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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

Translating Empire: Emulation and the Origins of Political Economy

Author(s):Reinert, Sophus A.
Reviewer(s):Nakhimovsky, Isaac

Published by EH.Net (July 2013)
Sophus A. Reinert, Translating Empire: Emulation and the Origins of Political Economy. Cambridge, MA: Harvard University Press, 2011. xiii + 438 pp. $55 (hardcover), ISBN: 978-0-674-06151-4.

Reviewed for EH.Net by Isaac Nakhimovsky, Faculty of History, University of Cambridge.

This prize-winning book presents an important new account of the emergence of political economy as a discipline in the eighteenth century. It mounts a strong challenge to histories of economic thought that limit their attention to highly abstract treatises on political economy, particularly those that seek to trace the emergence of principled arguments for free trade. Reinert shows that intensifying competition between states formed the backdrop for eighteenth-century reflection on political economy. The book draws attention to a wide-ranging practical literature that focused on the imperatives of economic survival in a hostile international environment. The claim Reinert develops is that the process by which such practical economic knowledge began to be formalized and institutionalized cannot be understood without appreciating the significance of interstate rivalry. Reinert shows that this process can be illuminated by tracking eighteenth-century translations of publications on political economy. As he vividly shows, such translations were much more than mere renderings in foreign languages: understood as creative vehicles for the transmission, evaluation, and appropriation of economic knowledge, these translations themselves represent an important facet of international competition. They were among the means by which France sought to catch up to Britain, and by which lesser powers across Europe sought to avoid becoming the victims of economic imperialism. The formalization and institutionalization of political economy, Reinert?s book suggests, took place in this politically charged and mediated fashion.

An expansive introductory chapter illustrates the potential of this approach to the history of political economy through a statistical analysis of translations in the magnificent Kress Collection (covering economic literature before 1850) at the Baker Library of Harvard Business School, where Reinert is an Assistant Professor. The heart of the book, however, is an elegantly framed narrative revealing how, over the course of the eighteenth century, John Cary?s 1695 Essay on the State of England was thoroughly transformed by its French, Italian, and German translators. The 1745 English edition of Cary?s slim essay became a two volume French treatise published in 1755 by Georges-Marie Butel-Dumont, an associate of Vincent de Gournay; this in turn became a three volume work by the famed Neapolitan professor Antonio Genovesi in 1757-58; and finally, elements of all three of these editions were recombined in truncated form in a German edition of 1788, prepared at the instigation of a former Danish official by a Saxon political economist named Christian August Wichmann. As Reinert shows to great effect, Cary?s essay was vastly expanded and systematized over the course of its ?grand tour? to Paris, Naples and Leipzig, and in the process what began as a Bristol merchant?s ?primer of economic imperialism? was transformed into a ?general guidebook for escaping de facto colonial dependencies? (p. 203).

Cary?s essay, long cited as a classic statement of mercantilism, is revealed by Reinert to be a practical guide for how England could secure its urban manufacturing base as the engine of its economic development. Cary?s aim was to explain how England could remain at war with France without destroying the foundations of its wealth. Resisting the threat of Catholic absolutism, according to Cary, required England to have an economy powered by export-oriented manufacturing, even if this meant brutally suppressing the industrialization of potential low-wage competitors in Ireland as well as on the continent. Cary?s debate over Ireland with William Molyneux already prompted him to attempt giving his essay a more scientific cast. However, this process began in earnest when Butel-Dumont injected his revised and updated version of Cary?s essay into 1750s French debates about how to respond to England?s economic success. In the spirit of Gournay?s project to build up public knowledge of political economy in France, Butel-Dumont provided the essay with an impressive new bibliographic apparatus, but the most ambitious conceptual transformation of Cary?s essay was undertaken in Naples. From Genovesi?s perspective, Cary?s Anglican republican vision of an ?honest hive? was indistinguishable from Mandevillian atheism. It pointed to a historical model of cyclical decline and fall, which would condemn Naples to becoming an English colonial dependency. For Genovesi, avoiding this result required reworking Cary?s theoretical starting point and equipping his conjectural history of society with a stronger providential purpose. The final reformatting of Cary?s essay by Wichmann was intended for a Cameralist audience, whom Reinert compellingly places in a new light, describing Cameralism as fundamentally concerned with the problem of how to respond to the rise of maritime empires despite not having access to their superior imperial technologies.

Reinert draws two far-reaching conclusions from this impressively erudite investigation into the fate of Cary?s essay. The first has to do with the importance of manufacturing for England?s rise, which Reinert develops into a full-throated attack on ?the equality assumption? of neo-classical economics. Against James Buchanan?s assumption of ?constant returns to scale of production over all ranges of output,? (p. 82) Reinert claims that manufacturing industry enjoyed increasing returns to scale that could not be matched by agriculture. He traces this insight back to a pioneering early-seventeenth-century treatise by Antonio Serra that Genovesi later studied and that Reinert has recently translated into English. Cary?s eighteenth-century translators had no doubt that England?s great success was the product of an ?exceedingly conscious policy? favoring industrialization (p. 202). To forego such a policy was to submit to a fate of colonial dependency; perhaps the most provocative suggestion in Reinert?s book is that the rise of free-trade doctrines and their subsequent canonization can be attributed to English efforts to suppress foreign competition. Reinert?s fundamental point is that a history of doctrines of free trade yields at best na?ve dogmas and may even serve as a mask for economic imperialism. A more realistic political economy for our own times, in his view, requires a more realistic historical vision.

At the same time, Reinert draws out a second major insight from his history of Cary?s essay: all of Cary?s translators strove to purge his essay of what they regarded as his toxic variety of patriotism. Cary had equated English prosperity with the defeat and impoverishment of its rivals. His translators sought to substitute this ?jealousy of trade? with a more cosmopolitan vision that allowed for the possibility of ?emulation? or ?noble competition,? but without resorting to an agrarian utopianism. In eighteenth-century terms, they were for Colbertism without Machiavellism (p. 176): they entertained a vision of how a world of competitively industrializing states could be stabilized. In addition to mounting a powerful realist critique of free trade dogma, then, Reinert also advances recent reinterpretations of Enlightenment optimism in terms of a search for non-lethal forms of competition, and opens up a fascinating new prospect on the development of the discipline of political economy. His account goes a long way toward explaining why it was that the transformation of English practical economic experience into a systematic theory of political economy initially took place not in England itself, but in Ireland, Scotland, and continental Europe.

Isaac Nakhimovsky is author of The Closed Commercial State: Perpetual Peace and Commercial Society from Rousseau to Fichte (Princeton, NJ: Princeton University Press, 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 (July 2013). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):17th Century
18th Century

Money in the Medieval English Economy: 973-1489

Author(s):Bolton, Jim
Reviewer(s):Munro, John

Published by EH.Net (June 2013)

Jim Bolton, Money in the Medieval English Economy: 973-1489.? Manchester: Manchester University Press, 2012.? xv + 317 pp.? $35 (paperback), ISBN: 978-0-7190-5040-4.

Reviewed for EH.Net by John Munro, Department of Economics, University of Toronto.

