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The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure

Author(s):Boserup, Ester
Reviewer(s):Federico, Giovanni

Project 2001: Significant Works in Economic History

Ester Boserup, The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure. London, G. Allen and Unwin, 1965; Chicago: Aldine, 1965. 124 pp.

Review Essay by Giovanni Federico, Department of Modern History, University of Pisa.

Population, Agricultural Growth and Institutions: The Real Long-Run View

This may be an unusual review for the series. In fact, Ester Boserup was not a professional economic historian and this is not properly speaking a work of history. Boserup was part of the staff at the United Nations and she wrote the book out of her experience as a consultant in developing countries. The book does not discuss in depth any specific historical event, and quotations of historical works are rather rare. It nevertheless is one of the most widely quoted works in economic history. Usually, it is labeled as “anti-Malthusian” and encapsulated with a sentence such as “population growth causes agricultural growth.” This is undoubtedly an implication of her model and comes in handy to scholars who do not believe that the (human) carrying capacity of a given area is set, and cannot be exceeded. From this point of view, one can draw a parallel between The Conditions of Agricultural Growth and another highly influential book, Amartya Sen’s Poverty and Famines: An Essay on Entitlement and Deprivation (Oxford 1981), which dismantled another tenet of Malthusian theory — i.e. that famines were always (or mainly) caused by absolute deficiency of food.

However, Boserup’s book is much more than a simple rejection of Malthus. It aims at explaining all the characteristics of agriculture in any specific area and time according to the resource endowment — the land/labor ratio. The more dense population is, the more intensive cultivation becomes. Agrarian economists in the 1950s focused on the Western world, and thus they could appreciate only a relatively narrow range of techniques. Looking at less developed countries, Boserup could list five different agricultural systems, according to the length of fallow between periods of cultivation (pp.15-16): 1) forest-fallow or slash and burn (15-20 years of fallow), 2) bush-fallow (6-10 years); 3) short-fallow (1-2 years); 4) annual cropping (a few months); 5) multi-cropping (no fallow). Even if the original evidence comes from the observation of primitive societies in the 1940s, the leap from changes in space to changes in time is short. Thus the rest of the book explores the consequences of intensification — i.e. of the move from one stage to another caused by population growth. Each of them entails more labor per unit of (total) land, and thus the intensification increases the productivity of land and reduces that of labor. A household has to work more to keep the same level of income. The intensification brings about an improvement in tools (from the digging stick, to the hoe, to the plough) and in the long run also brings some investments in land improvement (e.g. irrigation schemes). With pre-industrial technology, land improvements had to be done manually by peasants. Thus, they are typical of the last stages of the process, when there is enough work-force and enough demand for food to justify them. Total factor productivity may increase in the long run, but surely most of the increase in total output is achieved with a massive growth of work effort by the agricultural population. Finally, the intensification also shapes institutions, and this is the most innovative aspect of Boserup’s model. The forest-fallow system is inconsistent with household property of any given plot of land. The land belongs to (or more precisely is exploited by) the tribe as a whole. Property rights have to be created only when the cultivation cycle is shorter, and the quality of each single piece of land begins to matter. In the later stages of development some people could cease to work, and be entitled to rights to a part of the product (a “two-tier” society). However, Boserup is not nostalgic about primitive societies. She makes it crystal clear that the “two-tier” societies are better, even if in these latter some men did not work as hard as others.

Some years later, Boserup extended her model from agriculture to the whole of society (Population and Technological Change: A Study of Long-term Trends, Chicago, 1981). She added the concept of economies of scale. Many technologies can be properly exploited only if the population is dense enough. Population growth makes urban civilization possible. The second book is highly interesting, and has many insightful passages. Yet it fails to reach the simple elegance of The Conditions of Agricultural Growth — that quality which makes this book really deserving of being added to this list of masterpieces.

Of course, one could quibble endlessly about the “details” of Boserup’s model such the number and the exact features of the “stages.” The overall view provides a short, but powerful, history of the world, from prehistory to the nineteenth century arranged around one of the basic principles of economic theory — that techniques (and much else) depend on resource endowments. As you would expect from a seminal work, The Conditions of Agricultural Growth launched and refocused many modern debates. Let me give two examples. When Boserup was writing, the British agricultural revolution (i.e. the change in rotations with the substitution of fodder crops for fallow) was considered an epochal change with far-reaching implications for the entirety of world history. This view is still diffused, if no longer dominant. In Boserup’s model, the change is only part of the long-run process of world-wide intensification, and Europe was trailing behind the two other major civilizations, India and China. In fact, the most advanced areas of Europe reached Stage 4 while China was already at Stage 5. Another, and perhaps less obvious, example may be Greg Clark’s thesis on the differences in work intensity between Eastern Europe and the West (including the US). He argues that in the early nineteenth century Eastern Europeans were less productive than Westerners, because they worked less hard, and that they worked less hard because “they were different” (Clark, “Productivity Growth without Technical Change in European Agriculture before 1850,” Journal of Economic History, Vol. 47, 1987, p. 431). The thesis is very controversial (see the subsequent debate with John Komlos in the Journal of Economic History, in 1988 and 1989), but let’s assume it is true. Is it not possible that the “different” work ethic had been shaped over the centuries by different land/labor ratios? Other examples could follow, but the main point is clear: Boserup’s book is a treasure-trove of ideas. Unfortunately, it is more often quoted than used in actual research. As far as I know, there are very few really “Boserupian” works — i.e., long-term analyses of agricultural change as driven by changes in factor endowments. The most ambitious is Kang Chao’s book on Man and Land in Chinese Economic History: An Economic Analysis (Stanford 1986).

Why this (relative) neglect in spite of the so frequent quotations? One can put forward three causes, which are not mutually exclusive. The first is academic specialization. Intensification lasted for centuries, even for millennia, and few scholars would feel at ease in discussing both pre-historical agriculture and nineteenth century techniques. This fate is common to all interpretations of long-term change (cf. J. L. Anderson, Explaining Long-term Economic Change, Basingstoke, 1991). Second, the evidence on early-stage societies is very scarce, and by its nature it is often unfamiliar to historians. “Real” historical sources exist for Western Europe, China and India in the last three stages.

Last, but not least, the model has its own weaknesses. It is surely convincing as an account of long-term growth. It is less convincing as an explanation of short-term trends, and in this case the “short” term can last for decades. Boserup speaks as if all the techniques were known since the beginning, so that the population had only to choose the one best suited to its resource endowment and adjust its institutions if necessary. On the contrary, new techniques had to be learned, and sometimes discovered or re-discovered. In backward economies, information travels very slowly or not at all, and thus a people may not know that another one, maybe hundreds or thousands of miles away, has successful managed to overcome a specific problem. And, even if it gets to know the right technique, plant, or implement, the population still may need time and effort to master it and to adapt it to its own environment. Thus a success in the long run may conceal several short-term crises. Outright failure cannot be ruled out entirely.

Second, Boserup assumes that population growth is exogenous, following a standard practice among economists in pre-Beckerian time. Today, however, most consider population growth to be endogenous, and largely affected by economic calculations. People could reduce population increase by delaying marriages, controlling births, migrating and the like. Slower population growth would, ceteris paribus, reduce the drive to agricultural intensification. This is, of course, an empirical issue.

Finally, Boserup seems to neglect the different nature of modern technology or, if you want, the new role of capital. Her world is a two-factor world — labor and land. As said, capital does exist either as simple tools or as labor-intensive investment projects — but not as labor-saving machinery and above all land-saving fertilizers. In her world, intensification is possible up to a point, but sooner or later it has to reach a limit. It is unclear whether in real history this limit had ever been reached, even if China in the eighteenth and nineteenth centuries may be a good candidate. Aside from China, even in, say, 1800 there was a lot of “free” land on the Earth and thus a “Malthusian” crisis was still far away for the world as a whole. But sooner or later, a limit had to be reached, and further population increase beyond it was bound to cause a Malthusian crisis (even if smart people may prevent it with birth control). As everyone knows, the solution was technical progress, which has increased the productivity of both land and labor. (One wonders whether there are ecological or maybe ethical limits to technical progress). Boserup should have added a Stage 6 to her intensification model. Of course, she was very well aware of the technical progress, but she did not. One may speculate that she was more interested in less developed countries than in advanced countries, or simply she did not want to add a stage which could not fit easily in a model based on the length of fallow.

It is too easy to criticize ex post with the hindsight of decades of research. In spite of all its shortcomings, The Conditions of Agricultural Growth remains a small masterpiece which economic historians should read — and not simply quote.

Giovanni Federico is the author of An Economic History of the Silk Industry, 1830-1930 (Cambridge University Press, 1997) and (with Jon Cohen) The Economic Development of Italy, 1820-1930 (Cambridge University Press, forthcoming for the Economic History Society).

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Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Cambridge Economic History of the United States, Volume III: The Twentieth Century

Author(s):Engerman, Stanley L.
Gallman, Robert E.
Reviewer(s):Libecap, Gary

Published by EH.NET (March 2001)

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Stanley L. Engerman and Robert E. Gallman, editors, The Cambridge Economic History of the United States, Volume III: The Twentieth Century. New York: Cambridge University Press, 2000. vii + 1190 pp. $99.95 (cloth), ISBN: 0-521-55308-3.

Reviewed for EH.NET by Gary Libecap, Department of Economics, University of Arizona.

This is, of course, a volume about an extraordinarily successful economy in the twentieth century. Surely, in terms of individual welfare and economic advancement, there has been no parallel in human history. We not only are extremely lucky to be part of it, but are challenged to understand its origins and progress across the century. This volume is indispensable for such an undertaking. The chapters address key aspects of the American economy and are written by leading scholars in the field. In this review, I summarize some of the highlights from each of the seventeen chapters. There is a very useful bibliographic essay at the end of the volume for more details on the broad patterns described in each chapter. This is the third volume in the Cambridge series on the development of the American economy, and one that serious economic historians will want to have readily available for reference in research and for use in the classroom.

The volume appropriately begins with an overview of the macro economy, “American Macroeconomic Growth in an Era of Knowledge-based Progress: The Long Run Perspective,” by Moses Abramovitz and Paul David. The introduction provides an excellent summary of the recent history of the American economy. Abramovitz and David point out that in the twentieth century there was a shift from extensive productivity growth that characterized the nineteenth century to intensive growth that relied more on technological and organizational change. This is sensible since the American economy moved from a frontier, natural-resource-based economy to a more mature, technology, energy-based economy. While late nineteenth-century technological change tended to be capital using and labor saving, twentieth-century technological change was more intangible capital using and tangible capital and labor saving. Data are provided detailing changes in total factor productivity growth in the transitional decades of 1879 to 1909. Beginning at this time, there was a shift to a greater role for intangible assets — education and training and organized investment in R&D — that would define the twentieth century. Key areas in the new economy were electricity, telecommunications, petroleum, the internal combustion engine, and later, the digital computer. Abramovitz and David outline the rising global position of the American economy over the century. They begin with a statistical profile of American growth since 1800, noting measurement problems, in the early period due to a lack of basic data and in the later period due to problems of comparability and definition of inputs and outputs. Interpretation of production during wars also presents challenges. Many of these issues are familiar to economic historians and were raised in Volume II of the Cambridge series. The authors examine what measured growth fails to capture in reflecting well-being, chiefly improvements in product quality and introduction of new goods and services for consumers whose qualities are not well represented in standard consumption bundles.

Over the twentieth century, the American population became more urban, more western, and more geographically mobile. In Chapter 2, “Structural Changes: Regional and Urban,” Carol Heim outlines the broad regional and urban/rural shifts that have taken place. Cities have grown and regionally, the West and South have gained, especially in the post-WWII period in terms of population and income per capita. There has been general convergence in population and income per capita across the country over the century. Heim emphasizes market and non-market forces, and what she calls hypermarket factors, resource decisions within large firms, in explaining these trends. As part of urban/regional changes, there has been a shift from manufacturing to service, an issue addressed later by Claudia Goldin in her chapter on labor markets. The chapter includes useful data by region on the breakdown of gainful employment by major sector in geographic divisions that reflect the major trends of the century.

The U.S. experience in the twentieth century was really a North American experience, and the growth of the Canadian economy is described in Chapter 3, “Twentieth Century Canadian Economic History,” by Alan Green. He has a particularly heavy load to carry, describing one hundred years of Canadian development in a single chapter. The patterns are similar to those observed for the United States with increased urbanization and industrialization and a movement away from the older wheat and timber-based economy. He points out, however, that the Canadian economy in the 1970s shifted to new natural resources — oil and iron ore production. All in all, Green outlines a record of economic and population growth that for many periods exceeded that of the United States. He briefly examines the sources of economic growth — increases in factor inputs and the growth of total factor productivity. Most interesting is his overview of the wheat economy from 1896-1929, which includes a description of the wheat boom and the staple theory of growth. Green summarizes Canada’s experience with the Great Depression, and although the Canadian economy suffered a sharp drop between 1929 and 1933, as did the U.S., there was a noticeable rebound thereafter that exceeded that of the U.S. The Canadian economy continued to grow, until a slowdown after 1973, where it performed less well than its southern neighbor.

Chapter 4 returns to the American economy with “The Twentieth-Century Record of Inequality and Poverty in the United States” by Robert Plotnick, Eugene Smolensky, Eirik Evenhouse, and Siobhan Reilly. Many of the chapters in the volume address the growth of the economy. This one examines distribution. The authors define inequality and poverty, with the poverty rate equaling the proportion of the population with income below a particular income level fixed in real terms. Inequality was at its highest levels in the century during the period from 1900 to World War I. It then declined during the war, but rose once again through 1929. Inequality fell during the Great Depression and WWII and continued to fall until 1967. It was flat and then trended upward after 1979. The authors claim that there is no single factor that underlies the record of income inequality. In the latter part of the century, where the data are the best, labor supply and demand factors play key roles. After 1979, increases in the demand for skilled labor and technological change bias toward skilled labor led to a premium for those workers. Additionally, there have been changes in the composition of industry, with a shift away from manufacturing toward services, that have increased the earnings of skilled labor and reduced the relative position of the less skilled. The end of the chapter contains an assessment of the public policy effects of tax and expenditures on inequality. The authors find that despite substantial changes in the level and composition of government spending programs in the post-WWII period, there has not been a detectable impact on the trend of inequality. Turning from inequality to the issue of poverty, there has been a clear, generally persistent downward trend through the century. The elderly have experienced a marked decline in poverty, but single-parent households have done less well. In assessing the effects of government programs on poverty, the authors conclude that policies have tended to reinforce, not offset, market factors. The chapter ends with very useful data appendices.

