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Heavenly Merchandize: How Religion Shaped Commerce in Puritan America.

Author(s):Valeri, Mark
Reviewer(s):Frey, Donald E.

Published by EH.NET (August 2010)

Mark Valeri, Heavenly Merchandize: How Religion Shaped Commerce in Puritan America. Princeton, NJ: Princeton University Press, 2010. xiii + 337 pp. $35 (cloth), ISBN: 978-0-691-14359-0.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.


Mark Valeri shows impressive mastery of a huge amount of colonial New England archival material, ranging from merchants? accounts, personal letters and legal filings, to Puritan ministers? sermons, tracts, and lectures. He also understands the major thinkers who shaped intellectual currents in England and America, during the period from the founding of Boston through the mid-eighteenth century. Valeri shapes all this into a comprehensive picture of the joint evolution of economics and Puritan teaching. Although Valeri does not explicitly address Max Weber?s Protestant ethic thesis, and even states that the book is not about Weber, I believe that his detailed portrayal of an evolving, multi-faceted Protestant ethic nevertheless shows Weber?s classic to be lacking in depth, with all the qualifications that fact raises.

Valeri frames this history as a sequence of overlapping stages, focusing upon a representative merchant for each of the stages. Valeri?s lens is specifically upon pious merchants, who believed that their commercial practices and ideals were compatible with their Puritan faith. That these merchants were not rebels from mainstream Puritan teaching makes Valeri?s case all the more compelling. Besides showing how religion shaped commerce, Valeri also shows that economics shaped religious teachings: Puritanism?s early suspicion of commerce eventually learned to stand on its head, evolving into an endorsement of commerce. Indeed, the book?s title is taken from the title of a colonial sermon that resorted to commercial metaphors to make its point.

Puritan merchant Robert Keayne is Valeri?s representative of the first stage (early Boston to 1650).? Keayne tried to hold to two moral codes that were incompatible at major points of intersection. The ?civic humanism? of merchant guilds idealized trade as a source of civic and national improvement and promoted professional practices such as keeping detailed accounts. Yet, Keayne also converted to Puritanism, which ?interpreted the market through a different conceptual framework? (p.26); this framework held that sinful humans, including merchants, and maybe especially merchants, were ?inescapably prone to avarice.? Further, as might be obvious, the norms of scripture were hardly the same as civic humanism. Thus, Keayne, the pious merchant, regularly heard sermons that ?warned that merchants were tempted to take advantage of their neighbors, forget their duty to the poor, and become self-interested,? and described an accounting mentality, which every merchant acquired as a matter of course, as a ?disguise for inhumaneness? (p. 31).?

The easy solution to Keayne?s dilemma would have been to reject orthodox Puritanism. Not surprisingly, many merchants flocked to the antinomian heresy, which ?condoned merchants? proclivities to follow their own regulations and rules? (p. 45). Yet, Keayne resolutely remained among the orthodox, faithfully submitting to censure from his church for his own business practices (though continuing to defend his own case). Keayne?s dual professions (one of faith, and one of livelihood) left him in a dilemma that lasted to his death, and was addressed in his bequest to the city. In this early era, Reformed religion recognized economic activity as another human arena requiring boundaries to define acceptable behavior.

With time, Puritan clergy did become more tolerant of trade — and ultimately, much more than merely tolerant. The second stage (1650- late 1680s) was marked by the restoration of the old royal line in England (following Puritan Cromwell?s interregnum). The restored monarchy forced upon New England royal governors not attuned to Puritanism; and Boston merchants inevitably came to conform to developing English trade practices.? According to Valeri, the new complexity of trade caused old Puritan certainties to blur. The Puritans knew ?that usury, oppression, and pure market pricing were wrong, but they lost the specific meaning of such terms in the swirl of contemporary techniques? (p. 90). As a result, Puritan churches ceased disciplining their merchant members for economic infractions.

Puritanism of this stage, however, did not simply abandon the field to rampant commerce. Calvin?s doctrine of divine providence opened the way to a new interpretive approach to commerce.? (In Reformed teaching, this doctrine held that God?s purposes control even the smallest events.) At the personal level, Puritan merchants like John Hull tempered their commercial striving in the belief that God?s providence ultimately dictated success or failure. But the clergy went further, arguing that, as with ancient Israel, God would punish an unrighteous society and reward a virtuous one (though in his hidden purposes, he just might not). ?At minimum, therefore, good government would be necessary for New England to be positioned to receive divine favor. And good government relied on specialized knowledge. Now, ?economic reform rested … in the responsibility of civic leaders to rule according to their social expertise? (p. 103). This exempted the churches from disciplining for more complex economic infractions. As long as merchants avoided ?gross excesses? and ?downright avarice,? their pursuit of profit was not subject to church censure (p. 105).? The merchant John Hull never encountered the censure faced by his predecessor, Keayne. Nevertheless, Puritan faith seems to have influenced Hull?s personal style, for he lived a relatively modest life and accumulated a relatively small estate.

The third stage (1690 to the mid-1710s) marked a shift toward technical, economic theories dominating even the clergy?s discussion of commerce. But the clergy ratcheted up the concept of divine providence to provide a new religious interpretation of what was happening. The Glorious Revolution (1688) providentially returned Protestants to power in England, and allowed for a grand harmonization of faith and economics: ?Protestantism led to wealth; wealth funded the empire; the empire combated Catholicism; the end of Catholicism brought civil liberties; and civil liberties allowed citizens to practice Protestant and market principles? (p. 134). Samuel Sewall was a merchant of this era. He was a writer who ?discovered a perfect congruence between political economy and the most intensely providential world view? (p. 172).? He envisioned God?s purpose to be a Protestant empire in America, funded by commerce.

With providence now drafted into the service of economics, the lead role in defining virtue and vice shifted to purely economic reasoning. For example, the dim Puritan view of luxury was relaxed on the say-so of economic theory, which claimed that hyper-consumption ?strengthened the commonwealth, promoted its independence, and therefore amounted to a social virtue? (p. 137). Ultimately, the clerical successors to the original Puritans ?jettisoned older puritan readings of Scripture for interpretations resting on scientific analyses, patriotic agendas, and practical necessity? (p. 154). They ?treated the language of political economy as a universal certainty, while discarding the original dictates of Reformed teaching? (p. 156).

The transformation of Puritan teachings continued between the 1710s and 1730s. Even the idea of divine providence was renovated: henceforth, it would be reduced to concepts acceptable to the Enlightenment. According to Boston clergy, ?God ruled humanity through a universal, which is to say natural, law? (p. 209) — a proposition consistent with Enlightenment views and Newtonian science.? Commerce became ?a series of natural exchanges, that, by the law of nature, coalesced into a balanced system? (p. 211).? No longer did clergy see the market as a temptation to evil, but glorified it as a natural mechanism ordained by God. It is little wonder, therefore, that the merchant Hugh Hall in this era was ?apparently oblivious to the moral ideas of classic puritanism? and so ?imported expensive and fashionable items, sold sugar and rum … sued his debtors, contributed to the unsettling fluctuation of fiscal values and prices, and dealt in slaves? (p. 224).? Hall?s deeds, which would have rated condemnation from earlier Puritan clergy, were congruent to the Enlightenment-soaked teachings of his religious mentors; these clerical successors to the early Puritans could ignore slave trading while emphasizing inner qualities that showed up more in style than in substance.

Valeri concludes with the revival era of the 1740s and 1750s, which was more of the same, but played in a new key. Clergy and merchants alike, whether for or against the evangelical revivals of the Great Awakening, understood the relationship between Protestantism and economics in the same way: the market was part of God?s natural design and, as such, was ?an arena for the exercise of virtue? (p. 241). As had been the case since at least 1700, ?virtue? was not defined in terms of the goodness of certain actions (and regulation of bad actions), but in terms of inner virtues such as ?equanimity, sincerity, and benevolence? (p. 235).? It is not surprising that pious merchants of the era ?worried about the corruption of personal inclinations yet expressed no reservations? about their business practices, which would have earned them censure by their Puritan ancestors (p. 242).? This era saw the hardening of an ideology, blessed by religion: the market was a ?natural law, a divine construct,? and a school for certain kind of social virtue. The market ?appeared to be a universal truth, whereas the old scriptural idioms … receded into anachronism? (p. 249).

Valeri carefully refrains from drawing conclusions that go beyond his immediate research. I wish he had been willing to extrapolate more, and so I will do so myself. As suggested above, this book raises questions about the adequacy of Max Weber?s classic ?Protestant ethic? thesis. (At a very, very high level of generalization, where specifics are too diluted to matter, Valeri?s work can be made to agree with Weber, in that religious ideas do indeed interact with economics. But beyond that, I see important differences.) The Puritan merchants studied by Valeri never seem so driven by insecurity about their election to seek affirmation of their salvation in economic success — as argued by Weber. In fact, according to my reading of Valeri?s work, the religious stimulus to (or affirmation of) economic activity increased to the degree that clergymen abandoned core Calvinist teachings and adopted secular, Enlightenment ideas.

