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The Federal Reserve and the Financial Crisis

Author(s):Bernanke, Ben S.
Reviewer(s):Mitchener, Kris James

Published by EH.Net (August 2013)

Ben S. Bernanke, The Federal Reserve and the Financial Crisis. Princeton, NJ: Princeton University Press, 2013. vii + 134 pp. $20 (hardcover), ISBN: 978-0-691-15873-0.

Reviewed for EH.Net by Kris James Mitchener, Department of Economics, University of Warwick.

This book is the product of a series of university lectures given by Federal Reserve Chairman Ben Bernanke in March 2012 at George Washington University. It is short, crisp, and clear, with only five footnotes and no references.? The four chapters are called ?lectures? and the prose is written in a conversational style reflecting the original form of delivery. Indeed, the unedited lectures are also available for free on the web. They could easily be absorbed while driving one?s car, though this reviewer does not necessarily endorse that form of consumption, nor would one expect that to be the Fed?s official position. Since the original audience consisted largely of undergraduates, concepts are kept simple throughout, largely at an introductory level of economics. Student questions from the lectures are included at the end of each chapter.

Not often does one get to read a book that articulates the beliefs and actions of an incumbent policymaker, let alone one who was charged with conducting monetary policy during a severe financial crisis unless, of course, one is reading sworn testimony given to a public agency, but that is an altogether different exercise than what is undertaken here. The value of this book is that it allows one to observe how the Chairman of the Federal Reserve reacted to the events of 2007-2009 and how that response is justified. What makes it especially delightful to read or listen to is that Chairman Bernanke puts his decision making in a long-run context, describing the particular ?lessons? from the Fed?s history that he drew on during the crisis period. It thus provides a shining example of how policymakers use history in formulating economic policy.

It probably comes as no surprise to those familiar with his academic research on central bank transparency that Chairman Bernanke is the first standing Fed Chairman to write a book while in office. That said, one must keep expectations in check while reading the book. Although he is not afraid to discuss mistakes that the Fed made in its past nor to acknowledge that it could have possibly done more prior to the recent crisis, the chairman presents the official rationale of the most controversial decisions. Some economists, such as Alan Blinder (2013), have drawn attention to differences between the rationale policymakers provided to the President, Congress, and the American public and their actual motivations during the crisis.

Lecture 1 provides a review of the history of the founding of the Federal Reserve System and discusses the tools that central banks have at their disposal for maintaining financial stability and limiting the size and duration of aggregate fluctuations. It covers themes that will be very familiar to most readers of this review: the origins of central banking, the advantages and disadvantages of the gold standard, nineteenth-century banking panics, and ?Bagehot?s Rule.? This lecture and the subsequent one serve the purpose of providing the historical and institutional context for the lessons that Chairman Bernanke applied during the financial crisis that peaked in 2008-2009. They also lay out a case for the Fed?s learning process: the Fed made a variety of mistakes in the 1930s and 1970s, for example, which it subsequently drew on in formulating later policies. In this lecture, Chairman Bernanke acknowledges that the Fed failed with respect to monetary policy and financial stability during the Great Depression, as witnessed by the severity of the banking crisis and the depth and duration of the economic decline. He suggests that FDR?s abandonment of the gold standard and the enactment of federal deposit insurance were actions taken to offset policy errors. Detailing the Fed?s policy mistakes of the 1930s allows him to later contrast the Fed?s policy response to the recent financial crisis.

Lecture 2 continues the examination of the Fed?s history, focusing on the post-World War II period. The first part of it is devoted to the Great Inflation and the associated policy mistakes (overconfidence in the ability to fine tune the economy and loose fiscal and monetary policy) as well as the Great Moderation, with substantial credit given to Paul Volcker and Alan Greenspan?s stewardship of the monetary policy. An omission from this period of policymaking is a discussion of the S&L crisis. Although savings and loans were outside the Fed?s regulatory domain, the episode might have been one that the Fed could have learned from, at least with respect to the idea that it could have refocused the Fed?s attention on ensuring financial stability. (An interesting theme throughout the book is that the Fed?s role of providing financial stability fell into neglect until the recent crisis hit.)

The second half of lecture 2 presents his views on what factors led to the intensity of the financial crisis of 2008-2009, which he casts as a ?classic financial panic? that took place in a broader institutional context (multiple financial markets rather than just banks). He provides a laundry list of weaknesses in the financial system that likely transformed a modest recession into a more severe crisis. For example, he points to household leveraging (driven partly by a decline in the standards for mortgage underwriting and exotic mortgage products), inadequate risk management by banks, short-term funding exposure of banks, and the use of CDS and other exotic derivatives as private-sector catalysts. With respect to public sector vulnerabilities, he suggests that supervision of insurance companies, investment banks, and GSEs was inadequate and that the economy lacked a systemic regulator that could oversee risks across different types of financial institutions. It is unsurprising that he places little stock in the view that the Fed set rates too low early in the 2000s, citing cross-country evidence of other housing booms, the timing of the bubble, and the size of the house price increases relative to changes in monetary policy as evidence against this argument. However, he does acknowledge that the Fed did not fully anticipate how large of an effect a decline in house prices could have on the overall economy.

Lecture 3 provides a description of the Fed?s response to the recent financial crisis and a sense of the real-time decision making that was required during the peak period of the crisis when problems in different sectors of the financial system were springing up on an almost daily basis. This is where it is entertaining for the reader to play armchair central banker, and think whether one?s own policy choices would have deviated that far from the path that the Fed actually took. Important for his description of the Fed?s response to the crisis is the fact that, even though the total losses due to subprime mortgages were not very big, they were spread out across different financial markets, making the size of the losses and the bearers of those losses uncertain. Because many financial firms were using wholesale funding, the uncertainty over losses created the potential for short-term funding to dry up as lenders re-assessed the health of borrowers. Firms in need of short-term funding faced fire sales of assets and runs rippled through the financial system. In response, the Fed provided liquidity to illiquid banks via the discount window and to other financial firms like broker-dealers through special liquidity and credit facilities. Interestingly, although he does not state that the Fed could have done more to save Lehman Brothers (arguing it was an investment bank and the Fed and Treasury tried to find either a buyer or more capital), he does seem to acknowledge that its failure was systemically important (p. 75), and he goes on to describe the effects its failure had on money market mutual funds such as Reserve Primary Fund. Finally, he discusses the coordinated international response of central banks to the financial crisis, contrasting it with the lack of coordination of the 1930s.

The last lecture provides a discussion of what the Fed has been doing in the wake of the crisis, how it is working to implement Dodd-Frank, and what that law means for future Fed conduct. This lecture includes a cogent discussion of the Fed?s quantitative easing policies, which are aimed at influencing long-term interest rates and stimulating the housing sector, and it discusses its continued effort to satisfy its dual mandate by focusing on the persistently weak labor market conditions. Since this lecture provides a detailed description of the expansion of the Fed?s balance sheet and the piling up of reserves by Fed member banks, it would have been nice to see this discussion connected more directly to the continued low levels of bank lending.

This book will be particularly useful for those teaching a class in either macroeconomics or economic history of the twentieth century at the undergraduate level, as these lectures provide a succinct and accessible account of U.S. macro policymaking over the last hundred years. Companion questions, written by Stephen Buckles of Vanderbilt and referencing the video presentation, are also available on the Fed?s website.

Alan Blinder, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, New York: Penguin, 2013.

Kris James Mitchener is professor of economics at the University of Warwick and Research Associate at NBER and CAGE. Recent publications include ?Globalization, Trade and Wages: What Does History Tell Us about China?? (with Se Yan) International Economic Review (February 2014) and ?Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz? (with Gary Richardson) American Economic Review (May 2013).
Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2013). All EH.Net reviews are archived at

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

Shaping Medieval Markets: The Organisation of Commodity Markets in Holland, c. 1200 – c. 1450

Author(s):Dijkman, Jessica
Reviewer(s):McCants, Anne E.C.

Published by EH.Net (August 2013)

Jessica Dijkman, Shaping Medieval Markets: The Organisation of Commodity Markets in Holland, c. 1200 – c. 1450.? Leiden: Brill, 2011. xvi + 447 pp. $172 (hardcover), ISBN: 978-90-20148-4.

Reviewed for EH.Net by Anne E.C. McCants, Department of History, Massachusetts Institute of Technology.

In a growing body of scholarship that explores the medieval origins of the early modern Dutch economy, many economic historians now expound the thesis that the prosperity of the ?golden age? was presaged, or even made possible, by the fortuitous resource allocations and resulting market conditions that date back to the early settlement of the reclaimed marshy land that would in time become Holland. Much of the detailed archival work that stands behind this literature has been published in Dutch, but increasingly works of broader synthesis are appearing in English.? Jessica Dijkman?s new contribution to this literature fits squarely within this basic framework.

Her study adds to the tradition of regional inquiry, however, by offering up a serious engagement with another currently fashionable project, that is the documentation of the so-called ?institutional origins? of a given economic outcome, in this case a highly successful one.? Dijkman defines the terms of her study from the outset as a response to the oft-cited work of Acemoglu, Johnson, and Robinson (2001), but with the explicit acknowledgement that we must actually explain where the much-touted ?good institutions? came from, and how they are situated in time.? That is, she sets for herself the explicitly historical task of explaining origins and change, and not just the social scientific task of identifying and categorizing states of being.? To do this, she borrows from Acemoglu, Johnson, and Robinson what she calls the ?social conflict view? (p. 18).? Institutions arise, she argues, not just (or perhaps not even usually) as the most efficient response to a set of circumstances, but as the most advantageous to those who wield the political power necessary to enforce them.? Unlike Acemoglu, Johnson, and Robinson though she places a greater emphasis on exogenous forces that shape that political process rather than relying so overwhelmingly on endogenous factors alone (p. 20).?

Dijkman?s argument draws on one other older theoretical tradition, namely that immortalized by Adam Smith in The Wealth of Nations ? the idea that commercialization (the widening and deepening of markets for commodities in particular, but with spin-off effects in markets for labor and land) can be found at the root of what we now think of as modern economic growth.? As she puts it at the outset of her study, her ?aim is to discover whether favourable commodity market institutions rooted in Holland?s specific social and political structure contributed to the remarkable economic development Holland experienced in the late Middle Ages? (p. 15).? From the literature on institutions she defines the relevant markets as ?sets of institutions: rules, customs, and practices that structure the exchange of goods? (p. 15).? But her question, and her method of probing it, are fundamentally historical in nature, namely to ascertain if the specific timing of Holland?s geographical emergence from previously uninhabited swampland was critical to the formation of one set of institutions and not another; and to execute that investigation by means of a comparative analysis with Flanders and England, both places that shared a range of important characteristics with Holland, but also differed from Holland in critical, and easily distinguishable, ways.