Embracing a most impressive range of research, cogently organized, penetrating in its analysis of all aspects of the medieval English economy related to money, and elegant in its prose, Bolton?s Money in the Medieval English Economy: 973-1489 is one of the most important books published in English medieval economic history during the past two decades.? Indeed, I do not know of any other comparable and equally comprehensive study of English medieval monetary history. The book is cast into two unequal parts.? Part I (pp. 3-86) is theoretical, beginning with the Fisher Identity and the relationships between money, population, and prices in the medieval economy, followed by uniformly excellent chapters on the roles of money in a developing market economy: in terms of? bullion supplies, coinage, and credit instruments.? The longer Part II (pp.? 87-309), analyses the changes in coinage and other forms of money, and then in more detail the changing roles of money in the actual economy, sector by sector, over three distinct eras: 973-1158, 1158-1351, and 1351-1489.
This section thus begins with the monetary reforms of Edgar of Mercia, first to be crowned and remain king of England, in 973; and it ends with Henry VII?s issue of the first gold sovereign coin, representing the value of one pound sterling, in October 1489 (the shilling came later).? A far more logical end-point would have been the onset of Henry VIII?s Great Debasement in 1542-44, as in Martin Allen?s recent, magisterial Mints and Money in Medieval England (2012), to which Bolton acknowledges his great indebtedness. Manchester University Press?s severe space limitations evidently prevented Bolton from extending his study beyond 1489, and also from including his 25-page bibliography, now available only online (URL on p.? 310).
Beyond the general objectives just outlined, Bolton?s book has two other major goals.? The first is achieved with great success: to prove, in chapters 6 and 7, that England did not acquire a fully-developed money economy until the era from 1158 to 1351, i.e., up to the onset of the Black Death.? In his fully justifiable view, a money economy essentially meant a well-functioning market economy, one that required not only a considerable expansion in the circulating coinage but also rapid population growth and the concomitant development of towns and villages with urban and regional fairs, the establishment of effective forms of royal taxation, the development of the requisite commercial, financial and legal institutions, especially those needed for various forms of credit; and for the latter, the spread of both literacy and numeracy.? He demonstrates that, while population growth from 1086 (Domesday Book) to 1300 at least doubled and may have tripled (from 2.0/2.5 million to 5.0/6.0 million), the money supply expanded by 27 to 40 fold: from ?25,000/?37,500 to more than ?1.0 million ? most of that from the 1220s, though attributing the major increases in coinage to the Central European silver mining booms of ca. 1160 to ca. 1230.? He cites Mayhew?s estimates (2004) that per capita GDP rose from ?0.18 in 1086 to ?0.78 in 1300 (and to ?1.52 in 1470: Table 9.2, p. 295). Depending on sources,? methodology, and population estimates, he contends that per capita supplies of silver coin rose from 3.2d/6.0d in 1042-1066 to 65.5d/101.3d in 1310 (Table 2.2, pp. 25-27).? Thereafter, the introduction of gold coinages (from 1343-51) created significant problems for both our estimates of money supplies and the well-being of the English domestic economy, especially since the English government consistently and seriously overvalued gold to the severe detriment of silver coinage supplies (in effect, England exported silver to acquire gold), given that silver coin was the chief mechanism for transacting domestic trade, wages, and other such payments.
That problem, however, leads us to his second goal, for which he is much less successful: to refute the current ?monetarist? views that later fourteenth- and fifteenth-century England experienced severe monetary scarcities (whether seen in terms of stocks or flows), most especially in silver coin supplies.? A disclaimer is in order: I am evidently one of those so-called monetarists under attack.? The tenor of the book becomes most evident in his statement (p. 75) that: ?It [the money supply] was not the sole determining factor [of price levels] as monetarist historians argue.?? I do not know of anyone who now does so.? That negative viewpoint may be deduced from his lengthy discussion, in his opening chapter, of the well-known and much abused Fisher Identity: M.V = P.T.? Thus, if one accepts the view that changes in V (velocity) and T (volume of transactions) cancel each other out, one might deduce that the price level P ? usually measured by the Consumer Price Index (CPI) ? is directly and proportionately a function of changes in M.?? But, even if some historians still use this antiquated formula, few if any economists do so, preferring? the modernized version in the form M.V = P.y (the occasionally-used equation M.V = GNP is unacceptable as an analytical tool). In this version, y, representing real net national income (or output), thus replaces the completely unmeasurable T; and V thus becomes the income velocity of high-powered money (however defined). Most economists now prefer even more to use the Cambridge ?cash balances? approach, with a demand-for-money equation: M = k.P.y, in which M, P, and y remain the same, while k represents that proportion of national income that the public collectively chooses to hold in non-earning real cash balances, according to determinants of liquidity preference, so that k is often sensitive to changes in interest rates.? Mathematically k is the reciprocal of V.

As may be deduced from either (revised) formula, an expansion in M may have been offset by some decline in V (with a lesser need to economize on coin use) and thus by some increase in k, and also by an increase in y:? especially if an increased M led to a decline in interest rates (with no changes in liquidity preference) and to a greater stimulus for investment and trade, so that P would have risen less than proportionately, if at all.? But the converse was not necessarily true, for the various forces contracting monetary stocks may also have constricted monetary flows: i.e., also reducing V and thereby increasing k.? These revised formulae clearly demonstrate that any analysis of changes in the price levels requires a detailed understanding of changes in both money stocks and money flows (especially liquidity preferences) but also changes in the real economy, as represented by y:? i.e., changes in population, technology, economic organizations, real capital investments, etc.? In my recent publications involving coinage debasements, I have sought to prove that in late-medieval and early-modern Europe, increases in M never resulted in proportional increases in the price level, even during Henry VIII?s Great Debasement (Munro 2011, 2012a, 2012b). None of this constitutes the supposed ?monetarism? that Bolton portrays, except to indicate that ?money matters? (a proposition that Bolton admittedly never denies).
Bolton?s specific goal, in the final two chapters, 8 and 9, is to prove that increases in the supply and use of various credit instruments fully offset the two supposed ?bullion famines?: those from ca. 1375 to ca. 1420 and from ca. 1440 to ca. 1480.? Indeed, his focus on the expanding role of credit allows him fully to accept the nature and extent of these two ?bullion famines? as portrayed by so-called ?monetarists,? in contrast to the published views of the current group of ?anti-monetarist? historians (such as Sussman 1990, 1993, 1995, 1998, 2003).? He thus accepts the three prevailing theses to explain that coinage scarcity: a severe decline in outputs of European silver and gold mines; the disruptions in the trans-Saharan African gold trade to the Mediterranean; and increased bullion outflows to the East, particularly for purchases of Asian spices and other luxury goods.? But this third thesis seems inconsistent with his view that late-medieval England always enjoyed a surplus in its balance of payments with the continent. I myself am far from convinced that any payments deficit with the East, so chronic from Roman times, became proportionately worse during the later-Middle Ages, especially because the specific evidence adduced in favor of this thesis (from Ashtor 1971, 1983) comes from the 1490s, when the Central European mining boom, having commenced in the 1460s (peaking in the 1530s) was supplying vast new quantities of silver to promote increased Venetian trade with the Levant (Munro 2003a).? The more significant of these factors, therefore, may have been the reduction in European inflows of African gold, from the 1370s: a trade that the Portuguese later sought to restore, from the 1440s, and with considerable success from the 1470s.
What Bolton neglects to consider as a major factor in these ?bullion famines? is changes in Cambridge k (and thus in V): i.e., an increased liquidity preference in the form of hoarding ? not by burying precious metals in the ground but by converting them into plate and jewelry, readily changeable back to coin, in times of war-induced taxation.? The one (other) historian who has given such emphasis to changes in liquidity preference and hoarding (?thesaurisation?), as a reaction to general economic pessimism and risk aversion in times of chronic plague, other forms of depopulation, economic contraction and periodic depressions, is Peter Spufford (1988); but Spufford still places greater emphasis on the roles of the European mining slump and bullion outflows to the East.

