is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

The Economic History of Australia from 1788: An Introduction

Bernard Attard, University of Leicester


The economic benefits of establishing a British colony in Australia in 1788 were not immediately obvious. The Government’s motives have been debated but the settlement’s early character and prospects were dominated by its original function as a jail. Colonization nevertheless began a radical change in the pattern of human activity and resource use in that part of the world, and by the 1890s a highly successful settler economy had been established on the basis of a favorable climate in large parts of the southeast (including Tasmania ) and the southwest corner; the suitability of land for European pastoralism and agriculture; an abundance of mineral wealth; and the ease with which these resources were appropriated from the indigenous population. This article will focus on the creation of a colonial economy from 1788 and its structural change during the twentieth century. To simplify, it will divide Australian economic history into four periods, two of which overlap. These are defined by the foundation of the ‘bridgehead economy’ before 1820; the growth of a colonial economy between 1820 and 1930; the rise of manufacturing and the protectionist state between 1891 and 1973; and the experience of liberalization and structural change since 1973. The article will conclude by suggesting briefly some of the similarities between Australia and other comparable settler economies, as well as the ways in which it has differed from them.

The Bridgehead Economy, 1788-1820

The description ‘bridgehead economy’ was used by one of Australia’s foremost economic historians, N. G. Butlin to refer to the earliest decades of British occupation when the colony was essentially a penal institution. The main settlements were at Port Jackson (modern Sydney, 1788) in New South Wales and Hobart (1804) in what was then Van Diemen’s Land (modern Tasmania). The colony barely survived its first years and was largely neglected for much of the following quarter-century while the British government was preoccupied by the war with France. An important beginning was nevertheless made in the creation of a private economy to support the penal regime. Above all, agriculture was established on the basis of land grants to senior officials and emancipated convicts, and limited freedoms were allowed to convicts to supply a range of goods and services. Although economic life depended heavily on the government Commissariat as a supplier of goods, money and foreign exchange, individual rights in property and labor were recognized, and private markets for both started to function. In 1808, the recall of the New South Wales Corps, whose officers had benefited most from access to land and imported goods (thus hopelessly entangling public and private interests), coupled with the appointment of a new governor, Lachlan Macquarie, in the following year, brought about a greater separation of the private economy from the activities and interests of the colonial government. With a significant increase in the numbers transported after 1810, New South Wales’ future became more secure. As laborers, craftsmen, clerks and tradesmen, many convicts possessed the skills required in the new settlements. As their terms expired, they also added permanently to the free population. Over time, this would inevitably change the colony’s character.

Natural Resources and the Colonial Economy, 1820-1930

Pastoral and Rural Expansion

For Butlin, the developments around 1810 were a turning point in the creation of a ‘colonial’ economy. Many historians have preferred to view those during the 1820s as more significant. From that decade, economic growth was based increasingly upon the production of fine wool and other rural commodities for markets in Britain and the industrializing economies of northwestern Europe. This growth was interrupted by two major depressions during the 1840s and 1890s and stimulated in complex ways by the rich gold discoveries in Victoria in 1851, but the underlying dynamics were essentially unchanged. At different times, the extraction of natural resources, whether maritime before the 1840s or later gold and other minerals, was also important. Agriculture, local manufacturing and construction industries expanded to meet the immediate needs of growing populations, which concentrated increasingly in the main urban centers. The colonial economy’s structure, growth of population and significance of urbanization are illustrated in tables 1 and 2. The opportunities for large profits in pastoralism and mining attracted considerable amounts of British capital, while expansion generally was supported by enormous government outlays for transport, communication and urban infrastructures, which also depended heavily on British finance. As the economy expanded, large-scale immigration became necessary to satisfy the growing demand for workers, especially after the end of convict transportation to the eastern mainland in 1840. The costs of immigration were subsidized by colonial governments, with settlers coming predominantly from the United Kingdom and bringing skills that contributed enormously to the economy’s growth. All this provided the foundation for the establishment of free colonial societies. In turn, the institutions associated with these — including the rule of law, secure property rights, and stable and democratic political systems — created conditions that, on balance, fostered growth. In addition to New South Wales, four other British colonies were established on the mainland: Western Australia (1829), South Australia (1836), Victoria (1851) and Queensland (1859). Van Diemen’s Land (Tasmania after 1856) became a separate colony in 1825. From the 1850s, these colonies acquired responsible government. In 1901, they federated, creating the Commonwealth of Australia.

Table 1
The Colonial Economy: Percentage Shares of GDP, 1891 Prices, 1861-1911

Pastoral Other rural Mining Manuf. Building Services Rent
1861 9.3 13.0 17.5 14.2 8.4 28.8 8.6
1891 16.1 12.4 6.7 16.6 8.5 29.2 10.3
1911 14.8 16.7 9.0 17.1 5.3 28.7 8.3

Source: Haig (2001), Table A1. Totals do not sum to 100 because of rounding.

Table 2
Colonial Populations (thousands), 1851-1911

Australia Colonies Cities
NSW Victoria Sydney Melbourne
1851 257 100 46 54 29
1861 669 198 328 96 125
1891 1,704 608 598 400 473
1911 2,313 858 656 648 593

Source: McCarty (1974), p. 21; Vamplew (1987), POP 26-34.

The process of colonial growth began with two related developments. First, in 1820, Macquarie responded to land pressure in the districts immediately surrounding Sydney by relaxing restrictions on settlement. Soon the outward movement of herdsmen seeking new pastures became uncontrollable. From the 1820s, the British authorities also encouraged private enterprise by the wholesale assignment of convicts to private employers and easy access to land. In 1831, the principles of systematic colonization popularized by Edward Gibbon Wakefield (1796-1862) were put into practice in New South Wales with the substitution of land sales for grants in order to finance immigration. This, however, did not affect the continued outward movement of pastoralists who simply occupied land where could find it beyond the official limits of settlement. By 1840, they had claimed a vast swathe of territory two hundred miles in depth running from Moreton Bay in the north (the site of modern Brisbane) through the Port Phillip District (the future colony of Victoria, whose capital Melbourne was marked out in 1837) to Adelaide in South Australia. The absence of any legal title meant that these intruders became known as ‘squatters’ and the terms of their tenure were not finally settled until 1846 after a prolonged political struggle with the Governor of New South Wales, Sir George Gipps.

The impact of the original penal settlements on the indigenous population had been enormous. The consequences of squatting after 1820 were equally devastating as the land and natural resources upon which indigenous hunter-gathering activities and environmental management depended were appropriated on a massive scale. Aboriginal populations collapsed in the face of disease, violence and forced removal until they survived only on the margins of the new pastoral economy, on government reserves, or in the arid parts of the continent least touched by white settlement. The process would be repeated again in northern Australia during the second half of the century.

For the colonists this could happen because Australia was considered terra nullius, vacant land freely available for occupation and exploitation. The encouragement of private enterprise, the reception of Wakefieldian ideas, and the wholesale spread of white settlement were all part of a profound transformation in official and private perceptions of Australia’s prospects and economic value as a British colony. Millennia of fire-stick management to assist hunter-gathering had created inland grasslands in the southeast that were ideally suited to the production of fine wool. Both the physical environment and the official incentives just described raised expectations of considerable profits to be made in pastoral enterprise and attracted a growing stream of British capital in the form of organizations like the Australian Agricultural Company (1824); new corporate settlements in Western Australia (1829) and South Australia (1836); and, from the 1830s, British banks and mortgage companies formed to operate in the colonies. By the 1830s, wool had overtaken whale oil as the colony’s most important export, and by 1850 New South Wales had displaced Germany as the main overseas supplier to British industry (see table 3). Allowing for the colonial economy’s growing complexity, the cycle of growth based upon land settlement, exports and British capital would be repeated twice. The first pastoral boom ended in a depression which was at its worst during 1842-43. Although output continued to grow during the 1840s, the best land had been occupied in the absence of substantial investment in fencing and water supplies. Without further geographical expansion, opportunities for high profits were reduced and the flow of British capital dried up, contributing to a wider downturn caused by drought and mercantile failure.

Table 3
Imports of Wool into Britain (thousands of bales), 1830-50

German Australian
1830 74.5 8.0
1840 63.3 41.0
1850 30.5 137.2

Source: Sinclair (1976), p. 46

When pastoral growth revived during the 1860s, borrowed funds were used to fence properties and secure access to water. This in turn allowed a further extension of pastoral production into the more environmentally fragile semi-arid interior districts of New South Wales, particularly during the 1880s. As the mobs of sheep moved further inland, colonial governments increased the scale of their railway construction programs, some competing to capture the freight to ports. Technical innovation and government sponsorship of land settlement brought greater diversity to the rural economy (see table 4). Exports of South Australian wheat started in the 1870s. The development of drought resistant grain varieties from the turn of the century led to an enormous expansion of sown acreage in both the southeast and southwest. From the 1880s, sugar production increased in Queensland, although mainly for the domestic market. From the 1890s, refrigeration made it possible to export meat, dairy products and fruit.

Table 4
Australian Exports (percentages of total value of exports), 1881-1928/29

Wool Minerals Wheat,flour Butter Meat Fruit
1881-90 54.1 27.2 5.3 0.1 1.2 0.2
1891-1900 43.5 33.1 2.9 2.4 4.1 0.3
1901-13 34.3 35.4 9.7 4.1 5.1 0.5
1920/21-1928/29 42.9 8.8 20.5 5.6 4.6 2.2

Source: Sinclair (1976), p. 166

Gold and Its Consequences

Alongside rural growth and diversification, the remarkable gold discoveries in central Victoria in 1851 brought increased complexity to the process of economic development. The news sparked an immediate surge of gold seekers into the colony, which was soon reinforced by a flood of overseas migrants. Until the 1870s, gold displaced wool as Australia’s most valuable export. Rural industries either expanded output (wheat in South Australia) or, in the case of pastoralists, switched production to meat and tallow, to supply a much larger domestic market. Minerals had been extracted since earliest settlement and, while yields on the Victorian gold fields soon declined, rich mineral deposits continued to be found. During the 1880s alone these included silver, lead and zinc at Broken Hill in New South Wales; copper at Mount Lyell in Tasmania; and gold at Charters Towers and Mount Morgan in Queensland. From 1893, what eventually became the richest goldfields in Australia were discovered at Coolgardie in Western Australia. The mining industry’s overall contribution to output and exports is illustrated in tables 1 and 4.