Certainly, one of the major events of the American economy during the twentieth century was the Great Depression, and Chapter 5, “The Great Depression,” is by a leading scholar of the issue, Peter Temin. Temin argues that credit tightness explains most of the fall in production and prices during the first phase of the depression. He discusses the confounding effects of five events that have been cited in the literature as contributing to the start of the depression — the stock market crash, Smoot-Hawley tariff, the first banking crisis, the world-wide decline in commodity prices, and a decline in consumption. He examines the role of the Fed and its adherence to the Gold Standard. Temin argues that a serious macroeconomic downturn due to these factors was turned into the Great Depression by the Federal Reserve’s actions in late 1931 to preserve the Gold Standard. The devaluation that followed the movement off the Gold Standard by the Roosevelt Administration was not followed by aggressive fiscal policy so that the economy deteriorated sharply through 1933. There was recovery between 1933 and 1937, before another downturn. Temin discusses the first New Deal and the actions of the NIRA and AAA and then briefly turns to the second New Deal. Gold inflows from an increasingly unstable Europe increased the money supply, and this helped fuel the recovery through 1937. But government policy brought about an end to that recovery with the recession of 1937. Recovery followed in 1939, largely stimulated by new gold inflows and then the build up for World War II.

Besides the Depression, the other major events of the twentieth century were wars, and in Chapter 6, “War and the American Economy in the Twentieth Century” Michael Edelstein, attempts to gauge the costs of war. This is a very interesting and ambitious chapter. During the twentieth century, there were four major military conflicts — World War I, World War II, the Korean War, and the Vietnam War — along with the Cold War. These conflicts demanded considerable change in the amount of resources devoted by the United States to military activities, which were quite small in the late nineteenth century. Edelstein gauges the direct and indirect costs of these wars, with the direct costs being expenditures for labor, capital, and goods, and the indirect costs including the lost lives, injuries, and destruction of capital and land. Estimates are provided for each as a share of GNP in Table 6.1. The Cold War was the most costly conflict in terms of direct expenditures. Edelstein then turns to the financing of these military conflicts, examining total expenditures and their funding through taxes, borrowing and inflation. Financing approaches are outlined in Table 6.2-6.9. One long-term effect was the apparent permanent increase in the income tax, which was raised by the Revenue Acts of 1941 and 1942. WWII and Korea were financed more by taxation, while Vietnam more by inflation. Finally, Edelstein examines the opportunity costs of the wars by examining the lost capital and investment in public and private enterprises, as described in tables 6.10-6.12. WWI’s opportunity costs included a reduction in nondurable goods consumption and investment in residential and business structures. WWII, held back any growth in consumption, and reduced investment, and the Cold War, Korea, and Vietnam reduced non-durable consumption and relied on deficit financing.

Another broad trend of the twentieth century was the growth of international trade. Peter Lindert, in Chapter 7, “U.S. Foreign Trade and Trade Policy in the Twentieth Century,” examines changes in America’s competitive advantage, the goals of government policy, and their impact on trade. Over the century, he finds a steady increase in the advantage of American skill-intensive goods, with exports increasing. This was not the case for natural resource-based exports. Lindert notes that some industries lost competitive advantage over time, particularly, steel and autos. Although protectionism rose and fell, efforts to promote infant industries never dominated U.S. trade policy. Lindert concludes that U.S. government intervention played no major role in determining which sectors increased or lost competitiveness. Market forces were dominant.

Chapter 8, “U.S. Foreign Financial Relations in the Twentieth Century” by Barry Eichengreen, continues the examination of international trade and monetary patterns. This is one of the best summaries of the financial history of the twentieth century I have seen. It is so complete that students should find it especially useful. The theme of the chapter is that international financial transactions and the institutions that governed them significantly influenced the growth and formation of the American economy. More narrowly, foreign investment led to railroad construction, and more broadly, the business cycle and responses to it were shaped by international capital flows. A related theme is that U.S. financial flows have affected other economies. U.S. capital contributed to European reconstruction following WWI and less positively, transmitted the American depression in the 1930s to other economies. American capital flows had an even greater impact after WWII. Eichengreen examines the gold standard and international financial management during WWI and the associated transformation of U.S. foreign finance. He notes that the United States became more of a creditor at that time, raising policy tensions for balancing internal and external financial markets. This tension was very apparent during the start of the depression, when the U.S. retreated from its international financial position with devaluation and the move off the gold standard. World War II and post-war reconstruction once again increased the role of the United States in the international monetary system. Eichengreen cites Lend Lease, other foreign aid through the Marshall Plan, international borrowing for reconstruction, the Bretton Woods Conference, and the IMF as examples of the key contribution provided by the U.S. in the latter part of the century.

Chapter 9, “Twentieth Century American Population Growth,” by Richard Easterlin shifts attention from financial flows to demographic patterns. This chapter by another leading scholar in the field provides valuable demographic data and charts that outline key trends. Easterlin summarizes patterns that emerged during the century — fertility and mortality continued to decline — and discusses contributing factors. Internal migration to the West, noted earlier in the volume by Carol Heim, is examined in more detail. During the twentieth century, international migration ebbed and flowed, and by the end of the period became a major contributor to population growth. Easterlin concludes with discussion of the implications of the general aging of the population, a pattern offset somewhat by immigration.

Another very complete and useful chapter is by Claudia Goldin, “Labor Markets in the Twentieth Century,” Chapter 10. Goldin summarizes major trends in American labor markets and provides valuable data to demonstrate those trends. Labor gained enormously over the century in terms of increases in real hourly earnings, enhanced worker benefits, reduced hours per week, a reduction in years of work over lifetime, and greater security in the face of unemployment, old age, sickness, and job injury. Goldin argues that these improvements were not really due to union activity or to legislation. They mostly followed from market conditions. Over the century, the face of labor changed. There was a decline in child labor and work by the elderly. The labor force participation of women, however, rose sharply from around 18 percent at the turn of the century to close to 50 percent of the labor force by the end. There were other changes in the labor market, including a shift from manufacturing to service with greater emphasis on skill. The distributional implications of this change in labor markets were noted earlier in Chapter 4. Goldin also points out that workers gained more protection from unemployment, acquired more formal education, and developed increased long-term relationships with firms over the century. At the same time, less discretion was given to supervisors and foremen in hiring and firing and more labor decisions were determined by formal workplace rules. There were fewer strikes and greater reliance on rewards than on punishment by managers. The observed evolution of modern labor markets in the U.S. has affected both individual well being and the performance of the macro economy. Still, Goldin points out that there are differences across region, among immigrants, and across skill levels. She summarizes major twentieth century intervention in the job market, including the enactment of Social Security legislation, OSHA, and the passage of the Wagner Act. Even so, Goldin argues that these actions did not fundamentally change labor markets. Rather, they reinforced market trends. Among the useful data provided are labor force participation; the industrial distribution of the labor force; occupational distribution; self employment figures; productivity measures; data on earnings, benefits, and hours; union membership; unemployment; wage inequality; black/white differences; and the contribution of education.

The discussion of labor markets continues in Chapter 11, “Labor Law” by Christopher Tomlins. Tomlins provides institutional background for the experiences described by Goldin. He traces the beginning of labor law in England and its transfer to the United States in the eighteenth century. He examines the roles of the judicial and legislative bodies in the U.S. in framing labor markets. Unionization, the adoption of workers’ compensation, the granting of anti-trust exemption to unions, the labor provisions of the NIRA and the Wagner Act, as well as Taft Hartley legislation are described.

Chapter 12 turns to agriculture, “The Transformation of Northern Agriculture, 1910-1990,” by Alan Olmstead and Paul Rhode. The well-written introduction summarizes changes in American agriculture in the north during the century, including the decline in the number of farms and farmers and increases in productivity. Improvements in transportation and communication better linked agriculture with the rest of the economy. Olmstead and Rhode examine three themes: sources of technological change, the farm crisis, and government intervention. They begin with discussion of regional contrasts in farm size and number of farms between 1910 and 1990. They emphasize the importance of technological change in explaining these trends. Most productivity change occurred after 1940. There was a labor-saving bias, and a machinery and fertilizer-using bias in technological change. Mechanization was spurred by the internal combustion engine and improved tractor design. The chemical and biological revolutions brought hybrid seeds. Olmstead and Rhode describe the roles of the federal government in providing telephone and electricity to rural areas, in promoting research through the Hatch Act and the agricultural experiment stations, and in subsidizing agriculture. Declining commodity prices, worsening terms of trade, and falling farm populations led to greater federal support of agriculture, beginning in the 1920s, expanding during the New Deal, and continuing through the rest of the century.

While international financial flows were described in Chapter 8 by Barry Eichengreen, Eugene White completes the discussion with focus on internal developments in Chapter 13, “Banking and Finance in the Twentieth Century.” White argues that twentieth century American economic growth was financed by a expanded flow of funds, channeled by alternating waves of financial institutional innovation and government regulation. Government regulation was expanded through adoption of the Federal Reserve System and through various pieces of New Deal legislation, such as the Glass-Steagall Act. White describes the tension that subsequently emerged later in the century between market forces and the regulatory structure that ultimately resulted in political pressure for deregulation. He describes the actions of the Federal Reserve Bank between1913 and 1929 and its relative ineffectiveness in the late 1920s and early 1930s in response to bank failures. This discussion effectively supplements that provided by Eichengreen and Temin. He outlines the consequences of the New Deal and its legacy for financial markets in the last part of the century.

The role of technological change in twentieth century American economic development was emphasized by Abramovitz and David in Chapter 1 and by Goldin in Chapter 10. David Mowery and Nathan Rosenberg examine technology in more detail in Chapter 14, “Twentieth-Century Technological Change.” The distinctive feature of the twentieth century, according to Mowery and Rosenberg, was the institutionalization of the inventive process within firms, universities, and government laboratories. There was emphasis on the use of the scientific method to promote invention and practical use of technology. The authors describe the organization of research and development and the incremental adoption of new technology to improve products and processes. They link the contribution of technology to the pattern of American economic growth. Mowery and Rosenberg note, as well, that as the century progressed, international flows of technology increased through reductions in trade barriers. They show that early technological change tended to be linked with resource endowments and occurred within the chemical and petroleum industries. But there were other examples and the chapter includes short case studies of the internal combustion engine, the automobile and airplane industries, plastics, synthetic fibers, pharmaceuticals, electric power and electronics in production and in consumer products, semi conductors, and of course, computer hardware and software. They provide measures of the growth of industrial R&D and its ties to university research and government investment.

Much R&D occurred within modern corporations, and Louis Galambos describes the development of the corporation in Chapter 15, “The U.S. Corporate Economy in the Twentieth Century.” He outlines the U.S. business system, and argues that there were three major changes: a shift to the corporate form of organization and the development of a high degree of concentration at the beginning of the century; the movement toward the multi-division firm in the 1940s and 1950s, as illustrated by Ford and AT&T; and most significantly, the development of global organizations in the latter part of the century.

Big business and big government collided, as described in Chapter 16, “Government Regulation of Business,” by Richard Vietor. Vietor argues that the growth of regulation over the century in part was due to market failure and in part due to the strategic use of government by firms to enhance their competitive position. He usefully summaries theories of regulation, including the public interest and capture views. Vietor also describes the role of regulatory bodies, which were increasingly influential across the century. He highlights early anti-trust policy, New Deal regulation, and social and environmental regulation in the latter part of the century. He also discusses the deregulation that took place in some industries, notably, in airlines, telecommunications, petroleum and natural gas, and utilities.

The final chapter, “The Public Sector,” by Elliott Brownlee completes the discussion introduced by Vietor. Brownlee describes the growth of government in the twentieth century with data on the relative sizes of the federal, state, and local sectors. He emphasizes Robert Higgs’ crisis argument in explaining the expansion of the public sector. The importance of WWI, the Great Depression, and WWII are noted. Deregulation, however, remains more difficult to understand.

As I indicated in the beginning of this review, Volume III of the Cambridge Economic History of the United States is a superb companion to the earlier two volumes and is an essential addition to the libraries of all serious students of the American economy.

Gary D. Libecap is former editor of the Journal of Economic History. His books include Titles, Conflict and Land Use: The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier (with Lee Alston and Bernardo Mueller) University of Michigan Press, 1999; The Federal Civil Service and the Problem of Bureaucracy: The Economics and Politics of Institutional Change, (with Ronald Johnson), University of Chicago Press and NBER, 1994, The Political Economy of Regulation: An Historical Analysis of Government and the Economy (co-editor with Claudia Goldin), University of Chicago Press and NBER, 1994, and Contracting for Property Rights, New York: Cambridge University Press, 1989.

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

The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation

Author(s):Perelman, Michael
Reviewer(s):Clark, Gregory

Published by EH.NET (March 2001)

Michael Perelman, The Invention of Capitalism: Classical Political Economy

and the Secret History of Primitive Accumulation. Durham, NC: Duke

University Press, 2000. 412 pp. $22,95 (paper), ISBN: 0-8223-2491-1; $64.95

(cloth), ISBN: 0-8223-2454-7.

Reviewed for EH.NET by Gregory Clark, Department of Economics, University of

California-Davis.

One of our popular diversions here in California is “channeling” the thoughts

of those who have passed on to the spirit world. Michael Perelman has

seemingly by these methods made contact with Karl Marx himself. For his book

is a lively polemic directed at the Classical political economists, full of

allegations of double dealing and bad faith, that the master himself would

have been proud to deliver. Marx lives. He lives in Chico, California.

Perelman interprets Classical political economy as a political program in

search of an intellectual justification. Classical economists wanted to

promote the interests of the new capitalist class. To this end the Classical

system celebrated the virtues of the free market. But free markets were of no

use if the capitalist class could not recruit the wage slaves they needed for

their factories. So Classical economists simultaneously promoted intervention

in markets to strip the peasantry and handicraft workers of the vestiges of

their independence and reduce them to the wage labor. They advocated in Marx’s

terms (or at least in the terms of Marx’s English translators) “primitive

accumulation” as necessary to make a market economy. But they did not advocate

this openly: thus the “secret history of primitive accumulation.” Free

competition was optimal, unless it produced an independent peasantry unwilling

to submit to wage labor. “While energetically promoting their laissez-faire

ideology, they championed time and again policies that flew in the face of

their laissez-faire principles” (pp. 2-3).

Exhibit A in Perelman’s indictment of the Classical mob is the case of the

Game Laws. The Game Laws banned the landless and small owners in the

countryside from taking game animals. Thus in England by the laws of 1670 to

take game even on your own land a person had to meet a very substantial

property qualification. In both England and Scotland these laws became more

severe as the eighteenth century progressed, and more people were convicted

under the laws. Why, asks Perelman, did the new capitalist class and their PR

agents, the Political Economists, support these feudal restrictions in favor

of the country squires? They did so because it took away the sources of

support that kept the poor in the countryside from the factory door. They did

so because a hunting peasant was an idle peasant and an insolent peasant, not

a docile and dependable worker.

That is the Perelman claim. What is his evidence? The main evidence that

Classical political economy promoted the game laws to dispossess the peasantry

is their almost complete silence on the subject! Adam Smith, “that great

master of capitalist apologetics” (p. 49), was, writes Perelman, the only

Classical Economist to ever mention the Game Laws. Smith, however, condemned

the game laws as a feudal relic, noting that “The reason they give is that the

prohibition is made to prevent the lower sort of people from spending their

time on such unprofitable employment; but the real reason is that they

delightin hunting” (p. 50). In light of this Perelman concludes this

discussion by noting generously that “Although Smith refuses to acknowledge

any association between the Game Laws and the interests of capital, he

deserves some credit for broaching the subject, since all other political

economists failed to make any mention whatsoever” (p. 51).