Bolton obviously does not wish to entertain the Spufford thesis ? which necessarily implies a decrease in the income velocity of money ? because he seeks to show that an increased use of credit fully offset the bullion famines by increasing either V or M or both.? In this debate, on the role of credit, his chief opponent is Pamela Nightingale (1990, 1997, 2004, 2010), and indeed the two have continued this debate is recent issues of the British Numismatic Journal (2011, 2013).? I continue to support Nightingale.? That might seem obvious for one accused of being a ?monetarist,? so that readers of this review must judge for themselves by a careful examination of their respective publications (and the others cited here).? In my view, Bolton fails to refute or contradict Nightingale?s two major propositions.? The first, and most important, is that the supply of credit remained essentially a function of the coined money supply, because most (if not all) credit transactions depended on the use of coin, and especially on the creditor?s confidence of being fully repaid in coin:? so that credit generally expanded with increases in the coined money supply and conversely contracted with any decline in the supply or circulation of coined money, often disproportionately.? On this important issue, Nightingale receives full support from many other monetary historians: Peter Spufford (1988), Nicholas Mayhew (1974, 1987, 1995, 2004), Reinhold Mueller (1984: for Italy), Frank Spooner (1972: for France), and most recently (if less strongly) Chris Briggs (for England: 2008, 2009).? Nightingale?s? second proposition, also endorsed by most of these historians, is that the wide variety of credit instruments used in late-medieval England were not yet negotiable, and thus, while affecting velocity (V), they did could not and did not add to the money supply (M) ? though the differences between the two may here be moot.? To be sure, many of these credit instruments were, and long had been, assignable ? transferable to third parties.? But as Eric Kerridge (1988) ? whom Bolton cites for other purposes ? long ago stressed: ?transferability is not negotiability,? a point that Michael Postan had also earlier made (1928, 1930), despite Bolton?s assertions to the contrary. The fully developed legal institutions required for secure negotiability of commercial bills, in protecting the full rights of assignees and bearers to claim and enforce payment on redemption, were first established in the Habsburg Netherlands by imperial legislation enacted in 1537 and 1541, as Herman Van der Wee has clearly demonstrated (1963, 1967, 1975, 2000),? Not until the early seventeenth century do we find comparable full-fledged English acceptance of negotiability and no national legislation until the Promissory Notes Act of 3 & 4 Anne c. 8 (1704).
Equally essential for full negotiability was the legal acceptance of discounting, a problem related to the issue of usury, given short shrift not only by Bolton but also by Nightingale and most other financial historians (except, notably, De Roover 1967, also in Kirschner 1974).? To be sure, we may fairly assume that many medieval creditors did disguise interest in a loan by increasing the amount stipulated for repayment; but disguising such implicit interest was far more difficult to achieve in discounting (selling a bill for less than face value before redemption).? As Van der Wee has also demonstrated for the Habsburg Netherlands, discounting, along with multiple transfers by endorsement, spread only after an imperial ordinance, issued in October 1540, explicitly permitted interest payments on commercial loans up to 12%.? He also demonstrated that nominal interest rates in the Netherlands dropped sharply in this era, by almost half: from 20.5% in 1511-15 to 11.0% in 1566-70; real rates dropped even further with the inflation of the Price Revolution.? Similarly, according Norman Jones (1989), an even sharper fall in English interest rates on commercial bills took place after Elizabeth I, in 1571, restored her father?s abortive statute (1545) permitting interest payments up to 10%: from about 30% in the 1560s to 10% by 1600, with further declines in the seventeenth century, to about 5% (see also Homer and Sylla 1997, pp. 89-143; Munro 2012c).? Bolton has also not taken account of the significantly increased restrictions on the use of credit in fifteenth century England, from both anti-usury and bullionist legislation, and also the prevailing social attitudes that remained deeply imbedded until the early Stuart era. As Lawrence Stone (1965) so aptly commented on Elizabethan England: ?Money will never become freely or cheaply available in a society which nourishes a strong moral prejudice against the taking of any interest at all. ? If usury on any terms, however reasonable, is thought to be a discreditable business, men will tend to shun it, and the few who practise it will demand a high return for being generally regarded as moral lepers.?
If we were to accept, instead, Bolton?s contentions that an increased use of credit fully offset the coined money scarcity evident in the two bullion famines, then we would then be hard pressed to explain the sharp deflation of these two periods.? Bolton evidently sees no need to do so, for his book, most surprisingly, contains no tables or graphs on the price level (CPI); he provides only one price graph, on relative prices for just wheat and oxen, from 1160 to 1350 (p. 183).? Demographic decline cannot itself explain the periods of deflation (apart from its possible impact on V).? For note that the Black Death (1348-49), quickly reducing population by about 40%, was followed by three decades of rampant inflation: when the Phelps Brown and Hopkins CPI (1451-75 = 100) rose from a quinquennial mean of 85.53 in 1341-45 to one of 136.40 in 1366-70, falling slightly to 127.35 in 1371-75.? Thereafter, the CPI fell to a low of 103.70 in 1421-25, for an overall decline of 23.94%, despite the 16.67% silver debasement of 1411-12.? Rising thereafter to a peak of 124.22 in 1436-40, the CPI fell by 25.40 % during the second ?bullion famine?: to a nadir of 92.667 in 1476-80, again despite the 20.0% silver debasement of 1464.? Recent alternative historical consumer prices indexes ? those by Robert Allen (2001) and Gregory Clark (2004, 2007), neither cited by Bolton ? show the same patterns of inflation and deflation demonstrated in the older Phelps Brown and Hopkins Composite Price index (1956, 1981: revised by Munro).
Bolton consequently does not take full account of the negative economic consequences of deflation.? If all relative prices had moved together in tandem, with proportional changes, then neither deflation nor inflation would matter. But price changes have never done so, especially factor prices in relation to commodity prices.? In general, deflation raises the burden of factor costs for borrowers and entrepreneurs, while inflation reduces that cost burden.? The most familiar such phenomenon is downward nominal-wage stickiness ? so widespread throughout Western Europe, unaffected by demographic factors, and persistent in England itself until 1920 (Smith 1776/1937; Phelps Brown and Hopkins 1955/1981; Munro 2003b).? But nominal interest rates and land rents were generally also sticky in this era, especially when defined by contracts, though for much shorter periods.? Thus all these real factor costs rose, at least in the short run, with the fall in the Consumer Price Index. If creditors were more reluctant to lend in times of monetary scarcity and depression, for fear of non-payment, debtors were also reluctant to borrow more in facing prospects of higher real costs in payments of both interest and the principal.? For both creditors and debtors that reluctance, in especially the mid fifteenth century, may have been due as much to the adverse circumstances of the commercial depressions that accompanied that bullion ?famine? and deflation (Hatcher 1996; Nightingale 1997; Bois 2000).
A final problem, and one that pervades much of the book, concerns the proper distinctions between bullion, coinage, and moneys-of-account, and the closely related problem of coin debasements.? Bolton ought to have followed the model set forth long ago by Sir Albert Feavearyear (1931/1963), whose absence from the bibliography is astonishing.? By this model, silver and gold coins, bearing the official stamp of the ruler, generally circulate by tale (official face value), commanding an agio or premium over bullion.? That agio represents the sum of the minting costs of brassage (for the mint-master) and seigniorage (a tax for the ruler), added to the mint?s bullion price; but also, for the public, it represents their savings on transaction costs in not having to weigh the coins and assay their proper fineness.? As Douglass North (1984, 1985) has demonstrated, transaction costs are always subject to considerable scale economies: thus they are a major burden in small-scale, low-valued silver transactions in retail trade and wage payments, but far less so in very large volume, high-valued transactions, especially those involving gold in wholesale and foreign trade and major debt transactions.? Bolton is very ambiguous on whether coins circulated by weight or by tale, ignoring the scale economies of transactions, but seemingly supporting the former view (despite his evidence presented on pp. 120-21).?
An increased tendency for coins to be accepted only by weight, in higher-valued transactions, arose when the quality of the circulating coinage inevitably deteriorated over the years and decades following a general recoinage: when its silver contents diminished through normal wear and tear, but especially when? the coinage became more and more corrupted by the nefarious practices of clipping, ?sweating? and counterfeiting ? none of which would? have been profitable had coins earlier circulated by weight. Such deterioration, the loss of public confidence, and growing refusals to accept coins by tale meant that all coins lost their former agio, with four consequences.? First, merchants, still accepting coins by tale, sought compensation for perceived silver losses by raising their prices; second, good, higher-weight coins were culled and hoarded or exported, often in exchange for foreign counterfeits (Gresham?s Law); and third, bullion ceased to flow to the mints, so that the king lost? his seigniorage revenues.? Fourth, the king consequently had no alternative but to debase his coinage to bring it in alignment with the current depreciated circulation, thereby restoring the agio and resuming the flow of bullion to the mints.? In Feavearyear?s view, this purely defensive reaction to coinage deterioration explains all English silver debasements before Henry VIII?s Great Debasement of 1542-52: in particular, the 10.00% silver reduction of 1351; the 16.66% reduction of 1411/12; the 20.00% reduction of 1464; and the 11.11% reduction of 1526 ? so that fine silver content of the penny fell from 1.332 g in 1279 to just 0.639 g in 1526.? Henry VIII?s Great Debasement was undertaken, however, for purely fiscal motives (as had long been the continental pattern): to augment seigniorage revenues. But the evidence on seigniorage rate changes indicates that such fiscal motives had also prevailed in Edward IV?s silver and gold debasements of 1464-65 (Munro 2011).
None of this analysis or any credible explanation for debasement can be readily found in Bolton, who even denies that English kings debased their coinages before the Great Debasement, on the overly literal grounds that the sterling silver fineness (92.5%) was always maintained (except for the 1336 issue of 10 dwt halfpence = 83.33% silver halfpence).? Almost all monetary historians define debasement instead as the reduction of the quantity of fine silver or gold in the money-of-account unit (pence, pound). That was achieved by a diminution in fineness (adding more base metal), and/or by a reduction in weight ? but also, for gold coins, by an increase in their official exchange rates.? Thus Edward IV?s initial debasement of gold in August 1464 was achieved by increasing the value of the traditional, physically-unchanged gold noble, from 6s 8d to 8s 4d.? In this respect, I also regret the absence, for a book on money in the medieval economy, of tables on English mint outputs (except for one graph on the Calais mint), in both pounds sterling and kilograms of fine metals, with related details on specific coinage issues in terms of weight, fineness, and mint charges ? though much of that information can be found in both Christopher Challis (1992) and Martin Allen (2011, 2012). ???
Other readers may, however, place much less emphasis on the issues raised in this review; and some, suspecting an unwarranted ?monetarist? bias in this review, may well support Bolton?s views, especially on the role of credit in the late-medieval economy.? Indeed, I must stress the significant contributions that Bolton has made in this field, especially those based on his ongoing research on the Borromei bankers (Milan), and the roles of other Italian merchant-banking firms in both English foreign and domestic trade, i.e. in London. As I indicated at the outset of the review, this book is one of the most important published in English economic history in the past two decades, and one in which the virtues well outweigh the defects.? I recommend that you buy it; if so, get the online bibliography now, before it disappears from the web.