This book also highlights two enduring alternative paradigms about the fundamental nature of economic systems. The early Puritans had viewed the market essentially as a human activity, and, as such, less than perfect. That being assumed, economic behavior needed boundaries defined by human institutions (churches and governments). The impact of commerce on the local community was a matter for regulation. By the time essentially secular Enlightenment ideas had been hallowed by eighteenth-century clergy, the market had ceased being a human invention and been transmuted into an expression of natural law and a divine construct (p. 249). As such, of course, the economy became sacred and untouchable — perhaps to be worshipped, but never to be reformed by mere mortals. The way was set toward nineteenth-century laissez-faire. The distinction between the economy as an imperfect human invention, always the proper object of reform, and the economy as an expression of some kind of perfection (perhaps general equilibrium), it seems to me, plays out to this day in contemporary politics and economics. As this book shows, these alternative paradigms are largely matters of faith.? Recognition of this might greatly improve contemporary political discourse.

My criticisms of the book are minor. As noted already, the book?s subtitle might have somehow indicated that half of the thesis was that commerce shaped religion, in addition to religion shaping commerce. Although merchants were highly significant in the New England economy, somewhat more attention might have been paid to other occupations. However, authors have to define some boundaries, and Valeri?s chosen emphasis makes sense. Valeri?s long discussions of colonial monetary problems can be defended because such problems were integral to the economic story he tells. However, in my opinion these discussions might have been pared without great damage to the thesis. However, these are minor suggestions. Overall, I found this book to be an outstanding contribution to our understanding of the working out of the Protestant ethic in colonial New England. Therefore, it is a major contribution to our understanding of American economic morality.


Donald E. Frey is author of America?s Economic Moralists: A History of Rival Ethics and Economics (2009).

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Subject(s):Business History
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):17th Century
18th Century

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

Author(s):Landes, David S.
Mokyr, Joel
Baumol, William J.
Reviewer(s):Brenner, Reuven

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 Reuven Brenner, Desautels School of Management, McGill University.

Carl Schramm, who wrote the Foreword to this book, and who, through the Kauffman Foundation, paid for it, states clearly that the book is about “entrepreneurship? as people ? entrepreneurs in particular ? understand the term: Someone who creates a business that, in some respects, differs from existing ones.

Yet, just two pages later, William Baumol writes in his Preface that the book is about both “redistributive” and “productive” entrepreneurship, the former covering warfare, crime, bribes, lobbying ? any innovative ideas. Since this covers just about everything from Napoleon and his Code to Robin Hood, and from Muhammad, the merchant and one of the very few of Heavens’ intermediaries on this Earth to 35,000 registered lobbyists in Washington ? it is little wonder that most of the 18 chapters, written by 18 different academics are all over the map, and provide little illumination on Schramm’s targeted subject matter. If one just went from the Foreword and Preface straight to the Index of the book, one could immediately realize that. “Finance, credit, debt” appear in less than 40 pages of the 541 pages of text, and the terms “equity” and “partner(ship))” do not even appear in the Index, though the few relevant chapters in the book highlight the importance of both in financing entrepreneurial ventures across some countries and time. How can one write anything about entrepreneurs without starting the examination with the ways they were financed? Where was the risk capital coming from and in what shapes and forms? And if there was no risk capital ? then why not? Even if just parts of the book dealt with “productive entrepreneurs,” these should have been the questions framing the discussion in the 18 chapters.

Susan Wolcott’s chapter, “An Examination of the Supply of Financial Credit to Entrepreneurs in Colonial India,” is among the exceptions that actually does that and sheds light on the unusual features of India’s credit markets. The chapter describes the options entrepreneurs faced if they wanted their businesses to grow; how the lack of openness of its credit markets forced entrepreneurs to rely on family savings; how the caste system and the English come into the financial landscape. This chapter provides insights into the financial difficulties of launching and growing a business when capital markets are in their infancy, and also a brief glimpse into how lack of tolerance hinders entrepreneurship.

The only other chapters that cover these topics are Oscar Gelderblom’s and Timur Kuran’s. The first is about “The Golden Age of the Dutch Republic,” which shows in detail how equity combined with limited liability financed the Dutch entrepreneurs, though even he gets distracted at first by categorizing things and then stating that Amsterdam’s 2,600 shopkeepers (butchers, bakers, cobblers etc.) were the city’s entrepreneurs. Luckily, after only three pages, he forgets about this, and deals with the ways “entrepreneurs and innovations” were financed as the Dutch Republic became both the first religiously tolerant place in Europe, and also allowed its financial markets to thrive, with sophisticated futures trading on the world’s first stock exchange. Timur Kuran’s chapter deals with the same topics but is focused more on obstacles to entrepreneurs under Islam.

Although here and there other chapters mention in a few paragraphs financial conditions (though I cannot recall anyone in the book ever using the term “risk capital”), often the topic is more about impediments and antagonism to the notion of “business.” Authors make reference to usury laws and the low social status of businessmen and traders in many societies ? from Babylon to Rome, Cicero defining their endeavors as “vulgar and dishonest.” This latter view resonates centuries later within Islam (with the doctrine of bid’a, in Kuran’s good piece subtitled “Inhibitive Roles of Islamic Institutions”) and later in the English view of commerce: Jane Austen referred to the endeavor in a similar vein as a violation of aristocratic principles, though with timeless humor. And yes, this anti-business view resonates across all countries and time with Jews, always the Jews.

In fact large chunks of the book are more about the topic of inhibitions to enterprise and both the variety of ideas people came up with to rationalize them and the institutions rulers and governments put in place to enforce these ideologies. Strangely there is only passing mention of Latin America, Russia and communism ? and though there is a chapter on China, the twenty pages jumping from 200 BC to our days offer not one insight. It first concludes that politics there is “as central as ever, and having no access to party officials remains a critical impediment to any successful entrepreneurial operation,” yet the last sentence reads “if the past record is a guide, [the entrepreneurs] will overcome future challenges that come their way.” I am no expert on Chinese history, but as far as I know it has been well documented that under the Ming, and even more under the Manchu dynasties, when rigid Confucianism was imposed by state power, Chinese inventiveness ceased for centuries ? about which the chapter is mum.

Unfortunately most of the chapters dealing with the topic of inhibitions miss the forest from the trees, as not one addresses what is to me the basic issue when examining “the invention of enterprise.” There is nothing more threatening to an established order ? any order ? than opening up, deepening, democratizing capital markets ? accountably, allowing people to leverage their inventive, enterprising spirit. True, this would also disperse power ? political power in particular. The deeper capital markets would also threaten established industries and commerce. Entrepreneurs, brilliant and ambitious as they might be, are not a threat. They can be sent to Siberia, forced into complacency by the Maos of this world, and the opportunistic ones will channel their ambition through the established powers.

But entrepreneurs with access to different, independent sources of risk capital ? now that’s threatening, be they Brin and Page, Jobs or Milken at the time (quickly taking away much of the banks’ bread and butter of providing loans). Understanding this, even if not wanting to articulate it, provides enough incentives for those in power to subsidize, spread, and promote ideas and institutions inhibiting the deepening of capital markets under a wide variety of jargons, and thus inhibiting the invention and reinvention of enterprises. With time, people get accustomed to these institutions, their origins lost in the mist of time, inhibiting entrepreneurship and business for centuries. Today this may be happening a bit before our eyes. Suddenly, everything becomes a “bubble” ? Internet, oil, houses, gold, bonds. Guess what: if everything is ? why have capital markets to start with? If pricing no longer offers guidance to allocate capital; if stock and bond markets are not there to help correct mistakes faster ? why should they continue to exist? And if they do not exist, who else remains but politicians, bureaucrats and the academics surrounding them ? none of whom ever worked in a business even one day in their lives ? who would then tax and borrow and subsequently allocate capital and “invent enterprises” based on ? well ? whatever.

While I know who Schramm had in mind with this project ? and it is a worthy project ? I do not know what the editors wanted to convey with their selections, or who they had in mind as an audience for this book. Baumol warns that “entertainment is not the purpose of this book.” That’s an unnecessary warning: 90 percent of its pages are dry, tedious, and some ? especially those with bombastic titles such as “History of Entrepreneurship: Britain, 1900-2000,” “History of Entrepreneurship: Germany after 1815,” and “Entrepreneurship in the United States, 1920-2000″ ? are little more than jargon-ridden, superficial texts, providing zero insight. They are filled with taxonomies and referenced sentences such as “Computer and computer-based technologies in particular, later collectively known as information technology, extended across all boundaries (Coopey 2004)” or “The one thing that it is impossible to have too much of is good judgment (Casson 2000)” ? Casson quoting himself on this observation. Apparently both sentences were unheard of before the years 2000 and 2004.

Even just a little judgment by, perhaps, talking to some entrepreneurs and following them in the daily execution of their ventures before writing treatises about them, could have reshaped this book into something far more concise, sharply written and surprising. After all, learning means being surprised. There were very few pages where I was.

Reuven Brenner, Repap Chair, Desautels Faculty of Management, McGill University, is the author of Force of Finance: The Triumph of Capital Markets (Thomson/Texere) and A World of Chance (Cambridge University Press). His early books, History: The Human Gamble (Chicago), Betting on Ideas (University of Chicago Press), and Rivalry (Cambridge University Press), were, in part, about entrepreneurship. His latest article, “Venture Capital: Building (or Restoring) National Wealth,” appeared in the Winter 2010 issue of the Journal of Applied Corporate Finance.