In Victoria, the deposits of easily extracted alluvial gold were soon exhausted and mining was taken over by companies that could command the financial and organizational resources needed to work the deep lodes. But the enormous permanent addition to the colonial population caused by the gold rush had profound effects throughout eastern Australia, dramatically accelerating the growth of the local market and workforce, and deeply disturbing the social balance that had emerged during the decade before. Between 1851 and 1861, the Australian population more than doubled. In Victoria it increased sevenfold; Melbourne outgrew Sydney, Chicago and San Francisco (see table 2). Significantly enlarged populations required social infrastructure, political representation, employment and land; and the new colonial legislatures were compelled to respond. The way this was played out varied between colonies but the common outcomes were the introduction of manhood suffrage, access to land through ‘free selection’ of small holdings, and, in the Victorian case, the introduction of a protectionist tariff in 1865. The particular age structure of the migrants of the 1850s also had long-term effects on the building cycle, notably in Victoria. The demand for housing accelerated during the 1880s, as the children of the gold generation matured and established their own households. With pastoral expansion and public investment also nearing their peaks, the colony experienced a speculative boom which added to the imbalances already being caused by falling export prices and rising overseas debt. The boom ended with the wholesale collapse of building companies, mortgage banks and other financial institutions during 1891-92 and the stoppage of much of the banking system during 1893.

The depression of the 1890s was worst in Victoria. Its impact on employment was softened by the Western Australian gold discoveries, which drew population away, but the colonial economy had grown to such an extent since the 1850s that the stimulus provided by the earlier gold finds could not be repeated. Severe drought in eastern Australia from the mid-1890s until 1903 caused the pastoral industry to contract. Yet, as we have seen, technological innovation also created opportunities for other rural producers, who were now heavily supported by government with little direct involvement by foreign investors. The final phase of rural expansion, with its associated public investment in rural (and increasingly urban) infrastructure continued until the end of the 1920s. Yields declined, however, as farmers moved onto the most marginal land. The terms of trade also deteriorated with the oversupply of several commodities in world markets after the First World War. As a result, the burden of servicing foreign debt rose once again. Australia’s position as a capital importer and exporter of natural resources meant that the Great Depression arrived early. From late 1929, the closure of overseas capital markets and collapse of export prices forced the Federal Government to take drastic measures to protect the balance of payments. The falls in investment and income transmitted the contraction to the rest of the economy. By 1932, average monthly unemployment amongst trade union members was over 22 percent. Although natural resource industries continued to have enduring importance as earners of foreign exchange, the Depression finally ended the long period in which land settlement and technical innovation had together provided a secure foundation for economic growth.

Manufacturing and the Protected Economy, 1891-1973

The ‘Australian Settlement’

There is a considerable chronological overlap between the previous section, which surveyed the growth of a colonial economy during the nineteenth century based on the exploitation of natural resources, and this one because it is a convenient way of approaching the two most important developments in Australian economic history between Federation and the 1970s: the enormous increase in government regulation after 1901 and, closely linked to this, the expansion of domestic manufacturing, which from the Second World War became the most dynamic part of the Australian economy.

The creation of the Commonwealth of Australia on 1 January 1901 broadened the opportunities for public intervention in private markets. The new Federal Government was given clearly-defined but limited powers over obviously ‘national’ matters like customs duties. The rest, including many affecting economic development and social welfare, remained with the states. The most immediate economic consequence was the abolition of inter-colonial tariffs and the establishment of a single Australian market. But the Commonwealth also soon set about transferring to the national level several institutions that different the colonies had experimented with during the 1890s. These included arrangements for the compulsory arbitration of industrial disputes by government tribunals, which also had the power to fix wages, and a discriminatory ‘white Australia’ immigration policy designed to exclude non-Europeans from the labor market. Both were partly responses to organized labor’s electoral success during the 1890s. Urban business and professional interests had always been represented in colonial legislatures; during the 1910s, rural producers also formed their own political parties. Subsequently, state and federal governments were typically formed by the either Australian Labor Party or coalitions of urban conservatives and the Country Party. The constituencies they each represented were thus able to influence the regulatory structure to protect themselves against the full impact of market outcomes, whether in the form of import competition, volatile commodity prices or uncertain employment conditions. The institutional arrangements they created have been described as the ‘Australian settlement’ because they balanced competing producer interests and arguably provided a stable framework for economic development until the 1970s, despite the inevitable costs.

The Growth of Manufacturing

An important part of the ‘Australian settlement’ was the imposition of a uniform federal tariff and its eventual elaboration into a system of ‘protection all round’. The original intended beneficiaries were manufacturers and their employees; indeed, when the first protectionist tariff was introduced in 1907, its operation was linked to the requirement that employers pay their workers ‘fair and reasonable wages’. Manufacturing’s actual contribution to economic growth before Federation has been controversial. The population influx of the 1850s widened opportunities for import-substitution but the best evidence suggests that manufacturing grew slowly as the industrial workforce increased (see table 1). Production was small-scale and confined largely to the processing of rural products and raw materials; assembly and repair-work; or the manufacture of goods for immediate consumption (e.g. soap and candle-making, brewing and distilling). Clothing and textile output was limited to a few lines. For all manufacturing, growth was restrained by the market’s small size and the limited opportunities for technical change it afforded.

After Federation, production was stimulated by several factors: rural expansion, the increasing use of agricultural machinery and refrigeration equipment, and the growing propensity of farm incomes to be spent locally. The removal of inter-colonial tariffs may also have helped. The statistical evidence indicates that between 1901 and the outbreak of the First World War manufacturing grew faster than the economy as a whole, while output per worker increased. But manufacturers also aspired mainly to supply the domestic market and expended increasing energy on retaining privileged access. Tariffs rose considerably between the two world wars. Some sectors became more capital intensive, particularly with the establishment of a local steel industry, the beginnings of automobile manufacture, and the greater use of electricity. But, except during the first half of the 1920s, there was little increase in labor productivity and the inter-war expansion of textile manufacturing reflected the heavy bias towards import substitution. Not until the Second World War and after did manufacturing growth accelerate and extend to those sectors most characteristic of an advance industrial economy (table 5). Amongst these were automobiles, chemicals, electrical and electronic equipment, and iron-and-steel. Growth was sustained during 1950s by similar factors to those operating in other countries during the ‘long boom’, including a growing stream of American direct investment, access to new and better technology, and stable conditions of full employment.

Table 5
Manufacturing and the Australian Economy, 1913-1949

1938-39 prices
Manufacturing share of GDP % Manufacturing annual rate of growth % GDP, annual rate of growth %
1913/14 21.9
1928/29 23.6 2.6 2.1
1948/49 29.8 3.4 2.2

Calculated from Haig (2001), Table A2. Rates of change are average annual changes since the previous year in the first column.

Manufacturing peaked in the mid-1960s at about 28 percent of national output (measured in 1968-69 prices) but natural resource industries remained the most important suppliers of exports. Since the 1920s, over-supply in world markets and the need to compensate farmers for manufacturing protection, had meant that virtually all rural industries, with the exception of wool, had been drawn into a complicated system of subsidies, price controls and market interventions at both federal and state levels. The post-war boom in the world economy increased demand for commodities, benefiting rural producers but also creating new opportunities for Australian miners. Most important of all, the first surge of breakneck growth in East Asia opened a vast new market for iron ore, coal and other mining products. Britain’s significance as a trading partner had declined markedly since the 1950s. By the end of the 1960s, Japan overtook it as Australia’s largest customer, while the United States was now the main provider of imports.

The mining bonanza contributed to the boom conditions experienced generally after 1950. The Federal Government played its part by using the full range of macroeconomic policies that were also increasingly familiar in similar western countries to secure stability and full employment. It encouraged high immigration, relaxing the entry criteria to allow in large numbers of southern Europeans, who added directly to the workforce, but also brought knowledge and experience. With state governments, the Commonwealth increased expenditure on education significantly, effectively entering the field for the first time after 1945. Access to secondary education was widened with the abandonment of fees in government schools and federal finance secured an enormous expansion of university places, especially after 1960. Some weaknesses remained. Enrolment rates after primary school were below those in many industrial countries and funding for technical education was poor. Despite this, the Australian population’s rising levels of education and skill continued to be important additional sources of growth. Finally, although government advisers expressed misgivings, industry policy remained determinedly interventionist. While state governments competed to attract manufacturing investment with tax and other incentives, by the 1960s protection had reached its highest level, with Australia playing virtually no part in the General Agreement on Tariffs and Trade (GATT), despite being an original signatory. The effects of rising tariffs since 1900 were evident in the considerable decline in Australia’s openness to trade (Table 6). Yet, as the post-war boom approached its end, the country still relied upon commodity exports and foreign investment to purchase the manufactures it was unable to produce itself. The impossibility of sustaining growth in this way was already becoming clear, even though the full implications would only be felt during the decades to come.

Table 6
Trade (Exports Plus Imports)
as a Share of GDP, Current Prices, %

1900/1 44.9
1928/29 36.9
1938/38 32.7
1964/65 33.3
1972/73 29.5

Calculated from Vamplew (1987), ANA 119-129.

Liberalization and Structural Change, 1973-2005

From the beginning of the 1970s, instability in the world economy and weakness at home ended Australia’s experience of the post-war boom. During the following decades, manufacturing’s share in output (table 7) and employment fell, while the long-term relative decline of commodity prices meant that natural resources could no longer be relied on to cover the cost of imports, let alone the long-standing deficits in payments for services, migrant remittances and interest on foreign debt. Until the early 1990s, Australia also suffered from persistent inflation and rising unemployment (which remained permanently higher, see chart 1). As a consequence, per capita incomes fluctuated during the 1970s, and the economy contracted in absolute terms during 1982-83 and 1990-91.

Even before the 1970s, new sources of growth and rising living standards had been needed, but the opportunities for economic change were restricted by the elaborate regulatory structure that had evolved since Federation. During that decade itself, policy and outlook were essentially defensive and backward looking, despite calls for reform and some willingness to alter the tariff. Governments sought to protect employment in established industries, while dependence on mineral exports actually increased as a result of the commodity booms at the decade’s beginning and end. By the 1980s, however, it was clear that the country’s existing institutions were failing and fundamental reform was required.

Table 7
The Australian Economy, 1974-2004

A. Percentage shares of value-added, constant prices

1974 1984 1994 2002
Agriculture 4.4 4.3 3.0 2.7
Manufacturing 18.1 15.2 13.3 11.8
Other industry, inc. mining 14.2 14.0 14.6 14.4
Services 63.4 66.4 69.1 71.1

B. Per capita GDP, annual average rate of growth %, constant prices

1973-84 1.2
1984-94 1.7
1994-2004 2.5

Calculated from World Bank, World Development Indicators (Sept. 2005).

Figure 1
Unemployment, 1971-2005, percent

Unemployment, 1971-2005, percent

Source: Reserve Bank of Australia (1988); Reserve Bank of Australia, G07Hist.xls. Survey data at August. The method of data collection changed in 1978.