Allen, Martin (2011), ?Silver Production and the Money Supply in England and Wales, 1086 – c. 1500,? Economic History Review, 64: 114-31.
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??? ???
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Bois, Guy (2000), La grande d?pression m?di?vale: XIVe – XVe si?cles: le pr?c?dent d?une crise syst?mique. Paris: Presses Universitaires de France.

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Homer, Sidney, and Sylla, Richard, A History of Interest Rates, 3rd rev. edn.? New Brunswick, N.J.: Rutgers University Press, 1996, pp. 89-143

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Kerridge, Eric (1988), Trade and Banking in Early Modern England. Manchester, Manchester University Press.

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Mayhew, Nicholas (1995), ?Population, Money Supply, and the Velocity of Circulation in England, 1300-1700,? Economic History Review, 48: 238-57.

Mayhew, Nicholas (2004), ?Coinage and Money in England, 1086 – 1500,? in Medieval Money Matters, ed. Diana Wood. Oxford: Oxbow Books, pp. 72-86.

Mueller, Reinhold (1984), ??Chome l’ucciello di passegio?: la demande saisonni?re des esp?ces et le march? des changes ? Venise au moyen ?ge,? in ?tudes d’histoire mon?taire, XIIe-XIXe si?cles, ed. John Day.? Lille: Presses universitaires de Lille, pp. 195-220.

Munro, John (2003a), ?The Monetary Origins of the ?Price Revolution?:? South German Silver Mining, Merchant-Banking, and Venetian Commerce, 1470-1540,? in Global Connections and Monetary History, 1470-1800, ed. Dennis Flynn, Arturo Gir?ldez, and Richard von Glahn.? Aldershot and Brookfield, Vt: Ashgate Publishing, pp. 1-34.

Munro, John (2003b), ?Wage-Stickiness, Monetary Changes, and Real Incomes in Late-Medieval England and the Low Countries, 1300-1500:? Did Money Matter?? Research in Economic History, 21: 185-297.

Munro, John (2011), ?The Coinages and Monetary Policies of Henry VIII (r. 1509-47),? in The Collected Works of Erasmus: The Correspondence of Erasmus, Vol. 14:? Letters 1926 to 2081, A.D. 1528, trans. Charles Fantazzi and ed. James Estes.? Toronto: University of Toronto Press, pp. 423-76.

Munro, John (2012a), ?The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe: with Special Reference to the Low Countries and England,? in Money in the Pre-Industrial World: Bullion, Debasements and Coin Substitutes, ed. John Munro, Financial History Series no. 20. London: Pickering & Chatto Ltd., pp. 15-32, 185-89 (endnotes).

Munro, John (2012b), ?Coinage Debasements in Burgundian Flanders, 1384-1482: Monetary or Fiscal Policies?? in Comparative Perspectives on History and Historians: Essays in Memory of Bryce Lyon (1920-2007), ed. David Nicholas, James Murray, and Bernard Bacharach.? Medieval Institute Publications, University of Western Michigan: Kalamazoo, pp. 314-60.

Munro, John (2012c), ?Usury, Calvinism and Credit in Protestant England: From the Sixteenth Century to the Industrial Revolution,? in Religione e istituzioni religiose nell?economia europea, 1000 -1800/ Religion and Religious Institutions in the European Economy, 1000 -1800, ed. Francesco Ammannati. Florence: Firenze University Press, pp. 155-84.
Munro, John, The Phelps Brown and Hopkins ?Basket of Consumables? Commodity Price Series and Craftsmen?s Wage Series, 1265-1700: Revised by John Munro, available online in Excel, at

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Phelps Brown, E.H., and Hopkins, Sheila V. (1955), ?Seven Centuries of Building Wages,? Economica, 22 (87): 195-206; reprinted Phelps Brown and Hopkins (1981), A Perspective of Wages and Prices. London: Methuen, pp. 1-12

Phelps Brown, E. Henry; and Hopkins, Sheila V. (1956), ?Seven Centuries of the Prices of Consumables, Compared with Builders? Wage Rates,? Economica, 23 (92): 296-314: reprinted in Phelps Brown and Hopkins (1981), A Perspective of Wages and Prices.? London:? Methuen, pp. 13-39 (with price indexes not in the original).

Postan, Michael (1928), ?Credit in Medieval Trade,? Economic History Review, 1st ser., 1 (1928), 234-61, reprinted in Michael Postan (1973), Medieval Trade and Finance.? Cambridge: Cambridge University Press, pp. 1?27.

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Spufford, Peter (1988), Money and Its Use in Medieval Europe, Cambridge: Cambridge University Press, pp. 339-62.

Spooner, Frank (1972), The International Economy and Monetary Movements in France, 1493-1725. Cambridge, MA: Harvard University Press.

Stone, Lawrence (1965), The Crisis of the Aristocracy, 1558-1641, Oxford: Clarendon Press; reissued 1979, with some corrections.