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

Capitalism and the Jews

Author(s):Muller, Jerry Z.
Reviewer(s):Temin, Peter

Published by EH.NET (March 2010)

Jerry Z. Muller, Capitalism and the Jews. Princeton, NJ: Princeton University Press, 2010. v + 267 pp. $25 (hardcover), ISBN: 978-0-691-14478-8.

Reviewed for EH.NET by Peter Temin, Department of Economics, MIT.

This small book is in the currently popular form of a lecture series. The book stretches the concept as the lectures were not given as a unit, but delivered at various conferences. They were close enough in subject to be grouped together, but they have less coherence than the format suggests. Muller, a historian at Catholic University, has given us four lectures on economics aspects of Jewish life in the modern world. The lectures are based on secondary sources, so it is not new research. Instead they are thoughtful and occasionally insightful essays of specialized interest.

The first essay is a history of the concept of usury from Aristotle to Osama bin Laden with attention to the role of Jews in money lending. The second essay is a refutation of a remark by Milton Freidman asserting that Jews were in debt to capitalism but opposed to it. Muller notes that Jews were successful in business in Western Europe and champions of socialist equality in Eastern Europe. The third essay is a survey of Jewish communists in several countries and times, concluding that most Jews were not communists and most communists were not Jews. The final essay argues that Zionism is a form of nationalism which was in turn a result of capitalism; it is an exposition of the views of Ernest Gellner.

The first essay is the longest and most interesting. It asks why the concept of usury has been so tenacious, as opposed to asking the more usual question of what effect usury laws have. Muller argues that the concept ?provides one of the most long-lived paradigms for the condemnation of market activity? (p. 17). In its restricted sense, usury refers to a specific activity, the lending of money. The more ?radical? use of the term is as a condemnation of all commerce. The opposition to trade and interest comes in turn from seeing resources as fixed. Readers will recognize this view that all wealth comes from land as the source of the Physiocratic view in the late eighteenth century and Henry George?s single-tax proposals a century later. Muller argues that the condemnation of usury went underground in the eighteenth century, only to reappear in more abstract expressions.

In his most startling assertion, Muller argues that Marx?s labor theory of value was just such an underground expression of the opposition to usury. It is a return to Aristotle in its denial of the value of commerce, and it also is a denial of Marx?s Jewish heritage ? which is how it appears in this book. This claim that Marx?s personal history determined his core economic beliefs is asserted but hardly proved. It derives indirect support from Cuddihy?s analysis in The Ordeal of Civility of how several seminal modern thinkers were influenced and troubled by their Jewish heritage. Cuddihy argues that Marx in particular was prone to using euphemisms to refer to Jews. Marx?s condemnation of usury would rank as just such a euphemism, albeit one that had damaging effects on communist policies.

Muller unhappily did not inquire more deeply into this aspect of Marxian theory. Was Marx denying his heritage? Or was he trying to preserve a non-toxic place for Jews in socialism? Was he aware of the strong effect of his Jewish background on his abstract theory? These are fascinating questions stimulated by Muller?s discussion but not pursued in this book.


John Murray Cuddihy, The Ordeal of Civility: Freud, Marx, Levi-Strauss, and the Jewish Struggle with Modernity, New York: Basic Books, 1974.

Ernest Gellner, Nations and Nationalism, Oxford: Blackwell, 1983.

Peter Temin is the Gray Professor Emeritus of Economics at the Massachusetts Institute of Technology (MIT). He is the author of ?An Elite Minority: Jews among the Richest 400 Americans,? in David Eltis, Frank Lewis and Kenneth Sokoloff, editors, Human Capital and Institutions: A Long Run View, Cambridge University Press, 2009.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Human Capital and Institutions: A Long Run View

Author(s):Eltis, David
Lewis, Frank D.
Sokoloff, Kenneth L.
Reviewer(s):Mitch, David

Published by EH.NET (February 2010)

David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, editors, Human Capital and Institutions: A Long Run View. New York: Cambridge University Press, 2009. ix + 342 pp. $85 (hardcover), ISBN: 978-0-521-76958-7.

Reviewed for EH.NET by David Mitch, Department of Economics, University of Maryland ? Baltimore County.

The Cliometric movement is now a half century old and throughout its existence Stanley Engerman has been one of its leading lights. Thus it is no surprise that this volume based on papers from a festschrift conference in honor of Engerman offers some exceptionally strong scholarship. However, it also bears some of the characteristics peculiar to festschrift volumes. The human capital and institutions theme suggested by the title has been applied quite broadly and loosely in order to incorporate all the contributions in this volume. Only three of its ten contributions deal with this theme directly; of the rest, two are anthropometric, one deals with employment and income stability, two with human talent, one with legal standing of labor contracts and one with usury laws. And while about half of the contributions are based ? as best I can tell ? on fresh research, the other half are largely reprises in varying degrees of work published elsewhere. Moreover, the book?s status as a festschrift in honor of Engerman is obscured by two aspects. The same editors, David Eltis (Emory University), Frank Lewis (Queens University), and Kenneth Sokoloff (late of UCLA), put together Slavery in the Development of the Americas published in 2004 which also honors Engerman and it is that earlier volume which has the usual introductory tributes and concluding bibliography of published work of the honoree. And in addition, one of the editors, Kenneth Sokoloff, died before the volume under review was completed and this current volume begins with a two page memoriam to Sokoloff while the editor?s introduction gives as much mention to Sokoloff as to Engerman. All the same, given his contributions to economic history, one can hardly begrudge Engerman at least a second festschrift volume and I suspect that at least one memorialschrift to Sokoloff is in the works. Having now actually read the chapters of this volume, I found that their cumulative quality more than offset any lack of cohesiveness, freshness or clarity on festschrift status. In fact, the diversity of topics was a plus in at least one respect; I found a definite merit of this book as an edited volume to be the opportunity it provided to sample the range of approaches currently undertaken by some of the senior practitioners of economic history.

The essays in the volume are grouped into four parts. The first part deals with ?health and living standards.? Two of the essays in this section are anthropometric: Robert Fogel?s survey of his work on biotechnology and what he calls the technophysio evolution and its implications for current health care policy along with Richard Steckel?s overview of his project on using skeletal remains to examine very long run trends in health and nutrition. It is these two essays which truly offer long run perspectives spanning in the case of Fogel?s project several centuries and in the case of Steckel some millennia. Although both these essays stem from much larger research projects, I found each informative as overviews of the authors? work. The third essay in the section is by George Boyer on income and employment instability in Victorian and Edwardian England. Boyer extends previous work with Timothy Hatton on unemployment estimates in substantial new ways with careful marshalling of evidence from diverse sources to argue that important but not fully appreciated changes occurred between the late eighteenth and early twentieth centuries in how British society coped with income and employment insecurity. Boyer argues that provision for poverty ?was not a ?unilinear progression in collective benevolence? from poor relief to national insurance? (p. 83). Instead, compared to what came before or after, the Victorian era was dominated by the role of self-help, friendly societies and other forms of mutual assistance rather than government-funded poor relief.

The second part of the volume is the one that directly addresses the topic of human capital and institutions. While two of the chapters in this part are based on work published elsewhere, they are both fundamental contributions and thus worth bringing together in one volume. One of these chapters is Stanley Engerman, Elisa Mariscal, and Kenneth Sokoloff?s piece on the evolution of schooling in the Americas. It is a slightly revised version of Mariscal and Sokoloff (2000). In this chapter, the authors build on the now influential Engerman/Sokoloff thesis on the importance of resource endowments in shaping long run institutional change. They attribute the much more advanced state of schooling North America over Central and Southern America to the more equal distributions of land and wealth in the former area. This chapter is a model of careful comparative argument and is also valuable for its collection of schooling data for various dates for a wide range of North and South American countries. In their contribution, Claudia Goldin and Lawrence Katz, like the Engerman et al chapter, consider the comparative question of why the U.S. led in education over other countries of the world. However, they address this question by looking at variation across U.S. states throughout the early twentieth century and they focus on secondary education. Like Engerman et al, they attribute much of the advance to social homogeneity in U.S. communities but in contrast to the previous study they give less consideration to the franchise. To their credit, the authors are quite clear in opening notes on how their chapter builds on previous working papers and also on material taken up in greater depth in their recent book The Race between Schooling and Technology. And they provide a sense of the care taken in compiling their data. They thus nicely offer readers ?Goldin and Katz Concise? rather than ?Goldin and Katz Lite.? The remaining chapter in this part reports Michael Edelstein?s new time series estimates of engineering graduates in the State of New York over the nineteenth and twentieth centuries. Edelstein does a thorough job of explaining his choices in compiling his numbers and the significance of his findings on trends in a profession that he argues convincingly has been central to modern economic growth.