A major strength of the book is the detailed historical work that is both carried out directly and distilled from the research of others.? The first part of the book, titled ?The Institutional Framework: Trade Venues,? reviews the actual places where trade took place: fairs, rural markets, urban attempts to control rural trade, and successful small urban staple markets.? Here the main advantage enjoyed by Holland relative to either Flanders or England appears to have been the absence of a feudal past.? Because of the relatively late start date for land reclamation in the northern Low Countries, feudalism never had time to put down sturdy roots in this region.? Neither did any one urban place manage to exert strong control over rural production as had been the case with the major Flemish cloth towns to her south, bolstered as they were by large scale urban industry as well as noble power.

Part II, ?The Institutional Framework: Rules and Practices,? shifts gears to examine the actual practices that facilitated trade.? Here the emphasis is on the emergence of agreed-upon weights and measures which were not as standardized as they were officially in England, but were not so loose as to stifle trade since both Dutch towns and the counts exercised more effective control than it might appear on a first glance at the evidence.? Moreover, the early development of international trade demanded a fair degree of conformity in any event (p. 235).? Similarly, the other great test for the Institutional explanation for economic success, reliable contract enforcement, again finds Holland lagging behind England (with her royal courts) and Flanders (with her few large and dominating cities).? Here Dijkman suggests that the enduring strength of local courts in every town and village was the ?Achilles? Heel of Holland?s system of debt litigation? (p. 267).? Yet once again, this factor proves not to have been ?decisive? ? because in ?medieval Holland a solid foundation for a locally-based system of contract enforcement grounded on individual responsibility was laid at an early stage? (p. 271).

Part III, ?Market Performance: Quantitative Tests,? is where the rubber really hits the road as it were.? It is in Dijkman?s quantitative tests of both price convergence and market density that Holland really begins to outshine its neighbors across the Channel or south of the great rivers.? Holland demonstrates a remarkably well-integrated price system (for wheat) vis-a-vis international markets from a very early stage.? This does not mean that prices were not volatile; but they did track developments on the international trade circuit very closely.? Dijkman attributes this to the very poor land quality for wheat agriculture in the north, leaving no hope of sustaining the local population.? This forced Holland into international grain markets with an unusual precocity.? England by contrast had a relatively self-contained grain market so prices varied much more by distance than in Holland (pp. 306-07).? But dependence on imports still left Holland vulnerable in times of dearth as ?export restrictions in the producing regions could cause acute problems in Holland? (p. 311).?

Finally, her most remarkable finding is the incredibly high level of market orientation in Holland from a relatively early date, with already 60 to 66 percent of the population involved in the market for their sustenance by the mid-fourteenth century rising to around 90 percent by 1500 (p. 325).? Market participation in Flanders had been somewhat higher (at approximately 70 percent of the population in the early fourteenth century) but it had been entirely eclipsed by 1500 (p. 332).? Meanwhile, market density in England never even came close.? In the early fourteenth century its population involved in the marketplace ranged around 50 percent and that number had only edged up towards 65 percent by 1500 (p. 338).

How can we account for these incredibly high levels of market penetration already in the years prior to the Black Death? Or for that matter, for the perhaps even more amazing feat of increasing market saturation in the period of population collapse following?? Dijkman has this to say: ?Returning to Holland, we can conclude that the strong growth of market orientation between 1350 and 1500 would not have been possible without the support of an efficient organization of commodity markets? (p. 342).? Nonetheless, she goes on to argue that Holland?s favorable institutions did not generate high levels of commercialization of their own accord: the process was ultimately triggered by non-institutional forces.? But the contribution of the institutional framework was still essential: it facilitated and supported flexible adaptation to changing circumstances.

So where does this leave her readers interested in testing the theoretical usefulness of the institutional approach?? This reader remains somewhat uncertain.? In the final analysis Dijkman gives us a well-nuanced ?just-so story? ? her strongest explanation is ?the absence of a truly feudal past? ? in the formulation of De Vries and Van der Woude (1997), coupled with ?the near absence of urban coercion over the countryside? (p. 374).? Or as she argues elsewhere ?the weakness of both vertical ties (constraints ensuing from the exertion of lordly power) and horizontal ties (constraints ensuing from collectivities such as guilds)? account for Holland?s unique experience (p. 351).? But of course, for anyone wanting to use the Dutch case as a guide for best practice, this conclusion is not terribly helpful.

Nonetheless, I am not satisfied to end this review on that critical note.? Just-so stories are often actually very good history ? even if they don?t meet the abstractness criterion of best-practice social science.? The historian?s primary task is, of course, to explain how things came to be, not how to alter the future.? In our future-besotted present this may not seem worth much.? But understanding how things came to be is a worthy enterprise in its own right.? There is yet much to learn from the ever-more-clearly delineated medieval origins of the early modern Dutch economy.?? Prosperity often has long roots ? understanding that can indeed help us make wiser assessments in the present, and hopefully, offer more people better opportunities for the future.


Daron Acemoglu, Simon Johnson and James A. Robinson, ?The Colonial Origins of Comparative Development: An Empirical Investigation,? American Economic Review, 91: 1369-1401 (December 2001).

Jan de Vries and Ad van der Woude, The First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy, 1500-1815, Cambridge University Press (1997).

Anne McCants has research and teaching interests in the economic and social history of the Middle Ages and Early Modern Europe, as well as in the application of social science research methods across the disciplines.? Her work has appeared in the Economic History Review, Explorations in Economic History, Family History, Historical Methods, the Journal of Economic History, the Journal of Interdisciplinary History, the Journal of World History, and Social Science History.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2013). All EH.Net reviews are archived at

Subject(s):Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):Medieval

The American Technological Challenge: Stagnation and Decline in the 21st Century

Author(s):Vijg, Jan
Reviewer(s):Mokyr, Joel

Published by EH.Net (April 2013)

Jan Vijg, The American Technological Challenge: Stagnation and Decline in the 21st Century.? New York: Algora Publishing, 2011.? 248 pp.? $33 (hardcover), ISBN: 978-0-87586-886-8.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

Jan Vijg is a Dutch-born leading molecular geneticist at one of the most prestigious scientific institutions in the nation.? He displays an insatiable appetite for history and technology and an intellectual curiosity that would do credit to the most interdisciplinary of economic historians.? He is also well-read, thoughtful, and articulate, and asks excellent questions.? The result is a thought-provoking and lively ?big picture? book, ideal for undergraduate teachers who want to introduce young students without a strong background in economics and history to global history.?

This book, like a pearl, was born out of irritation.? As a young man, Vijg read a lot of science fiction, which made him think that the world of the future would be full of technological wonders, such as manned space flight, time travel, flying cars, immortality, and one hundred percent dependence on non-hydrocarbon energy.? None of these things have materialized to date, and Vijg at times sounds disappointed that his modern car is not much different from the cars he learned to drive in the 1960s, that airplane flights today are not much faster than the Boeing 707’s of his youth, and that even in medicine, his field of expertise, the rate of technological progress has slowed down.? The exciting technological hustle and bustle of earlier times, he feels, has disappeared.? We are simply coasting along, driven by momentum, but truly revolutionary macroinventions have disappeared and in his view are unlikely to re-appear.? Technological stagnation, or at best technological creep, awaits us.

Vijg is far too sophisticated a thinker to turn this book into a Jeremiad in the style of Daniel Cohen?s recent The Prosperity of Vice: A Worried View of Economics (2012).? He notes that with the technology of the twenty-first century the industrialized West has already secured an unimaginable standard of living, and that prosperity is slowly but inexorably spreading to the rest of the world.? Despite pockets of violence, the world is largely at peace, and most existentialist threats to our golden age such as nuclear terrorism are dismissed as unlikely.? Climate change and an asteroid strike, to be sure, are threats, but on the whole he realizes that the slow-down is the result of our success.? Many of humanity?s most pressing needs ? high-quality food in abundant supply, comfortable shelter, entertainment, information and so on ? are increasingly met with our existing technology.? Yet the boyish and adventurous streak in him wants more: space-travel (or at least hypersonic flights), instant-made textiles, radically different sources of energy, and household robots that obey our whims.? None of this, he claims, is forthcoming.? The IT revolution, he submits, offers scant compensation for those disappointed dreams.? As Peter Thiel, the founder of PayPal once put it, ?we wanted flying cars, instead we got 140 characters.?

To understand his disappointment, he looks at the history of technology summarized in a bare one hundred pages.? Usually these summaries have a certain ?potted? quality to them, but Vijg?s point is to understand an important issue: why successful societies seem to have sunk into stagnation after periods of technological flourishing.? His examples are, not surprisingly, the Roman Empire, Song China, Medieval Islam, and our own industrialized world, the offspring of the Industrial Revolution of the eighteenth century.? In all of them, he observes, a successful period of technological progress was followed by a slowing-down and eventually a collapse.? He observes quite astutely that such a collapse was not inevitable but brought about by foreign invasions of barbarian invaders specializing in violence and mayhem.[1] Given that such an invasion in our own time is unlikely, Vijg feels we will basically coast along, gradually improving on the margins but without setting foot on Mars or doubling life expectancy again.

The culprit of this stagnation, in his view, is decidedly not that human minds are running out of ideas, or that everything important that could be invented already has been invented, or that the ?low-hanging fruits in technology have all been picked? as my Northwestern colleague Robert J. Gordon puts it.[2]? Indeed, the technology we are developing is much like ever-taller ladders that allow us to get to ever higher-hanging fruits.[3]? Instead, Vijg points to what we would call today institutional failure.? We are the victims of our success: wealthy and sated (Vijg does not use words like ?lazy? or ?complacent,? but clearly they are in the back of his mind), we become more risk-averse, more concerned about possible losses, and we feel increasingly reluctant to venture into the unknown and the possibly risky.[4]? Medical advances are severely slowed-down and even blocked if the most minute percentage of users are negatively affected, and Vijg is eloquent and convincing in his just indignation at ?irrational? resistance to many potential sources of macroinventions such as genetically modified organisms, human cloning, and third-generation nuclear energy such as pebble-bed reactors, which are essentially disaster-proof.? Regulation and political control, he feels, are the result of such sentiments and they are getting in the way of more progress.?