The catalyst was the resumption of the relative fall of commodity prices since the Second World War which meant that the cost of purchasing manufactured goods inexorably rose for primary producers. The decline had been temporarily reversed by the oil shocks of the 1970s but, from the 1980/81 financial year until the decade’s end, the value of Australia’s merchandise imports exceeded that of merchandise exports in every year but two. The overall deficit on current account measured as a proportion of GDP also moved became permanently higher, averaging around 4.7 percent. During the 1930s, deflation had been followed by the further closing of the Australian economy. There was no longer much scope for this. Manufacturing had stagnated since the 1960s, suffering especially from the inflation of wage and other costs during the 1970s. It was particularly badly affected by the recession of 1982-83, when unemployment rose to almost ten percent, its highest level since the Great Depression. In 1983, a new federal Labor Government led by Bob Hawke sought to engineer a recovery through an ‘Accord’ with the trade union movement which aimed at creating employment by holding down real wages. But under Hawke and his Treasurer, Paul Keating — who warned colorfully that otherwise the country risked becoming a ‘banana republic’ — Labor also started to introduce broader reforms to increase the efficiency of Australian firms by improving their access to foreign finance and exposing them to greater competition. Costs would fall and exports of more profitable manufactures increase, reducing the economy’s dependence on commodities. During the 1980s and 1990s, the reforms deepened and widened, extending to state governments and continuing with the election of a conservative Liberal-National Party government under John Howard in 1996, as each act of deregulation invited further measures to consolidate them and increase their effectiveness. Key reforms included the floating of the Australian dollar and the deregulation of the financial system; the progressive removal of protection of most manufacturing and agriculture; the dismantling of the centralized system of wage-fixing; taxation reform; and the promotion of greater competition and better resource use through privatization and the restructuring of publicly-owned corporations, the elimination of government monopolies, and the deregulation of sectors like transport and telecommunications. In contrast with the 1930s, the prospects of further domestic reform were improved by an increasingly favorable international climate. Australia contributed by joining other nations in the Cairns Group to negotiate reductions of agricultural protection during the Uruguay round of GATT negotiations and by promoting regional liberalization through the Asia Pacific Economic Cooperation (APEC) forum.

Table 8
Exports and Openness, 1983-2004

Shares of total exports, % Shares of GDP: exports + imports, %
Goods Services
Rural Resource Manuf. Other
1983 30 34 9 3 24 26
1989 23 37 11 5 24 27
1999 20 34 17 4 24 37
2004 18 33 19 6 23 39

Calculated from: Reserve Bank of Australia, G10Hist.xls and H03Hist.xls; World Bank, World Development Indicators (Sept. 2005). Chain volume measures, except shares of GDP, 1983, which are at current prices.

The extent to which institutional reform had successfully brought about long-term structural change was still not clear at the end of the century. Recovery from the 1982-83 recession was based upon a strong revival of employment. By contrast, the uninterrupted growth experienced since 1992 arose from increases in the combined productivity of workers and capital. If this persisted, it was a historic change in the sources of growth from reliance on the accumulation of capital and the increase of the workforce to improvements in the efficiency of both. From the 1990s, the Australian economy also became more open (table 8). Manufactured goods increased their share of exports, while rural products continued to decline. Yet, although growth was more broadly-based, rapid and sustained (table 7), the country continued to experience large trade and current account deficits, which were augmented by the considerable increase of foreign debt after financial deregulation during the 1980s. Unemployment also failed to return to its pre-1974 level of around 2 percent, although much of the permanent rise occurred during the mid to late 1970s. In 2005, it remained 5 percent (Figure 1). Institutional reform clearly contributed to these changes in economic structure and performance but they were also influenced by other factors, including falling transport costs, the communications and information revolutions, the greater openness of the international economy, and the remarkable burst of economic growth during the century’s final decades in southeast and east Asia, above all China. Reform was also complemented by policies to provide the skills needed in a technologically-sophisticated, increasingly service-oriented economy. Retention rates in the last years of secondary education doubled during the 1980s, followed by a sharp increase of enrolments in technical colleges and universities. By 2002, total expenditure on education as a proportion of national income had caught up with the average of member countries of the OECD (Table 9). Shortages were nevertheless beginning to be experienced in the engineering and other skilled trades, raising questions about some priorities and the diminishing relative financial contribution of government to tertiary education.

Table 9
Tertiary Enrolments and Education Expenditure, 2002

Tertiary enrolments, gross percent Education expenditure as a proportion of GDP, percent
Australia 63.22 6.0
OECD 61.68 5.8
United States 70.67 7.2

Source: World Bank, World Development Indicators (Sept. 2005); OECD (2005). Gross enrolments are total enrolments, regardless of age, as a proportion of the population in the relevant official age group. OECD enrolments are for fifteen high-income members only.

Summing Up: The Australian Economy in a Wider Context

Virtually since the beginning of European occupation, the Australian economy had provided the original British colonizers, generations of migrants, and the descendants of both with a remarkably high standard of living. Towards the end of the nineteenth century, this was by all measures the highest in the world (see table 10). After 1900, national income per member of the population slipped behind that of several countries, but continued to compare favorably with most. In 2004, Australia was ranked behind only Norway and Sweden in the United Nation’s Human Development Index. Economic historians have differed over the sources of growth that made this possible. Butlin emphasized the significance of local factors like the unusually high rate of urbanization and the expansion of domestic manufacturing. In important respects, however, Australia was subject to the same forces as other European settler societies in New Zealand and Latin America, and its development bore striking similarities to theirs. From the 1820s, its economy grew as one frontier of an expanding western capitalism. With its close institutional ties to, and complementarities with, the most dynamic parts of the world economy, it drew capital and migrants from them, supplied them with commodities, and shared the benefits of their growth. Like other settler societies, it sought population growth as an end in itself and, from the turn of the nineteenth century, aspired to the creation of a national manufacturing base. Finally, when openness to the world economy appeared to threaten growth and living standards, governments intervened to regulate and protect with broader social objectives in mind. But there were also striking contrasts with other settler economies, notably those in Latin America like Argentina, with which it has been frequently compared. In particular, Australia responded to successive challenges to growth by finding new opportunities for wealth creation with a minimum of political disturbance, social conflict or economic instability, while sharing a rising national income as widely as possible.

Table 10
Per capita GDP in Australia, United States and Argentina
(1990 international dollars)

Australia United States Argentina
1870 3,641 2,457 1,311
1890 4,433 3,396 2,152
1950 7,493 9,561 4,987
1998 20,390 27,331 9,219

Sources: Australia: GDP, Haig (2001) as converted in Maddison (2003); all other data Maddison (1995) and (2001)

From the mid-twentieth century, Australia’s experience also resembled that of many advanced western countries. This included the post-war willingness to use macroeconomic policy to maintain growth and full employment; and, after the 1970s, the abandonment of much government intervention in private markets while at the same time retaining strong social services and seeking to improve education and training. Australia also experienced a similar relative decline of manufacturing, permanent rise of unemployment, and transition to a more service-based economy typical of high income countries. By the beginning of the new millennium, services accounted for over 70 percent of national income (table 7). Australia remained vulnerable as an exporter of commodities and importer of capital but its endowment of natural resources and the skills of its population were also creating opportunities. The country was again favorably positioned to take advantage of growth in the most dynamic parts of the world economy, particularly China. With the final abandonment of the White Australia policy during the 1970s, it had also started to integrate more closely with its region. This was further evidence of the capacity to change that allowed Australians to face the future with confidence.


Anderson, Kym. “Australia in the International Economy.” In Reshaping Australia’s Economy: Growth with Equity and Sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 33-49. Cambridge: Cambridge University Press, 2001.

Blainey, Geoffrey. The Rush that Never Ended: A History of Australian Mining, fourth edition. Melbourne: Melbourne University Press, 1993.

Borland, Jeff. “Unemployment.” In Reshaping Australia’s Economy: Growth and with Equity and Sustainable Development, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 207-228. Cambridge: Cambridge University Press, 2001.

Butlin, N. G. Australian Domestic Product, Investment and Foreign Borrowing 1861-1938/39. Cambridge: Cambridge University Press, 1962.

Butlin, N.G. Economics and the Dreamtime, A Hypothetical History. Cambridge: Cambridge University Press, 1993.

Butlin, N.G. Forming a Colonial Economy: Australia, 1810-1850. Cambridge: Cambridge University Press, 1994.

Butlin, N.G. Investment in Australian Economic Development, 1861-1900. Cambridge: Cambridge University Press, 1964.

Butlin, N. G., A. Barnard and J. J. Pincus. Government and Capitalism: Public and Private Choice in Twentieth Century Australia. Sydney: George Allen and Unwin, 1982.

Butlin, S. J. Foundations of the Australian Monetary System, 1788-1851. Sydney: Sydney University Press, 1968.

Chapman, Bruce, and Glenn Withers. “Human Capital Accumulation: Education and Immigration.” In Reshaping Australia’s economy: growth with equity and sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 242-267. Cambridge: Cambridge University Press, 2001.

Dowrick, Steve. “Productivity Boom: Miracle or Mirage?” In Reshaping Australia’s Economy: Growth with Equity and Sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 19-32. Cambridge: Cambridge University Press, 2001.

Economist. “Has he got the ticker? A survey of Australia.” 7 May 2005.

Haig, B. D. “Australian Economic Growth and Structural Change in the 1950s: An International Comparison.” Australian Economic History Review 18, no. 1 (1978): 29-45.

Haig, B.D. “Manufacturing Output and Productivity 1910 to 1948/49.” Australian Economic History Review 15, no. 2 (1975): 136-61.

Haig, B.D. “New Estimates of Australian GDP: 1861-1948/49.” Australian Economic History Review 41, no. 1 (2001): 1-34.

Haig, B. D., and N. G. Cain. “Industrialization and Productivity: Australian Manufacturing in the 1920s and 1950s.” Explorations in Economic History 20, no. 2 (1983): 183-98.

Jackson, R. V. Australian Economic Development in the Nineteenth Century. Canberra: Australian National University Press, 1977.

Jackson, R.V. “The Colonial Economies: An Introduction.” Australian Economic History Review 38, no. 1 (1998): 1-15.

Kelly, Paul. The End of Certainty: The Story of the 1980s. Sydney: Allen and Unwin, 1992.

Macintyre, Stuart. A Concise History of Australia. Cambridge: Cambridge University Press, 1999.

McCarthy, J. W. “Australian Capital Cities in the Nineteenth Century.” In Urbanization in Australia; The Nineteenth Century, edited by J. W. McCarthy and C. B. Schedvin, 9-39. Sydney: Sydney University Press, 1974.

McLean, I.W. “Australian Economic Growth in Historical Perspective.” The Economic Record 80, no. 250 (2004): 330-45.

Maddison, Angus. Monitoring the World Economy 1820-1992. Paris: OECD, 1995.