The third part is titled ?human capital outliers? and consists of chapters on artists and very rich Jews. In their chapter, David Galenson and Robert Jensen revisit work Galenson has been doing for about a decade on the life cycle of artists based on a distinction between incremental, experimental innovators and conceptual innovators. They provide examples of artists in each category and then some empirical support by showing fitted profiles of prices of artworks on age in each case. Edward Tufte (2006, pp. 148-50) has objected to this modus operandi of displaying fitted curves without displaying the underlying auction price data ? and that the dichotomy in creative types may over-simplify. Still the exposition is lucid and the price-age profiles are intriguing. The other chapter in this part is Peter Temin?s study of why there have been a disproportionate number of very wealthy Jews. After providing a quite cogent formulation of the problem, Temin argues that Jews attaining great wealth were able to do so not as is sometimes suggested because discrimination in large business corporations spurred their entrepreneurial endeavors but rather because of the social networks they could draw on due to their clearly defined religious and ethnic identity. He supports his argument with simulations showing contagion effects. Despite this volume?s title, neither Galenson and Jensen nor Temin give much attention to the role of institutions in shaping and influencing the factors they consider although Galenson has done so elsewhere (see for example Galenson (2001)). I was surprised that Temin did not reference Andrew Godley?s (2001) comparison of Russian immigrant Jews in London versus New York City as a way of ascertaining the role of institutional environment in influencing the promotion of entrepreneurship for groups with a common Jewish heritage.

The final part of the volume takes up the theme of constraints. Robert Steinfeld?s chapter takes up constraints in the labor market. His point of departure is the Fogel and Engerman finding in Time on the Cross that slave labor was not necessarily less efficient than free labor. He then argues that the emergence of free labor contracting and in particular the reform of the Masters and Servants Act in Victorian England was not due to market forces or the perception by employers that free labor was more efficient than coerced or constrained labor but rather to the extension of the franchise with the Reform Bill of 1867 and related political factors. Steinfeld?s is the only non-cliometric chapter in the volume making minimal use of quantification and with no tables or figures.

Hugh Rockoff?s concluding chapter deals with the non-human resource issue of usury laws in the North American British colonies and U.S. He has compiled evidence on the evolution of usury laws in the North American colonies and the U.S. He argues for the importance of both intellectual attitudes as well as competitive market forces in influencing imposition and relaxation of usury laws. Until I read his chapter, I am not sure I fully appreciated that Adam Smith had actually advocated usury restrictions in The Wealth of Nations, albeit with moderation. Rockoff gives careful attention to the usury provision of the National Currency Act of 1863, arguing that concern for promoting the flow of capital to Western states implied provisions allowing national banks in a given state to charge the highest allowed interest in that state rather than some lower uniform national level. Rockoff?s weighing of the evidence leads him to conclude that on balance usury laws in the U.S. did have an impact on capital markets, though he leaves it as an issue for future research to assess its magnitude. Interestingly, Rockoff admits (p. 313, note 36) that compared with Bodenhorn and Rockoff (1992), his current work on usury laws implies somewhat less regionally integrated capital markets in the nineteenth century U.S.

To use David Galenson?s distinction, the cliometric movement was initially perceived by many as making a conceptual breakthrough in the practice of economic history; however, this volume raises the issue of whether many of the founding cliometricians should in retrospect be classified as experimental innovators. Comparing the second section of this volume with the human capital section of the manifesto of the cliometric movement, The Reinterpretation of American Economic History (Fogel and Engerman 1972), one is certainly struck by the variety of incremental advances both conceptually and in data collection that have occurred in the interim. The current volume also highlights at least some of the interdisciplinary directions in which cliometrics has proceeded over the last 40 years. This is particularly evident in the anthropometric work of Fogel and Steckel. As Galenson (2009, p. 2) has recently acknowledged, efforts to extend quantification to art history have met with definite resistance by art historians. All the same, the use of quantification in this volume while certainly abundant is generally worn lightly and in a nuanced manner as would seem fitting for the honoree?s intellectual style. While Steinfeld?s is the only non-quantitative chapter, only three of the remaining nine chapters by my reckoning explicitly report econometric results.

It is certainly a tribute to the breadth of both Engerman?s and Sokoloff?s work as well as the reach of cliometrics that this volume features just one aspect of their endeavors. One can turn to Slavery in the Development of the Americas for an entirely different dimension of Engerman?s contributions and I would anticipate at least one Sokoloff memorialschrift dealing extensively with his work on technological innovation and other topics barely touched on in this volume.


Howard Bodenhorn and Hugh Rockoff (1992), ?Regional Interest Rates in Antebellum America? in Claudia Goldin and Hugh Rockoff eds. Strategic Factors in Nineteenth Century American Economic History, A Volume to Honor Robert W. Fogel (Chicago: University of Chicago Press).

David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, editors (2004), Slavery in the Development of the Americas (Cambridge University Press).

Robert Fogel and Stanley Engerman (1972), The Reinterpretation of American Economic History (New York: Harper and Row).

David Galenson (2001), Painting Outside the Lines (Cambridge, MA: Harvard University Press).

David Galenson (2009), Conceptual Revolutions in Twentieth-Century Art (Cambridge University Press).

Andrew Godley (2001), Jewish Immigrant Entrepreneurs in New York and London, 1880-1914 (New York: Palgrave).

Claudia Goldin and Lawrence Katz (2008), The Race between Education and Technology (Cambridge, MA: Harvard University Press).

Elisa Mariscal and Kenneth L. Sokoloff (2000), ?Schooling, Suffrage, and the Persistence of Inequality in the Americas, 1800-1945? in Stephen Haber ed. Political Institutions and Economic Growth in Latin America (Stanford: Hoover Institution Press).

Edward Tufte (2006), Beautiful Evidence (Cheshire, CT: Graphics Press LLC).

David Mitch is Professor of Economics at the University of Maryland, Baltimore County. His chapter ?Chicago and Economic History? is forthcoming (2010) in Ross Emmett ed., The Elgar Companion to the Chicago School of Economics. Email:

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):General or Comparative

The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present

Author(s):Vries, Jan de
Reviewer(s):Voth, Hans-Joachim

Published by EH.NET (May 2009)

Jan de Vries, The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present. Cambridge: Cambridge University Press, 2008. xii + 327 pp., $23 (paperback), ISBN: 978-0-521-71925-4.

Reviewed for EH.NET by Hans-Joachim Voth, Department of Economics, Universitat Pompeu Fabra, Barcelona.

This is an impossible book. Had someone told me a few years back that somebody ? anybody ? was trying to write a book so short, yet so ambitious in scope, I would have laughed and filed it under ?impossible and pretentious?– and I would have been wrong. In his latest book, Jan de Vries sets out to examine the “Industrious Revolution,” following on from his Economic History Association Presidential Address (published in the Journal of Economic History in 1994). The final result is closer to a comprehensive overview of work, consumption, and well-being in Europe and North America, from the early modern period to the present. It is written from a particular vantage point: that of the household. The book represents a tremendous accomplishment: it is staggeringly erudite, insightful, stimulating, and on all the main points, convincing.

De Vries examines how households interacted with the evolving opportunities in the labor market and the changing range of goods and services. The intellectual starting point is emphatically Beckerian: households first convert part of their available time into labor income. Money is then combined with more time in the household to produce “Z-commodities” that satisfy our wants. Enjoying these Z-goods is what leisure time is for. To take an everyday example: Labor income buys edible produce; then, the meal is cooked, using non-market time; consuming it claims more of the residual time available. Gradually, households accumulate Z-capital ? the ability to produce or appreciate Z-goods. Generating this kind of capital takes time, energy, and money ? think Sebastian and Charles in “Brideshead Revisited,” teaching themselves about wine while slowly emptying the dynasty’s cellar, or the discerning palates of EUI students and faculty after a few years under the Tuscan sun. From this point of view, the ultimate budget constraint facing us all is time, not money ? it’s literally all we have to spend.

Over the last five hundred years, total hours of work ? both in the household and outside ? have shifted dramatically. To Marx, it was in the nature of capitalism itself that the lower classes ended up working more and harder. De Vries traces the rise of industriousness, defined as a combination of long hours of market work for adult males, and wide-spread participation in the labor market by women and children, to its peak in the nineteenth century. Then, for a period of less than a century, the “male breadwinner household” took over. While men worked long and hard, women became homemakers. Children started going to school.

De Vries locates his Industrious Revolution in the long eighteenth century. In the first chapter, he summarizes the theory on how work and leisure combine to satisfy desires. The second chapter fuses observations from the history of economic thought with social history, and explains how ?luxury? became acceptable ? having long been regarded as suspect in many societies, and heavily curtailed through sumptuary laws banning conspicuous consumption. Holland led the way. The burghers of the newly independent state invented a new type of luxury. While Old Luxury had a distinctly aristocratic and somewhat decadent air to it, aimed at communicating grandeur and taste, the New Luxury emphasized usefulness in the form of domestic comfort.

The next two chapters explore the supply of labor, as well as the consumer demand into which the newly-acceptable desire for practical luxury was translated. Undoubtedly, annual working hours for fully employed males had become very long by 1850 or so ? some 3,500 or so ? scarcely imaginable for workers today who often work 1,600 to 1,900 hours in most developed countries. Women and children often worked side-by-side with the men. When did hours get so long? To say anything of substance about actual hours worked before 1800 is not for the faint-hearted; existing data is staggeringly scarce [Voth 2001]. De Vries does a good job surveying the existing literature, and making a strong case for a universal rise of hours among the middling and lower sorts in Northwestern Europe at some point during the early modern period.