What is the economic historian to make of this analysis? The idea that ?conservative? institutions may get in the way of innovation can be traced down to Schumpeter?s Capitalism, Socialism, and Democracy and has been the subject of a small but important literature in an area we may call the political economy of technological change (for a summary, see my Gifts of Athena, chapter 6). While we use the term ?technological progress? in our historical analysis, implying a clear-cut non-stationarity in the evolution of useful knowledge, we do not admit ?progress? in our institutional stories.? There may have been improvement, but it is less secure and less obvious.? Vijg is quite right in that he sees institutions as a threat to continued technological advance.? It is quite possible that a mixture of vested interests in incumbent techniques, and ?irrational? fears of what unknowable disasters innovations may inflict upon our comfortable and secure existence could throttle progress.

Yet two caveats are in order.? First, it is far from clear that in fact technology is slowing down.? Vijg relies heavily on a database of his own creation, 337 macroinventions made between 10,000 BC and 2006.? Such attempts to count the uncountable are common, but in the end run into the irrefutable complaint that inventions simply do not obey the laws of arithmetic because of complex complementarities and substitution effects.? More immediately, his diagnosis that we find ourselves in the midst of a technological slow-down is far from a consensus (as he knows all too well).[5]? Take for instance his argument that transportation has barely improved in the past half century.? Cars are not markedly different in outward appearance, and not moving noticeably faster; airplanes do not fly any faster either and are more cramped than ever.? On the surface, this argument is correct, but at closer examination some doubts creep in: cars today are far better-made, more durable, comfortable and safe than in 1965; drivers have access to hands-free costless communication with almost anywhere on the planet, can listen to a bewildering choice of high-definition music and information, and will never need to shuffle annoying paper maps or worry about getting lost.? Traffic jams are still annoying and costly, but modern technology can resolve it through pricing that will charge peak-hour driving a higher marginal cost (if the political problems of doing so can be resolved).? Airplanes are a different matter.[6]? But even here the effect of technology has been enormous, by reducing the real price of travel and thus making it available to almost everyone in the developed world ? leading of course to the congestion and queues Vijg dislikes.[7]? It is also no more than fair to point out that, before he dismisses the impact of innovation on transportation, Vijg might have benefited from reading Vaclav Smil?s Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines (2010), which describes in magisterial detail the impact of technology on transport costs and the world we live in.?

What Vijg must also realize is that if he is right that further innovation may not make transportation all that much more efficient (or even cheap), it may make much of it redundant, through increasingly more effective and inexpensive person-to-person communication, in professional meetings and conferences as well as family gatherings can be conducted electronically and much work can be carried out from one?s living room.? If telecommuting and teleconferencing have not taken off quite as rapidly as many were hoping a decade ago, it is because for some reason most of us prefer it this way.? But the technology is basically here and still getting better by the day.? If the full price of transportation were to rise steeply all of a sudden due to a 9-11 type of event, this substitute for transportation would surely witness a rapid expansion.? Similar developments are evolving as these lines are being written, especially three-dimensional printing, which has the potential to alter manufacturing more than any invention since the Industrial Revolution, by providing mass-customization in ways and at prices that are totally unprecedented.? In services, the effects of pattern- and speech-recognizing software are only beginning to be felt.?

The second point is that technology, much like evolution in living species, often moves in leaps and bounds, punctuating extended periods of seeming stagnation.? Part of the reason is that at times technology comes up with a new idea that affects many other techniques and thus causes a widespread innovative wave.? Such techniques have been called General Practice Techniques and account to some extent for the intensity of first Industrial Revolution, but even more so for that of the second Industrial Revolution between 1870 and 1914.[8]? Historically such interactions can explain a great deal of the irregular and discrete behavior of technology.? At times, however, a dominant design is so effective that little change should be expected.? Who would complain that the forks we eat with or the buttons and zippers we use for our clothing have not changed in many years? Moreover, when a new technique is still in development, it is hard to fully see its full impact.? Would someone in 1760 England not have felt that for all their noise and bombast, steam engines had to date done little more than pump a bit of water out of coal mines?
Finally, we should keep in mind that innovation is often needed to fix the unexpected side-effects of earlier technological progress, such as catalytic converters and asbestos removal.? Whether such a technique can emerge to cope with the ?mother of all side-effects? ? climate change ? remains to be seen.? But Vijg is right: the problem is not technological, it is institutional.? Solving the ?global commons? threats, and much of our technological future, depend on politics, not knowledge.


1. A more detailed and elaborate statement in the direction can be found in Ian Morris, Why the West Rules ? For Now, 2010.?

2.? Robert J. Gordon, ?Is U.S.? Economic Growth over? Faltering Innovation Confronts the Six Headwinds?.?? NBER Working Paper 18315 (Aug. 2012).? The term does not appear in that essay, but can be found for instance in ?The Innovation Equation,? World Finance, March 2013, An earlier use of the term was proposed by Tyler Cowen.
3. I made this argument in some detail in my The Gifts of Athena (2002), in which I argue that what counts for technological development is socially useful knowledge which can be defined as the union of all sets of knowledge possessed by members of society.? Since the division of knowledge can be made finer and finer, what really matters is the access that agents have to the knowledge that is in the possession of specialists.? This access is what has become increasingly easy and cheap due to the IT revolution, and hence ? on this account ? we might well expect technological progress to keep growing at a rate that is at least as fast as in the past and possibly a lot faster.?

4. Vijg himself is anything but risk-averse, and boldly (if controversially) postulates (p. 108) that part of the higher risk aversion of modern society could be due to the larger influence of women and older voters on political outcomes, since he feels that these groups are more risk averse than young males.

5. See for example ?Has the Ideas Machine Broken Down,? The Economist, Jan. 12, 2013.

6. GPS technology ? astoundingly ? has not yet been introduced into commercial aircrafts, and a bill to fund the FAA?s plan to introduce it has a target date of 2020, by which time the technology may well be outdated.?

7. Vijg should recognize that goods and services come in two variants, following Fred Hirsch?s classic distinction between ?material? and ?positional? goods.? The former are amenable to technological progress because they are what we think of as goods subject to standard production function relations.? Positional goods are by definition zero-
sum: access to uncrowded museums, front-row tickets to opera performances, fast-track driving on highways, and VIP treatment at airports.? As income goes up, the gap between progress in material goods and the lack thereof in positional goods becomes more noticeable and perhaps more irritating.?

8. For an introduction to GPT?s see Elhanan Helpman, ed., General Purpose Technologies and Economic Growth (1998) and Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar, Economic Transformations: General Purpose Technologies and Long-term Economic Growth (2005).

Joel Mokyr is the author of The Enlightened Economy: An Economic History of Britain, 1700-1850 (Yale University Press, 2009).

Copyright (c) 2013 by EH.Net.? All rights reserved.? This work may be copied for non-profit educational uses if proper credit is given to the author and the list.? For other permission, please contact the EH.Net Administrator ( Published by EH.Net (April 2013).? All EH.Net reviews are archived at

Subject(s):History of Technology, including Technological Change
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):General or Comparative
20th Century: WWII and post-WWII

The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy

Author(s):McCraw, Thomas K.
Reviewer(s):Brownlee, W. Elliot

Published by EH.Net (April 2013)

Thomas K. McCraw, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy. Cambridge, MA: Harvard University Press, 2012.? ix + 485 pp. $35 (hardcover), ISBN: 978-0-674-00692-2.

Reviewed for EH.Net by W. Elliot Brownlee, Department of History, University of California, Santa Barbara.

Thomas McCraw, the Straus Professor of Business History Emeritus at the Harvard University Business School, passed away in November 2012, the year this book appeared. Over his career of more than four decades McCraw often used biography as a tool to reveal and explain important trends and developments in the history of American business and economic life. No historian working in the fields of business and economic history has done so as effectively. His last book, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy, also mobilizes biography as an interpretive tool. The result is a work that lives up to the high standards McCraw set in books like Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, and Alfred E. Kahn (Harvard University Press, 1984) and Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Harvard University Press, 2007).

?The United States government started out on a shoestring and almost immediately went bankrupt,? McCraw writes in the first sentence (p. 1) of The Founders and Finance. He goes on to suggest that the severe financial problems might have fragmented the new nation except for ?a handful of people who understood finance and also grasped the economic potential of the American national future,? and adds that ?a disproportionate number of them were recent arrivals from almost a dozen different places overseas.? The objective of the book is to show ?how they put the United States on a sound institutional footing to manage its finances, and how some of their ideas grew out of their experience as immigrants? (p. 2).? From among this ?handful? McCraw focuses on two: Alexander Hamilton (born in the West Indies, probably on the British island of Nevis, and an immigrant to New Jersey in 1772) and Albert Gallatin (born in Geneva, then an independent republic, and an immigrant to Massachusetts in 1780). They were two of the first four secretaries of the treasury, with Gallatin?s service of nearly 13 years the longest in American history.? ?What Hamilton?s policies achieved,? McCraw concludes, ?was the promotion of long-term business confidence, setting the stage for the release of immense economic energy? (p. 132). McCraw argues that as secretary of the treasury Gallatin ?dominated public financial affairs? and ?did more than any other federal official to oversee settlement and economic growth in the West and to turn America?s public lands into a force for the public good? (p. 179).