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

Maddison, Angus. The World Economy: Historical Statistics. Paris: OECD, 2003.

Meredith, David, and Barrie Dyster. Australia in the Global Economy: Continuity and Change. Cambridge: Cambridge University Press, 1999.

Nicholas, Stephen, editor. Convict Workers: Reinterpreting Australia’s Past. Cambridge: Cambridge University Press, 1988.

OECD. Education at a Glance 2005 – Tables OECD, 2005 [cited 9 February 2006]. Available from,2340,en_2825_495609_35321099_1_1_1_1,00.html.

Pope, David, and Glenn Withers. “The Role of Human Capital in Australia’s Long-Term Economic Growth.” Paper presented to 24th Conference of Economists, Adelaide, 1995.

Reserve Bank of Australia. “Australian Economic Statistics: 1949-50 to 1986-7: I Tables.” Occasional Paper No. 8A (1988).

Reserve Bank of Australia. Current Account – Balance of Payments – H1 [cited 29 November 2005]. Available from

Reserve Bank of Australia. Gross Domestic Product – G10 [cited 29 November 2005]. Available from

Reserve Bank of Australia. Unemployment – Labour Force – G1 [cited 2 February 2006]. Available from

Schedvin, C. B. Australia and the Great Depression: A Study of Economic Development and Policy in the 120s and 1930s. Sydney: Sydney University Press, 1970.

Schedvin, C.B. “Midas and the Merino: A Perspective on Australian Economic History.” Economic History Review 32, no. 4 (1979): 542-56.

Sinclair, W. A. The Process of Economic Development in Australia. Melbourne: Longman Cheshire, 1976.

United Nations Development Programme. Human Development Index [cited 29 November 2005]. Available from

Vamplew, Wray, ed. Australians: Historical Statistics. Edited by Alan D. Gilbert and K. S. Inglis, Australians: A Historical Library. Sydney: Fairfax, Syme and Weldon Associates, 1987.

White, Colin. Mastering Risk: Environment, Markets and Politics in Australian Economic History. Melbourne: Oxford University Press, 1992.

World Bank. World Development Indicators ESDS International, University of Manchester, September 2005 [cited 29 November 2005]. Available from

Citation: Attard, Bernard. “The Economic History of Australia from 1788: An Introduction”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

Economic Development in the Americas since 1500: Endowments and Institutions

Author(s):Engerman, Stanley L.
Sokoloff, Kenneth L.
Reviewer(s):Nonnenmacher, Tomas

Published by EH.Net (September 2013)

Stanley L. Engerman and Kenneth L. Sokoloff, Economic Development in the Americas since 1500: Endowments and Institutions. New York: Cambridge University Press, 2012. xx + 417 pp. $99 (hardcover), ISBN: 978-1-107-00955-4.

Reviewed for EH.Net by Tomas Nonnenmacher, Department of Economics, Allegheny College.

Economic Development in the Americas since 1500: Endowments and Institutions brings together the works of Stanley Engerman and the late Kenneth Sokoloff ? along with coauthors Stephen Haber, Elisa Mariscal and Eric Zolt ? on the topic of geography, institutions, and economic development. Their thesis will be very familiar to economic historians: a causal chain links initial endowments in New World colonies to the organization of economic activity, economic power, political power, institutions, and long-run economic performance. Institutions, in Engerman and Sokoloff?s story, are endogenous, and knowing the resource allocation of a colony in 1500 explains much of its future economic performance. The book begins with three chapters that lay out the big picture and then turns to case studies on suffrage, schooling, taxation, land and immigration policies, and banking. The concluding chapters offer commentary on the use of institution-based explanations of growth and a comparison with alternative explanations of development.

The New World constituted a vast and heterogeneous set of opportunities for European nations. Engerman and Sokoloff group colonies into three categories: those with land most suitable for growing lucrative crops like sugar and tobacco, those with rich mineral resources and a substantial native population, and those with land most suitable for small-scale agriculture. Europeans exploited the natural resources in the first two categories of colonies by either importing slaves from Africa or using the Native American population. Doing so led to an uneven distribution of economic and political power that persisted via the adoption of institutions designed to protect that power. In contrast, in areas where the initial endowment of natural resources did not encourage the use of forced labor, a virtuous cycle of political competition generated pro-growth institutions. The long-run economic prosperity of the U.S. and Canada relative to their neighbors is not due to ?better? British institutions, but due to the British coming to the New World late to the game and acquiring colonies that did not possess the valuable natural endowments that made slavery so profitable. Indeed, the economic development of the British sugar colonies (Barbados, Jamaica, and Belize) is more similar to that of Spanish, Dutch, and French colonies in the Caribbean than to the U.S. and Canada. Even the Puritan work ethic has a counterexample in Providence Island off the coast of Nicaragua.

The middle chapters of the book are the heart of Engerman and Sokoloff?s analysis and provide compelling narratives and statistical evidence supporting their hypothesis of a link between inequality and institutional choice. The chapter on voting establishes the link between economic and political inequality. The original thirteen colonies had rules that linked property or wealth to the right to vote. While these restrictions were fairly strict, they still allowed a broad set of elites to participate in elections. In order to attract immigrants, new western states, which had lower population density and lower income inequality, restricted the franchise much less, using race, gender, age, and criminal record rather than wealth and property. The pattern of extending the franchise in areas with lower population density and lower income inequality is a central piece of Engerman and Sokoloff?s story. In Latin America, the right to vote was greatly limited via a literacy test. Racial boundaries were generally more porous in Latin America, making the implementation of an explicit racial criterion politically difficult. While generally rising over time, the proportion of the population voting in Latin America remained well below that in the United States and Canada through 1940. This pattern limited the access of the general population to the political process and led to rules being written for the elites.

Using literacy as a requirement for the franchise reduced the incentive to provide public school education. The schooling ratio was highest in cities (where inequality was lower), in countries with higher income, and in countries in which a higher percentage of the population voted. Political inequality and education are thus directly linked. Inequality is also linked to the tax structure, with more unequal countries relying on regressive sales and trade taxes and more equal countries relying on property and income taxes. Immigration and land policy was open in the United States and Canada and restrictive in Latin America. The cumulative effect led to enormous differences in land ownership rates by the early 1900s. In Mexico, the highest rural land ownership rate was 5.6% in the Pacific Northwest. The rural land ownership rate was 83.4% in the western United States and 87.1% in Canada. Finally, the chapter on the banking system (by Stephen Haber) draws links between elite power and banking regulation. A powerful Latin American elite manipulated the opaque regulatory process in their favor.

One measure of the importance of a research agenda is the number of scholars who build on it, and, by this measure, Engerman and Sokoloff have achieved great success. Many subsequent studies find support for their hypotheses or raise questions about the links between economic and political inequality and underdevelopment. The work of Engerman and Sokoloff is foundational to the literature on colonialism, institutions, and economic development and anyone interested in development or new institutional economics will need to read this book.

Tomas Nonnenmacher is a Professor of Economics at Allegheny College. His most recent article, ?Stability and Change on Henequen Haciendas in Revolutionary Yucat?n: Two Case Studies from the Henequen Zone? is coauthored with Shannan Mattiace and is forthcoming in Estudios Mexicanos/Mexican Studies. He is currently working on a project exploring entrepreneurship in the telegraph industry.

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

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy

Reviewer(s):Bodenhorn, Howard

Published by EH.Net (August 2013)

Dora L. Costa and Naomi R. Lamoreaux, editors, Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy. Chicago: University of Chicago Press, 2011. x + 390 pp. $110 (hardcover), ISBN: 978-0-226-11634-1.

Reviewed for EH.Net by Howard Bodenhorn, Department of Economics, Clemson University.

Economic history lost one of its best and brightest with Ken Sokoloff?s death in May 2007. To celebrate and commemorate his contributions to economics, Dora Costa and Naomi Lamoreaux collected an impressive and diverse group of essays contributed by Ken?s friends, colleagues, coauthors, and classmates. Ken?s interests were wide-ranging ? he wrote on early industrialization and heights and health, but his signal contributions concerned invention and innovation, as well as the complex connections between geography, institutions and long-run economic growth. Fittingly, the essays are equally wide ranging.

The first article is an essay Ken was working on with Stan Engerman and advances the initial conditions-geography-institutions approach explored in their earlier research. The central argument is that differences in initial conditions between North America and Central and South America set those regions on markedly different social, economic and political trajectories. With its relative shortage of indigenous labor, early settlers recognized that North America would prosper only through European settlement and they adopted institutions in which new arrivals were welcomed (eventually) into the polity and might, with good fortune and hard work, rise in society. Blessed with an abundance of indigenous workers, the earliest settlers in South and Central America adopted institutions that discouraged European immigration by restricting economic and political privilege. Moreover, the nature of staple crop production pushed the returns to unskilled labor so low that few Europeans came. The argument, briefly stated, is that early inequality begat later inequality through endogenously arising institutions that favored the few, the elite.

Sokoloff and Engerman?s research raises fundamental questions: Are institutions exogenously determined by idiosyncratic events, such as the arrival of British rather than Spanish colonizers, as the legal origins approach posits?[1]? Are institutions, once established, persistent, as the colonial origins approach contends?[2]? Or, are institutions endogenous to geographies as societies struggle with how best to deal with the challenges of environments, technologies, and factor endowments? Sokoloff and Engerman are clearly in the endogenous institutions camp.

It is fitting, then, that the next two articles take on the exogeneity/endogeneity debate from alternative perspectives. Camilo Garcia-Jimeno and James A. Robinson explore the long-run implications of Frederick Jackson Turner?s thesis that the American frontier shaped its egalitarian representative democracy. Garcia-Jimeno and Robinson recognize that the U.S. was not the only New World country with a frontier and offer the ?conditional frontier hypothesis,? which posits that the consequences of the frontier are conditional on the existing political equilibrium when settlement of the frontier commences. They consider 21 New World countries and, from a series of regressions, conclude that if political institutions were bad at the outset (which they define as 1850) the existence of a frontier may have made them worse. The oligarchs divvied up the frontier among themselves, which further entrenched their economic and political power. Exogenous institutions rule.

Or do they? Stephen Haber next explores banking and finance in three countries ? the U.S., Mexico and Brazil ? but starts from a very different, very Sokoloff-ian (if I may) perspective. For Haber, as for Sokoloff, the task facing the economic historian interested in institutions involves tracing the many and complex ways in which economic and political power becomes embedded in institutions, how those institutions influence the formation of competing coalitions, and how competition between them either entrenches or alters the original institutions. Pursuing these connections is, Haber (p. 90) argues, ?a task better suited to historical narratives than to econometric hypothesis testing.? What connects banking in these three countries is that the elite used their existing power to rent seek ? to elicit government sanction of limited entry and privileged monopoly. What separated the three countries was that rent seeking efforts largely failed in the U.S. If Jackson?s war on the Second Bank was emblematic of anything it was that U.S. populists had little tolerance for government-sanctioned economic privilege. Haber doesn?t, and I doubt that Ken would, attribute the Jacksonian attitude to an accident of history. It was organically, indelibly American.