Sussman, Nathan (1990), ?Missing Bullion or Missing Documents: A Revision and Reappraisal of French Minting Statistics: 1385-1415,? Journal of European Economic History, 19:147 -62.

Sussman, Nathan (1995), ?Minting Trends in France and the Bullion Famine Hypothesis: Regional Evidence (1384-1415),? in Fra spezio e tempo: studi in onore di Luigi de Rosa, ed. I. Zili. Naples: Edizione scientifiche Italiane.

Sussman, Nathan (1998), ?The Late Medieval Bullion Famine Reconsidered,? Journal of Economic History, 58: 126-54.

Sussman, Nathan, and Zeria, Joseph (2003), ?Commodity Money Inflation: Theory and Evidence from France in 1350-1430,? Journal of Monetary Economics, 50: 1769-93.

Van der Wee, Herman (1967), ?Anvers et les innovations de la technique financi?re aux XVIe et XVIIe si?cles,? Annales: E.S.C., 22: 1067-89, republished as ?Antwerp and the New Financial Methods of the 16th and 17th Centuries,? in Van der Wee, Herman (1993), The Low Countries in the Early Modern World , trans. by Lizabeth Fackelman, Variorum Series: Aldershot, pp. 145-66.

Van der Wee, Herman (1975), ?Monetary, Credit, and Banking Systems,? in The Cambridge Economic History of Europe, Vol. V: The Economic Organization of Early Modern Europe, ed. E. E. Rich and Charles Wilson.? Cambridge: Cambridge University Press, pp. 290-393.

Van der Wee, Herman (2000), ?European Banking in the Middle Ages and Early Modern Period (476-1789),? in A History of European Banking, 2nd edn., ed. Herman Van der Wee and G. Kurgan-Van Hentenrijk,? Antwerp: Mercator, pp. 152-80.

John Munro is Professor Emeritus of Economics at the University of Toronto, specializing in the economic history of the late-medieval Low Countries and England, with a focus on money and textiles.? His recent publications in monetary history (2011 – 2012) are listed in the bibliography above; he has also recently published:? ?The Rise, Expansion, and Decline of the Italian Wool-Based Cloth Industries, 1100 -1730:? A Study in International Competition, Transaction Costs, and Comparative Advantage,? Studies in Medieval and Renaissance History, 3rd series, 9 (2012), 45-207.

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 (June 2013). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):Medieval

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

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

Published by EH.Net (April 2013)

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

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

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

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

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

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

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

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

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

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

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

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

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

The Digital Flood: The Diffusion of Information Technology across the U.S., Europe, and Asia

Author(s):Cortada, James W.
Reviewer(s):Garcia-Swartz, Daniel D.

Published by EH.Net (December 2012)

James W. Cortada, The Digital Flood: The Diffusion of Information Technology across the U.S., Europe, and Asia.? New York: Oxford University Press, 2012.? xix + 789 pp. $99 (hardcover), ISBN: 978-0-19-992155-3.

Reviewed for EH.Net by Daniel D. Garcia-Swartz, Compass Lexecon.

In The Digital Flood, James Cortada, the author of two dozen books on the history and management of information technologies, undertakes an incredibly ambitious project: to analyze the international diffusion and deployment of IT from the 1940s through the late 1990s. The project is mind-boggling not only because of its geographical scope ? the book has chapters on the U.S., Western Europe, Eastern Europe, Japan, the Asian Tigers, China, and India ? but also because it covers both the activities of governments and IT vendors (?diffusion?) and those of users (?deployment?). Although readers may quibble about specific dimensions of the world history of IT that should have been included (or left out), in my view Cortada delivers a solid synthesis.

The book focuses on what the author calls Wave One of the history of IT, which extends ?from the late 1930s or early 1940s to the end of the 1990s or beyond? (p. 37). In Cortada?s view neither the distinction between mainframes and personal computers nor the differences between various generations of mainframe computers are substantive enough to serve as periodization criteria ? mainframes, minis, and PCs all belong to Wave One. The key elements marking the transition between Wave One and Wave Two are ?the Internet and cell phones, clearly dominant features of post Wave One IT? (p. 38).
The Digital Flood makes a number of contributions. First, the book examines not only what national governments and commercial vendors did to foster IT diffusion but also the ways in which users fostered the adoption of IT technologies. This is a healthy recalibration ? we know that in the early decades of what Cortada calls Wave One U.S. computer customers, for example, played a fundamental role in, among other things, the creation of computer software.

Second, by compressing the history of IT diffusion in the U.S. to one chapter, the author forces both experts in American IT history and readers more generally to reassess ?their perspectives about the global experience with computing,? and to ?recognize that it proved far greater and more diverse than any of us acknowledged in earlier research? (p. 44).

Third, within the framework of this geographical reassessment of the history of IT, Cortada introduces the notion, largely correct in my view, that IT diffusion started not just in the U.S. but rather in what he calls a Pan-Atlantic community that also included some of the wealthiest Western European countries (pp. 235-237). Computers, and traditional office machines before them, ?were invented and were most thoroughly deployed first in both North America and in Europe? (p. 236). Literature published on one side of the Atlantic travelled to the other side, just as ?early pioneers in computing shuttled back and forth across the Atlantic? (p. 236). Technologies developed on one side of the Atlantic were used on the other side and, most importantly, ?not all the traffic flowed west to east; European software made its way west too, such as Germany?s SAP products in the 1990s, and the Internet?s World Wide Web (WWW) from Switzerland? (p. 236).

Some readers may counter-argue that, in the 1950s and 1960s, IT diffusion happened at a much faster pace in the U.S. than in any of the Western European countries, not only in absolute terms but also in relation to the size of each individual economy. They may also point out that American computer vendors ? and IBM fundamentally ? developed a substantive presence in many Western European markets in the 1950s and 1960s, while Western European vendors failed to penetrate the American market. These facts, however, do not invalidate Cortada?s Pan-Atlantic community thesis ? after all, the first practical stored-program computer, the EDSAC, was designed and built in Cambridge, England, by a group directed by Maurice Wilkes. The question is not whether Cortada?s Pan-Atlantic community existed or not? it did. The interesting question, at least from an economic and business history perspective, is: Why was it that the American computer companies turned out to be so much more successful than their European competitors given that the Pan-Atlantic (scientific and technological) community existed?

Finally, Cortada intersperses summary chapters on diffusion (in Western Europe and Asia) that are particularly useful because they synthesize and highlight some of the key components of his story. Chapter 11, for example, breaks down Asian nations into three groups based on the timing of IT diffusion. The first group ? the early adopters ? includes Japan, the Asian Tigers, Australia and New Zealand. The second group ? the recent adopters ? includes China, India, Malaysia, Thailand, Indonesia, the Philippines, and Vietnam. The third group ? the laggard adopters ? comprises all other Asian countries. These chapters are helpful not only because they summarize a massive amount of information contained elsewhere in the book but also because they allow the reader to pause and digest the main tenets of Cortada?s analysis.

Hard-core cliometricians could argue that Cortada proposes a number of hypotheses about the sequence of IT diffusion but does not bother to test any of them. In various sections of his book Cortada appears to suggest that the depth and scope of national domestic markets played a key role in facilitating diffusion. The Asian early adopters, for example, ?enjoyed high per capita incomes sufficient to pay for their adoptions of IT? (p. 548), whereas the recent adopters ?experienced far lower per capita incomes which often were inadequate to pay for extensive adoption of IT across multiple industries and economic groups? (p. 550). In statements such as these econometrically-oriented historians would immediately discover an opportunity to do some hypothesis testing with, perhaps, dynamic panel-data models. But estimating econometric models is not what Cortada?s book is about. And although The Digital Flood does not rely on mathematical equations or econometric procedures, quantitatively oriented readers interested in the history of IT will likely find in the book a number of insights that they may later want to explore in a more formal framework.
The book is about 600 pages long, without counting two appendices, over 100 pages of footnotes with citations to books and articles in various languages, and a 35-page bibliographic essay. As such, it is not the kind of tome that one would digest in an afternoon or even a long weekend. In any case, as a comprehensive synthesis of the international history of IT diffusion through the late 1990s, Cortada?s book is unique and will clearly serve as the standard reference on the subject for years to come.