Since Classical writers cunningly concealed their support and promotion of the

Game Laws by not discussing them, or pretending to be opposed to them, their

guilt is established by the silence of their friends in Parliament on the

issue. “When Parliament debated the Game Laws again in 1830, not one prominent

spokesperson for political economy called for their abolition” (p. 54). The

alternative hypothesis, that Classical economists really thought the Game Laws

were a feudal relic too minor to bother with, is not explored.

Exhibit B in the indictment of the Classical mob is their treatment of

household “self provisioning” or as Perelman also refers to it “the social

division of labor.” Here again we know of their bad faith in this matter in

the contrast between their obvious desire to destroy self-provisioning and

force all workers into the market and their public silence on the issue. Thus

“Smith, insofar as he addresses the subject, treated the social division of

labor as the result of voluntary choices on the part of free people” (p. 90).

On the other hand any random statement by anyone criticizing sloth or

indiscipline by independent producers is sign of a plan to eliminating

independence and create a proletariat.

It is true that Classical economists often wrote about the indolence of the

poor and of smallholders. But was this casual moralizing just a relic of

earlier modes of discourse, on the way to a more systematic way of thinking

about the economy? Here I read their general silence on the issue very

differently. It is the silence that shows that concern with forcing the poor

to labor for wages was a peripheral element of their system. Perelman, has to

transform this casual silence into a much more sinister conspiracy to conceal.

The book makes little progress in that direction. Indeed the bold links drawn

on the most tenuous of evidence are one thing that distinguishes the Chico

Marx from the original. Those connections are so bold that this book might

better be placed on the shelf with the “grassy knoll” and “Roswell” genres.

As a historian who has written on England in the Industrial Revolution period

I have a more innocent interpretation of the Classical conspiracy of silence

on the alleged expropriation of the peasantry. This is that the process

whereby independent peasants and artisans became wage laborers was already

largely complete in England by the time the Classical economists arrived on

the scene in the eighteenth century. Their silence on the issue is a silence

of true indifference. They had no need to conspire in the expropriation of

the means of subsistence by capitalists, because a free labor market was in

place. The issue of common rights, access to land, and self-provisioning had

been settled in favor of wage labor by 1700 in all but the rural fastnesses of

the Scottish highlands. Even before the formal Parliamentary enclosure

movement of 1750 and later common rights had mainly become private tradable

rights of access unlikely to be owned by the poorest workers. Truly common

areas with free access were limited and of little value (see Leigh

Shaw-Taylor, “Did Agricultural Laborers Have Common Rights?” forthcoming,

Journal of Economic History, and “Labourers, Cows, Common Rights and

Parliamentary Enclosure: The Evidence of Contemporary Comment, c. 1760-1810″

forthcoming, Past and Present).

Perelman, like Marx, suffers from a wildly romantic vision of a pre-industrial

England of laughter and leisure that accords little with reality. Marx had the

excuse that he was writing at a time when little was known about that past.

Gregory Clark is Professor of Economics at the University of California,

Davis.

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

Traditional Industry in the Economy of Colonial India

Author(s):Roy, Tirthankar
Reviewer(s):Wolcott, Susan

Published by EH.NET (February 2001)

Tirthankar Roy, Traditional Industry in the Economy of Colonial India.

Cambridge: Cambridge University Press, 1999. xi + 252 pp. $64.95 (cloth),

ISBN: 0-521-65012-7.

Reviewed for EH.NET by Susan Wolcott, Department of Economics, University of

Mississippi.

This new book by Tirthankar Roy of the Indira Gandhi Institute of Development

Research, Bombay is well worth reading. It is a careful and extremely well

researched discussion of the evolution of five important craft-based

industries during the colonial period: handloom weaving, on which Roy has

written before, gold thread (jari), brassware, leather, and carpets. Roy

addresses himself to India’s failure to grow. Why did industrialization never

lead to a sustained increase in per capita income? He sets out to do two

things in this book. The first is to dispute the contention that the craft

industries were devitalized by the colonial economy, and thus prevented from

becoming the incubators of an indigenous industrial revolution. His second

task is to show that the true root of stagnation was the too rapid rate of

growth of population and an absence of government involvement in the provision

of education and credit. In the first of these tasks, the book succeeds. The

thorough discussion and careful analysis of the history and organization of

each of these crafts well illustrate the dynamism and inventiveness of the

Indian entrepreneur. But the second task remains for further research. Roy

shows that the laissez faire policy of the British colonial government did not

crush these indigenous craft industries. But a history of craft industries by

itself is not well suited to answering the question of why modern industry did

not establish itself in India.

It can, however, offer certain hints. But the hints in this case do not

support Roy’s contention in an obvious manner. If the histories had shown that

there were attempts to move from small scale craft production to large scale

factory production, but these attempts were thwarted by a lack of capital,

that would have lent support to Roy’s claim that more direct intervention by

the government would have fostered faster growth. That is not the case. In

fact, just the opposite is true. The centralization of the craft industries as

they moved from their rural roots to a more urban existence is a recurrent

theme in Roy’s book. All of these crafts moved away from production for local

consumption to production for long distance trade, either for export to

Europe, or intra-India trade via the new railroads. To some extent, this was

just small craft shops moving to the cities for economies of agglomeration;

information sharing is one theme Roy often stresses. But the urban shift was

frequently accompanied by a large increase in the size of the typical factory,

and a move away from family labor to wage labor. To this reader, large

increases in the scale of individual operations suggest capital constraints

were not a critical issue. (The large scale of modern factory operations in

India during this period support this contention.)

Nor do the histories of these crafts suggest that there was a problem that a

broad program of education would address. Roy makes the important point that

the artisans were quick to adopt modern methods. Examples include the move to

use sheet metal in constructing brassware, mineral dyes for carpets, and the

fly-shuttle in handloomed silks. Through simplification, entrepreneurs

increased productivity. His examples successfully dispel any notion that the

Indians were technologically stagnant, at least in these areas. But this makes

it difficult to believe that these crafts, at least, would have seen greater

productivity increase with a more educated workforce.

What the histories do suggest is the importance of caste and regional ties in

the transmission of knowledge and access to credit. Roy’s attention to these

details in his histories is one of the chief reasons for the book’s

usefulness. It appears that knowledge and credit were accessible in India, but

not to everyone. Leather, the longest chapter, provides perhaps the most

interesting discussion. Leather manufacture has until very recently been the

preserve of the lowest rungs of Indian society as it involves handling dead

animals, a very polluting activity among Hindus. (Anything involving death is

polluting (dead cows even more so), and anything which is polluting is avoided

by higher caste Hindus.) Originally leather tanning was done in the village.

Members of certain castes would have the right to the carcass of animals that

died by natural causes in return for removing and disposing of the carcass.

These animals provided more than sufficient leather for the shoes, water bags

and straps needed by villagers. But the development in the late nineteenth

century of large-scale chrome tanning in the US and mineral leather dyes in

Germany created an upsurge in international demand for hides. Suddenly the

carcasses of animals had a significant value. There was a fairly rapid switch

from a small rural craft to large urban slaughterhouses and tanning factories.

Interestingly, these factories remained chiefly staffed and quite often owned

by the same castes that had performed these functions in the villages.

However, although there had been a quick response to the change in export

demand, and yet another rapid switch in product mix when export demand died

down in the interwar period, the further step of developing chrome tanning in

India was pursued only on a very limited basis. Roy attributes this to the

restricted access to capital of the lower caste Hindus who had skills in

leather working. Capital was available in India, but not to them.

Another illustrative story is the non-adoption of the fly shuttle in much of

the trade for coarse cotton cloth. But the reason is not that the workers did

not know better. There had been adoption of better techniques and large-scale

manufacture in handloomed silks. The cotton weavers were unwilling to make

even this relatively small capital investment in what was essentially a use

for otherwise unemployable household labor – women in agricultural off

seasons. The question of why the opportunity cost of women remained virtually

zero is not directly addressed.

These two examples provide a different justification for government

involvement in education and capital markets than what is typically given in

development texts. Roy writes that “the conversion of craft skills into

industrial and innovative capacity required an induced social

revolution in India, the conditions for which were not created,” (emphasis

mine, see p. 59). His book does not directly prove that this was the case. But

it does provide hints to this effect. A discussion that addresses this point

directly instead of obliquely might yield very interesting results.

Susan Wolcott is currently working on an article entitled “The Role of Caste

Relations in the Slow Industrialization of Colonial India: Evidence from

Textile Strikes, 1921-38.”

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Asia
Time Period(s):20th Century: Pre WWII

Inventing Ourselves Out of Jobs?: America’s Debate over Technological Unemployment, 1929-1981

Author(s):Bix, Amy Sue
Reviewer(s):Zieger, Robert H.

Published by EH.NET (September 2000)

Amy Sue Bix. Inventing Ourselves Out of Jobs?: America’s Debate over

Technological Unemployment, 1929-1981. Studies in Industry and Society.

Baltimore and London: Johns Hopkins University Press, 2000. x + 376 pp.

Illustrations and index. $45.00 (cloth). ISBN 0-8018-6244-2.

Reviewed for H-Business and EH.NET by Robert H. Zieger, Department of History,

University of Florida.

Men (and Women) at Work?

Inventing Ourselves Out of Jobs? is an able and lucidly written account

of the ongoing debate in the United States over the effects of technology on

employment. Drawing on a wide range of published materials as well as on

corporate, labor, and governmental archives, Amy Sue Bix traces in rich detail

the views of three generations of policy makers, labor leaders, engineers, and

business executives to come about the relationship between expanding

productivity and the availability of jobs. A notable feature of the debate has

been the absence of a definitive empirical method for weighing the impact of

technology on employment. Thus, over the seventy years covered in the book

(which deals with developments over the past twenty years as well as with the

period indicated in the title), celebrants and critics of workplace technology

have tended to make the same arguments, often with the same rhetorical

embellishments. According to corporate leaders, engineers, and other partisans

of labor-saving technology, expanding production inevitably lowers prices,

increases consumption, and boosts employment. Labor leaders, social critics,

and troubled politicians, on the other hand, have focused technology’s role in

work force reduction and have argued that promises of long-term growth in job

opportunities have proved unduly optimistic or even illusory.

In Bix’s telling, however, virtually no one called for an end to technological

advance. Laborites, for example, have accepted and even celebrated

technology-facilitated productivity gains, arguing only that workers should

share in them through shorter hours, higher wages, and greater voice in the

actual implementation of new workplace regimes. Three generations of labor

leaders, from William Green and John L. Lewis in the 1930s through Walter

Reuther in the 1950s and John Sweeney currently have repudiated Ludism,

confining their critique of job-related technology to advocacy of

worker-friendly regulation, job training, and the passing on of productivity

savings to workers and consumers. Critical of the blithe optimism of corporate

spokesmen and their scientific and engineering allies that productivity gains

lead inexorably to expanded (and enriched) employment opportunities, even those

most troubled by job loss have accepted the inevitably of continuous workplace

transformation.

Employers have dismissed concerns about job loss, although often in a

defensive idiom. Equating technological advance with progress, and, in turn,

a commitment to progress with national identity, corporate leaders and their

scientific allies have painted a bright new world of abundance and ease.

Rejecting calls for public intervention in the development and application of

labor-saving devices, business leaders such as Henry Ford and machine-tool

innovator John Diebold acknowledged that inevitably some workers would be

displaced and might suffer local and temporary hardships. But the advantages

of expanded production and its concomitant proliferation of consumer goods far

outweighed these minor side effects. Popular writers and editorial cartoonists

might depict soulless robots and inexorable machines spitting out superfluous

unemployed workers as well as appliances and amenities, but resistance to the

machine was in fact ignorant, self-defeating, and even unpatriotic. “Workplace

mechanization,” writes Bix in summary of industrialists’ views, “represented

the inevitable, the only possible way to attain national success.” (166-67).

She quotes economist Benjamin Anderson: “on no account,” declared this banking

analyst of the 1930s, “must we retard or interfere with the most rapid

utilization of new inventions.” (166)

The debate over technology and unemployment has waxed and waned since the onset

of the Great Depression. It raged most fiercely during the 1930s, when

joblessness rose to catastrophic proportions. During World War II, full

employment and military needs dampened it. It re-emerged, now stimulated by

early computerization and other forms of electronic replication, during the

prosperous era of the 1950s and early 1960s, with labor leaders such as Walter

Reuther calling attention to the problem of lingering unemployment amidst

otherwise bright economic prospects. Congressional hearings in 1955 on what

was now called “automation” demonstrated that even during good times, the

specter of worker redundancy walked hand-in-hand with the promise of a brave

new consumerist world. By the late 1970s and into the 1980s, of course, the

computer revolution raised these issues in a new idiom, although corporate

down-sizing, globalization, and widening income disparities have tended to

merge discrete apprehensions about technology’s adverse effects with broader

concerns about job security and living standards.

Bix touches on a wide range of industries and employment situations in

surveying the technology-vs.-unemployment theme. Drawing on TNEC and WPA

studies, she examines the experiences of telephone operators, musicians, steel

workers, coal miners, and railwaymen buffeted by the demands of new

technologies in the 1930s. In the 1950s and 1960s, it was the turn of

packinghouse workers, longshoremen, clerical workers, and electrical workers.

Unions attempted various strategies in an effort to cope with mechanical

displacement. In the 1930s, the musicians union, faced with the substitution

of recorded music for live orchestras in movie houses, launched a massive

public relations campaign, hoping futilely to stimulate an outraged public to

demand live music. In the 1950s, the West Coast Longshoremen’s Union followed

an opposite course, capitulating to what its leaders regarded as the inevitable

inroads of containerization while securing for its existing membership generous

severance and manning reduction payments.

Bix’s account of the protracted and continuing debate over technology and work

is enlivened by frequent references to popular literature and films. In

addition, drawings and cartoons, some hailing the brave new future of a

worker-less future, others depicting with grim foreboding the social chaos sure

to afflict hapless displaced workers, give the debate vivid expression.

Inventing Ourselves Out of Jobs? also brings to attention governmental

efforts in the 1930s, primarily through studies conducted by the Works Progress

Administration and testimony offered at the Temporary National Economic

Committee congressional hearings, to establish an empirical basis for weighing

the impact of industrial technology on employment. The latter chapters ably

survey a wide range of opinion drawn from more contemporary sources, attesting

to the continuing pertinence of concern about the relationship between

employment and technology.

Inventing Ourselves Out of Jobs touches on but explores only briefly a

number of key themes that the general subject would seem to entail. The book

is more of a history of discourse about employment and technology than it is a

social history of the subject. Thus, themes of gender and, especially, race

receive only brief explicit exposition, for example. The social context in

which employers and engineers devise and implement labor-saving devices

likewise is only glancingly dealt with. Thus, for example, some observers have

argued that rapid mechanization of labor- intensive departments in metal

working, paper making, and meat packing after World War II represented less a

technological imperative than an effort on the part of employers to curtail

African American employment in operations that had proven unusually susceptible

to worker militancy and trade union pressure. This is not an issue that

captures Bix’s attention, however.