Joel Mokyr summarizes Ken?s approach to his other great intellectual passion: invention and innovation. Innovation was the consequence of purposive, rational behavior. Inventors, at least at some level, were motivated and directed by costs and benefits. Ken also recognized that inventive activity was sensitive to the institutions that generated markets that defined the rewards for innovation. Zorina Khan takes these issues head on in her analysis of patents versus prizes. At the risk of gross oversimplification, the English and the French preferred prizes for inventions believing that what motivated inventive genius was the esteem of one?s peers. Americans proceeded under the pragmatic and republican belief that profits motivated and markets would ?allow society to better realize its potential? (p. 207). Prizes were subject to momentary whims, were idiosyncratic, difficult to predict, and therefore less useful in pushing out the frontiers of useful knowledge. Markets elicited more innovation, at least as markets were organized in America.

The second article in the volume to which Ken directly contributed is coauthored with Naomi Lamoreaux and Dhanoos Sutthiphisal. They, too, explore the connection between markets and inventions in the ?new economy? of the 1920s. They argue that the rapid expansion of equity markets afforded many small enterprises on the technological frontier access to finance that was unavailable a generation earlier. Big firms dominated patenting in the Northeast. In what became the Rust Belt, small, entrepreneurial firms with new products or processes issued equities or attracted the venture capital necessary for them to bring their products to market. Markets influence innovation in all kinds of direct and indirect ways.

The constraints of a book review, unfortunately, preclude a discussion of the many other very good essays in the volume but which venture so far afield that they are not readily condensed. They are all worth reading; I was particularly fascinated by Dan Bogart and John Majewski?s article comparing the British and American transportation revolutions, and touched by Manuel Trajtenberg?s reflections on Ken as scholar and friend.

On a personal note, I am a beneficiary of Ken?s gentle but firm guidance. It was inadvertently revealed to me that Ken was one of the anonymous reviewers of my State Banking in Early America (2003). While the manuscript was well outside his research interests, he offered several insightful comments, one of which forced me to think more deeply about a central idea. My book is better for Ken?s advice. Many of the chapters included in this volume are undoubtedly better for Ken?s prodding, pushing and provocation. He is missed.

1. See, for example, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny.? 1998. ?Law and Finance.? Journal of Political Economy 106(6).

2. See, for example, Daron Acemoglu, Simon Johnson and James A. Robinson. 2001. ?The Colonial Origins of Comparative Development.? American Economic Review 91(4).

Howard Bodenhorn is currently studying early corporate governance in the United States.???

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

Subject(s):Economic Development, Growth, and Aggregate Productivity
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Historical Demography, including Migration
Historical Geography
History of Technology, including Technological Change
Urban and Regional History
Geographic Area(s):General, International, or Comparative
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Why Australia Prospered: The Shifting Sources of Economic Growth

Author(s):McLean, Ian W.
Reviewer(s):Harper, Ian

Published by EH.Net (May 2013)

Ian W. McLean, Why Australia Prospered: The Shifting Sources of Economic Growth. Princeton, NJ: Princeton University Press, 2012. xvi + 281 pp. $35 (cloth), ISBN: 978-0-691-15467-1.

Reviewed for EH.Net by Ian Harper, Deloitte Access Economics.

There was a time not so long ago when the study of Australian economic history was taken more seriously than it is today.? Australia?s major universities boasted separate departments of economic history, in which some of the authors familiar to any student of Australian economic history studied and taught.? Occasionally professional economic historians took their place alongside economists in departments of economics, as is true of the author of this fine book, who taught for many years at the University of Adelaide in South Australia.

Why Australia Prospered
is the first major survey of Australia?s modern economic history to appear in many years, and it is an outstanding piece of scholarship.? Indeed, in his comment on the dust-cover, E.L. Jones, one of Australia?s internationally distinguished economic historians, confidently predicts that, ?it will become the standard work on Australian economic history.?

The book spans the full gamut of Australia?s story from the settlement of the penal colony of New South Wales by the British in 1788 to current debates about the future of Australian prosperity in the wake of the China-driven resources boom.? A great strength of the book is its value to readers interested in Australia?s contemporary economic challenges as much as to those keen to understand more of what distinguishes Australia?s historical experience from that of similar ?settler? economies like Canada, the United States and Argentina, with which Australia is often compared.

Australia remains one of the most prosperous countries in the world, easily within the top ten ranked by GDP per capita and second only to Norway according to the United Nations Human Development Index.? By any account, this is a story of remarkable success considering the comparatively short time period since European settlement and the fact, as McLean sensitively explains, that Australia?s modern economy was ?built from scratch,? there being no economic interaction of significance between the Australian Aborigines and the newly-arrived British colonists.

McLean tells the story sequentially, partly for convenience but partly to demonstrate one of his themes that the basis of Australia?s prosperity has shifted over time.? There is no single reason why Australians are rich, and McLean firmly repudiates the popular view that Australia is just a vast quarry or farm, and Australians are wealthy for no better reason than their fortunate initial endowment of resource-laden and/or arable land ? in other words, there?s little more to Australia?s economic development than dumb luck.

Australia?s bountiful resource endowment might have amounted to far less without the kick-start provided by favorable demographics and labor force participation rates characteristic of a convict settlement, generous financial ?aid? from Britain and strong trade links with the Mother Country, as well as the early adoption of representative and responsible self-government.? After all, Argentina stands as the classic counterexample of a settler economy with a resource endowment to rival Australia?s but whose economic prosperity began to lag Australia?s in the late nineteenth century and has fallen further behind ever since.

The run-up from near-starvation in the first decade of colonial existence to enjoying the world?s highest material living standard (as measured by GDP per capita) just one century later in the 1880s is familiar.? It is a story of land, exploited first for wool production, then mineral extraction beginning with gold, and subsequently for agriculture, especially following the development of refrigerated shipping.? But then the first of a series of major shocks, sourced from beyond her shores rather than within, hit Australia, beginning with the devastating depression of 1893-95 and followed by two world wars and another depression, all within the span of the next half-century.

The seemingly relentless rise of Australian living standards slowed to a crawl.? The annual average growth rate of per capita GDP fell by half during the two-and-a-half decades following 1890, and barely reached 0.1 percent per annum between 1913 and 1939.? Not until after the Second World War did prosperity levels once again begin to lift.? The latest long boom, which has seen Australian living standards ascend several places up global league tables, commenced as recently as 1990, during which time Australia, almost uniquely among developed economies, has avoided recession altogether.

As Australia?s economic fortunes waxed and waned, domestic economic institutions and policies evolved.? McLean makes much of this historical dialectic, more so than the orthodox telling.? This applies most especially to his interpretation of Australia?s long dalliance with industrial tariff protection, commencing in 1908 during the lengthy aftermath of the 1890s depression and concluding only in the 1980s.

Most economists regard this episode as the triumph of vested interests over rational economic policy.? Yet, in McLean?s rendition, such policy innovations say more about the resilience of Australian political institutions in re-casting the social trade-off between stability and growth as circumstances warrant or allow.? Australia?s later abandonment of tariff protection and floating of the Australian dollar are interpreted in a similar vein.? This is the only respect in which McLean?s narrative has divided professional opinion in Australia, with proponents and detractors of Australia?s proclivity towards economic interventionism voicing their approval or disapproval with equal brio.

Ian McLean has written a timely and masterful account of the long sweep of Australia?s economic history, which will be relished by anyone interested in the unique circumstances of this country?s remarkable economic development.? Written for the non-specialist, the narrative is accessible, brisk and appropriately, if sparsely, illustrated with charts and tables.? There is an extensive bibliography and index.

Ian Harper is Emeritus Professor of Economics at the University of Melbourne and a Partner at Deloitte Access Economics.? His latest book, Economics for Life (Acorn Press, 2011), includes a chapter on Australian economic history.? Email correspondence should be sent to

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

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Growth of Public Expenditure in the United Kingdom from 1870 to 2005

Author(s):Lee, Clive
Reviewer(s):Earley, Martin

Published by EH.Net (February 2013)

Clive Lee, The Growth of Public Expenditure in the United Kingdom from 1870 to 2005. New York: Palgrave Macmillan, 2012. ix + 285 pp. ?67.50/$100 (hardcover). ISBN: 978-0-230-35414-2.

Reviewed for EH.Net by Martin Earley, Department of History, Bristol University.

Clive Lee (emeritus professor at the University of Aberdeen) is a noted authority on the Scottish economy and on Britain and its regional economy more generally. He wrote a short discussion paper, in 2000, on ?The Origins of Leviathan: The Growth of Public Expenditure and Taxation in the United Kingdom, 1880-1938.? This book is a considerable expansion of the discussion paper in 247 pages of text plus a statistical appendix of 28 pages. Lee selects from other works on the growth of public expenditure in order to describe and explain the extraordinary increase in public expenditure in the period covered. The primary thrust of his explanation for such growth appears early, ?it was driven largely by demand for public services on the part of those who saw themselves as its probable beneficiaries? (p. 2) and this pressure was largely channeled through the Labour movement.?

The first chapter is an overview of the growth, providing a balanced review of the very general explanations beginning with Greenleaf?s hypothesis and considering the libertarian versus collectivist perspectives, all very much within a British framework. He has a repeated emphasis on council house sales as the main platform of Thatcherism but otherwise this is a conventional analysis.? Marx is mentioned several times, Hobson favored against other political economists of his time and Hayek, despite the author?s stated bias, given a very fair hearing.? His second chapter considers public revenue in a first sub-period, 1870-1939. The sub-period dates are problematic for several reasons: at several points in his narrative 1890 would seem to be more of a turning point; it is not clear why data before 1870 were not included; 1939 is a natural division but in fact 1960 seems to be a better fulcrum to discuss the dramatic later shifts in spending. Although this is primarily a work on public expenditure, I found this emphasis on revenue issues most useful. To my taste, actual tables rather than extended summaries of the data would have been preferable but for his target audience he obviously feels the need to explain the data at length. The breakdown of revenues is extremely useful even if the figures are difficult to follow on occasion (and, for example, Figure 2.5 is incomplete).? Chapters three, four and five cover public expenditure for three broad categories of expenditure (central, central/local and local) for the 1870-1939 periods ? although he is clear that the central-local division is not adhered to consistently. I found his acceptance of the ?extended franchise to greater public spending? dynamic rather simplistic and the summary of Lindert, one of few intrusions of cross-national work, uncritical and selective.? Chapters 6-9 take the same headings as for chapters 2-5, but for the period 1938-2005. Bringing the history up to 2005 serves to support arguments from as yet weakly established historical facts for his general hypothesis given on page 2. In his very brief (only two full pages) summary and conclusion in chapter 10, Lee repeats his view of explanations for the general increase and feels it is necessary to abruptly bring in Scottish devolution at the very end.