(Cortada is a member of the IBM Institute for Business Value, and has held various positions at IBM for over 35 years. He has written numerous books and articles on the history of IT.)

Daniel D. Garcia-Swartz is an economist with Compass Lexecon in Chicago. His publications focus on the economics of high-technology industries, including computer hardware and software. He is currently working with Martin Campbell-Kelly on a book on the economic and business history of the international computer industry.
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Subject(s):Business History
History of Technology, including Technological Change
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

A Europe Made of Money: The Emergence of the European Monetary System

Author(s):Mourlon-Druol, Emmanuel
Reviewer(s):Mushin, Jerry

Published by EH.Net (November 2012)

Emmanuel Mourlon-Druol, A Europe Made of Money: The Emergence of the European Monetary System.? Ithaca: NY: Cornell University Press, 2012. viii + 359 pp. $55 (hardcover), ISBN: 978-0-8014-5083-9.

Reviewed for EH.Net by Jerry Mushin, School of Economics and Finance, Victoria University of Wellington, New Zealand.

At a time when the problems in the euro zone are frequently in the news, it is wise to consider the nature and origins of its immediate predecessor. Emmanuel Mourlon-Druol, of the University of Glasgow and the London School of Economics, has written a thorough description and analysis of the political and economic developments that led to the establishment, in 1979, of the European Monetary System [EMS].

The author explains that, especially from the early 1970s, there were several processes, which were often conflicting. Two were of particular importance. There was a cooperative, transnational monetary elite of technocrats, which was especially interested in the macroeconomic and operational benefits of monetary integration. In addition, from 1974, regular meetings of heads of government at the European Council ensured that this issue remained current. The politicians were often more interested in the importance of monetary stability in the establishment of a European identity. Despite the difficulties, there was a hesitant transition from emphasis on European cooperation to emphasis on European integration.

Although it deals with economic issues, this book is principally a political and diplomatic history, and not an economic history, of the founding of the EMS. It is part of the publisher?s Political Science series. The author has shown that the eventual outcome was reached by a tortuous process that was influenced by recent history and by traditional rivalries. The intermittent progress and regress of negotiations depended on the interaction of a small number of strong and idealistic personalities. Economic arguments were tempered by political pressures and vice versa. Political pressures frequently dominated the economic arguments.

Mourlon-Druol places the negotiations of the 1970s in their proper context. He refers to economic and political events in individual countries, including election results and national policies against inflation. He also shows the significance of world developments, including the perceived increasing weakness of the United States dollar. However, it is curious that the Sterling Area does not merit much attention. In the 1960s, the role of the UK in the Sterling Area was frequently seen, especially by France, as an obstacle in the British application to join the European Economic Community. The author also refers to the theoretical basis of monetary integration, including optimum currency area theory, and to the development of transnational and supranational institutions in Europe.

The negotiations occurred during the existence of the Snake, a cooperative exchange rate arrangement that dated from 1972. There were serious problems in this system. Membership was unstable; the United Kingdom and the Irish Republic withdrew after less than one month, and only the German Federal Republic remained a member for the whole of its existence. Other countries withdrew and rejoined and some, including France, did this more than once. The structure and processes that were eventually agreed for the EMS were an attempt to learn from the experience of the Snake. This was a lengthy process in which the dominant issues included the nature of the parity grid, the role of gold and of the SDR, the width of margins, the increased freedom of capital movements, and the precise obligations of members. The intention was that benefits and obligations would be symmetrical between larger and smaller members. The outcome was the establishment of the EMS, from which, in 1999, the euro zone could evolve.

Although Mourlon-Druol is a fluent and engaging writer, the volume of detail is likely to be overwhelming to all but the most committed specialists. This indicates one of the strengths of this book. It is based on extensive use of primary sources (including the archives of central banks). For this reason, it should be purchased by university libraries. However, it also indicates a weakness. An excess of detail means that this book is unlikely to be accessible to a wide readership.

Although this book should be purchased, as a research resource, by university libraries, it is unlikely to be included on undergraduate reading lists.

Jerry Mushin?s most recent book is Interest Rates, Prices, and the Economy, Scientific Publishers [India], Jodhpur, 2009.

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

The Political Economy of Pipelines: A Century of Comparative Institutional Development

Author(s):Makholm, Jeff D.
Reviewer(s):Castaneda, Christopher J.

Published by EH.Net (September 2012)

Jeff D. Makholm, The Political Economy of Pipelines: A Century of Comparative Institutional Development.? Chicago: University of Chicago Press, 2012. xii + 270 pp. $60 (hardcover), ISBN: 978-0-226-50210-6.

Reviewed for EH.Net by Christopher J. Castaneda, Department of History, California State University ? Sacramento.

Pipelines are an essential yet largely unseen segment of the modern world?s commodity transport system. Typically buried underground, pipelines provide an overland transportation service that cannot be employed nearly as efficiently by railroads, ships or trucks. And while pipelines are basically not much more than buried steel tubes that transport natural gas, oil, water and other products, they have been subject ? depending on the product transported ? to varying degrees of intensive policy making, regulatory oversight and debate. From the merchant?s perspective, the goal is fairly straightforward: make some money by selling or transporting a product that is delivered via pipeline. But policy makers have sought to shape and guide these financial transactions with different strategies for different pipelines, based on the products transported. In The Political Economy of Pipelines, Jeff D. Makholm, an economist and senior vice president for National Economic Research Associates (NERA) Economic Consulting who has worked with many major oil and gas pipeline systems in the U.S. and internationally, places oil and gas pipeline operations in an economic, political and historic context in order to examine the evolution of competitive pipeline markets.

The Political Economy of Pipelines
examines the evolution of pipeline politics and regulation in several countries with a focus on the U.S. experience. The book is organized into nine chapters that analyze the pipeline industry with respect to the new institutional economics, several phases of pipeline regulation, and the competitive potential of the global pipeline industry. The overarching analytical theme of Makholm?s book is ?the triumph of latter-day economic institutionalists? (p. 1) in successfully explaining why competition arose in the U.S. pipeline industry. In particular, Makholm?s study is informed by the work of economists Leonard Weiss, Alfred E. Kahn and Oliver E. Williamson. But the immediate theoretical framework is that of Coasian bargaining, the theorem developed by Ronald H. Coase, which emphasizes the control of property rights ?as the fulcrum of economic organization? (p. 10) by endowing ?a resource with institutional scarcity in order to form the basis for trade?.? (p. 11)

After reviewing the range of existing literature on oil and gas pipeline history, politics and economics, Makholm posits that there has not been sufficient economic analysis of the world?s pipeline systems. In chapter three, the author examines the generally accepted claim that pipelines are natural monopolies that require regulatory oversight in order to operate efficiently. Yet, U.S. pipeline firms did compete for licenses (certificates of public convenience and necessity) in order to operate. Ultimately, Makholm suggests that long-distance pipelines cannot be easily defined as natural monopolies. Then, in chapter four he explains how the neoclassical structural analysis of pipelines is also not sufficient for understanding the different types of pipeline regulation in the U.S. and abroad.