Why did so many Europeans start working more regularly, perhaps harder, and definitely much longer, at some point in the early modern period? De Vries essentially argues that by 1800, there were many ?new goods? to work for. Consumption baskets for the sixteenth century show that beer and bread were consumed in staggering quantities (182 liters and 182 kg per annum according to Allen 1992). While we mostly evaluate consumption in later centuries with no more than a slightly modified consumption basket, there were many other things to spend one’s money on. De Vries details the interrelated rise of fashion and of “breakable” goods; the rise and fall of hard liquor consumption, such as the gin craze; and the growing use and availability of furniture, of cutlery, ceramics, bed linens, underwear, pokers, playing cards, etc. It is the striking difference between largely stagnant day wages on the one hand, and rising consumption as reflected in probate inventories on the other, that is one of the best bits of evidence in favor of the ?Industrious Revolution.? Thus, what I have elsewhere called the “sirens of consumption” (Voth 1998) lead households to work more, and harder.

The process did eventually go into reverse. Hours per full employee have fallen precipitously. Before that happened on a large scale, women and children exited the labor force. Having developed a taste of goods over home-made services, why did the industrious households of the seventeenth and eighteenth century give way to the male-breadwinner household of the Victorian period? De Vries? answer to some extent is health. As knowledge about what made people sick spread, cleanliness became more important. Wages rose, and much of the gain was transmuted into keeping wife and children at home ? the former making the beds, cleaning the stove, mending the socks, and the latter learning in school. Feminists and ?progressive? critics have long seen the women’s exit from the labor force (at least after marriage) as a sign of male domination ? ?patriarchy? in short. De Vries begs to differ. Far from a sign of male suppression, the male breadwinner household gave ample power to women. Men handed over their pay packets, and got a warm, clean home, well-behaved children, plus some pocket money in exchange. As De Vries argues: ?The contemporary vestiges of the breadwinner-homemaker household suffer the condescension of contemporary historians and other social scientists, who often suppose themselves to be liberated from a structure of Western society as long lasting as it was suffocating. It deserves a more serious scholarly treatment. Far from eternal, it was literally a moment in Western family history. Far from suffocating, it was, in its prime, a powerful vehicle of modernization and economic advance. It was the indispensable producer of many of the final consumption commodities that we … associate with the finest achievements of modern society.?

A reviewer of Gerald D. Feldman’s monumental history of the hyperinflation [Feldman 1997] compared the prodigious production of the author with the output of the Reichsbanks’ printing presses. (I think it was meant as a compliment, despite the obvious thought that Reichsbank paper by 1923 was almost completely worthless.) In a similar vein, I thought of calling Jan de Vries’ latest work a true Stakhanovite accomplishment, but then remembered that Alexey Grigoryevich Stakhanov’s widely-praised “production miracles” in Stalinist Russia were later found to have been staged. The sheer amount of hard work that went into every aspect of these chapters is hard to convey. Surveying the rise of consumer items through the prism of probate inventories shows the author confidently mastering the abundant historical literature in four or five languages. De Vries’ reconstruction of Europeans’ increasing consumption of ?colonial luxuries? ? sugar, tea, and coffee ? alone is going to be useful for all scholars working in the area. (While this phrase is beloved by reviewers, this one put his pen where his praise was ? and immediately re-wrote a draft of his paper called “Sweet Diversity” [Hersh and Voth 2009].)

The book will be an invaluable reference for anyone working in early modern economic history. I also expect to see it used as a textbook in advanced undergraduate classes. If there is a fly in the ointment ? and every conscientious reviewer is expected to find one ? it is the almost complete disconnect with behavioral economics. The households making decisions in De Vries? world are of the sturdy Dutch burgher type depicted on the cover; work and consuming is a sober, serious business for them. They have preferences, income, and a range of choices, and then make decisions without too many further complications. De Vries, by allowing for a bit of endogenous preference formation, is departing to some extent from the more rigid basics of household decision-making models. Yet there is no struggle here of ?present selves? with ?future selves,? no hyperbolic discounting, no perennially unfulfilled desire to start saving … tomorrow (for an overview, see Mullainathan and Thaler 2001). This is not quite how some early modern observers saw (in particular) lower class consumers. Sir Frederick Eden (1797), in his The State of the Poor, was highly critical of the dietary choices made by Southern English families. He argued that choosing the quick kick of sugar and tea over more substantial fare was welfare-reducing. From his point of view, the incomes of the poor were not the issue; it was their consumption patterns. Of course, rigorous economic analysis is on shaky ground already when we allow for changing tastes (Becker and Stigler 1977); perhaps, a more detailed analysis of consumers in their full, often self-contradictory glory would have made this a truly impossible book. The profession will be grateful for the one it got.


Robert C. Allen, 2001, ?The Great Divergence in European Wages and Prices from the Middle Ages to the First World War,? Explorations in Economic History 38(4): 411-47.

Gary Becker and George Stigler, 1997, ?De Gustibus Non Est Disputandum,? American Economic Review 67(2): 76-90.

Frederick Eden, 1797, The State of the Poor, London.

Gerald D. Feldman, 1997, The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914-1924, Oxford: Oxford University Press.

Jonathan Hersh and Hans-Joachim Voth, 2009, ?Sweet Diversity: Colonial Goods and the Rise of European Living Standards after 1492?, Available at SSRN:

Sendhil Mullainathan and Richard H. Thaler, 2001, ?Behavioral Economics,? in N. J. Smelser and P. B. Baltes, editors, _International Encyclopedia of the Social and Behavioral Sciences, New York: Elsevier:1094?1100.

Hans-Joachim Voth, 1998, ?Work and the Sirens of Consumption in Eighteenth-Century London,? in: M. Bianchi, editor, The Active Consumer. Novelty and Surprise in Consumer Choice, London: Routledge.

Hans-Joachim Voth, 2001, Time and Work in England, 1750-1830, Oxford: Oxford University Press.

Hans-Joachim Voth is ICREA Research Professor of Economics at Universitat Pompeu Fabra, Barcelona, a Research Affiliate at CREI (Barcelona), and a Research Fellow in the International Macro Program at the CEPR, London. His latest publications include ?Betting on Hitler: The Value of Political Connections in Nazi Germany? [with Thomas Ferguson], Quarterly Journal of Economics (2008); ?Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714? [with Peter Temin], Economic Journal (2007); and ?Why England? Demographic Factors, Structural Change and Physical Capital Accumulation during the Industrial Revolution? [with Nico Voigtlaender], Journal of Economic Growth (2006).

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

L??conomie morale, pauvret?, cr?dit et confiance dans l?Europe pr?industrielle

Author(s):Fontaine, Laurence
Reviewer(s):Hautcoeur, Pierre-Cyrille

Published by EH.NET (January 2009)

Laurence Fontaine, L??conomie morale, pauvret?, cr?dit et confiance dans l?Europe pr?industrielle. Paris: Gallimard, 2008. 439 pp, ?20 (paperback), ISBN: 978-2-0707-8577-3.

Reviewed for EH.NET by Pierre-Cyrille Hautcoeur, Ecole des Hautes Etudes en Sciences Sociales and Paris School of Economics.

Economic history frequently suffers a tension between a purely economic approach that considers homo economicus as invariable through time and space, and a relativist approach that refuses any broad comparison because of the supposed incommensurability of human activities experienced in different settings. The influence of anthropologists, especially in the tradition of Karl Polanyi, has contributed in particular to the idea held by many historians that Ancien R?gime societies were qualitatively different from modern ones, and that their economies cannot be studied in the same terms because economic activity was embedded in social life. Furthermore, this statement is sometimes reintroduced in today?s policy debates in a more normative way, when it is argued that the markets should be submitted to social institutions and needs as was the case up to the Industrial Revolution.

Laurence Fontaine ? an economic historian at Centre national de la recherche scientifique in Paris ? helps us to clarify these questions in a particularly interesting way since, as a social historian, she insists on the importance of social relationships in the provision of credit in early modern Europe, but she also, and indistinguishably, emphasizes the role of the market as allowing the poor, and especially women, to escape the constraints and limitations that result from their social position. To that extent, her book is not only a good one for those wanting to better understand the economies ? and particularly the credit markets ? of early modern Europe, but it also provides a way out of that enduring epistemological debate.

Although I have chosen to open this review by insisting on that epistemological contribution, the book is not centered on these issues, which appear mostly in the conclusion. Most of the book actually discusses the provision of credit in the Ancien R?gime economy. It chooses to study it ?from below,? that is from the point of view of economic agents and not from that of institutions, governments or economic theorists (even if all of these appear sparsely). The focus is on the ordinary agents: the poor and lower middle class, in contrast to the most-studied bourgeoisie. Because of these choices, the book is based mostly on qualitative sources, such as diaries, letters, death inventories, small firms? accounting books, and prison records, with some attempts at quantifying the questions under study, but only at an individual or local level and for relatively short periods. A few chapters build on an insightful use of contemporary novels and theater. If unsystematic, the documentation is abundant: examples are taken from all over Europe from the fifteenth to the eighteenth centuries. The book is organized in a thematic order (with chapters on the poor, the peasantry, the elite, urban micro-credit, women, pawnshops, usury, mentalities, exchange practices and the construction of trust). This organization brings a strong sense of the fact that most economies inearly modern Europe faced similar problems, even if the variety of traditions or the different choices that were taken by governments when creating or regulating institutions are frequently mentioned. It downplays long-term change, even if some particular transformations are mentioned.

As is typical of any book dealing with such a large period and space, it is mostly based on a large ? indeed impressive ? bibliographical base (30 pages of references, mostly in English, French and Italian, with occasional Dutch, German and Spanish). It is, perhaps more importantly, based on Fontaine?s experience studying the poor and migrants (especially peddlers) of early modern Dauphin? and Savoie.