This is an individualistically written book in many respects.? There are 25 figures but only two tables. There are fewer than 180 references in the bibliography, with many of the usual authorities such as Bernard Harris, Hobsbawn, Macnicol, Middleton and Pedersen missing, limited reference to Feinstein, only the 1984 edition of Fraser, no Ursula Hicks for 1920-36, and no reference to Lindert?s summative 2004 volumes. The great majority of the text is summaries of other works. Unusually for such a work there are considerable and extended descriptions of the Great Wars (pages 63-73 and 158-182) without specific links to spending patterns. Although this is an important corrective to histories which simply give the figures, the extent of text devoted to military history seems unbalanced. The paucity of tables, because such tabular information is given at great length verbally, is another quirk of the author. The figures have no source references provided for each individually, and the statistical appendices, which are given as the source in general for the figures, are tables copied uncritically from the usual sources (although Mitchell is not mentioned in the references). The sources of somewhat confusingly presented figures therefore cannot be readily checked. However the breakdown of expenditure and revenue categories is somewhat different from others and thereby more thought provoking.

An underlying problem is that the description and the explanations, from either the words or the data presentation, are not tightly linked. There is, moreover, very little original data or contribution to scholarship. Trends are hardly described. Some summaries are lacking in depth, for example, Clarke on Keynes (p. 240), on Lindert (pp. 31-32), and on the extension of the franchise (p. 300).? There is almost no extended reference to medium term explanations, except Lindert. There is hardly anything on Baumol?s theory and, after the opening chapter, little on the public choice school.? This is part of recoil from exploring economic and fiscal explanations, but he does not match Harris or Fraser on the social history and has little on political history. For in-depth analyses undergraduates would be better reading the original sources summarized here and, as I have indicated, those wishing to check the data would have their work cut out.? Much of the book is at the level of a sixth form textbook, summarizing positions and personalities. It is often idiosyncratic but this arresting aspect hardly justifies the price.

Martin Earley?s Ph.D. dissertation (completed at Bristol University) was titled ?Public and Social Expenditure in the UK, 1830-1950: Data, Trends and Explanation.?

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

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

?Merely for Money?? Business Culture in the British Atlantic, 1750-1815

Author(s):Haggerty, Sheryllynne
Reviewer(s):Hoppit, Julian

Published by EH.Net (January 2013)

Sheryllynne Haggerty, ?Merely for Money?? Business Culture in the British Atlantic, 1750-1815. Liverpool: Liverpool University Press, 2012. xiv + 287 pp. $100 (hardcover), ISBN: 978-1-84631-817-7.

Reviewed for EH.Net by Julian Hoppit, Department of History, University College London.

In a way, this book is a behavioral study of merchants trading across the Atlantic in the era of the American, French, and early industrial revolutions. As such, it is much less concerned with prices and profits, supply and demand, ships and ports, laws and government, than with hopes and fears, conventions and customs, friendships and networks. It explores the culture of business practice, not how merchants conspicuously consumed, engaged in philanthropy, or donated to the libraries and assembly rooms of the ports they worked from.

The great strength of the book is the extent of primary research on which it rests and how that evidence is related to modern research into business practice from the fields of economics, business studies, and sociology. Throughout that relationship is developed thoughtfully and suggestively. Moreover, Haggerty also engages with a large body of secondary work by economic historians. Given such efforts, the many footnotes provide lead after lead to follow up on. This is a book to make one think, even if its conclusions are unsurprising.

A key aspect of Haggerty?s book is its geographical and chronological ambition. In practice, the ?British Atlantic? is viewed from Liverpool primarily (though not exclusively) to the Caribbean and, more especially, North America. In Britain, Glasgow, Bristol, and London are given some consideration, Whitehaven none at all. Records of merchants in the Caribbean and North America are employed, trade with West Africa is mentioned in passing, but Ireland is completely ignored. Chronologically, the weight of the book lies from the mid-1760s to the abolition of the British slave trade in 1807. This was, to put it mildly, a challenging time to be a merchant in the British Atlantic and Haggerty?s book is suggestive in helping us to understand how those challenges were met.

To a considerable extent the book rests upon the correspondence of a number of merchants. Material from 30 archives in several countries is employed, as well as numerous printed primary sources. Yet weighty though this material is, it plays a supporting role in determining the book?s approach and direction. The titles of the six substantive chapters in the book make clear Haggerty?s focus: Risk, Trust, Reputation, Obligation, Networks, and Crises. Each of these chapters begins by carefully setting out recent and mainly theoretical work on these from beyond history: terms are defined with real care, previous assumptions critically considered, and telling questions nicely posed. This is a very valuable feature of the book. Those questions are then addressed in the body of the chapter by detailed exploration of the primary sources. Haggerty is notably skilled in identifying the apposite quote and showing how a jigsaw with many missing pieces can, nonetheless, be plausibly reconstructed.?

This is then a book, full of good things. But one its great sources of strength, the attention to the subtleties of business relationships to be found in letters, arguably makes it harder for more general arguments to be made. Haggerty?s approach is mainly qualitative and illustrative, dipping in and out of particular sources with a focus upon individuals and their business connections. There is very little quantitative analysis, and only in the chapter on networks is her approach more systematic, and even then the presentation makes it hard to compare her case studies and little attention is paid to how representative they are. Take therefore Haggerty?s statement near the end of the book that ?the United States continued to be Britain?s largest single trading partner. This success was largely due to a business culture which facilitated trade despite long-term structural changes and short-term crises? (p. 235) To write ?largely due? is to make a big claim for the role of business culture which Haggerty has not attempted to support by systematically considering other possible explanations, such as terms of trade and the international division of labor.

A further marked feature of the book is that six of the seven substantive chapters pay scant attention to balancing issues of continuity and change. Haggerty skillfully and deftly shows aspects of business culture, habits, and etiquette, but is less interested in showing how they did or did not change over time. Developments are not ignored, but just what was distinctive about business culture in this period needs more concerted consideration. This matters because a number of her key features might be supposed to have a timeless aspect to them ? such as the role of trust or networks. Perhaps more weight might have been paid to the influence upon business culture of the evolution in the period of marine insurance, the emergence of chambers of commerce (on which Robert Bennett has done path-breaking work, including a detailed study of Liverpool), pre-war Anglo-American debts after 1783, the growth of the Lancashire cotton industry, and the Continental System. None of these are ignored, but they crop up only in passing and are only foregrounded near the end of the book in a discussion of crises.

A lot of outstanding work has been published on the mercantile world of the British Atlantic in this period by the likes of Bernard Bailyn, Ralph Davis, Tom Devine, David Hancock, John McCusker, Kenneth Morgan, and Jacob Price. It is no mean achievement of Haggerty that she has made a distinctive contribution to such a rich field of research.

Julian Hoppit?s recent publications include Nehemiah Grew and England’s Economic Development (Oxford University Press, 2011), ?Compulsion, Compensation and Property Rights in Britain, 1688-1833,? Past and Present (2011), and ?The Nation., the State, and the First Industrial Revolution,? Journal of British Studies (2011).
Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (January 2013). All EH.Net reviews are archived at

Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Europe
Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):18th Century
19th Century

Land of Promise: An Economic History of the United States

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

Published by EH.Net (October 2012)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Reinterpretation of Italian Economic History: From Unification to the Great War

Author(s):Fenoaltea, Stefano
Reviewer(s):A'Hearn, Brian

Published by EH.Net (July 2012)

Stefano Fenoaltea, The Reinterpretation of Italian Economic History: From Unification to the Great War. Cambridge: Cambridge University Press, 2011. xxi + 296 pp. $85 (hardcover), ISBN: 978-0-521-19238-5. (First published in Italian as L?economia italiana dall?Unit? alla Grande Guerra, 2006.)

Reviewed for EH.Net by Brian A’Hearn, Department of Economics, University of Oxford.

This book brings together four decades of research on Italian industrialization by Stefano Fenoaltea. The backbone of this research, and of the book, is the author?s well-known estimates of industrial value added. These are presented in Chapter 1, which details their construction and offers a lucid discussion of technical issues from ?double deflation? to the treatment of unobserved sectors. Scrutiny of production and import series for individual industries reveals no evidence of the sort of supply-side discontinuity or ?great spurt? predicted by what Fenoaltea terms stages of growth theories. Instead, supply responded elastically to variation in demand throughout the 1861-1913 period. Chapter 5 investigates the role of railroads in establishing stages-of-growth prerequisites for industrialization, and finds that they did not play this role. Chapter 2 sets out the author?s alternative explanation of the industrial upswings of the 1880s and 1900s. In a reinterpretation of the Kuznets Cycle, Fenoaltea argues that British capital exports drove construction and broader investment booms in the periphery in general and Italy in particular.

Chapters 3 and 4 deal with Italy?s protectionist response to globalization. The first argues convincingly that the much-discussed agrarian crisis of the 1880s never happened. The perception of one arose from the lamentation of landowners in cereal-growing areas (who really were harmed by the ?grain invasion?) and an unreliable agricultural output series. In fact the 1880s were a period of structural change during which Italy followed its evolving comparative advantage into more labor-intensive production, not only in the booming industrial sector but also within agriculture, where an expansion of vineyards and citrus groves was underway. Chapter 4 shows how the tariff on imported grain from 1887 reversed these effects and contributed decisively to a growing tide of emigration. Internally, real wages were lowered; externally, the costs of labor-intensive exports, whether industrial or agricultural, were raised to the point that production in Italy became uncompetitive.

Chapter 4 exhibits as well as any other several of the book?s virtues. The writing is elegant and spare, with close logical reasoning and subtle argument throughout. And the range of scholarship and ingenuity on display is formidable: clever reasoning to coax from scattered evidence estimates of the quality of cotton textiles; polished expositions of various points of pure theory; detailed critiques of the Italian literature; minor asides on the history of economic thought (Hume, Ricardo, Marxist thinkers?); original applications of trade theory to migration (with a digression on the slave trade); and more besides.

The geography of industrialization is the subject of Chapter 6, which presents Fenoaltea?s estimates of regional value added in industry for several census years. The pattern discerned by the author in the earliest figures (for 1871) is that those regions were relatively industrialized which had recently hosted the national capitals (or in the case of Sicily a major regional capital) of pre-Unification states. Here were the markets wherein most of the agricultural surplus had been consumed in the ancien r?gime. So the now-familiar pattern of an Industrial Triangle in the Northwest observable in 1911 was not the perpetuation of an age-old pattern, but the emergence of something new. And it was not history but geography that drove this concentration, specifically the immobile factor of water power. A less-familiar pattern that emerges from the analysis, and a puzzle meriting further research, is what looks like a non-industrial economic boom in the Southern regions of Sicily and Apulia.