Makholm then focuses on the regulatory development of the oil and natural gas pipeline industries in the United States. In 1906, the U.S. Congress passed the Hepburn Act which imposed common carriage regulation on oil pipelines. Standard Oil?s domination of the oil pipeline and petroleum market subsequently led to the 1906 anti-trust suit that resulted in its break-up in 1911. But the political outcry over Standard Oil?s monopolistic practices did not encompass natural gas to the same extent. At that time, however, the gas pipeline industry was barely in its infancy and policy makers, apart even from economic reasons, suggested that imposing common carriage status over the gas pipeline system, such as it was, would hinder its further entrepreneurial development.

The gas pipeline industry did not boom until the 1920s and the use of new welding techniques and seamless steel pipe. By the late 1920s, several long-distance lines were constructed and with reliable long-distance transport possible the industry expanded rapidly. By the mid-1930s after the results of the Federal Trade Commission?s investigation of the public utility industry and subsequent Public Utility Holding Company Act (1935), the Federal Power Commission (FPC) became the regulatory agency that administered the Natural Gas Act (1938) on the interstate gas pipeline industry. Makholm describes how Congress intentionally avoided imposing common carriage status (as the Hepburn Amendment had with oil pipelines in 1906) on gas pipelines by treating them instead as public utilities. Makholm traces this episode through the Phillips decision (1954) that gave the FPC regulatory power over the wellhead price of gas and then the gas shortages of the 1970s and subsequent industry dysfunction. This led ultimately to the Federal Energy Regulatory Commission?s (FERC) restructuring of the gas pipeline industry so that pipelines no longer bought and sold gas but served as open access transporters in a redefined competitive gas market. Makholm then examines the pipeline experience in Canada, the United Kingdom, Australia and Argentina as well as the prospects for developing a competitive gas market in the European Union. He concludes that outside the United States, the prospects for competitive pipeline transport ?is thus a question of whether local governing institutions are pushed to evolve to support such competition or are purposely maintained to prevent it.? (p. 186)

The Political Economy of Pipelines provides a valuable perspective on the pipeline industry, and it will be especially useful to policy makers and economists. The book is organized well and clearly written with a focus on the major pipeline regulatory laws in historical context. The narrative is instructive although economists might like to see more quantitative data. The book is particularly useful in its comparison of the U.S. pipeline industry?s transformation into a competitive open-access system with that of international pipeline sectors as they grapple with issues of competitive efficiency versus governmental control.

Christopher J. Castaneda is Professor of History at CSU, Sacramento. His most recent publication is ?Natural Disasters in the Making: Fossil Fuels, Humanity, and the Environment,? OAH Magazine of History (2011) 25 (4): 21-25.
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Subject(s):Government, Law and Regulation, Public Finance
Transport and Distribution, Energy, and Other Services
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Before and Beyond Divergence: The Politics of Economic Change in China and Europe

Author(s):Rosenthal, Jean-Laurent
Wong, R. Bin
Reviewer(s):Ma, Debin

Published by EH.Net (February 2012)

Jean-Laurent Rosenthal and R. Bin Wong, Before and Beyond Divergence: The Politics of Economic Change in China and Europe. Cambridge, MA: Harvard University Press, 2011. xi + 276 pp. $45 (hardback), ISBN: 978-0-674-05791-3.

Reviewed for EH.Net by Debin Ma, Department of Economic History, London School of Economics.

This book is the latest installment in the Great Divergence debate, which could also be simplified as the question of why the Industrial Revolution (IR) happened in England or Europe, but not in China or Asia. Written by two leading scholars on French and Chinese economic history, respectively, this book makes a new contribution to this debate with a focused, theme-by-theme comparison of similarities and differences between China and Europe. Too often, as the two authors correctly point out, our views of long-run economic growth and the IR have been informed by the English experience, from which a unilinear model of growth is drawn. Their book, by carefully pairing and meshing the narratives of Europe and China with relatively equal weight, is a welcome departure in this genre. It is also a stylistic success, with economic theory seamlessly woven into the narrative and with schematic economic models usually spelled out in separate boxes within the chapters.

The book is, however, more than a stylistic or methodological contribution. The seven substantive chapters examine a far greater array of themes on the issue of Great Divergence than was originally surveyed by Ken Pomeranz and others. The book mounts a careful and thoughtful critique on the traditional wisdom by laying out alternative hypotheses and explanations. Distinguished from the Pomeranz thesis, which emphasizes resource endowments, they stake their claim on differences in political structure, namely the dichotomy between a unified and centralized imperial China versus a politically fragmented Europe. Turning the traditional thesis upside down that Europe?s economy and institutions triumphed because of political fragmentation and inter-state competition while China stagnated under a single despotic autocratic emperor, they argue that for too long we may have underestimated the costs of fragmentation or the damages of constant warfare in Europe, and at the same time neglected the benefits of peace and stability in a unified imperial China. Indeed, they argue that peace and stability help explain not only China?s initial economic lead and, but also ? somewhat surprisingly ? her falling behind or the absence of a Chinese IR in the early modern era ? but not in the way the traditional wisdom had proposed. Below, I will start with some of the more enlightening insights from this book before I turn to its fundamental thesis, which I find more problematic.?

Chapter 1 is an overview of two millennia of contrasting patterns of centralization versus fragmentation in China and Europe. Chapter 2 offers an excellent critique of the traditional thesis on the connections between household structure (nuclear versus extended family), fertility patterns, labor markets and economic growth. The authors argue that, when introducing the concept of transaction cost, the comparative economic efficiencies of an open and external labor market (often associated with a nuclear family structure in Western Europe) versus an internal labor market as existed within extended households in China, becomes far more ambiguous than is traditionally claimed. One implication of their model is that the use of Chinese and European real wages as an indicator of average per capita income may actually underestimate Chinese living standards. Their argument is that if family business could take advantage of private information to retain the high-productivity workers within the household, average wage rates in the external labor market in China were likely to be over-represented by low-productivity workers released from the family business. My own suspicion is that, even allowing for the logic of their model, it may well be the high-productivity workers that were more inclined to exit the household business to enter the external labor market for the potential of high wages. Such disagreement aside, I see great value in their approach to set out a testable hypothesis on the possible linkages between real wages and average real income.?

Chapter 3 counters the simplistic dichotomy on the choice of formal and informal mechanisms for dispute resolution in business transactions. Rosenthal and Wong point out that the two mechanisms are often more complimentary than substitutive. They demonstrate this with a matrix of categories displaying the choice of these two mechanisms as a function of the nature of the transactions, such as frequency, the duration of each exchange, the value of each trade and the distance between trading partners, rather than purely cultural and institutional factors. I find this a very useful correction of the current literature, despite my disappointment at their scant attention paid to the possible differences in the nature of formal justice between China and Europe. Indeed, many scholars, including some cited in the chapter, have long argued for profound differences in the notions and trajectories of law, contract, property, legal jurisprudence, procedures and legal enforcement between the two regions. Although the degree and magnitude of these differences are themselves a source of debate, neglecting them must leave out something that could be potentially important.?

Jumping to Chapter 5, which takes on the thesis of differential factor prices of capital and labor between China and Europe, the authors challenge the accepted thesis of China being a high interest rate and capital scarce country. They argue that empirical observations of a very large differential in interest rate spreads between China and Europe are not based on the comparison of likes for likes. The pairing of long-term interest rates for Europe often derived from public credit (or government debt) ? a credit instrument largely non-existent in China ? with short-term interest rates from the private sector (particularly consumption loans from pawnshops) in China is highly misleading. Indeed, they argue that when Chinese pawnshop rates are compared with similar European ones, the interest rate differentials narrow considerably. The chapter is also mindful of the looming issue of how to account for the absence of a market for public credit or the general relative under-development of formal financial institution in China. Their thesis of an insufficient demand for public debt in China due to the absence of European type of inter-state warfare is not entirely convincing to me as after all, supply and demand are difficult to separate. Historically, there were sustained periods of inter-state warfare in Chinese history particularly in the pre-modern era and there had been various forms of ?forced contributions? or ?advances in tax collection,? none of which developed into a regularized and formal public debt. But public debt of some form caught on very quickly from the second half of the nineteenth century after the arrival of Western imperialism in China. There seems to be more than just an insufficient level of demand behind the absence of sustainable public debt in traditional China. Again despite my disagreement, I like many of the insightful discussions in this chapter.??????