Likewise, Bix invokes but never quite explores in detail the implications of

the consumerist justifications to which employers increasingly turned in

justifying their resort to labor-saving measures. In 1951, Fortune magazine

published a special edition titled “USA-The Permanent Revolution,” boldly

proclaiming that mass affluence and its attendant consumerism constituted the

real revolution of the 20th century. In the 1960s, social critics such as

Herbert Marcuse, Charles Reich, Paul Goodman, E. F. Schumacher, and Christopher

Lasch-none of whom receives mention in Inventing Ourselves Out of

Jobs?-expressed the reverse of this kind of celebration of material plenty,

which in corporate America’s view depended on continuous technological

innovation. In a sense, competing visions of America centering on consumerism

(and, thus, technology) are the modern echo of the 18th century debate between

adherents of the civic republic and partisans of a commercial republic.

Implicit also, but underdeveloped in the book, is the question as to whether

work can remain an adequate vehicle for the social identities that before the

Great Depression it conveyed. Many of the jobs that Americans hold today are

far removed from productive enterprise, at least as it has traditionally been

understood. Technological advance and productivity gains have made it possible

for televangelists, day traders, and historians to flourish. Why these

particular occupations should attain public certification while other kinds of

non-productive employment languish or are suppressed is a question of culture

and politics, not one of technology per se.

Bix suggests rather than asserts her own sympathies. Her prose comes alive

when she exposes the fatuities and excesses of technology celebrants while

taking on a more troubled and somber tone when exploring the plight of the

displaced and dissident. Her dismay with those who equate America’s purposes

and promises with technological progress and consumerist indulgence is evident,

although never strident. She seems reluctant to concede that ordinary people

might have benefitted from technological innovation and at times flirts with

nostalgia for the good old days of man-killing coal mines and lethal railroad

work. Even so, Inventing Ourselves Out of Jobs? is a useful survey of

the ongoing debate over the relationships between technology and work in the

modern United States.

Robert Zieger has worked extensively in the fields of American labour history

and twentieth century history. His latest book is America’s Great War: World

War One and the American Experience, Rowman & Littlefield, 2000.

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

Capitalism, Socialism and Democracy

Author(s):Schumpeter, Joseph A.
Reviewer(s):McCraw, Thomas K.

Joseph A. Schumpeter, Capitalism, Socialism and Democracy. New York: Harper & Row, 1942, 381 pp.; Third edition, 1950, 431 pp.

Review Essay by Thomas K. McCraw, Harvard Business School.

The Creative Destroyer: Schumpeter’s Capitalism, Socialism, and Democracy

Does Joseph Schumpeter’s Capitalism, Socialism and Democracy rank with the most important works of economic history of the twentieth century? Of course it does. Has there been a more penetrating analyst of capitalism than Joseph Schumpeter? No, I do not think there has.

Schumpeter led a melodramatic life (1883-1950), moving from Austria to England to Egypt to Germany before coming to Harvard for good in 1932. He was a phenomenally productive scholar, despite occasional forays into business and government in addition to a plethora of romantic liaisons that included three marriages. His first published article appeared in 1905, his last in 1950. His output included fifteen books (several of immense length), six pamphlets, about one hundred book reviews, and 148 articles, comments, and occasional pieces.

Long after his death, his influence continues to grow. Massimo M. Augello’s Joseph Alois Schumpeter: A Reference Guide appeared in 1990 and ran to over 350 pages. Since then, several dozen articles on Schumpeter have appeared, in addition to biographies by Eduard M?rz, Robert Loring Allen, Richard Swedberg, and Wolfgang Stolper. All of this work has enriched our knowledge of this remarkable polymath.

Just how great was Schumpeter? Tibor Scitovsky places him at the very top: “America’s most brilliant economist.” The intellectual historian Martin Kessler agrees, arguing that Schumpeter was, apart from Keynes, “the only truly great economist the twentieth century has produced.” Oskar Morgenstern sensibly comments that at this level rankings become pointless, that “all will agree that [Schumpeter] belongs to that small top group where a further ranking becomes almost impossible.”1

Many scholars of business history, most notably Alfred D. Chandler, Jr., have looked to Schumpeter as the economist who best understood the rise of big business and the central roles of innovation and entrepreneurship.2 In economic history, the work of Nathan Rosenberg and William Lazonick, among others, is imbued with Schumpeterian insights.3 In the study of “business strategy,” a term probably coined by Schumpeter in Capitalism, Socialism and Democracy, Michael Porter’s seminal work places a distinctly Schumpeterian emphasis on relentless innovation as the essence of competitive strategy.4 Within economics, Schumpeter’s influence in America is perhaps best exemplified by the work of F. M. Scherer and Richard R. Nelson. Scherer, a prolific scholar and author of a standard textbook in industrial organization, acknowledges his intellectual debts in a book entitled Innovation and Growth: Schumpeterian Perspectives . Nelson’s Schumpeterian proclivities are on display in An Evolutionary Theory of Economic Change , co-authored with Sidney G. Winter.5 A few other economists have tried to implement parts of the Schumpeterian system, particularly those having to do with innovation.6

Most mainstream economists have been frustrated by the difficulty of operationalizing Schumpeter’s models. His aversion to equilibrium as a realistic picture of capitalist economies restricts the mathematicization of his system. Then, too, because he insisted on fusing economics with history, sociology, and psychology, the number of variables becomes almost impossible for the analyst to control.7

As a scholar Schumpeter never advanced a program of economic reform. He believed that doing so compromised “scientific” work. In particular he criticized Keynes and other English economists for their “Ricardian Vice” of leaping into policy debates with abstract models as general prescriptions for change.8 Schumpeter himself took a very different approach in Capitalism, Socialism, and Democracy.

Capitalism, Socialism, and Democracy and Its Predecessor Book

Schumpeter’s core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets:

1. The essence of capitalism is innovation (“creative destruction”) in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, can therefore disguise reality and mislead scholars and students.

2. The virtues of capitalism–in particular its steady but gradual pattern of growth–are long-run and hard to see; its defects, such as inequality and apparent monopoly, are short-run and conspicuously visible.

3. It is dangerous for economists to prescribe “general” recipes, because political and social circumstances are always changing.

Capitalism, Socialism, and Democracy was Schumpeter’s most popular success by far. Translated into at least sixteen languages, it still sells widely in paperback editions. Although the author often compared it unfavorably with his more scholarly books, it retains its seminal quality three generations after it appeared.

Despite the book’s title, it contains little of lasting interest about either socialism or democracy. But it bursts with ideas about capitalism, and as a “performance”–a term Schumpeter liked to apply to others’ works–it may be the best analysis of capitalism ever written.

Only three years before the appearance of this great work, Schumpeter had brought out another book he thought would be his magnum opus: the 1100-page Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. The virtues of the second book, Capitalism, Socialism, and Democracy, can be fully understood only against the shortcomings of this prior work.

The first problem with Business Cycles was its extraordinary and wholly unnecessary length. A second characteristic was the author’s misguided attempt to turn business cycle patterns into predictive scientific wave theories borrowed from physics. As Schumpeter wrote, “Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars [8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a Juglar–not as an average but in every individual case.” Why this was so, he admitted, “is indeed difficult to see.”9 As his former student Paul Samuelson wrote thirty-five years later, the whole exercise “began to smack of Pythagorean moonshine.”10

The third noteworthy aspect of Business Cycles was its remarkable richness of historical detail and understanding. Though the explanation of cycles remained problematical, the historical vision was squarely on point: that capitalism–not all economic activity, just capitalism–is fundamentally an unstable, disequilibrating process.11

Simon Kuznets, a macroeconomist and future Nobel laureate, wrote for the American Economic Review a fifteen-page analysis of Business Cycles. It was the most thorough and important of the reviews, kindhearted in tone but still devastating. Kuznets conceded that Schumpeter had written a “monumental treatise” that raised all the right questions and did relate short-term business cycles to long-run economic movements. Still, Kuznets wrote, business cycles are essentially quantitative phenomena. Instead of robust statistical argument, Schumpeter had presented the reader with “an intellectual diary,” an account of his own “journey through the realm of business cycles and capitalist evolution, a journal of his encounters there with numerous hypotheses, diverse historical facts, and statistical experiments.” These efforts could not substitute for robust quantitative analysis.12 Two other reviewers noticed Schumpeter’s implicit distaste for macroeconomics, referring to his “vigorous stand against ‘the curse of aggregative thinking.'”13

Given the harsh reception of Business Cycles, published only three years earlier, the content and also the detached and ironic tone of Capitalism, Socialism and Democracy appear in a different light. It is as though Schumpeter, now deeply pessimistic about the state of the world, decided to unburden himself not only on economics but on a broad array of other subjects as well. Hence the candor and breadth of the 1942 book, which produced thousands of future citations by scholars in sociology, history, economics, and other disciplines.14

Some of the major themes represent reworkings of ideas Schumpeter had first presented in articles published long before, while in his twenties (he was fifty-nine in 1942). A capitalist economy, he now wrote in Capitalism, Socialism and Democracy, “is not and cannot be stationary. Nor is it merely expanding in a steady manner. . . . Every situation is being upset before it has had time to work itself out. Economic progress, in capitalist society, means turmoil.”15

In a 54-page analysis of Karl Marx at the beginning of Capitalism, Socialism and Democracy, Schumpeter considers Marx as Prophet, Sociologist, Economist, and Teacher. It’s hard to avoid the thought that the author construed himself in the same roles. Certainly his critique of Marx is full of insight: “Now Marx saw this process of industrial change more clearly and he realized its pivotal importance more fully than any other economist of his time.” He accomplished a fusion of history and theory whose result represented something different from either one alone. Marx “was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raison?e.” Nevertheless, Schumpeter’s final verdict is negative, because of the “failure of [Marx’s] prediction of increasing misery,” which in turn derived from “wrong vision and faulty analysis.” Although Marx the economist and sociologist was mostly correct, Marx the prophet and teacher proved to be disastrously wrong.16

As prophet, the same might be said of Schumpeter himself. On page 61 of Capitalism, Socialism and Democracy Schumpeter asks, “Can capitalism survive?”, then replies, “No. I do not think it can.”17 This provocative passage may have been sincere, or simply Schumpeter’s way of getting the reader’s full attention. His purpose was to lay bare the core nature of capitalism–to show how it works, to demonstrate why, on balance, it is a good thing; and then to highlight its fragility.18

In response to the standard charge that capitalism distributes its fruits inequitably, Schumpeter points out that “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.”19

A by-product of capitalism is the dominance of all life by an economic calculus, which Schumpeter calls “rationality.” He shows how powerfully the economic way of thinking bestows rewards and penalties: “Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money. . . . The promises of wealth and the threats of destitution that [this arrangement] holds out, it redeems with ruthless promptitude.” Constant, relentless change is the hallmark of capitalism. “It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx.”20

Underscoring the deficiencies of any conceptual system that proceeds from static assumptions, Schumpeter compares the universe of Adam Smith and other classical economists with the reality of modern industry. The classicists “recognized cases of ‘monopoly,’ and Smith himself carefully noticed the prevalence of devices to restrict competition.” Yet neither Smith nor most other classical and neoclassical economists “saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think. If we look more closely at the conditions . . . that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it.”21

Schumpeter contrasts this situation with modern business, parts of which involve constantly evolving oligopolies. These new situations do not easily lend themselves to mathematical modeling. In oligopolies, “there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms.”22

The contemporary structure of business is best understood as having evolved from long “organizational development.” It reflects a “process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”23

In sum, the process is one of “creative destruction”–the sweeping out of old products, old enterprises, and old organizational forms by new ones. It is what capitalism consists in and what every capitalist concern has got to live in.”24 For the scholar, this necessitates a lengthy time frame for analysis: “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . . As long as this is not recognized, the investigator does a meaningless job.25

One result of this approach should be a sharper focus on product quality and on marketing, and a reduced emphasis on price. “[I]n capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” A theoretical analysis that “neglects this essential element of the case . . . even if correct in logic as well as in fact, is like Hamlet without the Danish prince.”26

Schumpeter then turns to the question of monopoly. He mounts a devastating attack on what he regards as popular American attitudes toward this subject, which, in his judgment, spill over onto big business in general. Much of what Schumpeter says here was conditioned by what happened in the 1930s, and specifically by New Dealers’ assaults on big business. He argues that the very nature of giant, capital-intensive enterprise requires strategic behavior not contemplated by orthodox economic theory except to the extent that the theory holds such behavior monopolistic. As a matter of historical record, Schumpeter insists, long-run price rigidities are practically unknown. The same is true of long-run cases of monopoly, which are rarer than instances of perfect competition.27

It seemed plain to Schumpeter that big business, instead of exploiting consumers, had radically elevated their living standards. Organizational innovation, not monopolistic profits, accounted for the prosperity of most great companies. They should be viewed with pride and awe, not with detestation and fear. “These units not only arise in the process of creative destruction and function in a way entirely different from the static scheme, but in many cases of decisive importance they provide the necessary form for the achievement. They largely create what they exploit.” Monopoly rents might flow for awhile, but they are inevitably temporary, “the prizes offered by capitalist society to the successful innovator.” Under capitalism, the idea of a permanent monopoly is ludicrous, especially in manufacturing.28

Schumpeter next mounts a savage assault on the idea of perfect competition. He implies that it has evolved from an analytical tool of theoretical economics into an ideal toward which theory should guide public policy. This, he suggests, is catastrophic:

If we try to visualize how perfect competition works or would work in the process of creative destruction, we arrive at a still more discouraging result. . . . In the last resort, [cases approaching perfect competition, such as] American agriculture, English coal mining, [and] the English textile industry are costing consumers much more and are affecting total output much more injuriously than they would if controlled, each of them, by a dozen good brains.29

Pushing his analysis to its limits, Schumpeter identifies capitalist entrepreneurship with technological progress itself. As a matter of historical record, they were “essentially one and the same thing,” the first being “the propelling force” of the second.”30

At this point in the book, Schumpeter begins to lay the foundations for his famous argument that capitalism contains the seeds of its own destruction–not for economic reasons but for sociological ones. His reasoning proceeds as follows:31

1. In pre-capitalist times, no sheer economic achievement, by itself, could advance anyone into the ruling class.

2. When capitalism began to develop, persons of “supernormal ability and ambition” became upwardly mobile provided they would “turn to business.”

3. It was hard to succeed in business, yet success remained inglorious: “no flourishing of swords about it, not much physical prowess, no chance to gallop the armored horse into the enemy. . . . The stock exchange is a poor substitute for the Holy Grail.”

4. There can be no assurance that people are “happier” or “better off” under industrialism than in the medieval manor or village. Efficiency is only one of many human desiderata, and perhaps not the most important one.

5. So the future of capitalism can’t be assured purely because of its economic superiority. “I am not going to argue, on the strength of that performance, that the capitalist intermezzo is likely to be prolonged.”

6. Capitalism all but destroyed most of the secular underpinnings of civilized society–the manor, village, and craft guild. Yet it replaced these institutions with nothing: no idealism, no sense of organic life, no essential ability for social organization of a non-economic nature.