Much of this will be familiar to readers with an interest in Italian economic history; Fenoaltea is, after all, a well-known authority in the field. One element that is new in the picture is the author?s historiographical reflections. Of particular interest are insights into the way in which current events and current economic theorizing influenced the writing of history, as when 1960s concerns about balance of payments constraints on growth were inappropriately projected backward into a very different historical context. Another new element, and perhaps the aspect of The Reinterpretation of greatest interest to a general readership, is the author?s own model of development. Really, the model is not new; it runs consistently throughout Fenoaltea?s work. But it can be perceived much more clearly in the present collection than in the author?s separate publications. This approach might be called the ?mobile resources? model of development.

In this approach all productive resources are viewed as mobile to a greater or lesser degree. In the late nineteenth century, a commodity like raw silk was highly mobile, coal less so. A factor of production like capital was highly mobile, craft labor less so. Only physical location and natural resources are truly immobile. Less mobile resources tend to attract the more mobile, and determine the profitability of different activities in a given location. Because technology and markets evolve over time and are specific to a particular moment, history matters for Fenoaltea. But it is the history of the moment, of an equilibrium quickly reached, rather than a historical process that is path-dependent or longue-dur?e. He offers the example of the Ruhr, where ? given the technologies and markets of a particular historical moment ? relatively immobile coal attracted capital, entrepreneurship, labor, and iron ore to a region with no particular industrial or commercial heritage.

The model, which is nowhere elaborated en bloc, deserves a more explicit and comprehensive treatment. One point that could be made clearer is that the goal of the model is to explain development rather than growth: an economy?s specialization (sectoral composition) and size (attraction or loss of mobile resources) rather than its productivity or prosperity. The questions are not whether real wages will be high or low, but whether they will be earned at home or abroad; not whether the economy will be advanced or backwards, but whether it will be large and industrial or small and agricultural. Giving greater salience to this point would help resolve what can otherwise appear as contradictions. For example, Fenoaltea states more than once that there is nothing magic about industry relative to other sectors, but seems to accept industrialization as the appropriate goal for policy, and studies only that sector. Or, he quotes approvingly the liberal pronouncements of late-nineteenth century economists regarding trade policy, but also presents a model that ?fully justifies ? (mercantilist) policies aimed at developing non-agricultural exports, the luxury-good industries and the carrying trade.? What reconciles these views is the common goal of enabling an abundant labor force to attract other mobile resources to a growing economy in Italy. Industry is not important, in itself; a labor-intensive service economy would have served just as well, had the technology and markets of the time permitted.

Beyond greater clarity on this point, there are two areas in which the model could be improved. First, given the key role of geography, it is curious that domestic market access, which is a key feature of most new economic geography models, is not considered. Because domestic market access is endogenously determined, it implies an even more important role for policy in promoting development. Second, institutions are equally neglected in the model. Are they flexible (another mobile factor, in a sense) or unimportant? If part of the book is a retrospect on a career?s achievements, the further elaboration of Fenoaltea?s mobile resources approach and its application to fresh issues or time periods is a prospect to look forward to.

Brian A’Hearn is an economics tutor and fellow of Pembroke College, University of Oxford. He is the author of a number of articles on Italian economic history.

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

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII

Law and Long-Term Economic Change: A Eurasian Perspective

Author(s):Ma, Debin
van Zanden, Jan Luiten
Reviewer(s):Sng, Tuan-Hwee

Published by EH.Net (June 2012)

Debin Ma and Jan Luiten van Zanden, editors, Law and Long-Term Economic Change: A Eurasian Perspective. Stanford: Stanford University Press, 2011. xiv + 358 pp. $65 (cloth), ISBN: 978-0-8047-7273-0.

Reviewed for EH.Net by Tuan-Hwee Sng, Department of Economics, National University of Singapore.

Researchers have long recognized the relationship between secure property rights and economic growth. Discussion on the subject, however, has often fallen into an oversimplified dichotomy between a ?progressive? West and a ?corrupt? East. As the editors of this volume — Debin Ma (London School of Economics) and Jan Luiten van Zanden (Utrecht University) — point out, the need to maintain some level of justice and fairness is probably shared by all societies. While they are not advocates of the revisionist view that the West?s decisive lead in the security of property only appeared with the advent of the industrial revolution, they recognize the need to study non-Western legal systems more systematically. Their admirable goal is to build ?a richer and subtler perspective on global legal traditions? that is ?much more than a simplistic tale of European exceptionalism.?

The volume brings together an impressive group of scholars with expertise on different parts of Eurasia to explore diverse aspects of property rights across space and time. Most of the 15 essays compiled in the volume originated in a conference on law and economic development held in Utrecht in 2007. Some of the questions that they addressed include: What are the main characteristics of a particular legal tradition? How did these characteristics evolve over time? How effective were different legal systems in the protection of property? Did differences in legal traditions contribute to the ?Great Divergence??

As one would expect from a collection of essays, many chapters in the volume are only loosely connected to one another under the broad theme of law and long-term economic growth. Some readers will enjoy the diversity. Others might have preferred a more focused comparative agenda. It is a matter of personal taste, but every reader should find something inside that is interesting and relevant to his/her own work.

The chapters are ordered from east to west, starting with Japan and ending with Britain. Very broadly, they can be classified into four groups: those arguing that an overly powerful state is the main obstacle to legal development; those seeking to explain the internal logic of individual legal systems without offering theories on ?what went wrong (right)?; those that analyze the transmission of legal institutions; and those that examine the performance of a specific institution in a local (British) context.

The State as an Obstacle to Legal Development

In the introduction, the editors offer a three-layer analytical framework to understand the evolution of law and legal institutions: culture provides the range of ideas; the state filters these ideas and selects those compatible with its interests; the ideas selected are then expressed as institutional rules. This is a simple yet powerful framework, with much food for thought.

Chapter 2, by John Haley, discusses the evolution of private law in the West and Japan. It argues that constraints on political power in Europe — itself the outcome of European geography, major tribal migrations between the third and the sixth centuries, the emergence of the church as a political player, and incessant warfare — prevented rulers in medieval Europe from adopting the kind of public-law system that emerged in imperial China. Instead, they were forced to accept adjudication as a principal means of maintaining order. According to Haley, the presence of similar political conditions (in particular, the existence of competing centers of power) also led to the development of an embryonic private-law order in early and medieval Japan. It was this ?shared institutional experience? that would allow Japan to adopt Western law successfully and with relative ease during the nineteenth century.

Recent revisionist scholarship has shown that the legal system in imperial China did a much better job of protecting property rights than previously thought. In Chapter 3, Debin Ma provides a critique of this view. Through a short review of the Chinese legal tradition, he argues that the imperial state?s desire to maintain its monopoly of power prevented the formation of an autonomous legal profession in China. Litigation masters who gave legal advice to ordinary people were driven underground as their presence was viewed by the state as a threat to a harmonious society, while court decisions continued to be made by magistrates with little legal expertise and whose primary concern was to satisfy the review from above. To Ma, ?[t]he rise of an independent legal profession in England and Western Europe and its absence in traditional China were merely reflective of two contrasting political structures at opposing ends of the Eurasian continent.?

The most theoretically oriented chapter in the volume is Metin Cosgel?s analysis of the adoption of legal and other innovations in the Ottoman Empire (Chapter 8). By building a theoretical framework to analyze interactions between a ruler, an organized religious and legal authority, and the citizenry, Cosgel suggests that the support of powerful groups in the society is an important factor that helps explain why the Ottoman state was quick to adopt some innovations (e.g. gunpowder technology) but not others (e.g. printing press, the legal concept of corporation).

In Chapter 10, Jerome Sgard asks why bankruptcy laws were first invented in medieval Europe and not elsewhere. Historically, societies without bankruptcy laws to manage commercial failures ex-post often imposed rules (e.g. usury laws) to prevent economic agents from taking too much risk ex-ante. While bankruptcy laws promote trade and investment by providing a mechanism to solve this dilemma, allowing the court to intervene in commercial affairs could also potentially lead to state predation. According to Sgard, it is therefore unsurprising that bankruptcy laws first emerged in northern Italy, where ?burghers and merchants could actually govern their local public affairs.? Republican institutions and bankruptcy statutes are natural complements.

Chapter 13, by Jaime Reis, studies the mortgage loan market in nineteenth-century Portugal. Using a new metric to identify the component in the interest rate that reflects institutional quality, Reis shows that creditor rights were weakly protected in Portugal between 1870 and 1910. By complementing his statistical analysis with a historical narrative, he argues that the relative high cost of credit observed cannot be attributed to flaws in the architecture of the Portuguese legal system. At root, the problem lies with political meddling with the judiciary and the appointment of judges based on political favoritism.

The Long-Term Evolution of Legal Arrangements

In Chapter 7, Anand Swamy?s insightful survey on land law in colonial India reflects the difficulties of promoting legal and economic development in traditional agrarian societies. In the late 1700s, the East India Company introduced a system of civil courts in Bengal with the belief that secure property rights would promote investment and growth. Over time, however, the colonists became increasingly worried that the court system, with its greater formalism and costs of access, might have disadvantaged poorer segments of society at a time when peasant demand for dispute resolution was rising due to the commercialization of agriculture. After the Mutiny of 1853, measures were readily adopted to curb the transfer of land. Ironically, concludes the author, ?at the height of its power, the colonial state was more fearful of market forces than at its insecure beginning.?

Akin to the situation in Colonial India, the judicial process in imperial China also placed much emphasis on the maintenance of social order. Mio Kishimoto points out in Chapter 4 that the imperial state in China saw the protection of private property rights as a means to reduce social tensions, not as an end in itself. An example used to illustrate the point was the imperial state?s willingness to tolerate the widespread custom of ?two masters to a land.? The custom weakened the rights of landowners by prohibiting them from replacing tenants at will and allowing a tenant to transfer cultivation rights without the landowner?s consent.

Kishimoto?s analysis is complemented by Harriet Zurndorfer?s case study (Chapter 5) on property litigation in sixteenth-century Huizhou (Anhui, China). The chapter discusses how population and commercial growth drove an increase in litigation and how the Chinese state and society coped with it.

Chapter 9, by Toru Miura, presents rich historical details on how legal institutions functioned in the Islamic Middle East. Miura highlights several unique features of the Islamic judicial system, including an emphasis on individual ownership, the reliance on oral testimonials instead of written documentation, and the role of the Islamic qadi as a mediator instead of a judge. Through a careful examination of the actual operation of the court, he shows that the Islamic court was far less arbitrary than commonly perceived.