The first important result of the book is to show that credit was not only developed among the well-to-do in early modern Europe (as shown for example by Hoffman, Postel-Vinay and Rosenthal in Priceless Markets). It was a daily part of the ?survival strategy? of the poor, more important, indeed, than the help provided by charitable institutions. Most of the working poor needed credit in order to start or to keep their small businesses running in the face of accidents, delays, illness, and life-cycle events ? and this was true as much in the countryside as in the cities. Fontaine shows that the few remaining traces suggest that oral credit was ubiquitous, that written credit was much more frequent than what is observed in notaries? archives (because of the cost and delay of their certification), and that a majority in the population died with negative assets ? that is, unpaid debts superior to their belongings.

Credit was organized in various circles, starting from the closest relatives (the family and neighbors), social authorities (the lord, notables), institutions (guilds, pawnshops) and, lastly, foreigners ? as most moneylenders were considered (either Lombard, Savoyard or Jew). Except for very small amounts, credit among equals (or relatives) ? was rarely much of a resource for the truly poor … because their relatives were poor too, and also because even ?family solidarity is everything but natural? (p. 36). Actually, such solidarity could only result from a well-organized community, which was able to constrain the borrower. Therefore most of the credit to the poor came from notables, institutions and moneylenders.

Among these, the lords were probably those with the most specific behavior in the Ancien r?gime. They frequently lent substantial amounts to their vassals, especially to their farmers. These debts were seldom reimbursed, and mostly implied yearly payments (which could be in kind). They could be restructured when either the lender or the borrower left or died, and parts of them could even be abandoned gracefully in periods of hardship. Fontaine argues that these debts were part of a broader social relationship, which explain both that the lords had to lend in order to maintain status and reputation even when reimbursement was anticipated as almost impossible, and how they were able to force payments for long periods, thanks to their local power.

Aristocrats actually reciprocated downward the relationships based on political dependence they suffered towards the princes to whom they forcefully lent and asked for privileges or rents as payments. When in debt (and they were frequently so), they dismissed and ill-treated their moneylenders (who always suffered bad treatment if they tried to obtain payment through legal means), except those who had been able to access some personal secrets, as was frequently the case when wives pawned their jewelry to old women lenders (the marchandes ? la toilette made famous by novelists down to Balzac). On the other hand, aristocrats considered their gambling debts as the only serious ones because they were purely personal, among equals, and a symbol of their lives? dedication to risk and gratuitousness.

At the opposite end of the social spectrum, poor women had no power and a precarious status. Fontaine shows that the legal position of women mostly deteriorated in much of Europe in the early modern period, obliging them to participate in the most informal and unsecured credit markets. However, her conclusion is not that the market was dangerous to women, but quite the opposite, since where women started participating in markets, they ended up not only surviving, but even obtaining some recognition, as merchants if not as wives: ?Everywhere and since the Middle Ages, the development of markets boosted the legal autonomy of women? (p.144).

Credit was then not limited to the world of the merchants, as often described, but penetrated, although unevenly, all classes of society. As early as the first half of the sixteenth century, Rabelais could write that ?nature created man only to lend and borrow.? Usury laws were unable to restrict the ubiquity of credit, as the Church actually abandoned applying them as early as the sixteenth century. At that time, the states took over the issue and maintained or reinforced usury laws, but let develop a jurisprudence which allowed for many exceptions and by-paths.

Credit was ubiquitous and diverse, but Fontaine argues that its diversity can be better understood using a bipolar lens. Step by step, her book builds a representation of the credit market that distinguishes two ideal-types of credit relationships. These two ideal-types are clearly delineated in chapter 8 thanks to the use of Shakespeare (Timon of Athens and The Merchant of Venice), Moli?re and the Tableau de Paris by Louis-S?bastien Mercier. The first one is ?aristocratic? the second one ?merchant.?

In the aristocratic world, credit relationships are embedded in social relationships and religious imperatives: interest is frequently hidden or in kind, or even disguised in voluntary gifts, debts have no definite term or can be prolonged indefinitely, the relationship between debtor and creditor is statutory or personal. In the merchant world on the other hand, the contract is precisely defined and respected thanks to strong guarantees, and the relationship is impersonal or among equals thanks to a strong role of the law. If this distinction is similar to the one usual among anthropologists, Fontaine?s claim is actually very different: first because she argues both types of relationships co-existed permanently (even if their relative importance varied) and most people could enter both types of relationships, choosing with whom to contract. Second because the market was not intrinsically less humane than the personal relationship: if less open to credit restructuring for personal reasons, it was more rule-based and thus more protected against the creditor?s power. So individuals chose both what type of relationship they wanted to enter and with whom to enter it. They, usually, had some choice, and the social environment, although constraining, was also a space of opportunities.

Even more important, Fontaine shows that the aristocratic and the merchant economies not only conflicted but also penetrated each other. Chapter 6 is very illuminating in that respect, showing that pawnshops (monte di pieta) were invented in the early fifteenth century by Franciscans wanting credit to become a complement to charity, one through which the poor could get more autonomy and capacity to exert their talents, although escaping the dangers of usury and over-indebtedness.

The last chapter on the social construction of credit provides the reverse example: while Franciscans accepted the role of credit markets in helping the poor, merchants never entirely rejected some ?aristocratic? dimension of credit. Analyzing bankruptcies and the relationships among merchants in hard times, Fontaine shows that they appealed to the community to which they belonged, and obtained help as long as they were truly integrated into it, much like in the aristocratic economy.

The book then concludes that both market and personal relationships were always present in early-modern credit, but focuses mostly on the role of the market in allowing the emancipation of the poor and the development of their capabilities, in an explicit reference to Amartya Sen. Although I had great pleasure in reading this convincing and powerful book, a few critical remarks must be added. First, although the book?s approach encompasses many topics, some important ones are missing. The practices and culture of credit among merchants is given little place. This is certainly intended as a necessary correction in view of its excessive place in the previous literature, but the correction is probably also excessive. Public credit is also absent, to some extent in contradiction with the author?s very views on the relationships between princes and some of their aristocratic creditors. Maybe most importantly, this is a history with little historical change. As mentioned earlier, some changes are mentioned in various chapters, but no answer is given to the most important question: if there was a substantial change in the way credit markets worked from the sixteenth to the nineteenth centuries, what was that change and where did it come from? The author could have linked the emancipation towards the power element in aristocratic relationships with the development of legal and representative institutions; nevertheless, law is little present except in the chapter on women, and politics is altogether absent. Finally, contemporary economic thought and modern theory are absent. Both have nevertheless proved to be useful in order to understand early modern economies (see e.g. Grenier?s L??conomie d?Ancien R?gime as an attempt based on contemporaries). Fontaine actually uses some concepts from imperfect information theory, but quite clumsily. These remarks suggest that an even broader synthesis would be welcome in order to provide a truly comprehensive view of early modern credit.

Some of the book?s arguments are not well presented, and would have gained from better writing. The author frequently makes the point that personal debts were extended for long periods, but does not relate this clearly to the annuities model which was so dominant in farming and public debt in the period. Over-indebtedness is forcefully asserted, but insufficiently demonstrated in economic terms, since payment flows should be related to incomes rather than volumes of debts to assets. More seriously, the author argues that the fact that the poor invested all their income in clothes or jewelry reflected a ?preference for illiquidity? (e.g., p. 132), when actually these goods were chosen because they were highly liquid (thanks to the pawnshops the author describes so well), and were given preference over money because of the riskiness of money that could be stolen or be forcefully borrowed by relatives.

Other remarks are more formal. Although the book is quite beautiful, it is not well edited. Chapter two is somewhat repetitive of chapter one, some developments (e.g. on women?s legal status on pp. 134-56) are too long and are not well integrated into the general story. A more careful reading by the publisher would also have avoided the repetition of entire sentences (pp. 164 and 165, pp. 185, 186 and 189, pp. 244 and 265) or quotes badly cut (p. 172).

In spite of these small shortcomings, this book remains an impressive synthesis and a brilliant essay. One should hope that it will be rapidly translated into English in order to get the wider readership it deserves.

References: Jean-Yves Grenier, L??conomie d?Ancien R?gime: un monde de l??change et de l?incertitude, Paris, Albin Michel, 1996. Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, Priceless Markets: The Political Economy of Credit Markets in Paris, 1660-1870, University of Chicago Press, 2001.

Pierre-Cyrille Hautcoeur is Professor of economics at Ecole des Hautes Etudes en Sciences Sociales and Paris School of Economics, Paris. His recent publications include Le march? financier fran?ais au 19e si?cle, Paris, Publications de la Sorbonne, 2007, the edition of a special issue of Histoire et Mesure on bankruptcies, “Bankruptcy Law and Practice in 19th Century France,” in Insolvency and Bankruptcy Laws: Issues and Perspectives (JAI University Press, 2008) and “Why Didn’t France Follow the British Stabilization after World War One?” (with M. Bordo), _European Review of Economic History, 2007.

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Time Period(s):Medieval

Trade in Classical Antiquity

Author(s):Morley, Neville
Reviewer(s):Temin, Peter

Published by EH.NET (June 2008)

Neville Morley, Trade in Classical Antiquity. Cambridge: Cambridge University Press, 2007. xiv + 118 pp. $30 (paperback), ISBN: 978-0-521-63416-8.