7. In particular, the talents necessary for economic success don’t translate well into other realms of life. “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose–both in the drawing room and on the platform.”

8. So, without protection from some other source, “the bourgeoisie is politically helpless and unable not only to lead its nation but even to take care of its particular class interest.”

9. Because capitalist evolution, and particularly the rise of big business, attacks masses of small producers and merchants, it alienates its natural allies, indirectly giving reinforcements to the enemy.

10. The substitution of a share of stock for tangible goods “takes the life out of the idea of property.” If this process goes on long enough and thoroughly enough, “there will be nobody left who really cares to stand for [property].”

11. Capitalism works gradual changes within the psyches of individuals. By reducing everything to an economic calculus, it “rationalizes” thinking. It “creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own.”

12. The philosophical case for capitalism is beyond the intellectual capacity of most persons, even most economists. “Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.”

13. Most important, the case for capitalism “must rest on long-run considerations.” In the short run, it is impossible for most people, even intellectuals, to ignore exasperating “profits and inefficiencies” and focus instead on long-range trends.

14. Uniquely among types of societies, capitalism is so successful economically that it “creates, educates and subsidizes a vested interest in social unrest.” It underwrites a class of hostile intellectuals who have no “direct responsibility for practical affairs” and little experience in managing anything.

15. The rise of mass media makes this situation more dangerous by multiplying the access of demagogues to short-run human instincts and desires. In the process, “public policy grows more and more hostile to capitalist interests.”

16. Bureaucracies in Europe antedate the capitalist epoch and owe no allegiance to bourgeois values. Bureaucracies in America, however, with no real civil service tradition, hold onto their antipathy toward capitalism because they don’t grasp the vast stakes at issue. Given the “legislative, administrative and judicial practice born of that hostility, entrepreneurs and capitalists–in fact the whole stratum that accepts the bourgeois scheme of life–will eventually cease to function.”

17. Most alarming of all, the bourgeois family may disintegrate. As soon as men and women “introduce into their private life a sort of inarticulate system of cost accounting,” they will become aware that “children cease to be economic assets.” When this happens, the last pillar of bourgeois society will fall.

Much of Schumpeter’s argument here might be interpreted as a cry from the heart of a brilliant but unlucky European elitist, who had witnessed one catastrophe after another during the bloody first half of the twentieth century. Even in contemporary America, a unique opportunity for the development of an advanced capitalist society stood on the edge of disaster. It was happening in the United States because of the Great Depression, the ascendance of fascism and communism in Europe, and the onset of World War II. It had not happened earlier because “The scheme of values that arose from the national task of developing the economic possibilities of the country drew nearly all the brains into business and impressed the businessman’s attitudes upon the soul of the nation.”32

Schumpeter professed to see not only the decline of capitalism but also the ultimate triumph of socialism. “Can socialism work?” he asks. “Of course it can.” In large part, it can work because it inspires people to noble ends, to something larger than themselves. Socialism implies “a new cultural world” whose psychic rewards may be worth the price of optimal economic efficiency. For true believers, “Socialist bread may well taste sweeter to them than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it.”33

Despite memorable aphorisms such as this one, Schumpeter’s analysis of socialism and democracy is a good deal less compelling than his dissection of capitalism. He says of democracy that it is best understood not as a system but merely a “method”–an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.” Of course there is much more to democracy than this, but Schumpeter’s real interests lie elsewhere.34

At the very end of Capitalism, Socialism and Democracy, Schumpeter delivers a philippic about the intrusion of modern government, and specifically the New Deal state, into economic life. He mentions counter-cyclical policies, redistributive taxation, antitrust, price controls, monetary policy, the regulation of labor, securities legislation, and the “indefinite extension of the sphere of wants” to be supplied by public enterprise. Yet, ever the “scientist” reluctant to succumb to the Ricardian Vice, Schumpeter closes with this remarkable statement: “It would spell complete misunderstanding of my argument if you thought that I “disapprove” or wish to criticize any of these policies. Nor am I one of those who label all or some of them “socialist.”35

The Book’s Reception

Capitalism, Socialism and Democracy received a modicum of attention in 1942, when it was first published. A second edition, which appeared in 1946, attracted wider notice, and the third, in 1950, became an international best-seller.

Reviewing the first edition, the Cambridge economist Joan Robinson found that Schumpeter “has little love for socialism, and none at all for socialists. His natural sympathy is all with the heroic age of expanding capitalism.” Herself a leading theorist of imperfect competition, Robinson found Schumpeter’s analysis of that subject the “most brilliant” part of the book: “his argument blows like a gale through the dreary pedantry of static analysis.” Although Schumpeter had little to say about contrary evidence, especially in his argument about the fadeout of capitalism and its replacement by socialism, “The reader is swept along by the freshness, the dash, the impetuosity of Professor Schumpeter’s stream of argument.” Whether or not the reader was totally convinced, “this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre.”36

Reviewing the 1946 edition of Capitalism, Socialism and Democracy, Arthur M. Schlesinger, Jr. wrote that the book “burst into the generally sterile atmosphere of political discussion like a collection of firecrackers and skyrockets.” Schumpeter’s analysis made it pointless to keep repeating mindless slogans about the evils of monopoly. Even if he were wrong, “there is no percentage in dodging the uncomfortable points he raises. The intellectual rigor of his analysis sets a standard that liberal writers should try to meet.” The book “is the performance of an intellectual virtuoso, brilliant, complex, perfectly controlled.”37 In 1981, a retrospective analysis of the book appeared, entitled Schumpeter’s Vision: Capitalism, Socialism, and Democracy After 40 Years.38 Here several of Schumpeter’s former students and associates joined with some European scholars in evaluating the book’s legacy. Paul Samuelson led off, conceding that the subject under discussion was “a great book.” He added that from a game theoretic viewpoint Schumpeter might have taken account of the propensity of democratic groups to change the nature of capitalism and to bend it to their own self-interest. Schumpeter’s praise of Marx for “being learned, bold to speculate, and broad in his dynamic vision” describes Schumpeter himself, Marx thereby being “a veritable chip off the new block.” Yet “Schumpeter was of all my teachers the one whose economics was essentially farthest from Marx’s.”39

The sociologist Tom Bottomore, a man of the Left, lamented Schumpeter’s disinclination to cast his analysis in terms of economic and social class. Thus, he had overlooked some important changes that now (in the 1980s) were clearer: “A very large part of the middle class, in spite of variations. . . has maintained a political orientation which is much more favourable to parties of the right and the centre than to those of the left. . . . [Schumpeter] thought that the ‘march into socialism’ was well-nigh irresistible, and deplored the fact. I, on the contrary, think that this ‘march’ has come to an untimely halt, and regret the eclipse of the highest ideal that has emerged in modern Western culture.”40

In a third essay, Schumpeter’s fellow Austrian and longtime Harvard colleague Gottfried Haberler wrote that although Schumpeter never said so in Capitalism, Socialism and Democracy, it was clear that his “real feeling” was “that capitalism or the ‘bourgeois’ society is very much worth fighting for.” Schumpeter’s forecast of capitalism’s downfall “has shocked and puzzled many people. If all qualifications, reservations, and elucidations are given their proper attention, however, the forecast of capitalism’s early doom becomes less apodictic and the demise of capitalism loses much of its inevitability.” Then, too, Schumpeter’s emphasis on rising resentment of taxation anticipated the American tax revolt that began in the 1970s, a movement of extraordinary importance.41

The economist Robert L. Heilbroner, a first-rate stylist himself, judged Capitalism, Socialism and Democracy partly on artistic terms: “There is [in the book] a great deal of attitudinizing. . . an open delight in epater le bourgeois and tweaking the noses of radicals. There is also pomposity and pedantry, mixed with an arrogance that teeters on the edge of a dangerous elitism.” Yet the book remains full of “perceptive insights,” such as Schumpeter’s remark that “The evolution of the capitalist lifestyle is best described ‘in terms of the genesis of the modern lounge suit,’ a remark worthy of Thorstein Veblen.”42

Arthur Smithies, Schumpeter’s former student and colleague, saw Capitalism, Socialism and Democracy in part as a reaction against Keynesianism. Schumpeter had openly derided the “stagnation thesis” introduced in Keynes’s General Theory. This thesis holds that as a country grows richer investment opportunities shrink but the propensity to save increases; therefore savings and investment balance only at high unemployment. “If valid,” wrote Smithies, “the long-run Keynesian argument provided an impregnable case for socialism.” Yet Schumpeter saw that the underpinnings of the stagnation thesis were the atypical conditions of the Great Depression. He “maintained his sanity” and insisted that such problems were not permanent but cyclical. As for Schumpeter’s concern with inflation, in the 1940s Anglo-American economists thought it “obsessive,” but in fact Schumpeter proved remarkably prescient.43

Herbert K. Zassenhaus, another economist from the generation just behind Schumpeter, detected “a certain mysticism” in Capitalism, Socialism, and Democracy. “In the shape of the ‘entrepreneur,'” Schumpeter introduces “a social miracle in the precise sense of the word: an event beyond the laws of nature and society.”44

In perhaps the most telling of all the retrospective comments, the Dutch scholar Henrik Wilm Lambers recalled Schumpeter’s influence on him as a youth and the continued appeal of his book. In Capitalism, Socialism and Democracy, Lambers wrote, “Schumpeter accomplished the feat of moving five layers of thought–the firm, the markets, the institutions, the cultural values, the leaders of society–as one interwoven dynamic process. With incomparable skill he made history go through time as one stream.” Lambers’ own students were invariably taken with the book: “After many an oral graduate examination, I have often heard remarks like: ‘to be honest, the one stimulating book was Schumpeter’.” Radical and conservative students alike “say, each in their own way, ‘he keeps me puzzled: is it my fault or did he intend to?'”45

Capitalism, Socialism, and Democracy continues to puzzle and provoke readers–to make them think, to question their own perceptions measured against their own ideologies and to wonder about the author’s intentions. Only the very greatest books do this, and age so well.

Endnotes:

1. Tibor Scitovsky, “Can Capitalism Survive? — An Old Question in a New Setting,” Ely Lecture, American Economic Review, 70 (May 1980), p. 1; Martin Kessler, “The Synthetic Vision of Joseph Schumpeter,” Review of Politics, 23 (July 1961), p. 334; O. Morgenstern, “Obituary,” Economic Journal, 61 (March 1951), p. 203.

2. Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise, Cambridge, MA: MIT Press, 1962, p. 284; and Chandler, Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge: Harvard University Press) pp. 597, 830-831 n1.

3. See, for example, Lazonick, Competitive Advantage on the Shop Floor, Cambridge: Harvard University Press, 1990, pp. 3, 10, 323-324; and Rosenberg, “Joseph Schumpeter: Radical Economist,” in Exploring the Black Box: Technology, Economics, and History, New York: Cambridge University Press, 1994. Schumpeter often spoke on the relationship between history and theory: “Personally, I believe that there is an incessant give and take between historical and theoretical analysis and that, though for the investigation of individual questions it may be necessary to sail for a time on one tack only, yet on principle the two should never lose sight of each other”; see Schumpeter’s 1949 essay, “Economic Theory and Entrepreneurial History,” reprinted in Richard V. Clemence, editor, [Schumpeter’s] Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, New Brunswick, NJ: Transaction Publishers, 1989. See also Schumpeter, “The Creative Response in Economic History,” Journal of Economic History, 7 (November 1947).

4. Porter, The Competitive Advantage of Nations, New York: Free Press, 1990, p. 778 n.46.

5. Frederic M. Scherer, Innovation and Growth: Schumpeterian Perspectives, Cambridge, MA: MIT Press, 1984. Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press, 1982. Part V of this book (pp. 273-351) is entitled “Schumpeterian Competition,” and in it the authors try, mathematically, to apply Schumpeter’s insights to the process of innovation.

6. See, in general, Richard V. Clemence and Francis S. Doody, The Schumpeterian System, Cambridge, MA: Addison-Wesley, 1950. For more specialized efforts, and critiques of them, see Carolyn Shaw Solo, “Innovation in the Capitalist Process: A Critique of the Schumpeterian Theory,” Quarterly Journal of Economics, 65 (August 1951), pp. 417-428; Franklin M. Fisher and Peter Temin, “Returns to Scale in Research and Development: What Does the Schumpeterian Hypothesis Imply?” Journal of Political Economy, 81 (January/February 1973), pp. 56-70 [see also Comments by Carlos Alfredo Rodriguez and Reply by the authors in Journal of Political Economy, 87 (April 1979), pp. 383-389]; Morton I. Kamien and Nancy L. Schwartz, “Market Structure and Innovation: A Survey,” Journal of Economic Literature, 13 (March 1975), pp. 1-37; Carl A. Futia, “Schumpeterian Competition,” Quarterly Journal of Economics, 94 (June 1980), pp. 675-695; Meir Kohn and John T. Scott, “Scale Economies in Research and Development: The Schumpeterian Hypothesis,” Journal of Industrial Economics, 30 (March 1982), pp. 239-249; and Horst Hanusch, editor, Evolutionary Economics: Applications of Schumpeter’s Ideas, Cambridge: Cambridge University Press, 1988.

7. During the 1990s the Schumpeter literature became especially voluminous, with articles in such publications as the Journal of Evolutionary Economics and the Journal of Institutional Economics. These pieces often drew as much on Schumpeter’s sociology as on his economics. Several sought to apply biology to Schumpeter’s evolutionary analysis.

8. Schumpeter actually used the word “sins”: “I did not exactly wish to put Ricardo and Keynes on the same level, but I do think that there is striking similarity between their sins.” (Letter to Arthur W. Marget, Feb. 24, 1937, Schumpeter Papers, Harvard University Archives.)

9. Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, New York: McGraw-Hill, 1939, Volume I, pp. 169, 173, 174.

10. Samuelson, “Joseph A. Schumpeter,” Dictionary of American Biography, Supplement Four, 1946-1950, New York: Scribner, 1974, p. 723.

11. In this book the orientation appears most clearly in some vivid passages on pages 220-245 of Volume I.

12. Simon Kuznets, American Economic Review, 30 (June 1940), pp. 257, 266-271.

13. E. Rothbarth, Economic Journal, 52 (June-Sept. 1942), p. 229; J. Marschak, Journal of Political Economy, 48 (Dec. 1940), p. 892.

14. An insightful analysis of Schumpeter’s state of mind when he wrote Capitalism, Socialism, and Democracy may be found in Chapter 7 of Richard Swedberg, Schumpeter: A Biography, Princeton, NJ: Princeton University Press, 1991.

15. Capitalism, Socialism, and Democracy, New York: Harper Torchbook Edition, 1976, pp. 31-32.

16. Capitalism, Socialism, and Democracy, p. 32, 34, 44.

17. Capitalism, Socialism, and Democracy, p. 61.

18. In the revised edition of Capitalism, Socialism and Democracy appears Schumpeter’s final paper, “The March into Socialism” (December 1949). Here he speaks candidly about capitalism’s social implications: “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce: it means a scheme of values, an attitude toward life, a civilization–the civilization of inequality and of the family fortune” (p. 419).