McCraw?s extended discussions of the institutional innovations of Hamilton and Gallatin add little information that will be new to scholars of the early republic, but no one has written about their careers in a more engaging and literate way, and with as much care regarding the vast scholarship that is available on both careers. McCraw?s attention to Gallatin?s monumental efforts on behalf of fiscal consolidation, financing of the Louisiana Purchase, reorganization of land sales, promotion of western economic development, and financing of the War of 1812 is particularly refreshing in a study that writes so admiringly of Hamilton. McCraw?s juxtaposition of the careers of Hamilton and Gallatin works superbly well.? In the realm of public finance, for example, McCraw correctly views Hamilton as the primary architect of what Joseph Schumpeter called the ?tax state? and Gallatin as complementing Hamilton?s work, crafting what I would describe as a kind of ?asset state? based on the nation?s great wealth in public lands. The juxtaposition also works well for McCraw in contrasting their national security strategies. While Hamilton, ?preoccupied with preserving independence against European threats, looked eastward, toward Europe,? Gallatin ?looked consistently not toward the Atlantic but toward the West.? But, McCraw nicely observes: ?Both believed that military effectiveness depended on economic strength? (pp. 359-60).? McCraw also appreciates the similarity of their views on the power of credit and the virtues of central banking. And, McCraw suggests looking at the ?American System? of Henry Clay and others as a kind of fusion of Hamilton?s and Gallatin?s policies. Except for its program of tariff protection, the system ?mirrored the policies of both Hamilton and Gallatin? (p. 363). More generally, it reflected their powerful nationalism and their shared belief in the potential of vigorous, coherent public-private cooperation to advance the national interest.

For a history of innovation in financial policy, the scope of the book?s attention to the personal lives of the innovators is admirably broad. Because of his ambitious biographical approach, McCraw is able to break new interpretive ground through his emphasis on the significance of their immigrant backgrounds. Hamilton dominates Part I of The Founders and Finance. In McCraw?s narrative, several elements of Hamilton?s formative experiences outside continental North America played crucial roles. First, in St. Croix (a Danish colony where British settlers became powerful) Hamilton?s immersion in the business of a New York trader provided an opportunity for him to learn about ?bookkeeping, inventory control, short-term finance, scheduling, and the pricing of merchandise? (p. 15), to become proficient in calculating exchange rates and coping with the arcane world of bills of credit, and even to acquire, when a teenager, a great deal of personal responsibility within the decentralized organization of international trade. During the Revolution he would follow up on his business experience with extensive reading of European authorities on finance. As early as 1780, McCraw suggests, Hamilton?s ideas foreshadowed the main elements of his programs as secretary of the treasury. Second, his life in the West Indian hot house of international commerce fostered cosmopolitan attitudes ? attitudes that ?the roiling mix? (p. 19) of New York would further encourage. During the political and financial crises after the Revolution Hamilton?s ?immigrant origins served him well, giving him a more national orientation ? a more single-minded devotion to the Union than that of perhaps any other founder? (p. 44). McCraw suggests that in the process of drafting, adopting, and ratifying the Constitution, Hamilton along with the ?other immigrant delegates? (most notably, Robert Morris, born in England) ?took a more national perspective than their native-born counterparts? (p. 83). Third, Hamilton?s experiences in the Caribbean, famously described by historian Eric Williams as ?the cockpit of Europe,? and Hamilton?s service in General George Washington?s headquarters, convinced him of the importance of ?national security in a world of warring empires? (p. 95).

Albert Gallatin takes over the flow of McCraw?s narrative in Part II. Gallatin arrived on the American scene in 1780, too late to play a major role in either the Revolution or the political consolidation of the new nation during the 1780s. Like Hamilton, McCraw argues, Gallatin?s cosmopolitan, immigrant background led him to take a national view of economic issues. But the assets and aspirations that Gallatin brought in immigrating to North America differed greatly from those of Hamilton. He grew up in an aristocratic circle in Geneva and had the benefit of an elite education and the certainty of a financial inheritance. His American goal was, McCraw suggests, becoming a rich landowner, realizing ?Rousseau?s notions about the moral virtues of nature? and ?doing well by doing good.? But his experiences in the financial center of Geneva had also given him a familiarity with the economic benefits of banking, and after more than ten years in the United States, he finally took advantage of this knowledge and realized that ?his gifts? were in finance (p. 183).

The structure of McCraw?s book weakens in the four very short, and perhaps hastily written, chapters of Part III (?The Legacies?). One of the four (?Immigrant Exceptionalism??) poses the important suggestion that Hamilton and Gallatin had an advantage as financial experts because ?much of the best American talent gravitated toward land development and away from trade, finance, and manufacturing? (p. 335). However, the chapter fails to provide the analysis required to sustain the point. Opportunities for land acquisition, trading, and development were certainly powerful economic magnets throughout the British colonies and new republic of the late eighteenth century. But farmers, merchants, and artisans on the mainland colonies often had diverse talents and diverse experiences in a wide range of activities, including international trade and finance (and proto-industrialization) as well as agriculture and land development or speculation. And American merchants did, in fact, contribute significantly to the young nation?s pool of financial talent. One example of such talent was the Philadelphia merchant Thomas Willing who became the first President of the Bank of North America (the first federally chartered bank, established in 1782) and later the first, and quite successful, President of Hamilton?s Bank of the United States.. Another example may have been Robert Morris, who played a central role in financing the Revolution and was George Washington?s first choice as secretary of the treasury. McCraw, however, counts him as an immigrant despite the fact that his father was a British tobacco factor living in Oxford, Maryland, which was then British territory, before young Robert joined him there at 13 years of age. Perhaps McCraw should have sharpened definition of an immigrant.

In this chapter McCraw also raises the interesting question of whether or not the United States was unique in calling on ?foreign-born financial talent.? He observes that ?From the seventeenth century down to the present, outsiders have been summoned to straighten out financial disarray in many countries,? explaining that ?their lack of ties to existing national interest groups has, almost by itself, made them more neutral judges of what must be done.? He cites numerous examples, including the ?money doctors? of the nineteenth and twentieth centuries and the IMF (p. 338). McCraw might have noted, however, that the quality of advice that Hamilton and Gallatin gave was far higher than that of many of the ?money doctors? (Joseph Dodge, for example, in the occupation of Japan) and certainly the cookie-cutter neo-liberalism of the IMF.? But McCraw does go on to emphasize a key point:? in pressing for a centralized and effective fiscal state during the 1780s Hamilton, despite his West Indian birth, was definitely not an outsider. In contrast with the later ?money doctors,? by the time he rendered financial advice he was a committed citizen of the nation he studied. McCraw might have taken the additional step of emphasizing that Hamilton?s financial advice was superb in large part because he was very much an insider:? an experienced leader of a national interest group that had formed to promote financial consolidation in the face of the commercial and financial challenges that the federal government experienced under the Articles of Confederation. With more time, McCraw might have explored in greater depth the composition, sources, objectives, methods, and results of this powerful entrepreneurial interest group, and thus even more effectively situated Hamilton within the political economy of the emerging republic.

At the end of his life McCraw apparently was pursuing further research on the important topic of immigrant entrepreneurship. This endeavor might well have provided him with an opportunity to develop the various intriguing issues that he was able to consider in only a tentative way in Part III. Even without such analysis, we are very much in McCraw?s debt for The Founders and Finance. McCraw?s brilliantly paired biographies of Hamilton and Gallatin add significantly to our understanding of the development of the financial underpinnings of the American republic.

W. Elliot Brownlee, Emeritus Professor of History at UC-Santa Barbara, is editor (with Eisaku Ide and Yasunori Fukagai) of The Political Economy of Transnational Tax Reform: The Shoup Mission to Japan in Historical Context to be published by Cambridge University Press in May 2013.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (April 2013). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):18th Century
19th Century

Bengal Industries and the British Industrial Revolution, 1757-1857

Author(s):Ray, Indrajit
Reviewer(s):Tomlinson, B. R.

Published by EH.Net (March 2013)

Indrajit Ray, Bengal Industries and the British Industrial Revolution, 1757-1857. New York: Routledge, 2011. xiii +290 pp. $145 (hardcover), ISBN: 978-0-415-59477-6.

Reviewed for EH.Net by B. R. Tomlinson, School of Oriental and African Studies, University of London.

The topic of the enforced deindustrialization of Asia as a consequence of the rise of industrializing Europe at the end of the eighteenth and the beginning of the nineteenth century is an ancient staple of global economic history.? This is especially true for stories of the interaction between Britain and India as colonial rule was being established after 1750.? The key concept of a ?drain of wealth? from India to Britain was developed by Edmund Burke and other critics of British rule in the 1780s; accounts of the bones of the cotton-weavers bleaching the plains of India, and of British soldiers cutting the thumbs from Bengali weavers to prevent them competing with imports from Lancashire, still figure prominently in popular histories of the period.? Such traditional narratives have now melded into more modern histories of the ?great divergence? between European and Asian economies from the late eighteenth century onwards; colonialism, capital export and unfair trading practices are now often seen as key reasons why Europe grew rich in the nineteenth century while Asia did not.

Indrajit Ray?s analysis of the Bengali economy in the first century of British domination addresses and contests these themes directly.? Ray?s account uses a wealth of data, especially on trade and employment, to show convincingly that the Bengali economy did not change fundamentally as soon as British rule there became established, or as an immediate result of British industrialization in cloth.? The staple industries of late-eighteenth century eastern India were cotton and silk textiles, salt production, ship-building and the supply of indigo.? Much of this production was for export to European, North American and Asian markets.? Textile manufacture never fell off a cliff once exposed to competition with machine-made imports; silk textile production and sales increased, while output of cotton textiles declined only after woven cloth began to be imported in the 1830s, and then by less than has often been supposed.? Salt, indigo and ship-building did suffer declines as the colonial state made political choices between metropolitan and local elites, but until 1830, at least, industrial Bengal remained buoyant under British rule.?

These case-studies show the resilience of economic agents in colonial Bengal, and their ability to adapt to the changing circumstances brought about by colonial rule.? Interestingly, Ray?s analysis of bullion flows demonstrates that gold and silver, the essential materials of coinage and mass savings, declined in the late eighteenth century, but increased markedly in the nineteenth century, with a steady annual inflow from 1835 to 1860.? Elsewhere, Ray, who is Professor in the Department of Commerce at the University of North Bengal, has also written on the jute industry ? a key part of the next stage of the industrial history of eastern India (?Struggling against Dundee: Bengal Jute Industry during the Nineteenth Century,? Indian Economic and Social History Review, 2012).

In some ways the book delivers rather less than it promises.? Most of the substantive material has been published before.? As the author makes clear, the chapters on the shipbuilding industry, on silk, on salt and on indigo are fuller versions of articles that have already appeared in academic journals between 1995 and 2005, and the chapter on cotton textiles ? arguably the most important ? reproduces an article that first appeared in Economic History Review in 2009.? Only the chapter on bullion flows into and out of Bengal from the late seventeenth to the late nineteenth centuries, which is largely concerned with evidence concerning the availability of coinage, contains arguments and evidence that have not been published before.? The information contained in all the case-study chapters is largely based on published material.? The secondary reading, which includes a range of official sources, covers a wide range stretching back over more than two centuries, but contains little analysis of the intellectual or political context in which this work was produced.