Reviewed for EH.NET by Peter Temin, Department of Economics, MIT.

This book is one of Cambridge University Press’s series of Key Themes in Ancient History. These brief books are designed to introduce various topics of ancient history to graduate students and interested laypeople alike. They presuppose little professional knowledge of the topic and provide an overview of the state of knowledge. The books have single authors, and they express the opinions of the authors more than a typical text.

Morley is a distinguished ancient historian, and this book fits the general pattern. It provides a summary view of trade in the ancient world, but the average economic historian needs a reader’s guide to extract this information. The problem is that Morley feels obliged to introduce his book with two chapters on methodology that easily will put off the non-ancient historian. In his words, “The aim of this book is not to offer a chronological history of the development of trade and commerce or to draw up lists of the goods that were traded between regions, but to identify the different structures ? physical, social, ideological ? that shaped the distribution of goods and the practices of exchange across the ancient world” (p. 15).

My advice to readers of this review is to skip the first two chapters and start reading at Chapter 3. The rest of the book will repay a careful read. Morley argues in Chapter 3 that the distinction between luxuries and necessities is culturally determined. You cannot decide which is which without knowing the culture of the trading people. Since ancient peoples of whom we know lived above biological subsistence, part of their consumption was devoted to culturally-determined goods, that is, goods that established their place in the local hierarchy. Chapter 4 is devoted to the institutions of trade, revealing the impact that Doug North has had on ancient history. This material is covered also in Kessler and Temin (2007), which apparently was not visible to Morley.

Morley confronts the morality of traders in Chapter 5. He argues that most ancient traders and office holders were law abiding in the modern sense. Just as today most contracts are honored without the intervention of a court, so Morley says ancient people dealt with each other on a trusting basis. Since law enforcement is expensive, this is a very important point, and Morley raises but does not answer the question of where this morality comes from. Perhaps that should be the topic of another book in this series. In the sixth and final chapter, Morley assesses the extent of what he calls “ancient globalization.”

One problem for the modern economic historian is Morley’s practice of hopping back and forth between Classical Greece and Republican Rome. These two venues were separated by time and ? more importantly ? scale. In modern terms, Athens was a small open economy, while Rome was the largest economy in the ancient world. Small and large countries differ even today, and we might infer that there were differences then too. This question does not appear to have occurred to Morley.

Another problem is Morley’s ambivalent attitude toward globalization. On the one hand, he says, “Farmers were never wholly isolated from society or wholly divorced from the market” (p. 45). On the other hand, he argues in Chapter 6 that globalization was severely limited by poor technology in transportation and information transmission. Morley does not appear to have a way to resolve this issue. Fortunately, two recent papers help to resolve this puzzle. Both papers were the outcomes of Harvard senior theses in economics.

Geraghty (2007) argues that the extension of Roman trade across the Mediterranean led Roman farmers to shift out of wheat into wine and truck farming for the neighboring city of Rome. This paper complements and extends Morley’s analysis of Roman farming in his 1996 book. Kessler and Temin (2008) show that Roman trade was so extensive that there was a single monetary system and a single wheat market across the whole Mediterranean Sea. Wheat prices were highest in the center of consumption, the city of Rome, and fell with the distance from Rome. While Morley’s new book is a worthy addition to the Key Themes series, I recommend that readers of this review start with the articles I have mentioned here and continue on to Morley if they want more evidence.


Geraghty, Ryan M., “The Impact of Globalization in the Roman Empire, 200 BC – AD 100,” Journal of Economic History 67 (December 2007): 1036-61.

Kessler, David, and Peter Temin, “The Organization of the Grain Trade in the Early Roman Empire,” Economic History Review 60 (May 2007): 313-32.

Kessler, David, and Peter Temin, “Money and Prices in the Early Roman Empire” in William V. Harris, editor, The Monetary Systems of the Greeks and Romans (Oxford: Oxford University Press, 2008): 137-59.

Morley, Neville, Metropolis and Hinterland: The City of Rome and the Italian Economy, 200 BC – AD 200 (Cambridge: Cambridge University Press, 1996).

Recent articles by Peter Temin include “The Economy of the Early Roman Empire,” Journal of Economic Perspectives (2006); “Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714″ (with Joachim Voth), Economic Journal, forthcoming; and “The German Crisis of 1931: Evidence and Tradition,” Cliometrica, forthcoming.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Middle East
Time Period(s):Ancient

Pricing Theory, Financing of International Organisations and Monetary History

Author(s):Officer, Lawrence H.
Reviewer(s):Sylla, Richard

Published by EH.NET (November 2007)

Lawrence H. Officer, Pricing Theory, Financing of International Organisations and Monetary History. London: Routledge, 2007. xii + 324 pp. $135 (cloth), ISBN: 978-0-415-77065-1.

Reviewed for EH.NET by Richard Sylla, Department of Economics, Stern School of Business, New York University.

“As they contemplate mortality and immortality,” the late Charles Kindleberger (1985, 1) once wrote, “many economists … think it useful to gather their scattered academic detritus into packages, organized either chronologically or by subject.” Kindleberger was a master of the genre, producing several such packages, which he described as exercises in tidying up things for one’s literary executor. In case you hadn’t guessed from the title of Lawrence Officer’s new book, it is a recent addition to the genre.

Officer, Professor of Economics at the University of Illinois at Chicago, is probably best known to economic historians for his work on purchasing power parity, the operation of the gold standard, and dollar-sterling exchange rates, all of which are treated in an earlier book (Officer, 1996). The current collection, written over the forty years 1966 to 2005, deals mostly with different but sometimes related topics, the three mentioned in the book’s title, and a final brief one entitled “Gold.” Each of the four parts ends with an afterword reflecting on and extending the papers collected under that topic. The first section, “Pricing Theory,” contains four papers, all written more than three decades ago, dealing with “firm and market behavior under conditions of joint supply” and developing “a multidimensional approach to pricing.” These are contributions to microeconomics, but probably will be of limited interest to economic historians.

“Financing of International Organizations,” part II, contains three papers on how the IMF sets its quotas of contributions and drawing rights for member nations, how the UN assessed member states to cover its expenses, and how both organizations might have done a better job of allocating their costs and benefits. Officer’s focus is on the tensions between developed and developing countries over the costs and benefits. Both international organizations tended to base their charges on members’ relative GDPs, made comparable by exchange-rate conversions. Such conversions tend to make developing countries appear smaller, economically, relative to developed countries than would purchasing-power-parity (PPP) comparisons. In the case of the UN, the developing countries liked this method because it resulted in lower assessments. But as regards the IMF, the method reduced the drawing rights of the developing countries compared to alternative methods of determining quotas, so it was less acceptable to them. Such is the stuff of political economy. Officer’s discussion is remindful of the debates over slavery at the U.S. constitutional convention, in which the northern-state delegates argued that slaves ought to be counted for purposes of taxation but not representation, and the southern delegates argued for just the opposite ? or of the debates between Britain and its colonies in the heyday of the empire, in which the British wanted the colonies to be economically independent but politically dependent, whereas the colonies wanted just the opposite. Officer’s treatment of the IMF and UN financing issues is as thorough as one is likely to find anywhere.

Economic historians, or at least financial historians, are likely to gravitate toward part III on “Monetary History,” which contains three fine papers published between 2000 and 2005. One is on the long British episode of sterling inconvertibility ? the paper pound of 1797-1821 ? and the related, so-called bullionist controversy. In that debate, which Officer terms “the most famous monetary debate in the history of economic thought,” the bullionists, forerunners of later monetarists, argued that excessive note issues by the Bank of England led to price-level inflation, a deteriorating exchange rate, and a premium on gold. On the other side, the anti-bullionists argued for a balance-of-payments theory of the exchange rate, in which Napoleonic-War trade interferences, British military spending outside of Britain, and poor wheat harvests led to a deteriorating exchange rate and the gold premium, higher import prices, and general price inflation, whereupon the Bank of England rather passively printed more notes to accommodate supplies of and demands for bills of exchange at the 5 percent usury limit. Officer models and tests both theories with improved data he painstakingly constructed (not included in the original paper, but included in the book in the afterword to part III), using up-to-date econometric techniques. The results are fairly decisively in favor of the anti-bullionist position. Officer ends the chapter on a thoughtful note worth quoting:

Monetarism sees its origin in the bullionist model; and the antibullionist approach to the exchange rate (a flow theory) and monetary policy (passive, and accommodating to the price level) has gone out of fashion. It may be humbling to the macroeconomist that these theoretical developments are contravened by the preponderance of empirical results for the Bank Restriction Period (178).

Chapter 11, “The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,” is one that intrigued me when it first appeared in 2002, and it still does. Among other things, careful data work ? a mark of all of Officer’s scholarship ? produces “a monetary base series that is consistent, complete in coverage, and continuous over a long period of time” (185). One intriguing argument of the chapter is that the two Banks of the United States (BUS) in early U.S. history were indeed central banks; Officer points to substantial evidence that BUS note and deposit liabilities were held as reserves by state and other banks. This is in contrast with analyses by Temin (1969) and others, which view the monetary base as specie (gold and silver) and the BUSs as very large banks but in other respects just like all the other banks in the system. Whether the two BUSs were central banks adding to the monetary base or ordinary banks operating on a specie base obviously bears on how one might model the U.S. money supply and its proximate determinants. It is safe to say that future work in this area will have to build on, or at least contend with, Officer’s data and insights. Officer himself uses the data to study eight different regimes during the 140 years covered in the study, and concludes that the classical gold standard regime (1879-1913) was superior to the others in most respects. One oddity of Officer’s monetary base series is that it grows by 64 percent in 1874, the first of several consecutive years of price deflation. Perhaps this is another triumph of non-monetarists over monetarists.

