gained access to the coastal trading system.

Campbell then examines an intriguing and little-known development. In the 1820s-50s a period of autarky existed, in which British mercantile free trade policies were rejected in favor of Merina state monopolies. An experiment in producing an industrial economy (“possibly the first in Africa and contemporaneous with similar projects in Europe”) took place, based on the use of forced corvee labor (fanompoana) and marked by the rapid expansion of Merina state authority. But by the middle of the nineteenth century this was weakening, both because of continued high transportation costs which made Malagasy goods uncompetitive in the rapidly commercializing region and because of local resistance to forced labor which led to desertion and banditry.

It was in this context that Merina power faltered in the later nineteenth century. Yet Campbell argues that the Malagasy economy as a whole revived in the 1860s and 1870s, partly because of regional initiatives that were previously disguised in the Merina empire but mainly because of the integration of the island into the expanding regional and international economy. A key role was played by merchants and their agents linked to the British and Indian trading nexus of the western Indian Ocean, focused on Zanzibar, Natal and Mauritius. These developments weakened the autarkic policies of the Merina, especially when other Malagasy peoples such as the Sakalava were able to purchase imported arms and resist Merina control. By the 1890s even the central Merina regions were subject to local raids, while desertion and banditry destroyed the last remnants of the fanompoana labor system on which the Merina economy was based.

The final section of the book examines the consequences of this for the colonial occupation of the island. Although French interests had long existed in Madagascar, it was only in the 1890s that the geopolitics of European expansion led to British abandonment of the region to the French. But it was, Campbell argues, the “implosion” of the Merina state which enabled them to succeed: the French conquered Madagascar “by default.”

Campbell’s study thus transforms our understanding of Madagascar and its place in the history of the western Indian Ocean region. It is also a model of how economic data can inform social and political historical analysis. This is a highly significant intervention in an era when economic history is battling to retain support especially among Africanists and other scholars of the colonial encounter for whom quantitative data have become unfashionable.

Nigel Worden’s research focuses on slavery in the Cape Colony, the construction of social identities in VOC Cape Town and on public history in the Indian Ocean region. Publications include Slavery in Dutch South Africa; Breaking the Chains: Slavery and Emancipation in the Nineteenth-Century Cape Colony; Cape Town: The Making of a City and The Making of Modern South Africa.

Subject(s):Servitude and Slavery
Geographic Area(s):Africa
Time Period(s):19th Century