Despite these limitations, there are some important arguments here.? The only major weakness of the book is the lack of any institutional analysis that could explain the structure and behavior of the various firms (native and foreign) and state agencies that operated in early-colonial Bengal.? The years from 1757 to 1857 in eastern India saw fundamental changes in the nature and workings of the East India Company (still nominally in charge of the governance of British India); of private capital in trade and industry, both European and India, formed into extensive managing agency houses; and of the agricultural land market under the Permanent Settlement.? Old accounts of this period assumed too readily that colonial economies jumped straight from viable peripheral local manufacture to simple raw material production for an industrialized imperial core.? By the late nineteenth century Bengal did briefly fit this model to some extent (although with the exception of important local industrial activities in jute, tea and coal); however, the first half of the century had seen a different type of economy, with considerable local dynamism still energizing the industrial activities of the pre-British period, and linking up effectively with new sources of investment and enterprise from the international economy.? It is the importance of this transitional period, from the cementing of British rule in the 1760s to the final collapse of peripheral semi-autonomous industrial capital in the 1840s, that Ray elaborates in such valuable detail.

B. R. (Tom) Tomlinson is professor emeritus at the School of Oriental and African Studies, University of London. He is author of a number of works on the economic and business history of modern India. A new edition of his Economy of Modern India will be published by Cambridge University Press later in 2013, covering the period from 1860 to the twenty-first century.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (March 2013). All EH.Net reviews are archived at

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Asia
Time Period(s):18th Century
19th Century

Land of Promise: An Economic History of the United States

Author(s):Lind, Michael
Reviewer(s):Dighe, Ranjit S.

Published by EH.Net (October 2012)

Michael Lind, Land of Promise: An Economic History of the United States. New York: Harper, 2012. vi + 586 pp. $30 (hardcover). ISBN: 978-0-06-183480-6.

Reviewed for EH.Net by Ranjit S. Dighe, Department of Economics, State University of New York at Oswego.

Over the past two decades, Michael Lind has established himself as one of America?s leading public policy intellectuals. Through eight nonfiction books, numerous articles in publications such as Harper?s and Salon, and his work as a founding member of the New America Foundation, Lind has staked out an identity as a ?radical centrist? with iconoclastic policy positions that might be described as 21st-Century Whig. Lind has long called for policies in the tradition of Alexander Hamilton and Henry Clay, so it is fitting that his newest book is an economic history of the United States, from Hamilton?s time to the present.

The book?s overriding theme is threefold: (1) the Hamilton-Jefferson economic policy debate has never ended, although the particulars have of course changed over the years; (2) policies in the spirit of Hamilton and Clay are almost always right; (3) such policies deserve credit for much if not most of our economic progress. That is, Lind favors government action to promote industrialization and economic development by aiding manufacturing, imposing protective tariffs as necessary, extending and regulating credit through a central bank, financing infrastructure improvements, and forging public-private partnerships. While Lind sometimes makes pronouncements that almost no economic historians would agree with ? for example, he says the National Industrial Recovery Act was a success ? he presents his case with verve and usually a deft blend of economic statistics, historical detail, and quotes from contemporaries.

Although this book is published for a lay audience, perhaps one that is a center-left counterpart to the readers of John Steele Gordon?s popular economic history books, Lind clearly wants it to be academically respectable and of interest to academics. His endnotes (68 pages worth) draw on a range of current and classic works by academic economic historians. Past economists like Adam Smith and Henry C. Carey are quoted at length, and Lind shows a lively interest in the intellectual backdrop of each era. For example, we learn that industrialist Joseph Wharton founded the Wharton School of Finance and Economy in 1881 to promote protectionism, as a counterweight to the Northeastern and Southern universities that taught free-trade theory.

The book goes in chronological order with the chapters grouped into four sections: the Preindustrial Economy, the Age of Steam, the Motor Age, and the Information Age. Each section begins with a helpful page-long preview titled ?The Argument.?

The most that Lind can say for the economics of Thomas Jefferson ? and, perhaps surprisingly, Adam Smith ? is that they made sense in a ?largely static? preindustrial economy. Even then, Jefferson?s opposition to a national bank and a national debt put him at odds with Lind, not to mention the course of history. It is by now commonplace to note that in the long run Hamilton?s economic program became a reality and Jefferson?s vision of a nation of small farmers became increasingly obsolete. While Smith?s economics were obviously a lot more sophisticated than Jefferson?s, it is fascinating to hear that Smith was ?the favorite economist of America?s agrarians? and argued that Americans should continue to specialize in agriculture rather than try to develop their own manufacturing. Lind quotes from The Wealth of Nations: ?It has been the principal cause of the rapid progress of our American colonies toward wealth and greatness that almost their whole capitals have hitherto been employed in agriculture?. Were the Americans, either by combination or by any sort of violence, to stop the importation of European manufactures, and by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country toward real wealth and greatness.?

Lind says that James Watt and Matthew Boulton?s invention of the steam engine ? in 1776, the same year as the Declaration of Independence and the publication of The Wealth of Nations ? made Smith?s arguments obsolete by ushering in a new industrial revolution. While that is a striking coincidence, Lind later notes that steam power caught on only gradually, with water power providing almost half of the total energy in manufacturing as late as 1869. And Lind gives due credit to (Jefferson?s!) Embargo Act of 1807 and the autarchic years of the War of 1812 for jump-starting American manufacturing. Lind staunchly defends America?s protective tariffs of the nineteenth century, pressing the infant-industry case, though he concedes that high tariffs were no longer necessary by the end of the century. Regarding the tariff of 1816, he cites a remarkable statement from that year by Parliament?s Henry Brougham in favor of predatory British dumping after the war: ?it was well worthwhile to incur a glut upon the first exportation, in order, by the glut, to stifle, in the cradle, those rising manufactures in the United States, which the war had forced into existence, contrary to the natural course of things.?

A notable theme is that the South essentially continued to be a British colony in the antebellum period, with an undiversified economy that revolved around exporting raw cotton to British textile mills. Of course, a significant portion of the South?s raw cotton went to textile mills in New England, and King Cotton had other Northern retainers as well. Lind provides a remarkable quote from New York City Mayor Fernando Wood as secession began in 1860: ?As commercial people it is to our interest to cherish and keep so good a customer?. Not only let us avoid making war upon her peculiar system of labor but let us become even stronger defenders of the system than the South itself.? Wood even proposed that New York City and several adjacent counties secede to be their own city-state.

Andrew Jackson is the principal antebellum villain here, not only dismantling the Bank of the United States but also vetoing a bill to fund part of the National Road. Not until 1916 would the federal government again allocate funds toward a national road system. In the entire period from Washington?s inauguration to the eve of the Civil War, the states spent nearly nine times as much on transportation infrastructure as did the federal government.

Lind sees the Civil War as the ultimate battle in the Jefferson-Hamilton debate. Lincoln called himself ?an old-line Henry Clay Whig,? and during the war the Republican Congress would enact such Hamiltonian measures as the National Banking Act, the Homestead Act, higher tariffs, and lavish subsidies for rail construction. The Confederacy stood for slavery, a weak central government (except for enforcing slavery), and low tariffs; its constitution even forbade its congress from spending money on internal improvements or to promote manufacturing. Prominent among the reasons Lind gives for the Confederacy?s loss are the weakness of its central government and its lack of a manufacturing base; in short, the Confederacy was too Jeffersonian to be a viable opponent of the diversified Hamiltonian Union.

Although Lind attributes no small part of economic growth to enlightened government intervention such as infant-industry protection and state and federal investments in infrastructure, he devotes much space to private inventors and innovators. As in more academic economic histories, technological change is emphasized as the great driver of progress. Lind begins his sections on the Age of Steam, the Motor Age, and the Information Age with admiring surveys of the great inventors and inventions of those eras. Lind?s take on the private sector is similar to his take on the public sector: he likes big government and big business. (One chapter subsection is titled ?The Myth of the Robber Barons.?) Lind sees the rise of big business as primarily a matter of exploiting economies of scale, not of extracting monopoly rents from consumers, and takes a dim view of antitrust. In fact, Lind is generally pro-cartel, saying that cartels are good for stability and often for efficiency, such as when they share patents and technology. Lind notes that even Thomas Edison?s genius was subject to economies of scale: Edison?s great inventions were typically the product of various teams of engineers in research labs directed by Edison, with financing by the House of Morgan and the Vanderbilts. The turn-of-the-century merger movement and J.P. Morgan?s condemnation of ?ruinous competition? get praise; William Jennings Bryan?s and Louis Brandeis?s attacks on monopolies do not. In the twentieth century chapters, Lind decries the stepped-up antitrust enforcement that began in Franklin D. Roosevelt?s second term and which the Truman administration rejoined after the war as counterproductive and wasteful. He decries the Cellar-Kefauver Act of 1950, which decreed that horizontal mergers would invite antitrust prosecution, as giving rise to inefficient corporate conglomerates that produced scores of unrelated products and which would be fat targets for corporate raiders several decades later.

Lind?s fondness for cartels and government involvement may explain his positive view of the National Recovery Administration ?codes of fair competition.? Lind says the claim that they ?retarded recovery by imposing minimum wages is not taken seriously, except by those whom Hoover derided as ?die-hard liquidationists.?? But whether it was through a spike in real wages or through the monopolistic raising of prices and restriction of output, literally every academic economic history I have read of the First New Deal says the NRA retarded recovery. And it bears mentioning that it was also a failure as a public-private partnership; business, both large and small, went from cautious acceptance of the NRA to outright hostility. By the time it was declared unconstitutional by the Supreme Court in 1935, it had virtually no allies. Lind notes that Keynes said that the NRA had worthy goals of reform but ?probably impedes recovery.? Keynes actually went further and said that while ending deflation was important, ?there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output,? i.e., as the result of a deliberate restriction of supply. ?Some debtors may be helped, but the national recovery as a whole will be retarded.?

(On a side note, Lind says that NIRA, for National Industrial Recovery Administration, was changed to NRA by Administrator Hugh S. Johnson after a Business Week article ridiculed NIRA as ?Neera My God to Thee.? The book has many little gems like that one.)