But wait. In Chapter 12, “The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old Question,” Officer demonstrates that both the classical quantity theory of money and Milton Friedman’s modern version of the quantity theory test out quite well. For Officer, various economic theories are tools to be applied, not articles of faith, and that is rather refreshing. The afterword to part III is full of substance, extensions, and wise commentary on the three provocative papers preceding it.

The short part IV on Gold contains a guide to various documentary collections relating to that subject, and study of reserve-asset preferences of countries when the Bretton Woods System was moving into its crisis period of 1958-1967. In the latter, Officer develops a political-power approach to the proportions of reserve assets consisting of dollars and gold various countries maintained. The United States wanted countries to hold dollars, of course, and used its clout in attempts to achieve that objective. Officer’s political-power model works to his satisfaction, and perhaps even better than standard alternative approaches based on portfolio-management concepts. Bretton Woods was a different world from our current one with market-determined exchange rates for the principal countries. But it seems the United States still has problems getting others to hold all the dollars out there at a non-depreciating exchange rate. Officer’s essay, written a third of century ago and republished here, indirectly sheds some light on a problem that has not gone away.

As one who has been stimulated by Officer’s work and who has relied on some of it in my own, I welcome this collection of articles from a researcher who richly deserves the accolade, “a scholar’s scholar.”


Kindleberger, Charles P. 1985. Keynesianism vs. Monetarism, and Other Essays in Financial History. London: George Allen & Unwin.

Officer, Lawrence H. 1996. Between the Dollar-Sterling Gold Points. Cambridge: Cambridge University Press.

Temin, Peter. 1969. The Jacksonian Economy. New York: Norton.

Richard Sylla is Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics, Stern School of Business, New York University. His article, “Integration of Trans-Atlantic Capital Markets, 1790-1845,” co-authored with Jack W. Wilson and Robert E. Wright, was published in Review of Finance 10 (2006).

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

Money, Markets and Trade in Late Medieval Europe: Essays in Honour of John H.A. Munro

Author(s):Armstrong, Lawrin
Elbl, Ivana
Elbl, Martin M.
Reviewer(s):Beek, Karine van der

Published by EH.NET (September 2007)

Lawrin Armstrong, Ivana Elbl, and Martin M. Elbl, editors, Money, Markets and Trade in Late Medieval Europe: Essays in Honour of John H.A. Munro. Leiden: Brill, 2007. xx + 648 pp. $201 (hardcover), ISBN: 978-90-04-15633-3.

Reviewed for EH.NET by Karine van der Beek, Universitat Pompeu Fabra, Barcelona.

This volume, edited by Lawrin Armstrong, Ivana Elbl, and Martin M. Elbl, the first in Brill’s peer-reviewed series Later Medieval Europe, is a Festschrift for the eminent economic historian John H.A. Munro on the occasion of his retirement from the University of Toronto in 2003. Munro’s remarkable academic achievements and extraordinary qualities of character are clearly reflected in the warm preface by Herman van der Wee, in the introduction by the editors, and in the numerous references to him and to his work in the various essays.

The essays, which mostly consist of original work, discuss various aspects of the late medieval economy. They are divided into seven sections ? Money and Ethics, Taxation and Revenue, Expenditure and War, Land and Labor, Market Integration, Long-Distance Trade and Markets, and Regional and Local Markets ? representing the broad range of academic interests embodied in Munro’s work (of which the volume includes a full bibliography).

The share of studies dealing with fiscal policy is quite surprising. The essays can be divided into those focusing on the relationship between public finance and public expenditure, the effect of public finance on markets, and the effects of public expenditure and war on markets. Among the studies that fit in the first category is a paper by Jeffrey Fynn-Paul on the introduction of civic debt in the Catalan city of Manresa in the 1340s. Although the historical evidence he presents is intriguing, the connection he makes between the introduction of civic debt and the subsequent civic unrest is not very convincing. Other essays in this category are by Susannah C. Humble Ferreira, pointing out administrative changes in royal finance that allowed a significant expansion of royal households both in sixteenth-century England and Portugal, and a captivating paper by Kelly De Vries on the effects of warfare finance on war strategies and tactics, concentrating on two critical failed Burgundian sieges during the Hundred Years War.

The effects of political fragmentation on trade are very well demonstrated in two studies. James Masschaele offers an informative overview of the tolls levied in medieval England. He suggests that although the widespread medieval tolls had the potential to undermine trade, “they were prevented from doing so by an effective assertion of public authority” provided by the crown, which managed “to establish relatively narrow limits within which uncertainty fluctuated.” This view is further strengthened by Mark Aloisio’s description of the political mechanisms and regulations that governed the fifteenth-century Maltese grain markets, which precluded their integration into those of the kingdom of Sicily.

Ivana Elbl’s study touches on the question of efficiency of public ownership in a fascinating account of the Portuguese African enterprise. She offers convincing arguments to prove that the enterprise was badly managed, though she does not provide any evidence to support her rather odd claim that the Portuguese crown, “did not necessarily aim at maximizing revenue, but rather at achieving an acceptable and sustainable cash flow.” Last within this category of fiscal policy, Maryanne Kowaleski, in a delightful essay, turns our attention to ways in which the Hundred Years War promoted the development of English merchant shipping and port towns, owing primarily to privileges and increasing naval activity granted by the crown.

Most of the other studies in the book are concerned with the operation of local, regional, interregional, and even intercontinental late-medieval markets. I found particularly intriguing the essays by Martha Carlin and Charlotte Masemann, both of whom used very original types of sources. Carlin utilized three texts that “used discussions of urban occupations, shops and shopping to instruct students in Latin vocabulary and the art of writing business letters,” to provide a vivid and detailed description of street sellers, negotiating techniques, and mainly the variety of goods that was available in the markets of thirteenth-century English towns and in Paris. Masemann’s study combines archaeological (botanical) evidence on consumption in L?beck, a northern German town, with evidence from written records documenting the city’s urban gardens to prove that what was grown in these gardens was consumed within the city.

Masemann’s finding is in line with Richard Unger’s work, in which he presents data on prices of various grains in southeast England, Flanders, Brabant, and Holland (from the late fourteenth century to 1600) indicating that while urban grain markets within these regions were highly integrated in the fifteenth century, their demand seems to have been supplied entirely by nearby rural areas, and that this tended to limit town size until such time as distant trade became less costly. Also concentrating on the Low Countries, David Nicholas analyzes the financial role of Ypres in the region during the thirteenth century based on debt recognitions contracted before the echevins of the city. Francesco Guidi Bruscoli and James Bolton summarize the first findings of their notable Borromei Bank Research Project ? a micro-study based on two surviving ledgers of the family’s companies in Bruges and London between 1436 and 1439, which adds to our understanding of long-distance exchange operations in general and among England, the Low Countries, and Italy in particular.

Ian Blanchard and Martin Elbl both offer detailed pictures of late-medieval intercontinental specie market operation. Blanchard describes the significant role played by Egypt’s crisis in monetary and specie markets, which he believes was responsible for two-thirds of the rise in gold prices between 1375 and 1425. Elbl focuses on the Maghrib, using the abundant Datini records (for the period 1394-1410), preserved in the Datini archive in Prato, to fill in the gap in the literature on the Venetian/Balearic trans-Saharan copper trade.

Lawrin Armstrong and Lutz Kaelber deal with the ethical aspect of medieval financial markets. Armstrong offers an insightful discussion on the tension that existed between canonists and theologians (thus, law and ethics) regarding the problem of usury, and Kaelber’s essay addresses the development of Max Weber’s view on usury.

Finally, the volume also includes studies that focus on institutional and legal aspects of late-medieval market operation. John Drendel’s essay argues that personal servitude, which appeared in northern Francia during the tenth century, never existed in Provence. Francesco Galassi examines the patterns of diffusion of different terms in sharecropping contract in Italy to identify the transmission mechanism that underlies institutional change. Lastly, Martha Howell provides an instructive and comprehensive examination of legal and social aspects of property law in late-medieval Ghent, which points out the political interests that were at work in the process of shaping the law.

To conclude, this Festschrift in honor of the revered John Munro contains original and remarkable work, and while I admit that I found some of the studies to be more appealing than others, they are all characterized by a notable wealth of historical evidence, references, and sources. Given the scope of topics and the diversity of approaches, the volume should be of great interest to a wide range of scholars in diverse fields.

Karine van der Beek is a Post-Doctoral Fellow at Universitat Pompeu Fabra, Barcelona. Her research focuses on early European growth and on the effects of political structures on institutional formation, market organization, and productivity. Recent papers include: “Political Fragmentation and Technology Adoption: Watermill Construction in Feudal France,” and, “Political Fragmentation and Investment Decisions: The Milling Industry in Feudal France (1150-1250).”

Subject(s):Military and War
Geographic Area(s):Europe
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