19. Capitalism, Socialism, and Democracy, pp. 67-68.

20. Capitalism, Socialism, and Democracy, pp. 73-74, 77 n1, 82. In History of Economic Analysis, published posthumously (New York: Oxford University Press, 1954), Schumpeter wrote that in capitalism, “Disequilibrium prevails throughout, but Marx saw that this disequilibrium is the very life of capitalism” (p. 1051).

21. Capitalism, Socialism, and Democracy, pp. 78-79.

22. Capitalism, Socialism, and Democracy, p. 79.

23. Capitalism, Socialism, and Democracy, p. 83.

24. Capitalism, Socialism, and Democracy, p. 83.

25. Capitalism, Socialism, and Democracy, pp. 83-84.

26. Capitalism, Socialism, and Democracy, pp. 84-86.

27. Capitalism, Socialism, and Democracy, pp. 93, 99.

28. Capitalism, Socialism, and Democracy, pp. 101-102.

29. Capitalism, Socialism, and Democracy, pp. 104-106.

30. Capitalism, Socialism, and Democracy, p. 110. Schumpeter adds that making such a distinction is “quite wrong–and also quite un-Marxian.”

31. My summary here is abstracted from Capitalism, Socialism and Democracy, pp. 124-157.

32. Capitalism, Socialism, and Democracy, p. 331. This point echoes one of Schumpeter’s pet themes: that all societies suffer from a paucity of first-rate talent. Legal issues, labor problems, price control issues, and antitrust prosecutions add up to a “drain on entrepreneurial and managerial energy.” So much effort is expended on such issues that an executive often “has no steam left for dealing with his technological and commercial problems.” One consequence is that except in very large companies, which can afford numerous specialists, “leading [management] positions tend to be filled by ‘fixers’ and ‘trouble shooters’ rather than by ‘production men'” (p. 388.)

33. Capitalism, Socialism, and Democracy, pp. 167, 170, 190.

34. Capitalism, Socialism, and Democracy, p. 269.

35. Capitalism, Socialism, and Democracy, p. 418. This passage is from Schumpeter’s last address, delivered to the American Economic Association in December, 1949, three weeks before his death. The address was entitled “The March into Socialism.”

36. Joan Robinson, in the Economic Journal, 53 (December 1943), pp. 381-383.

37. Arthur M. Schlesinger, Jr., in The Nation, April 26, 1947, pp. 489-491.

38. Arnold Heertje, editor, Schumpeter’s Vision: Capitalism, Socialism and Democracy after 40 Years, New York: Praeger, 1981.

39. Paul A. Samuelson, “Schumpeter’s Capitalism, Socialism and Democracy,” in Schumpeter’s Vision, pp. 1, 13, and passim.

40. Tom Bottomore, “The Decline of Capitalism, Sociologically Considered,” in Schumpeter’s Vision, pp. 22-29, 44.

41. Gottfried Haberler, “Schumpeter’s Capitalism, Socialism and Democracy after Forty Years,” in Schumpeter’s Vision, pp. 70, 71, 74-75, 83, 84, 89.

42. Robert L. Heilbroner, “Was Schumpeter Right?” in Schumpeter’s Vision, pp. 95, 96, 99-100, 101-102, 106.

43. Arthur Smithies, “Schumpeter’s Predictions,” in Schumpeter’s Vision, pp. 130-132, 145-146.

44. Herbert K. Zassenhaus, “Capitalism, Socialism and Democracy: The ‘Vision’ and the ‘Theories,'” in Schumpeter’s Vision, pp. 173, 176, 181, 189.

45. Hendrik Wilm Lambers, “The Vision,” in Schumpeter’s Vision, pp. 107-129.

Thomas K. McCraw is the Isidor Straus Professor of Business History at the Harvard Business School and editor of the Business History Review. He is author of Morgan Versus Lilienthal (William P. Lyons Award, 1970), TVA and the Power Fight (1971), co-author of Management Past and Present (1996); and editor of Regulation in Perspective (1981), America Versus Japan (1986), The Essential Alfred Chandler (1988), and Creating Modern Capitalism (1997). His book Prophets of Regulation won both the Pulitzer Prize in History for 1985 and the Thomas Newcomen Award for 1986. His American Business, 1920-2000: How It Worked (2000) was recently reviewed on EH.NET.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Railroads and American Economic Growth: Essays in Econometric History

Author(s):Fogel, Robert W.
Reviewer(s):Davis, Lance

Robert W. Fogel, Railroads and American Economic Growth: Essays in Econometric History. Baltimore: Johns Hopkins Press, 1964. xv + 296 pp.

Review Essay by Lance Davis, Division of Humanities and Social Sciences, California Institute of Technology. led@hss.caltech.edu

For those of us who lived through the exciting days of the “cliometric revolution,” the publication of Robert Fogel’s Railroads and American Economic Growth represented a very major milestone – it was as if we now had proof that we had left the bumpy and unpaved dirt road of the first few years and could see ahead a straight and well-paved highway into the future. (See note 1.) The roots of “clio” clearly lay in the 1956 publication of Cary Brown’s “Fiscal Policy in the Thirties: A Reappraisal” and, a few months later, in Alfred Conrad and John Meyer’s initial presentation of “The Economics of Slavery in the Ante-Bellum South.” Brown showed that, unlike the findings of the then-current historiography, government economic policy during the 1930’s was not an example of President Roosevelt’s imaginative application of the modern tools of Keynesian fiscal policy; and Conrad and Meyer demonstrated that, despite nearly a century of traditional historiography, ante-bellum slavery was profitable and, at least by implication, that, if the goal was to eliminate slavery before the 1940’s, the Civil War was not an extremely costly and totally unnecessary enterprise. However, these findings – findings that have been well substantiated by later research – while convincing to the small cadre of “converted,” were still not generally accepted by the historical profession. Thus, cliometrics did not really begin to flower until the publication of Robert Fogel’s study of the impact of railroads on American growth in the nineteenth century. Not only did it generate a spate of parallel studies (of Russia, Mexico, Brazil, England, and Scotland, to cite only five), but much more importantly, it provided a methodological foundation for the systematic study of economic history and long-term economic growth.

Despite the attention that had been paid to the construction of the Erie Canal, given the role of the national market in underwriting this country’s rise to become, economically at least, the richest nation in the world, and, given the speed with which rails came to dominate the transport network that provided the basis for that national market, it is not surprising that historians had concluded that railroads were the indispensable and driving force behind American growth in the nineteenth century. To the best of my knowledge, before the first annual Cliometric Conference (a conference held at Purdue University in 1960), few economic historians, neither those traditionally nor those cliometrically inclined doubted this fundamental tenant of American development. (See note 2.) Moreover, although some cliometricians may have been aware of the concept of social savings – a concept that was closely related to the economic literature on cost/benefit analysis – none had attempted to measure the savings attached to any specific legal or technical innovation. (Fogel had touched on a similar concept in The Union Pacific Railroad (1960), but his first published paper dealing specifically with social savings was still almost two years in the future – “A Quantitative Approach to the Study of Railroads in American Economic Growth” (1962).)

With its publication, Railroads proved once and for all that economic history, while still depending on the product of scholars “slugging it out in the archives,” could benefit mightily from the careful application of economic theory and econometrics. On the one hand, although the work immediately generated substantial controversy, and even today one might quibble about a few days or a few months, in the long run, there has been little question about the book’s major conclusion – that the level of per capita income achieved by January 1, 1890 would have been reached by March 31, 1890, if railroads had never been invented. Moreover, Fogel’s work also indicated that there was no other industry that was likely to have been more important than the railroads; and, thus, if not railroads, no other industry could have played the role that historiography attributed to the rails. On the other hand, the evidence is overwhelming that, since the publication and subsequent debate over Railroads, almost all economic history has been written by scholars who have either been trained in economics or who have found it necessary to acquire (either formally or informally) those basic economic and econometric skills. What, then, in addition to the central importance of the subject, made this such a path-breaking work? As the title suggests, the book is actually a collection of four interrelated, but really distinct, substantive essays: “The Interregional Distribution of Agricultural Products,” “The Intraregional Distribution of Agricultural Products,” “Railroads and the ‘Take-off’ Thesis: The American Case” and “The Position of Rails in the Market for American Iron, 1840-1860: A Reconstruction.” Any attempt at evaluating the contribution of the book rests on the evaluation of the methods and findings of the four.

If Fogel had limited his work to the last two essays – the two that in many ways were the most central to the then intense discussions of the “Axiom of Indispensability,” the work would have been important; but it would never have had anywhere near the impact that it actually did. In the third essay, “The Takeoff,” Fogel, although not addressing the question of whether or not there was in fact a “takeoff” between 1843 and 1860, in order to operationalize his argument, chooses the first of W.W. Rostow’s criteria for a “leading industry”: in this case, what impact did the railroads have on the “change in the percentage distribution of output among the various industries?” Then, drawing on the best available data – data reported by Robert Gallman in his seminal (1960) study of commodity output – Fogel finds that the impact of the railroads on that percentage distribution was minimal. In the case of iron, railroads, except at the end of the period, accounted for only a minor fraction of the output change (overall, including the later period, it was still only 17 percent); for coal, it was less than 5 percent; for lumber, barely 5 percent; in the case of transport equipment only 25 percent (only half of the change accounted for by vehicles drawn by animals); and for machinery it was less than 1 percent. Thus, for all manufacturing, the railroads accounted for less than 3 percent of the change – hardly a ringing endorsement for what was purported to be a “leading industry.”

In his more detailed examination of the impact of railroads on the development of the iron industry (an attempt to assess the importance of railroads to industrialization because of their alleged “backward linkages”), Fogel found it necessary to produce a new series on pig iron output between 1840 and 1860 and to revise the estimates of the consumption of railroads to account for imports and recycled rails as well as changes in the weight of rails. These new estimates represented a major contribution to our understanding of the industrial history of the period. Fogel’s primary interest, however, was not on the production of the new series, but on estimating the importance of the railroads in the development of the iron industry. His results, again, indicate that railroads did not dominate the development of the iron industry in the two decades before the Civil War. In fact, his conclusions strongly support Douglass North’s conclusion that, from the point of view of backward linkages, it would be as sensible to talk about an iron stove theory of the development of the iron industry as a railroad theory.

In these two essays Fogel demonstrates a command of what had heretofore been the best of traditional economic history, but in neither chapter are there any major methodological breakthroughs – merely a carefully constructed series of new estimates and the demonstration of an ability to bring those estimates to bear on important issues. In the first and second of the four substantive chapters – the estimate of the social savings from the interregional and from the intraregional distribution of agricultural products – Fogel’s methodological innovations do, however, play a central role. First, in both essays, he attempts to explicate and to provide estimates of the appropriate counterfactual – what the world would have been like had there been no railroads. Although historians have long employed counterfactual arguments – sometimes it seems without realizing it – to most historians the idea of an explicit counterfactual was still a very foreign notion in the early 1960s. Second, in both chapters Fogel employs the concept of social savings (the difference in social costs between the real and the counterfactual worlds) to provide a measure of the value of the introduction of the railroad. The concept of social savings is itself an important research tool; but, from a methodological point of view, it is equally important that the measure was defined operationally, so that Fogel’s calculations could be tested against alternative estimates and against possible alternative definitions. As an aside, however, it is interesting to note that, although the two studies are very very important from the view point of methodological innovation, from the point of view of traditional economic history, they are not as strong as the third and fourth substantive essays. In the second substantive essay – the social savings arising from the intraregional distribution of agricultural commodities – Fogel begins by noting that the substitution of rail for water was more rapid in the intraregional than in the interregional distribution of agricultural commodities, and, that, since the distances to be shipped in the intraregional case were only a third as great for rail as for water transport, one would expect that the social savings from the innovation would be greater. To estimate those savings he proposes two measures: alpha (a direct measure of the cost differences with and without the railroads) and beta (an indirect measure based on the difference in the value of the land that would have been economically productive with railroads and the lesser number of acres and, thus, the lesser value of land that would have been economically productive in the absence of those railroads).

Fogel then estimates alpha for a sample of counties in the North Atlantic region and concludes that the direct costs (alpha) would amount to a loss of 2.5% of GNP, and that adjustment for excluded indirect costs (alpha-2) would have increased that figure to 2.8% of GNP. Neither estimate, however, includes the potential savings that would have resulted from the construction of additional canals and better roads. He admits that the North Atlantic region may not provide an adequate representation of the entire country, but he argues that it would be too expensive and difficult to extend this direct measure of savings to the rest of the country.

As an alternative, Fogel suggests that, since water transport was available for about 76% of the land value in the U.S., since, in the absence of railroads, 75% of the loss of land value would be in the four states of Illinois, Iowa, Nebraska, and Kansas, and since all of the lost land could be brought into production with only a small extension of the canal network, a measure based on the difference in the value of arable land provides an equally good measure of social savings. He concludes that the cost of the direct loss of arable land from the absence of railroads (beta) would amount to 1.8% of GNP, and that the total loss – the sum of direct and indirect costs (beta-2) – would amount to 2.1% of GNP. Again, however, beta-2 does include the potential savings that would result from additional canals and better roads. Making further adjustments for the unbuilt canals and better roads, Fogel provides two estimates for the social savings from intraregional trade: alpha-3 equal to 1.2% of GNP and beta-3 equal to 1.0% It was, however, Fogel’s estimates of the social savings generated by railroads in interregional shipping (the first substantive essay), that really touched off the methodological revolution. As in the second essay, the use of explicit counterfactuals and the innovation of the concept (as well as his estimates) of the social savings broke new ground. In this case, however, there were also other very important methodological innovations.

Fogel begins with an operational definition of interregional distribution: “the process of shipping commodities from the primary markets of the Midwest to the secondary markets of the East and South.” While there were good estimates of agricultural production and agricultural exports, there were no data on the method and routes of shipment that were used to move agricultural commodities from producing areas to the points of domestic and foreign consumption; and it is here that Fogel introduces his single most significant innovation. He focuses of four commodities (wheat, corn, beef, and pork) – commodities that together represented 42 percent of agricultural income. He, first, estimates the export surplus at ten primary markets in the west and the consumption in the almost 200 deficit trading areas in the East and South (exports are attributed to the port from which they were shipped). The potential rail and water shipping routes from West to East were easily identified, and the costs of rail and water shipment were well known. To simplify the problem, Fogel focuses on a sample of 30 of the 825 potential routes between pairs of cities in the West and the East. Since the actual choice of routes is unknown, he very imaginatively suggests a linear programming model to estimate the routes – with and without railroads – that would have been selected had the shippers been guided by cost minimization. He then estimates the costs of the inferred shipments, costs estimated both with and without rails. Since there were also additional costs of water transport (lost cargoes, transshipment expenses, extra wagon haulage, time lost because of slower speed and because the canals and rivers froze, and the capital costs of the canals that were not included in the water rates), Fogel adjusts his original cost differentials to account for these additional expenses. His result is an estimate of the social savings in interregional shipment resulting from the innovation of railroads of six-tenths of one percent of GNP, a figure that would have increased to only 1.3%, had he assumed that rail rates were zero.