Public-private partnerships seem to get Lind most excited. The book begins with Hamilton?s Society of Establishing Useful Manufactures (SUM), which, far from being just another part of his neglected Report on Manufactures in 1791, became an industrial corporation in Paterson, New Jersey the same year and helped Paterson become a thriving and diversified factory town. Among other highlights, the SUM hired Edison to design an early hydroelectric power plant and Paterson became the site of the Wright Brothers? aeronautical company. The SUM lasted until 1945. Lind waxes eloquent about the Morrill land-grant universities and the agricultural innovation they spawned. And for all his praise of corporate R&D, he says, ?Even more important in the long run was the contribution of the federal government to innovation,? including the National Science Foundation, the National Institutes of Health, and defense-related research contracts that led to early computers and the Internet. One of the heroes of this book is Vannevar Bush, a relatively obscure engineer who directed the government?s Office of Scientific Research and Development and helped establish the National Science Foundation. Lind devotes an entire chapter to Bush, who epitomized the type of ?creative collaboration among government, the academy, and industry from which most transformative innovations in recent generations have emerged.? Bush was involved with the development of countless technologies from the atomic bomb to the jet engine to the personal computer. In addition to being a great administrator and inventor, Bush was a visionary with ideas ? say, for a computer-based networked library with a sophisticated search engine ? that were sufficiently specific to be a basic blueprint for later engineers who would bring those concepts to life.

A chapter on ?The Glorious Thirty Years? of post-World War Two prosperity leans heavily on John Kenneth Galbraith?s concept of ?countervailing power?: big business was oligopolistic and productive through economies of scale and scope; big labor helped make sure that those productivity gains translated into higher living standards; big government expanded the social safety net and the national infrastructure, notably through the interstate highway system. Lind sees a positive legacy for the short-lived NRA in the numerous government-sponsored cartels in such industries as airlines, trucking, and oil. These cartels, as well as established oligopolies in industries like automobiles and steel, helped stabilize the economy and avoid ruinous competition, Lind argues. In the financial sector, New Deal regulations like the Glass-Steagall Act made banking boring and the economy more stable.

As for what ended those glorious postwar decades, Lind recognizes that the 1970s productivity slowdown was worldwide but sees aggregate-demand factors at work too, principally in American trade flows and policy. As Germany, Japan, and other countries rebuilt their war-damaged capacity, it was inevitable that America?s trade surpluses would shrink. Lind says that the tide of imports was larger still due to Cold War policies designed to keep those countries out of the Soviet orbit by offering them one-way trade concessions. He further claims that the Japanese economic miracle of the 1960s?1980s would not have occurred without those concessions. As the economy weakened in the mid-1970s under the combined forces of the productivity slowdown and the OPEC oil shocks, the public rapidly lost faith in big business, big labor, and big government. ?The Great Dismantling? came with the deregulatory programs of Presidents Jimmy Carter and Ronald Reagan. While Lind acknowledges that deregulation may have made sense in the telephone industry and some others, he says deregulation was misguided in general and a disaster in airlines, electrical utilities, and finance. Carter was ?The First Neoliberal President? for his deregulation and his appointment of Paul Volcker to the Federal Reserve. Volcker?s shock therapy ended the high inflation of the 1970s but coincided with a 40 percent rise in the value of the dollar and accelerated deindustrialization. Lind quotes an oil executive at the time who said Volcker and Reagan (who reappointed Volcker) have ?done more to dismantle American industry than any other group in history.? Lind has surprisingly little on Reagan, perhaps because he wants to emphasize that Carter moved the country in a ?neoliberal? direction first. Yet Reagan was a more active dismantler ? for example, breaking up the air-traffic controllers union, consistently opposing an increase in the minimum wage, cutting anti-poverty programs, and calling for less government in general. Elsewhere Lind mentions Reagan as an example of inappropriate policy leadership in the Jefferson-Jackson tradition, but he offers few specifics. Which is unfortunate; whatever one?s politics, one has to admit that Reagan was one of the most consequential politicians of the postwar era, and his administration is arguably a bigger part of the story than we get here.

Regarding the crack-up of the economy in the late 2000s, Lind, like many analysts, traces it to the ?financial-market capitalism? that emerged in the wake of financial deregulation, an unbalanced ?bubble economy,? and over-securitization of mortgages. He contrasts today?s financial-market capitalism with the finance capitalism of J.P. Morgan?s time, arguing that Morgan, unlike today?s institutional investors, took a long-term ?buy and hold? view that was more keyed to fundamentals and stability. He adds that the growing wealth and income gap adds to the instability by weakening aggregate demand; the severe debt overhang and prolonged deleveraging among America?s middle class today would seem to support that view.

He concludes the book with a policy manifesto that he calls the Next American System, in homage to Clay?s American System. Lind?s system includes more government-funded R&D and infrastructure, industrial policy that promotes American manufacturing, and public-private partnerships like R&D banks to subsidize private innovation. In the financial sector Lind would bring back Glass-Steagall?s separation of commercial banking from the securities industry and impose a modest ?Tobin tax? on financial transactions to discourage speculation and raise revenue. Concerned with the failure of the post-1973 economy to distribute its gains to all income levels, Lind offers several possible ideas to raise lower and middle incomes, from an expanded earned-income tax credit to increased public employment to restrictions on unskilled labor immigration. (Like the economist George Borjas, he favors a point system for immigration that gives preference to skilled workers.) He also advocates ?universal social insurance,? financed out of current taxation, to replace dwindling employer-provided benefits.

As noted before, Lind?s book is intended for a lay audience, not an academic audience. Economic historians will find much to criticize here, most likely the general defense of protectionism and cartels, but the book is worth reading by anyone in search of provocative arguments and colorful details.

Ranjit S. Dighe is Professor of Economics at the State University of New York at Oswego. Email: His current research subjects include the economic conservatism of former New York Governor Alfred E. Smith.

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2012). All EH.Net reviews are archived at

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Creative Society ? and the Price Americans Paid for It

Author(s):Galambos, Louis
Reviewer(s):Rahman, Ahmed S.

Published by EH.Net (July 2012)

Louis Galambos, The Creative Society ? and the Price Americans Paid for It. New York: Cambridge University Press, 2011. xiv + 322 pp. $28 (paperback), ISBN: 978-0-107-60099-7.

Reviewed for EH.Net by Ahmed S. Rahman, Department of Economics, United States Naval Academy.

Patterns in history suggest a cold truth ? global hegemonic and economic dominance never lasts. When relative decline comes, it inevitably invites questions of what went wrong, and the answers typically are of two possible flavors. The country changed too much and failed to stay true to its core strengths, or the country did not change enough and failed to adequately adapt. These days we wonder if are witnessing the downward plunge of another such wave, and in its wake comes a surge of studies outlining the sources of, and threats to, American exceptionalism. These form part of a larger narrative on the rise and potential eclipse of the West. By understanding the roots of Western success, we might judge whether we have strayed too far or hewed too close to them.

With The Creative Society, Louis Galambos has developed an ambitious work that uncovers a crucial root from which springs much of America?s strength and durability ? its class of professional workers. It is a comprehensive group that includes lawyers, doctors, scientists, teachers, administrators, business managers, policy specialists, and urban planners. Galambos, a professional himself and startlingly a character in his own tale, has spent his distinguished career studying institutional developments in America. Here he taps into that wealth of knowledge to discuss how these groups of creative Americans interacted with different ideas and institutions, covering (for the most part chronologically) the period from the 1890s up to the present day.

A work mainly about twentieth century America can cover many themes, and this book seems intent on discussing them all.? Race, gender, immigration, politics, national defense, trade, urbanization, corporate downsizing, income inequality ? virtually no potential topic is left off the table. The reader would be unhinged from such a maelstrom of subjects (all compressed in roughly 300 pages) were it not for the common thread tying it all together ? America?s educational system and the entrepreneurial and inventive people who were shaped by it.

There is much here that both economists and historians should enjoy. A critical question hovering over this work is where the rise of professionalism sits in the causal chain of events leading to American growth. Did skill-intensive technological developments raise the need for specialized human capital, or did America?s unique educational system produce the cadre of professionals that in turn developed the innovations of the American Century?

Galambos seems to answer with the latter, and provides a series of compelling examples in support of this. Through their American education and experience, these professionals helped expand scientific knowledge, improve medical care, develop new urban and suburban centers, and revolutionize business. All is not sunshine and roses however ? this creative society also led America into costly and arguably unnecessary wars, fostered hubris and entrenched interests, and helped create huge gaps in inequality along lines of skill, gender and race. The stitching together of all these leitmotifs is the product of robust and eclectic research that challenges us to think of America in a new light.

Like American culture itself, Galambos?s narrative propels forward through stories of bold ascent by unlikely characters: the chemist of modest means who wins the Nobel Prize (Ernest Lawrence), the shiftless student who revolutionizes city planning (James Rouse), the mediocre engineer who becomes a prominent turnaround specialist (Al Dunlap), and yes, the historian struggling to make sense of the world becomes an eminent professor at Johns Hopkins University and writes this book (Louis Galambos). Trying to understand American economic and social history through its most successful professionals is bold and novel. Galambos is a skilled raconteur, and he weaves his tales with style and wit.

There is also much here that may drive some to distraction. The work suggests itself to be a new historical paradigm. I did not quite find it that exactly ? the narrative is a bit too loose and unfocused, with too many shaky and unsupported normative statements. The writing itself is an entertaining and curious mash-up of biography, auto-biography, and institutional and cultural history. The book whipsaws back and forth between close-up personal portraits of individual professionals, and panoramic landscapes of American society. The approach is often enlightening and sometimes disorienting.

If the goal was to produce a truly new perspective of American social history, the approach doesn?t entirely work. The biographies sketched out (including one for our current president) are of exceptional people, who by construction do not constitute a representative sample of the creative society. Inductive analysis that mainly observes society?s winners can get one only so far in understanding the macro forces that shaped society as a whole. Moreover, it tends to undermine the purported importance of America?s education system. The characters portrayed make for compelling reading, but often they come at the expense of the system they are supposed to illuminate. The more impressive the set of characters appear to be, the more it appears that the rise of America was an accident of fortune, the mere product of having the right people in the right places at the right times.?
I also would have welcomed more comparative analysis, using the systems and institutions of other nations to form a backdrop by which to contrast America?s.? How did America?s educational and business systems compare to those from which they originated? The book makes clear that America?s strengths spring from its connections between education and enterprise, but how precisely, and how these differ from other nations, remains underexplored.