The Transmission of Legal Institutions

The subject of institutional transmission features prominently in Chapters 6, 11, and 12, by Tirthankar Roy, Jessica Dijkman and Oscar Gelderblom, respectively. Roy traces the evolution of law in India between 1600 and 1900. Particular attention is paid to the way British colonial legislators, driven by a desire to secure the acquiescence of powerful communities to British rule, introduced the procedures of the common law system into India while preserving the content of India?s indigenous law. The result, however, was not a happy one. As multiple legal codes arose to reflect the diversity of the Indian society, the judicial process became unnecessarily costly in time and money. As Roy puts it, the colonial legal system was a ?monstrously inefficient hybrid.?

Dijkman?s chapter sets out to understand whether the development of debt litigation institutions in Holland between 1200 and 1350 led to its strong economic growth after 1350. She points out that many of the legal procedures for debt recovery used in medieval Holland were likely to be imports from the southern Low Countries. But unlike the case in colonial India, institutional transplantation worked well in medieval Holland. Dijkman?s analysis suggests that preexisting institutional similarities between the innovator and the follower matters. The towns of Holland could easily adopt innovations made by its neighbors because in most cases, doing so would require only modifying an existing institution rather than creating a new one.

In Chapter 12, Gelderblom surveys the institutions used by long-distance traders in Bruges, Antwerp, and Amsterdam between 1250 and 1650 to resolve disputes among themselves. He discusses how trade expansion led to the rise of consular courts in Bruges and Antwerp, and subsequently how, as business practices converged and local judges became more competent in adjudicating disputes among foreign merchants, local courts developed into the preeminent third party enforcer of contracts in the Low Countries.

Two British Institutions

Two chapters on Britain, one by Larry Neal on the London Stock Exchange and the other by Dan Bogart on the use of juries to approve infrastructural projects, conclude the volume. In Chapter 14, Neal describes the image of the pre-WWI London Stock Exchange as an entirely self-regulating entity as an ?illusion.? He argues that the exchange operated under the ?ever-present threat that the authorities could sanction the creation of a competing exchange,? and it was this fear of additional legislation that helped prevent the exchange from imposing self-interested restrictions on competition and innovation.

In the final chapter, Dan Bogart studies the link between British legal institutions and infrastructural development. After the Glorious Revolution, parliamentary acts gave juries, whose members often came from the landowning class, the authority to determine compensation for infrastructural projects such as roads, canals, and railways. Bogart finds empirical evidence showing that jury decisions were biased in favor of landowners. He warns, however, against taking the study as conclusive by pointing out that in pre-revolutionary France, infrastructural projects could take decades to receive the green light from the courts. By comparison, the system of juries, which often needed only a few months to reach a decision, could be more of a catalyst than an impediment to innovation.

Tuan-Hwee Sng is Assistant Professor of Economics at the National University of Singapore. He received his Ph.D. in economics from Northwestern University in 2011. His doctoral research has focused on the effects of geographic size on taxation and the quality of governance in Qing China and Tokugawa Japan, 1650-1850.

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

Subject(s):Economywide Country Studies and Comparative History
Government, Law and Regulation, Public Finance
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII

The Institutional Revolution: Measurement and the Economic Emergence of the Modern World

Author(s):Allen, Douglas W.
Reviewer(s):Koyama, Mark

Published by EH.Net (February 2012)

Douglas W. Allen, The Institutional Revolution: Measurement and the Economic Emergence of the Modern World. Chicago: University of Chicago Press, 2011.? xiv + 267 pp. $30 (cloth), ISBN: 978-0-226-01474-6.

Reviewed for EH.Net by Mark Koyama, Department of Economics, George Mason University.

In this astute and elegantly written book, Douglas Allen argues that the industrial revolution was accompanied by an institutional revolution. This institutional revolution replaced many seemingly archaic institutions such as the practice of restricting some offices in government to aristocrats while selling others (including army commissions and the right to collect taxes). The revolution substituted public for private provision in areas such as the building of roads and lighthouses and led to the rise of a professional bureaucracy and police force.? Allen’s point is not that these early pre-modern institutions were inefficient or wasteful. On the contrary, in his account, they were adapted for their environment: the high variance, high measurement cost, early modern world.

Institutions in Allen’s view minimize transaction costs, where transaction costs include the costs associated with opportunistic behavior.? Transaction costs precluded ?first-best? institutions from developing in the pre-industrial world.? Instead, apparently inefficient institutions such as tax farming, the sale of offices, and the aristocratic dominance of politics persisted for centuries.? Allen argues that these apparently inefficient institutions were, in fact, efficient given the existing configuration of transaction costs.? This insight, which builds on the ideas of Yoram Barzel, provides a powerful hypothesis for studying institutional change.? Allen places particular emphasis on the importance of measurement. In the high variance pre-modern world, measurement was costly or impossible and consequently bureaucrats, soldiers, sailors, and policemen could not be paid on the basis of observable inputs. Alternative institutions had to emerge to deter opportunism and reward effort. These institutions were often elaborate, and sometimes strange; they involved making the bureaucrats, soldiers, or tax collectors residual claimants of some sort.? The story of how these institutions disappeared and were replaced by modern institutions is The Institutional Revolution.

The institutional revolution Allen proposes is linked to the industrial revolution because technological change drove institutional change by reducing measurement costs. Standardization reduced variance. This reduction in variance lessened the possibilities for opportunistic behavior and enabled institutions based around the idea of rewarding individuals for their marginal contribution to emerge.? Not only this, institutional change also drove technological change.? Economic historians have shown that growth during the industrial revolution was slow.? Allen can account for this delay between the industrial revolution and the onset of sustained economic growth that only really began after 1850 by arguing that the transition from pre-modern to modern institutions delayed society’s ability to fully benefit from the new technologies of the first industrial revolution. This is the thesis that Allen lays out in the first two chapters of the book.

Each of the remaining chapters of The Institutional Revolution illustrate and expand upon this argument.? These chapters are largely based on papers that have appeared in journals such as Explorations in Economic History, the Journal of Law, Economics, and Organization, and the Journal of Legal Studies.? However, the book is written in such a way that one would hardly realize this, as each chapter follows smoothly from the last.?

Chapter Three provides a theory of the European aristocracy in the early modern period. In Allen?s theory, high offices were restricted to aristocrats (or those who could live like aristocrats) because monitoring the performance of officeholders was extremely difficult.? The rewards associated with behaving corruptly were high and the possibility of being caught very low.? The only individuals who could be entrusted with positions of authority were those individuals with sufficient ?hostage capital? that ensured they could be meaningfully punished if caught cheating.?? According to Allen this ?hostage capital? effectively comprised the secluded and very expensive lifestyle of an English aristocrat. Members of the middle classes were excluded from public office unless they adopted this lifestyle because they did not have enough to lose and therefore could not be trusted not to act opportunistically.?

Chapter Four extends this idea by proposing a rational choice explanation of duels for honor among the aristocracy. Duels were for aristocrats only and were characterized by a complex set of rules designed to both limit bloodshed and to reward specialized training.? Allen argues that the duel developed as a way of screening for individuals to see if they had made a costly investment in aristocratic ?honor.?? If they passed this test they could rise up the ladder of government.? Once measurement costs declined during the nineteenth-century institutional revolution, dueling disappeared and the civil service was thrown open to the middle classes.

Chapter Five considers the unique set of incentives facing officers in the Royal Navy.? Naval officers were rewarded for aggression and severely punished for cowardliness.? Specifically, the Articles of War demanded that a British ship always engage an enemy vessel and did not allow any excuse for inaction.? This tactical rigidity was inefficient from the point of view of the first-best but it overcame the most pressing incentive that captains faced, which was to shirk.? Allen shows how lucrative prize money and a system whereby captains and admirals were monitored by their inferiors, worked in conjunction with the Articles of War to ensure that the Royal Navy was the most aggressive and most successful navy throughout the eighteenth and early nineteenth centuries.?

Chapter Six examines the practice of purchasing army commissions. Allen convincingly argues that the sale of army commissions led to the self-selection of high-ability individuals into the officer class, i.e., individuals who expected to earn the highest returns from private plunder, and aligned their incentives with those of the Crown as profits came from engaging the enemy and from victory.? Chapter Seven looks at the private provision of lighthouses, roads and tax collection.? Chapter Eight examines how a professional police force replaced a system of private prosecutions in the first part of the nineteenth century. Chapter Nine concludes.

I greatly enjoyed this book and was particularly won over by the chapters on the aristocracy, dueling, the navy and the army.? Each of these chapters provides analytical narratives that illustrate Allen?s principle points with historical evidence and telling anecdotes.? The historical content is drawn from the secondary literature and Allen is keen to point out that he is not a historian ?or even an economic historian? (p. ix).? In general, this is a very well done book and Allen is adept at summarizing the relevant historical evidence, while picking out examples that are relevant or supportive of his theoretical framework.? Indeed, this adeptness is both an important strength and perhaps the only real weakness of this book.

It is an important strength in that it allows the author to keep the level of historical detail down to a manageable level and ensures that the book is extremely readable and will hopefully increase its sales among a more general audience.? However, brevity and conciseness at times preclude Allen from seriously considering alternative explanations of the institutions that he studies.? For example, in Chapter Eight Allen argues that a private system of prosecutions may have been optimal in a world where goods were individual and idiosyncratic, as the owners of stolen goods were the lowest-cost enforcers of the law, but that standardization reduced this advantage and thereby led to the rise of a professional police force.?? The theory is ingenious but there is little direct evidence for it.? Against this hypothesis, the prominence of horse theft in contemporary advertisements and newspapers suggests that standardization was not the only factor causing problems for the old criminal justice system.[1]? Other important factors are also missing from this analysis such as the virulent opposition to a public police force that existed up until the 1820s.? A fuller analytical narrative of this process would attempt to account for these factors as they were seen as significant by contemporaries. Economic historians and scholars of institutional change may find this shortcoming frustrating and I suspect it will ensure that the arguments of The Institutional Revolution will be viewed as a set of insightful and intriguing hypotheses rather than as the definitive or authoritative explanation of the institutions Allen considers.


1. John Styles (1989), ?Print and Policing: Crime Advertising in Eighteenth-Century Provincial England,? in Police and Prosecution in Britain in the Eighteenth and Nineteenth Centuries, Oxford University Press, Oxford, pp. 55?111.

Mark Koyama is an assistant professor at George Mason University and a senior scholar at the Mercatus Center. His recent work includes ?Prosecution Associations in Industrial Revolution England: Private Providers of Public Goods?? forthcoming in the Journal of Legal Studies.

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

Subject(s):Government, Law and Regulation, Public Finance
Military and War
Markets and Institutions
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century