In this chapter Fogel made four important innovations that were to have a major impact of the nature of research in economic history: (1) the operational definition of social savings; (2) the use of an explicit counterfactual; (3) the use of a formal economic model to estimate what costs would have been had the decisions been made by economic man; and (4) his choice, when it was necessary to make assumptions about the actual world, of assumptions that were biased against his central findings. (See note 3.) Even more than his estimates of interregional social savings, the work in this essay completely changed the way economic historians would do business in the future. There is, however, one blemish in the story. Professor Fogel never actually solved the linear programming problem; his choice of routes was based on what he assumed the solution would have been.

Notes:

1. To give you some feeling about that first decade, one might note that the term “cliometrics” was coined by my then colleague at Purdue, Stanley Reiter – he had been toying around with questions raised by a new discipline that he called “theometrics” (for example, “how many angels can dance on the head of a pin?); and, in his joking way, he suggested that the work in quantitative history seemed to be drawn from similar academic stream.

2. Bob Fogel and, perhaps, Douglass North and Al Fishlow, were the major exceptions. Fogel, himself, has said that he began his investigation fully believing that it would confirm the importance of the railroads. Fishlow (1965) reached conclusions for the antebellum period very similar to those Fogel reached about the latter part of the nineteenth century. Not long before this, North (1961, p. 164) wrote, “While the value added of rails was approximately $6.5 million in 1860 and roughly equals to the value added of bar iron, it was dwarfed by the value added of the polyglot classification of iron castings, which was $21 million in 1860. Indeed, the value added in stove making alone was equal to that of iron rails.”

3. For example, Fogel made no adjustment for changes in non-rail transport that might have been made had there been no railroads: he holds both origins and destinations fixed despite the fact that there would almost certainly have been some such adjustments in the absence of railroads; and he assumes that, in the absence of railroads, water rates would be constant rather than declining as might have been the case had canal builders exploited potential economies of scale.

References:

E. Cary Brown. 1956. “Fiscal Policy in the Thirties: A Reappraisal,” American Economic Review, 46 (December).

Alfred Conrad and John Meyer. 1958. “The Economics of Slavery in the Ante-Bellum South” Journal of Political Economy, 66 (April). This paper was first presented at the meeting of the Economic History Association in 1956.

Albert Fishlow. 1965. American Railroads and the Transformation of the American Economy. Cambridge, MA: Harvard University Press.

Robert Fogel. 1960. The Union Pacific Railroad: A Case Study of Premature Enterprise. Baltimore: Johns Hopkins Press.

Robert Fogel. 1962. “A Quantitative Approach to the Study of Railroads in American Economic Growth: A Report of Some Preliminary Findings,” Journal of Economic History, 22 (June).

Robert E. Gallman. 1960. “Commodity Output in the United States,” in Conference on Income and Wealth, Trends in the American Economy in the Nineteenth Century, 24, Studies in Income and Wealth. Princeton: Princeton University Press.

Douglass North. 1961. The Economic Growth of the United States 1790 to 1860 Englewood Cliffs, NJ: Prentice-Hall.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):19th Century

Nonzero: The Logic of Human Destiny

Author(s):Wright, Robert
Reviewer(s):Long, J. Bradford De

Published by EH.NET (July 1, 2000)

Robert Wright, Nonzero: The Logic of Human Destiny. New York: Pantheon

Books, 2000. x + 435 pp. $27.50 (cloth), ISBN: 0-679-44252-9.

Reviewed for EH.NET by J. Bradford De Long, Department of Economics, University

of California-Berkeley.

Back in 1794 the Enlightenment philosophe Marie Jean Antoine Nicolas Caritat,

Marquis de Condorcet wrote his Sketch for a Historical Picture of the

Progress of the Human Mind — the boldest of the eighteenth-century

declarations that humanity had and was destined to see Progress with a capital

P. Condorcet was a powerful and convincing advocate– Malthus wrote his

Essay on Population explicitly against Condorcet. But that was the high

water mark of belief in Progress. By and large the past two centuries have seen

the reaction, and confidence in human Progress — technological, political,

humanistic, and moral — fell out of intellectual favor.

Now comes Robert Wright, previously author of Three Scientists and Their

Gods and The Moral Animal, with an excellent book accompanied by an

enthusiastic blurb by William McNeill. Wright’s purpose is to set out the

gospel of progress anew, this time using the language of game theory as his

principal mode of rhetoric. At its most basic level Wright’s point is that

interactions are positive-sum: there are gains from cooperation. Thus human

cultural evolution has an arrow and a direction: toward greater complexity,

toward higher civilization.

The direction arises at two levels. First, individual humans seek out things

that increase their own powers and capabilities. Cooperation tends to do this,

so people find ways to cooperate. But the most important form of cooperation is

one that is almost impossible to stop: the simple sharing of knowledge. Two

heads are better than one. The denser the population (and the better the means

of communication) the more ideas will be generated, the larger the number of

ideas that turn out to be useful, and the faster will be progress. People are,

Wright argues — in my view correctly — naturally acquisitive in that they

want useful things, and will eagerly copy new technologies they hear about.

Thus Wright sees inventions such as agriculture as inevitable — not as a lucky

accident.

Second, at the level of human societies, the societies that are more powerful

– have better technologies, more effective social arrangements, greater

population densities, and so forth — either swamp their neighbors or force

their neighbors to copy them in order to maintain their autonomy. In Eurasia,

where contact was constant from an early age — as Wright points out, in 200 on

one could travel from Gibraltar to the Yangtze River and cross only three

borders (p. 117) — a good innovation at one end would diffuse all the way to

the other in a matter of centuries. He believes that the wide spread of

religion in agricultural civilizations proves that its productivity-boosting

and division of labor-enhancing effects outweigh its exploitative side (p. 86):

those societies that did not have temples and priests did not flourish.

Wright dismisses gloomy talk of barbarian invasions and the fall of empires by

asserting that one goes from furs-and-swords to linen-and-pens in three

generations: “The Romans weren’t exactly hailed by the Greeks as cultural

equals when they happened on the scene…. Yet they were massively infiltrated

by classical Greek memes, which they then spread across the wider world. In

Horace’s phrase, ‘The Greeks, captive, took the victors captive’. And, anyway,

who were the Greeks to look down on intrusive barbarians? … The early Greeks

had a title of honor, ptoliporthos, that meant ‘sacker of cities’…. But

whether these ‘barbarians’ sack cities, or hover on the periphery and trade …

or ally with them in war or ally against them, one outcome is nearly certain:

win, lose, or draw, the ‘barbarians’ become vehicles for advanced memes…” (p.

131). For what truly matters are the basic technologies of agriculture and

craft, not the products of high civilizations. And even when you do have

significant regression — in the post-Mycenean Dark Age, in the post-Roman Dark

Age, or in the wake of the Mongols – Wright reminds us that “the world makes

backup copies.”

Wright also dismisses gloomy talk of the stagnation of Ming and Qing China, the

fall of the Mughal Empire, and the technological and organizational stasis of

the Ottoman Empire by arguing that the key unit is not Europe vs. Asia but is

instead Eurasia. Sooner or later, Wright argues, some part of Eurasia — it did

not have to be Europe – would have hit upon a superior social and technological

recipe to that of the mid second millennium empires, and when it did the rest

would have copied it. Wright is of the school that holds that China almost

broke through to modernity, writing of how paper and woodblock printing were

used to distribute useful texts — Pictures and Poems on Husbandry and

Weaving, Mathematics for Daily Use, and the Treatise on Citrus

Fruit (p. 159). The recipe that ultimately proved successful — what Wright

calls the economic logic of freedom — was stopped in many places: “indeed, on

balance, in the centuries after the printing press was invented, European

governments grew more despotic” (p. 185). But it only had to succeed once. And

given sufficient cultural variation, sooner or later a breakthrough was

inevitable.

But even if you buy all of Wright’s argument that forms of increasing returns

– non-zero-sum-ness, as Wright calls it — impart an arrow of increasing

complexity and division of labor to human social, cultural, and economic

evolution, this does not necessarily amount to Progress — at least not to

anything we would see as progress in human morality or human happiness. For why

should organizational complexity be Progress? As Wright puts it: “… it would

be hard to argue that there was net moral gain between the hunter-gatherer and

ancient-state phases of cultural evolution. The Egyptians had slaves — which

virtually no known hunter-gatherer societies had — and their soldiers returned

from wars of conquest proudly brandishing the severed penises of their slain

foes” (p. 206).

So in the end Wright is forced to play a game of three-card monte to reach

conclusions that support his belief in Progress. The card labeled “complexity”

must be switched for the card labeled “Progress” without our noticing. In the

industrial core, at the end of the twentieth century, we are inclined to

tolerate this switch — to say that it is obvious that a highly complicated and

productive civilization will have widely-distributed individual wealth, lots of

individual freedom, and soft forms of rule, and that social complexity is

civilization. But back in the middle of the twentieth century this switch could

not have been accomplished at all: “complexity yes,” people would have said,

“but progress no.” And who knows how things will look in a hundred more years?

Marie Jean Antoine Nicolas Caritat, Marquis de Condorcet (1743-1794), was an

aristocrat, a mathematician, an official of the Academy of Sciences, and was a

friend of Voltaire (1694-1778). He strongly supported the revolution of 1789 as

an example of human progress. But the Committee of Public Safety turned on him:

he was arrested, and died in prison before he could be executed.

————————————————————————

*The above review covers only the first two-thirds of the book. At that point

Wright asks the question: “Aren’t organic evolution and human history

sufficiently different to demand separate treatment?”

I think the answer to this question is “yes,” and that the book should stop at

that point. Wright thinks that the answer is “no,” and so the book continues.

He goes on to draw analogies between human cultural evolution toward greater

complexity and biological evolution toward greater complexity.

Wright’s argument that biological evolution has an arrow as well — tends to

produce animals with big brains that think — runs roughly as follows:

Life starts out simple. It then evolves, with variation and with the

conservation and spread of successful variations. Thus evolution generates

increasing diversity, and increasing diversity generates increasing complexity:

it is hard for a one-celled organism to become less complicated (although

viruses have managed), and easy for it to become more complicated.

But wait! Most of your environment is made up of other living creatures. Hence

the environment becomes more complicated over time too. And because the

environment becomes more complicated over time, there is increasing adaptive

value in information acquisition and information processing organs: better eyes

(and ears) and bigger brains. Random evolution creates increasing diversity and

complexity of life. Increasing diversity and complexity of life make for a more

complicated environment. And a more complicated environment generates strong

evolutionary pressure for eyes, hands, and brains.

Maybe his biological argument is right — I’m inclined to think it probably is

– but maybe not. Big eyes and big brains are expensive in terms of energy. Why

not go for bigger teeth or stronger legs? And large complicated animals seem to

be (so far) at a disadvantage in species survival when the asteroids hit.

J. Bradford De Long is a professor of economics at U.C. Berkeley, and is the

author of the forthcoming “America’s Historical Experience with Low Inflation”

(Journal of Money, Credit, and Banking), and the recently published

“Some Speculative Microeconomics for Tomorrow’s Economy” (First Monday)

and “The Triumph[?] of Monetarism” (Journal of Economic Perspectives).

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Global Civil Society: Dimensions of the Nonprofit Sector

Author(s):Salamon, Lester M.
Anheier, Helmut K.
List, Regina
Toepler, S. Stefan
Reviewer(s):Goldin, Milton

Published by EH.NET (March 2000)

Salamon, Lester M., Helmut K. Anheier, Regina List, Stefan Toepler, S.

Wojciech Sokolowski and Associates. Global Civil Society: Dimensions of the

Nonprofit Sector. Baltimore, MD: Johns Hopkins Comparative Nonprofit Sector

Project, 1999. Price (paper) $34.95. ISBN 1-886333-42-4.

Reviewed for H-Business and EH.NET by Milton Goldin

National Coalition of Independent Scholars (NCIS)

The Global Associational Revolution

“…a veritable ‘global associational revolution’ appears to be underway, a

massive upsurge of organized private, voluntary activity in literally every

corner of the world. Prompted in part by growing doubts about the capability of

the state to cope on its own with the social welfare,

developmental, and environmental problems that face nations today, this growth

of civil society organizations has been stimulated as well by the

communications revolution….” (p. 4)

If these statements appear to be exaggerations–after all, how often do you

think of nonprofits in connection with revolutions?–brace yourself before

reading this book. Dr. Salamon and his co-authors will positively jolt you with

their conclusions based on data from 22 nations including Israel,

Japan, the United States, five countries in Eastern Europe, and five countries

in Latin America. All data relate to 1995.

Consider the following:

- “Even excluding religious congregations, the nonprofit sector…is a $1.1

trillion industry that employs close to 19 million full-time equivalent paid

workers. Nonprofit expenditures in these [22] countries…average 4.6 percent

of the gross domestic product, and nonprofit employment is nearly 5 percent of

all nonagricultural employment,” (p. 8)

- “… if the nonprofit sector in these countries were a separate national

economy, it would be the eighth largest economy in the world, ahead of Brazil,

Russia, Canada, and Spain.” (p. 9)

- “Nonprofit employment in the eight countries for which time-series data were

available grew by an average of 24 percent, or more than 4 percent a year,

between 1990 and 1995

. By comparison, overall employment in these same countries grew during this

same period by a considerably slower 8 percent, or less than 2 percent a year,”

(p. 29)

- “…the growth in nonprofit employment evident in these figures has been made

possible

not chiefly by a surge in private philanthropy or public-sector support, but by

a substantial increase in fee income,” (p. 31)

- “…the relative size of the nonprofit sector varies greatly among countries,

from a high of 12.6 percent of total nonagricultural employment in the

Netherlands to a low of less than 1 percent of total employment in Mexico. The

overall 22-country average, however, was close to 5 percent.

This means that the U.S., at 7.8 percent without religious worship, lies

substantially above the global average. However, it falls below three Western

European countries the Netherlands (12.6 percent), Ireland (11.5 percent), and

Belgium (10.5 percent), as well as Israel (9.2 percent). (pp.

265-266)

Despite the awesome data, Salamon writes in

his Preface that we are nowhere near having enough information to fully grasp

what is happening in America or elsewhere vis-a-vis nonprofits. For those of us

who closely follow the philanthropic literature, this is surely no

exaggeration: The IRS isn’t even certain how many private foundations or

nonprofits exist. Nor is lack of data the extent of the problem. Salamon and

his associates at the Johns Hopkins Comparative Nonprofit Sector Project which

manages the research rightly seek in the long term not only to describe the

“basic scale,

structure, and revenue bases” of nonprofits around the world but hope, in later

volumes, to account “for the differences that exist” between nonprofits in

various countries, “the factors [that] seem to encourage or retard

their development,” and, finally (and perhaps most important of all), to

answer the questions, “what difference…these entities seem to make? What are

their special contributions?” (p. xvii)

The more philosophical among us might have preferred that Salamon and his

associates begin with a volume responding to the questions about economic

benefits that justify nonprofits and what expectations we should entertain for

their future. The purpose would be not only to provide intellectual

satisfaction but because of the gigantic transfer of wealth currently

underway, in America, from the World War II generation and baby boomers to

foundations and other tax shelters.