The tale ends with a number of contemporary challenges well known to most. Given the slew of problems constantly offered by the chattering class (conceivably a subset of Galambos?s professional class), I appreciated the author?s hopeful message that our rich endowment of creative workers will help us through our challenges. The book offers neither grandiose theories nor explicit solutions. What it does provide is a new and valuable appreciation of how professionals have shaped our history and culture, and the abiding sense that they will save us once again.

Ahmed Rahman is an Assistant Professor at the U.S. Naval Academy. He is the author (with Darrell Glaser) of ?Human Capital and Technological Transition: Insights from the U.S. Navy? (Journal of Economic History, September 2011). Email:

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2012). All EH.Net reviews are archived at

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

Creative Reconstructions: Multilateralism and European Varieties of Capitalism after 1950

Author(s):Fioretos, Orfeo
Reviewer(s):Coates, David

Published by EH.Net (January 2012)

Orfeo Fioretos, Creative Reconstructions: Multilateralism and European Varieties of Capitalism after 1950. Ithaca, NY: Cornell University Press, 2011. xix + 245 pp. $50 (hardcover), ISBN: 978-0-8014-4969-7.

Reviewed for EH.Net by David Coates, Department of Political Science, Wake Forest University.

There is now a long established interest in the character and economic fortunes of different models of capitalism. Important debates continue about their internal dynamics of change. Do modern economies flourish to the degree to which we find ?institutional complementaries? within them, as in the original ?varieties of capitalism? (VOC) formulation by Hall and Soskice; or do we need to bring something ?back in? to supplement or replace the incipient ?institutional determinism? of that approach? Do we need to make the ?constructivist? turn favored by Vivien Schmidt and others, or do we need to make the ?class? turn favored by analysts influenced by an on-going stream of Marxist scholarship? If the argument of this impressively researched and coherently argued work by Orfeo Fioretos holds, the intellectual turn we need to take is towards behavioral economics and the concerns of international political economy, by recognizing the role multilateral strategies play (and have played in the immediate past) in shaping the trajectory of particular European capitalisms and the incentive structures operating on their key firms. We need to bring ?the state? back in to our analyses, but to do so in a new and important way.

Covering the years from 1950 to the financial crisis of 2008, this volume explores and explains the interplay of multilateral engagements and internal reform agendas in three major European economies: Britain, Germany and France. Its author asks the standard VOC questions: ?why are some national economic models sustainable over time while others disintegrate??? ?What explains the fact that some countries are able to transform their economic institutions successfully while others fail?? But he declines to answer them by dropping back into the standard VOC framework of liberal and coordinated market economies deploying different internal strongly embedded patterns of industrial organization, finance and governance. Instead, drawing on Joseph Schumpeter?s characterization of capitalism?s core propensity of creative destruction, he characterizes post-war Western Europe as an area (and a time) of ?relentless institutional innovation? (p.2) in order to emphasize a common experience of institutional experimentation and change. He charts the different trajectories of change in his three chosen economies, and uses that chart to deny any simple process of convergence. He sees a shared ?movement towards liberal policies,? but also a more limited and differentiated adoption of ?the panoply of institutions that are associated with the liberal market economy? (p.4). Breaking from the tendency of many comparative political economy scholars to deploy only binary distinctions to describe and measure change, Orfeo Fioretos develops four. For him, ?economic systems are characterized by patterns of consolidation, specialization, systemic transformation, or by patterns of recombination that lead to hybrid systems of governance ? In getting to those, we are told, ?multilateralism matters? (p. 8), precisely because, taken overall, ?the structural and institutional transformations that characterized Europe?s largest economies were not a product of domestic histories and designs alone. They were integrally linked to a history of international cooperation and an expanding set of multilateral institutions? (p. 172, emphasis added).
In a book of this quality, the strengths are so many that listing them all would take considerably more space than I have available here. So let me simply single out three.

One is the quality of the case studies themselves. If students are in need of concise but insightful characterizations of government-business relations and post-war modernization strategies in three leading European economies, they will find it here. French scholars, in particular, must appreciate a work that centers France, and not just Germany and the UK, as models of capitalism in need of consideration. As someone who has long worked on post-war UK political economy, I found the UK chapter one of the strongest I have recently read on all three of the UK?s dominant post-war political projects ? insightful precisely because it combines the standard explorations of internal barriers to growth with a sustained consideration of the impact on business incentives of changing UK government involvement in/attitudes to the emerging European Union.

The second is this. The general value of the case studies deployed here is established by Fioretos? willingness to engage directly with schools of scholarship within the new institutionalism. Here you will find a powerful critique of both historical and rational choice institutionalism, and a willingness to expand their analytical lens by bringing each into a working relationship with insights and agendas situated elsewhere in social science: insights from behavioral economics and agendas from international political economy. The result, ?a modified historical institutionalism informed by behavioral economics? (p. 14), retains the firm-centric focus of the original VOC formulations, but uses this behavioral institutionalist approach to explore how the interplay of different national and multilateral designs affects firms? support for different national reform strategies. The methodological conversations developed in this volume deserve study quite separate from the case studies they inform.

The third is the value of the volume?s central thesis. Multilateralism has mattered in the development of national capitalisms. The relationship between economies, and not just their internal configuration of forces, affects their trajectory. There is no institutional determinism here. Politics and policies matter; and that includes politics and policies directed at other economies. Trajectories are lubricated and constrained from outside as well as from within. What goes on abroad shapes what goes on at home, and that shaping often feeds back into levels of support abroad for original trajectories of reform. Systems of governance in national economies are in that sense open rather than closed, and need to be studied as such.

Do I think that this volume, splendid as it is, completes all that we need to know? No, I do not. There is still a voluntarism in the analysis here, and a willingness to stay firmly on the level of institutions and political actors: an agency focus that, from a Marxist perspective at least, gives insufficient weight to class contradictions within national economies and to the impact on each economy of the place occupied in a globalized system of combined and uneven development. But in a field as complex and important as the one concerned with capitalist diversity, there is always legitimate disagreement about how wide explanatory nets need to be spread, and how deep analysis needs to go for completeness. In that on-going conversation on width and depth, this volume establishes Orfeo Fioretos as an important voice. We all benefit from scholarship and insights of this quality.

David Coates holds the Worrell Char in Anglo-American Studies at Wake Forest University in North Carolina. His most recent book is Making the Progressive Case: Towards a Stronger U.S. Economy, details of which are at

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (January 2012). All EH.Net reviews are archived at

Subject(s):Economic Planning and Policy
Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Economic Evolution and Revolution in Historical Time

Author(s):Rhode, Paul W.
Rosenbloom, Joshua L.
Weiman, David F.
Reviewer(s):Moehling, Carolyn M.

Published by EH.Net (January 2012)

Paul W. Rhode, Joshua L. Rosenbloom, and David F. Weiman, editors, Economic Evolution and Revolution in Historical Time. Stanford, CA: Stanford University Press, 2011. xx + 461 pp. $60 (hardcover), ISBN: 978-0-8047-7185-6.

Carolyn M. Moehling, Department of Economics, Rutgers University.

A recent review in this series described festschrifts as ?an honored tradition? but ?also a somewhat antiquated and awkward form of scholarly communication.?? That awkwardness has been increasing in recent years.? More and more young scholars are being told that book chapters will receive little, if any, weight in tenure reviews, and many citation indices ? which are fast-becoming the ?summary statistics? of scholarly productivity ? ignore such contributions.? Given these trends, it is becoming more and more difficult to produce a collective volume that is relevant for current scholarship.? However, in the volume under review, Paul Rhode, Joshua Rosenbloom and David Weiman have proved that this can be done.? They do start with a tremendous advantage in that the scholar they honor, Gavin Wright, is one of the true greats in our profession.? Wright?s research is remarkable for both its scope and its diversity of method, and the editors have put together a volume that shares these qualities.? Several of the chapters are review essays which take a particular area of Wright?s research and place it in the context of the broader economic and historical literature.? These essays are more than just genuflections on the work of a beloved scholar and teacher; they discuss the challenges to Wright?s conclusions posed by other scholars and propose directions for future research.? Other chapters report the results of new or on-going research projects, many of which were inspired by Wright?s work.? For the most part, these essays make substantive and provocative contributions to the literature.? The editors achieve this feat by soliciting papers from well-established scholars who are no longer tormented by the ticking of the tenure clock.? The end result is a hefty volume of 17 chapters and over 400 pages.

Given space constraints, this review cannot adequately discuss the merits of each of the essays included in the volume.? The goal, instead, is to provide an overall sense of the volume by highlighting some of the more notable contributions.? Strong entries in the review essay category are the chapters by Karen Clay, Robert Fleck, and Joshua Rosenbloom and William Sundstrom.? Clay reviews Wright?s work on the role of natural resources on the development of the U.S. economy.? In a seminal paper published in the American Economic Review in 1990, Wright challenged conventional wisdom by claiming that the success of American manufacturing before 1940 was due to its intensive use of natural resources.? He went further to argue that this natural resource abundance was due less to the size of America’s geological endowment than to the ability to exploit that endowment.? Clay discusses the factors that led to this successful exploitation: federal and state geological surveys, the development of American mining and engineering colleges, and incentives for private agents to search for and extract natural resources.? Clay draws upon her own research with Wright on the Gold Rush to argue that these incentives existed even when the government could not effectively guarantee property rights.? Mining communities, building on cultural conceptions of fairness, created private-order institutions to secure such rights.? Clay then turns to the $64,000 question: why didn’t the U.S. suffer from the “resource curse?”? Clay believes that it was the strength of American political institutions and the high transportation costs of the period that made natural resources facilitate rather than hinder growth.? She then proposes a framework for future research to test this hypothesis.

Fleck situates Wright’s research on the New Deal and the transformation of the Southern economy in the broader political economy literature.? He provides a nice overview of the empirical studies of the politics of New Deal spending and re-interprets the findings to emphasize their more general implications for the interplay between policy and institutions.? Fleck goes on to connect this work to the very recent research on the role of institutions and economic development.? He focuses, in particular, on theoretical models of the extension of voting rights and how these models draw upon and complement Wright’s much earlier work on the South.

Rosenbloom and Sundstrom take on an even more ambitious agenda: using Wright’s concept of institutional regimes to provide a history of American labor markets from the colonial period to the present.? In this framework, political and economic institutions evolve to be complementary and mutually reinforcing, hence making them stable over long periods of time.? Only a shock or crisis precipitates change and then change can happen rapidly, as it did in Southern labor markets in response to the Civil War and then again in the mid-twentieth century.? The overarching theme of Rosenbloom and Sundstrom’s narrative is that changes in labor market outcomes cannot be interpreted simply in terms of shifts of supply and demand.? Instead, they must be examined in the context of the prevailing labor market institutions and how those institutions change and evolve over time.

Frank Levy and Peter Temin follow up on the theme of institutional regimes in their study of trends in income inequality in the second half of the twentieth century.? They argue that the declining position of the average worker reflects more than just the effects of globalization and skill-biased technological change.? They place the blame instead on the political and economic changes in the late 1970s and early 1980s that led to the erosion of organized labor’s bargaining power.? The institutional regime changed in a way that disadvantaged the average worker.

Leonard Carlson’s chapter also focuses on how outcomes are shaped by institutions.? Carlson contrasts the experiences of the aboriginal peoples of North America and Australia.? As he notes, there are many parallels in the settlement and development of these two areas.? Yet, they dealt very differently with their native populations.? In Australia, settlers developed a new legal concept, “terra nullius,” which asserted that the land belonged to no one prior to the arrival of the English in 1788.? In North America, native peoples were viewed as having “aboriginal rights” to the lands they occupied.? The result was that in North America, settlers had to negotiate land sales or treaties with natives in order to claim the land whereas in Australia, they did not.? Carlson presents a compelling case that the differences in these initial institutions can help to explain the very different experiences of these two native populations all the way up to the present.

Alan Olmstead and Paul Rhode return to the question of the productivity of slave agriculture.? Building on their previously published work, they argue that the expansion of cotton production into the New South and the increased labor productivity in cotton that generated, relied heavily on the continuing biological innovations in cotton varieties.? A nice feature of this essay is that Olmstead and Rhode provide a re-evaluation of the economics of slavery literature based on their new findings.?

Richard Sutch contributes a provocative essay linking the minimum wage to increases in education.? He argues that the minimum wage binds in the youth labor market.? Decreasing labor market opportunities for young workers could create what Sutch calls an educational cascade whereby teenagers stay in school longer both because of peer effects and the declining opportunity of schooling.? Using data from the Current Population Surveys and the decennial censuses, Sutch shows that birth cohorts which were in high school during periods in which the minimum wage was being increased, have higher than expected average years of schooling.? He proposes, therefore, that raising the minimum wage may be a way to lower high school dropout rates.

Stacey Jones offers an intriguing alternative explanation for the dramatic changes in women’s occupational choices starting in the 1960s: the declining demand for teachers.? The demographic changes in the 1960s led to a drop in the number of school children at the same time that the number of college-educated women was growing by leaps and bounds.? Educated women needed to find occupations outside of teaching, and as more and more of them did, they changed societal expectations about what was appropriate work for women.? Jones’ argument nicely complements the many recent studies that examine the effects of contraceptive technology on women’s career and educational choices.

The remaining chapters are remarkable for the variety of scope, data, and method.? George Grantham explores the history of science in Europe between 1650 and 1850.? Warren Whatley and Rob Gillezeau develop a theoretical model to consider how the effective demand for slaves in the New World affected the development of African economies.? Ta-Chen Wang compares the textile industries in Boston and Philadelphia in the early 1800s to examine how differences in state banking systems affected industrial development.? Jeremy Atack, Michael Haines, and Robert Margo present preliminary results from their large-scale research project on the impact of railroads on economic development.? Scott Redenius and David Weiman seek to explain the seasonality in financial markets in the South after the Civil War and then to examine its impact on the National Banking System.? Susan Wolcott studies rural credit markets in colonial India.? Susan Carter links the rise of Chinese restaurants in the U.S. to the Chinese Exclusion Act.

Finally, this volume contains a bonus chapter.? Wright himself provides an essay reflecting on the tradition of economic history research at Stanford.? This essay provides a rare glimpse at how a scholar and teacher evaluates his own body of work and those of his students and colleagues.

Carolyn M. Moehling is an Associate Professor of Economics at Rutgers University.? She is the author of ?The Political Economy of Saving Mothers and Babies: The Politics of State Participation in the Sheppard-Towner Program? (with Melissa A. Thomasson), Journal of Economic History (forthcoming).

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (January 2012). All EH.Net reviews are archived at

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Servitude and Slavery
Industry: Manufacturing and Construction
Labor and Employment History
Markets and Institutions
Geographic Area(s):Africa
Australia/New Zealand, incl. Pacific Islands
North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control

Author(s):Rutherford, Malcolm
Reviewer(s):Van Horn, Robert
McIntyre, Richard

Published by EH.NET (September 2011)

Malcolm Rutherford, The Institutionalist Movement in American Economics, 1918-1947: Science and Social Control. New York: Cambridge University Press, 2011. xii + 410 pp. $95 (hardcover), ISBN: 978-1-107-00699-7.

Reviewed for EH.NET by Robert Van Horn, Department of Economics, University of Rhode Island, and Richard McIntyre, Honors Program and Department of Economics, University of Rhode Island.

Malcolm Rutherford has written a superb book.? Not only is it well written, but it also makes a number of path-breaking contributions to the history of economics that are based on meticulous archival work.? The number of archives Rutherford delved into is astounding, and his archival work provides a solid base of support for an account that departs from much of the previous wisdom about the institutionalists.

Rutherford provides a detailed picture of the importance of institutionalism in American economics from 1918 to 1947, principally focusing on the interwar years.? 1918 marks the year of Walter Hamilton?s original institutionalist manifesto, and 1947 is when major universities resumed hiring academic economists following World War II and manifestly hired legions of non-institutionalist economists.? This is also the year of the Cowles Commission?s salvo on the National Bureau of Economic Research (NBER), and the publication of Paul Samuelson?s Foundations of Economic Analysis.? Although Rutherford?s title suggests that he confines his analysis to the period 1918-1947, his work focuses on the factors leading to the development of institutional economics, stretching as far back as the 1880s.? Moreover, he chronicles the changing development of institutionalism in the post-World War II period.

Rutherford demonstrates that institutional economics should be understood as a ?movement? that shared core ideas and beliefs and as a network of people with a self-conscious unity, and Rutherford marvelously shows how the self-conscious unity of this network shaped institutionalist economics and American economics more generally in the first half of the twentieth century.? By doing so, Rutherford betters the previous standard references on the history of institutionalist thought.? For example, Yuval Yonay, in The Struggle over the Soul of Economics, promised a network analysis of institutional thought, but did not deliver one. Rutherford does, and we now have a more complete picture of the internal dynamics of the institutional movement.? Rutherford also demonstrates that Joseph Dorfman?s claim that Veblen, Mitchell and Commons were the founders of institutionalism was a post-hoc reconstruction, and certainly not how institutionalists understood their own movement in its heyday.

Rutherford?s book has four parts.? Part one provides an introduction to the institutionalist movement.? Here Rutherford debunks a number of standard contentions about the history of institutional economics.?? First, he challenges the notion that institutional economics was only a critique of neoclassical economics and that institutional economics disappeared because it did not make any substantial contributions to economics.? Second, Rutherford successfully assails the idea that institutional economics was just a set of facts and bereft of theory.? Third, Rutherford dispels the notion that institutional economics was Veblenian; he shows that Veblen was an intellectual inspiration to the movement but not central to the networking process.? Part two explores the role of two oft-overlooked institutionalists, Walter Hamilton and Morris A. Copeland, thereby elevating two figures often ignored in the history of institutional economics.??? Rutherford argues that even though Hamilton favored qualitative and Copeland quantitative research methods, they shared ?the same set of overall ideals? and ?their careers interlace? (p. 349).? Part three examines the different centers of institutional economics in the interwar years.? Rutherford especially focuses on the University of Chicago, Amherst, the Brookings Graduate School, Wisconsin, Columbia, and NBER and explores the interconnectedness of these research centers.? Part four explores the challenges and changes to institutional economics after its interwar heyday as well as the reasons for its decline.? Rutherford?s exploration includes: the rise of Keynesian economics, the failures within key institutionalist research programs, the loss of interdisciplinary connections, the new concepts of ?scientific? work in economics, and the development of econometrics.

Like any good book, Rutherford?s book raises questions for further research.? First, Rutherford suggests that Chicago was one of the earliest stomping grounds for fledgling institutionalists — he points out the spate of hiring in the 1900s and 1910s that resulted in a number of institutionalists migrating to Chicago, including Thorstein Veblen, Robert Hoxie, Walter Hamilton, John M. Clark, and Harold Moulton.? Even though Rutherford points out that many of the key players vital for institutional economics were at Chicago together prior to 1918, he does not offer an explanation of why they left Chicago before the institutionalist movement coalesced and why the institutionalist movement did not emerge earlier due to the concentration of institutionalists at Chicago.? Moreover, he does not explain why Chicago hired relatively neoclassical economists to replace the institutionalists who left (or committed suicide in Hoxie?s case).? Second, although Rutherford provides a good summary of the factors that led to the decline of institutional economics, his analysis feels incomplete.? It would be useful to know more about the relative importance of these factors, and it would probably be useful to contrast institutional economics with other movements in economics that became successful.? Perhaps another reason for the decline of institutionalism is that it lacked a good synthesizer a la Alfred Marshall or Paul Samuelson. Because institutionalism was a movement (as opposed to a school of thought), such a synthesis may not have been possible, but this question deserves further exploration in our view.

With an unprecedented balanced engagement of archival and secondary sources, Rutherford provides the definitive history of institutional economics from 1918 to 1947.? It will be many years before anyone can provide a more compelling history of institutional economics than Rutherford has.?? Bravo.

Robert Van Horn is co-editor of Building Chicago Economics (Cambridge University Press, forthcoming 2011) and has recently published articles in History of Political Economy and Journal of the History of the Behavioral Sciences.

Richard McIntyre is the author of Are Worker Rights Human Rights? (University of Michigan Press, 2008).

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (September 2011). All EH.Net reviews are archived at

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