But to return to the present volume, someone somewhere once said there are no

specialists, only vested interests. When Salamon writes, “Traditionally,

the United States has been considered the seedbed of nonprofit activity,”

and then proceeds to write that Alexis de Tocqueville, “a keen 19th century

observer of American institutional life, aptly considered voluntary

associations a uniquely democratic response to solving social problems. . .”

(p. 261), you have to wonder exactly which vested interests de Tocqueville

thought were being served. But had de Tocqueville attempted to address this, he

would have come across immediate, knotty problems, including how,

exactly, to define “nonprofit” or “charity” or “philanthropy” in an American

context.

Definition is no easier 150 years after de Tocqueville’s visit. Annual salaries

of some nonprofit executives now exceed $1 million; this suggests that

nonprofit is not non- profit for them. Benjamin Franklin, the patron saint of

American philanthropy, thought charity (meaning welfare) should be the business

of churches and never of government. To him, philanthropy meant community

advancement, and community advancement must be the business of all citizens. To

put the matter bluntly, successful entrepreneurs could only do well if they did

some local good, but finding shelter for the homeless was not the kind of good

in which they should be involved.

As Global Civil Society

makes clear, one of the most remarkable aspects

of post-industrial philanthropy is the degree to which systems in various

countries throughout the world have come to resemble each other.

In Western Europe, “On average, three-fourths of all nonprofit employees…work

in education, health or social service organizations. This reflects the

historic role that the Catholic and Protestant churches have long played in the

education and social service field.” (p. 16). In America, “…almost half of

all nonprofit employment…is in the health field. This is more than twice as

high as the global average of 19.6%….” (p. 269) (On the other hand, it should

be pointed out, as Salamon does, that “one

out of every five nonprofit employees in the United States works in the

educational field. This is proportionally well below the all-country average

and also falls below the developed country average. The principal reason for

this is that the tradition of

separation of church and state in the U.S. has limited the growth of public

funding of religiously affiliated education institutions in the country….”)

(p. 270)

But in America, as in the other 22 countries during the past two decades,

financing nonprofits has had less and less to do with philanthropic giving and

more and more to do with fees paid for services by governments. In this

connection, Catholic Charities of America receives some 62 percent of its

annual $1.9 billion operating income from eight national agencies as well as

local and state governments, to provide home care for the elderly,

battered-women’s shelters, foster care, and other essential services.[1]

Global Civil Society was published at a time when the American economy

flourished

as no one had ever imagined it could. But not in Washington or in any other

world capital were those officials concerned with welfare policy over- curious

about what might happen if the global economy falters and a depression

threatens. Hopefully, a succeeding volume in this series will include a “What

If” chapter. We badly need thinking in this area.

[1] David Van Bema, “Can Charity Fill the Gap?” Time (December 4, 1995),

pp. 44-46, 53.

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

Latin America and the World Economy since 1800

Author(s):Coatsworth, John
Taylor, Alan
Reviewer(s):Salvucci, Richard

Published by EH.NET (February 2000)

John Coatsworth and Alan Taylor, editors, Latin America and the World

Economy since 1800. Cambridge, MA: Harvard University Press, 1999. xv +

484 pp. $49.95 (cloth), ISBN 0-674-51280-4; $24.95 (paper), 0-674-51281-2.

Reviewed for EH.NET by Richard

Salvucci, Department of Economics, Trinity University, San Antonio, Texas.

Welcome to the Cliometric Revolution, Latin Style

When I started graduate school in 1973, there were no textbooks on Latin

American economic history. Today, depending on your definition of a textbook,

there are 3 or 4 in English alone. In 1973, we argued about the Asiatic mode of

production and precapitalist economic formations. Today we discuss conditional

convergence. In 1973, bourgeois economists were the enemy. Today a bourgeois

economist is your dissertation supervisor. Welcome to the Cliometric

Revolution, Latin style. It’s been 25 years in coming,

but now that it’s come, it’s come with a vengeance.

The present anthology is an artifact of that revolution and like all

historical artifacts, it requires a bit of study to appreciate its meaning in

full. And so to begin, I’m going to quibble with the idea that what you read

here is really all that novel. After all, there’s always been some cliometric

work on Latin America, as the outstanding books of Carlos Dmaz Alejandro on

Argentina or Clark Reynolds on Mexico might attest. In my primary field,

Mexican history, you could point to things done by Luis Tellez or by Jaime

Zabludovsky as recognizably cliometric, but Tellez and Zabludovsky have gone

on to major careers in government service rather into careers as economic

historians. What’s more unusual is to find suitably trained professionals doing

purely academic work-doing economic history for a living. For that we can

thank, at least partly, a sea change in development ideologies in Latin

America, where economists in universities can now spend their time thinking

about conditional convergence (whose acquaintance they may have made in some

gringo institution) rather than about the Asiatic mode of production. And I

think I have some idea why.

For my generation, it was the fall of Allende in 1973 that was critical.

For this one, it is the fall of the Berlin Wall. That makes all the difference

in the world. You can write sympathetically about the economic history of

Cuban sugar mills without espousing the labor theory of value.

You can study the history of financial markets in Brazil without being

implicated in the overthrow of Joco Goulart in 1964. For

now, at least,

there are no gangster regimes advocating “market friendly” policies while

energetically murdering their own citizens. The ideological and political

baggage of the 1960s and 1970s is, for want of a better phrase, just so much

history. Hence

what we read here by so many relative newcomers to the field. Their authors

are students, not prisoners of the past, and that’s what makes their

scholarship worthwhile. I do have a small bone to pick with the volume’s title.

This is not a book about Latin America since 1800.

It is mostly about Argentina, Brazil and Mexico since 1870, which is not quite

the same thing. There are no Indians. There is no Caribbean or Central America.

No Andes. But worse, there are really no papers that engage with the period

before 1870 and that is a real problem. As John Coatsworth’s perceptive essay

on the nineteenth century puts it, “the available quantitative evidence shows

that Latin America became an underdeveloped region between the early eighteenth

and the late nineteenth century” (p. 26). In other words, most of the papers

in the volume-Carlos Newland’s excepted-do not address the principal issue of

Latin America’s economic history, namely, the origins of what Lant Pritchett

has called

“divergence, big time.” Even

if you argue in reply, that X (what existed before 1870) causes Y (what changed

later), the historian is liable to wonder why X occurred when it did and not

before, especially if Y is extremely profitable, the proverbial big bill on the

sidewalk.

I think

I know why. Sensible historians avoid the period before 1870 because it is a

Hobbesian world where life, not to mention some of its major actors, was nasty,

brutish and short. For most of Spanish America,

the era before 1870 (and after Independence in the 1820s) is much, much harder

to work in, let alone understand. The archives with which I am familiar (mostly

Mexican, to be sure) are a mess-disorganized,

uncatalogued, impenetrable-and very nearly impossible to utilize. Of course,

the messiness of the sources faithfully reflects the messiness of economic and

political life at the time, with unending coups, countercoups,

invasions, constitutions, blockades, wars, partitions, regulations,

proclamations, declamations, you name it. There’s no stable structure for

understanding, essentially. Unfortunately, this is where the action is,

unless you regard disorder itself as the proximate cause of poor economic

performance. As anyone reading this is probably aware, there’s really no

consensus about that either.

For this reason, I take claims made for the cliometric potential of Latin

American economic history the way I take tequila: in limited doses, and with

many grains of salt. Still,

triumphalism only infects the blurbs to the volume, for the “Introduction”

by John Coatsworth and Alan Taylor is conspicuously moderate in tone. So maybe

I shouldn’t complain. Besides, the papers are generally very good and a couple

are outstanding. One of the most coherent themes here is the importance of

financial markets and institutions in facilitating or accommodating economic

growth. This really is a new direction, at least in the Latin American context,

for I can think of little in the older historiography that makes this point

with any cogency. A very interesting paper by

Michael Twomey provides the relevant context in arguing that

“[t]he general trend of direct foreign investment [in the twentieth century]

has been downward relative to income and, probably, total capital stock” (p.

192). Portfolio investment aside, which

Twomey identifies as mainly, until 1990, loans to governments, the implication

is that domestic sources of capital were increasingly important between 1913

and 1950, the years when foreign direct investment fell sharply relative to

GDP. Twomey’s argument

frames papers by Stephen Haber, Anne Hanley, Leonard I. Nakamura and Carlos E.

J. M. Zarazaga, Gerardo della Paolera and Alan M. Taylor, and Gail D. Triner.

First, Brazil. Anne Hanley’s study of business finance and the Sco Paulo Bolsa

offers a good point of departure. In the spirit of Twomey’s conclusions,

Hanley argues that the role of foreign capital in direct investment “while

sizeable, mainly played a supporting role in the domestic business formation

that was the cornerstone of Sco Paulo’s development.”

The industrial and utilities sectors “actually found their base in the domestic

capital market” (both quotations, p. 126). And it was the impersonal mechanism

of the stock exchange rather than traditional kin-based finance that fueled “a

type of financial Big Bang” between 1905 and 1913 (p. 131). Similarly, Gail

Triner finds that the recharter of the Banco do Brasil in 1905 created a

“natural infrastructure for financial transactions” (p. 224) that supported a

“strong, centralized role for the national government in the economy.” And

like Hanley, Triner emphasizes that “[t]he banking system increasingly

accumulated and reallocated financial resources of the private sector at the

expense of either personal or other institutional channels” (p. 226, both

quotations). After 1905 the real money supply and the monetized economy grew

rapidly even as the economic predominance of Sco Paulo was consolidated.

The evolution of a modern financial infrastructure for Brazil had measurable

implications for the growth of industrial productivity in Brazil after 1890.

Stephen Haber’s sophisticated analysis of capital market regulation and the

development of a securities market argues that “one crucial piece of the puzzle

explaining the lack of industrial development

before 1890 and rapid industrial growth after 1890 was access to capital”

(p. 279). The maturation of debt and equity markets along with the

establishment of limited liability laws and mandatory financial disclosure

lowered the cost of capital. As a result, the cotton textile industry,

which is Haber’s focus, grew more quickly than it would have had traditional

patterns of kin-based and other less formal avenues of finance been maintained.

In short, “entrepreneurs who could best combine the factors of production and

choose the optimal output mix were able to mobilize capital that otherwise

would not have been available to them” (p.

279).

Argentina has always seemed baffling. Between 1870 and 1900, real per capita

product there doubled, but after 1900, it would not do so again until 1958. In

other words, the rate of real per capita growth fell from 2.3 percent per year

to 1.19 percent per year, which is some slowdown. For Gerardo della Paolera and

Alan Taylor, a capital constraint is (part of)

the answer

. The domestic financial system was simply unable to replace the dwindling

supply of British capital after World War I. Caught between the gold standard,

international convertibility, and repeated financial crises,

the monetary authority, the Caja de Conversisn, was unable to support domestic

banks and maintain convertibility at the same time. For this reason, Argentine

banks “had to maintain a higher capital cushion” than their foreign

counterparts who could borrow abroad much more easily.

“[D]omestic banks could not fill the void left by the retreat of foreign

capital after 1914″ (p. 163). A paper by Leonard I. Nakamura and Carlos E.

J. M. Zarazaga raises some questions about this argument by looking at returns

to Argentine debt instruments, which don’t

seem particularly high.

Daniel Dmaz Fuentes’ chapter on the gold standard in Argentina, Brazil and

Mexico reminds us that the Argentine peso was inconvertible between 1914 and

1927, an awkward point for della Paolera and Taylor as well.

Nevertheless, their discussion of the non-monetary aspects of financial crises

in Argentina is very stimulating. I have heard it said by some historians that

there is nothing “new” in the findings of the new economic history of Latin

America. I defy them to read della Paolera and Taylor and then tell me that. I

doubt the critics have read Bernanke’s 1983 paper and the subsequent work it

inspired. The remaining papers are somewhat more difficult to characterize

because they deal with a wide variety of subjects. Let me give

some examples.

Students of Mexican history will welcome the chapters by Graciela Marquez and

Aurora Gsmez-Galvarriato. Both make extensive use of archival data and both

question commonly held beliefs about Mexico between 1890 and 1920, the last

years of

the Porfiriato (the dictatorship of Porfirio Dmaz from 1876 through 1910) and

the opening decade of the Mexican Revolution (which lasted until 1920, 1938,

1968, or last week, depending on how you view Mexican history). Marquez shows

that it is not enough

to simply label Porfirian Mexico a high-tariff country since nominal

protection fell sharply during the 1890s. It never recovered its former levels

before the outbreak of the Revolution. Gsmez-Galvarriato looks at real wages in

the Santa Rosa textile factory in Veracruz. Stability in real wages through

1907 gave way to a sharp decline between 1907 and 1911. A marked recovery

occurred between 1911 and 1913, only to fall sharply during the bitterest years

of the civil war (1914-1916). From 1917 through 192 0, real wages recovered,

but did not rise much above their level in 1907. I think Marquez and

Gsmez-Galvarriato are saying that the stories we tell about Dmaz and the coming

of the Revolution are not likely to hold up under the careful scrutiny of a new

historiography informed by detailed industry and firm-level studies. Where

this leaves the big studies of the Revolution,

such as Alan Knight’s, which retells many of the old verities, remains to be

seen.

Both William Summerhill and Alan Dye contribute chapters that represent

aspects of larger projects. Dye’s study of the contracts between sugarcane

growers and millers in Cuba lays to rest the myth that the contracts between

growers and millers evolved to exploit the growers, upon whom they were

coercively imposed. Summerhill’s paper on Brazilian railroads concludes that

“The direct impact of the railroad in Brazil places it comfortably within the

top tier of the cases for which economic historians have constructed social

savings estimates” (p. 391). Interested readers can certainly learn more from

Dye’s Cuban Sugar in the Age of Mass Production

(Stanford, 1998) or Summerhill’s forthcoming Order Against Progress:

Government, Foreign Investment and Railroads in Brazil, 1854-1913

(Stanford, scheduled for Summer 2000).

Papers by Lee Alston, Gary

Libecap and Bernardo Mueller; Andri A. Hofman and Nanno Mulder; and Carlos

Newland round out the volume. All are well worth

reading.

A final observation. It’s ironic that economic historians of Latin America

stress the study of institutions, a theme that features prominently in this

volume as well. For those of us trained in the early 1970s, “institutional

history” was something to be avoided, the province of dullards and the

unimaginative. It was a matter of faith, enshrined in a famous article by

James Lockhart, that the only real historians of Latin America were social

historians, and, well, social historians had better things to do than pay

attention to, of all things, institutions. Institutions didn’t affect the

behavior of real people. And real historians studied real (read: ordinary)

people. My how times do change. There isn’t much doubt about who’s doing the

interesting history of Latin America these days. Not a few of them are

represented in this excel lent collection. Now if only I could get them to

explain the Asiatic mode of production to me, my life would be complete.

Fat chance.

Richard Salvucci teaches at Trinity University. He is co-author with Linda K.

Salvucci of “Cuba and the Latin American

Terms of Trade in the Nineteenth Century: Old Theories, New Evidence,”

forthcoming in the

Journal of Interdisciplinary History in Autumn 2000.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):General or Comparative