I now turn to the book?s central thesis, as spelled out in chapters 4, 6 and 7. Chapter 4 starts with the premise that China was more peaceful under a unified political regime than European nations were in that continent?s fragmented state between the fourteenth and nineteenth centuries. Warfare, however, impacted the European countryside far more severely than cities, which were often better fortified and defended. In contrast, in China levels of security and peace were better and also spatially more even across both urban and rural locations. The implication of this was a greater degree of concentration of trade and manufacturing in urban locations (and likewise a higher degree of urbanization) in Europe than in China. With higher urban wages and greater concentration of industry in urban locations, technological innovation in Europe, as in the good old Habakkuk thesis (recently resurrected by Robert Allen), would be more biased towards saving labor than in China. Hence the Industrial Revolution, founded as it was on labor-saving mechanical technology, was more like to take off in Europe than in China.

This stimulating and striking hypothesis is supported by fairly meager evidence in the chapter. For a chapter and a book that rely so much on warfare, there is no concrete comparative data on actual incidences, frequencies, duration and costs of warfare in both regions for these five centuries apart from some rather sketchy or vague narrative. China may have been more unified than Europe throughout this time, but was not necessarily short of external threats and internal rebellions, some of which led to phenomenal losses of lives and property perhaps not seen anywhere else in the world. It would have been more helpful if a bit more details had been spelled out in the chapter. Similarly, the claim that the Chinese countryside was comparatively safer, or Chinese urban-rural cost differentials were smaller, are treated almost like stylized facts backed by no empirical data except some ad hoc narrative.

Towards the end of this chapter, the authors focus on why the IR happened in England rather than the European Continent. Here, England becomes the equivalent of China in contrast with the European continent. Relative peace and more centralized? territory within England allowed the location of a rapidly mechanizing cotton textile industry in the low-wage and coal abundant region of Lancashire rather than in high-wage and coal-deficient London, or more poignantly in coal-abundant Belgium of the often war-torn European Continent. While I find this argument as an insightful and valid critique of or supplement to the recent Allen version of why the IR happened in England, I am troubled by the logic that exactly the same condition of peace and stability allowed the IR to take off in England but not in China. I assume that this paradox could be reconciled if we add in the fact that eighteenth century England was already a high-wage economy, possibly driven by the rise of her eminence in the booming Atlantic trade, which itself may be an outcome of the inter-state competition within Europe. I just wonder how much of their urban-rural cost differential argument would stand after controlling for this and other factors.??

One of the long-standing arguments of European urban-rural differentiation has been the peculiar institution of urban autonomy and the resultant inter-city or inter-state rivalry that could lead to successive improvements in institutions in order to attract and retain capital and labor ? a dynamism generally absent or weak in the unitary and isolated regime of imperial China. The book rarely addresses this particular mechanism in comparative perspective. In Chapter 6, the authors? major attempt is to show that imperial governance, at least under Qing, was far less predatory in terms of fiscal extraction and provided a higher level of public goods than European polities, largely because a unified empire engaged in less military warfare and expenditure. The chapter could benefit from a more concrete presentation and direct comparison of fiscal revenue. But overall, their argument of a low level of central fiscal revenue per capita in Qing China in peace time as compared with the relatively smaller western-European polities is credible given other evidences I have seen.

The problem concerns their interpretation of the fiscal revenue data. There is a large and burgeoning literature that links low levels of central taxation with low state capacity, characterized by low administrative efficiency, high agency costs of revenue collection, local corruption and so on. The vast literature on Imperial Qing or earlier dynasties including those by Chinese intellectuals of the time, the reformers of the twentieth century as well as more contemporary secondary scholarship, tends to point to various aspects of Chinese imperial governance as symptomatic of what we today refer as ?low state capacity.? I agree there perhaps has come the time for a reassessment of this literature, but the chapter expends little effort in dispelling the prevailing interpretations. Instead, the authors attribute the phenomenon of low taxation mainly to the imperial ideology of benevolence and good governance. They readily acknowledge that Chinese imperial rule faced no constitutional or other form of formalized institutional constraint on their predation, except the threat of revolt or insurrection. To resort to individual or collective revolt (often at the expense of one?s life or property) is an option available even under the most repressive and despotic regime. Why such a nearly universal threat or constraint in a typical stationary banditry equilibrium would somehow generate peculiarly good governance in Qing China is puzzling to me.

The evidence presented to support the claim that China provided higher levels of public goods is even shakier. To name a couple of problems here: There is no presentation of aggregate expenditure (military or civilian), let alone matching of comparable expenditure per capita between Europe and China. Selective discussions of specific public goods in the chapter are very vague, subject to multiple or even opposite interpretations and often with little clarification on whether they were actually provided by central, local or even the private or civil sectors (see p.177-178 and 189-191). The chapter plays down the role of political representation and parliament as an effective constraining device on ruler extraction. While this may be a valid argument on its own, the statement (p. 195) that ?representation was as unique to Europe as good governance was to China? seems way overdrawn and even rhetorically problematic (after all, ?good governance? is good by definition).???

In sum, the book represents a good contribution in the Great Divergence debate as it addresses some of the key issues beyond what has been done recently by Pomeranz, Allen and others and hence lays out a large research agenda for future scholarship. Overall, the arguments are particularly effective and insightful when it comes to opening our minds and the discipline to alternative hypotheses but far less so when it comes to providing credible support for its own thesis.

Debin Ma is a faculty member of the Economic History Department of the London School of Economics (personal website at He is the co-editor (with Jan Luiten van Zanden) of Law and Long-term Economic Change: A Eurasian Perspective (Stanford University Press, 2011).

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):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century

Creative Reconstructions: Multilateralism and European Varieties of Capitalism after 1950

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

Published by EH.Net (January 2012)

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

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

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

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

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

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

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

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

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

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

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

Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600-1850

Author(s):Parthasarathi, Prasannan
Reviewer(s):Mokyr, Joel

Published by EH.Net (January 2012)

Prasannan Parthasarathi, Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600-1850. Cambridge: Cambridge University Press, 2011. 365 pp. $30 (paperback), ISBN: 978-0-521-16824-3.

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

The year 2011 was? a banner year for ambitious books that explain what is becoming known as the ?Great Divergence? of the West and the Rest. In addition to the book under review here, two other books by major scholars have appeared: Jean-Laurent Rosenthal and Bin Wong?s Before and Beyond Divergence and Ian Morris?s Why the West Rules for Now. One would have hoped that the proliferation of this literature would perhaps start to converge toward a consensus, but alas, so far discord and confusion reign in this debate. One could call it perhaps ?the small divergence.?

Parthasarathi?s book, its title notwithstanding, is not about ?Asia? and ?Europe? but really about India and Britain. While there are some pages that deal with China and the European Continent, the author clearly is most at ease when writing about the former two countries. Japan makes only an occasional appearance, and the rest of Asia does not figure much. Above all, this book is an argument that the ?California hypothesis? applies to India as well. The California School, most notably embodied in Kenneth Pomeranz?s Great Divergence and Andre Gunder Frank?s Re-Orient, argue that the Chinese economy rather than falling behind from Ming times actually performed admirably until the end of the eighteenth century, and that it was only the Industrial Revolution in Western Europe that (temporarily) gave Europe a big advantage. Parthasarathi?s book makes a similar argument for India. Moghul India, he argues, was not backward, primitive, ignorant, poorly organized, or anything of the kind. As late as 1800 it was technologically sophisticated, scientifically progressive, commercialized with well-working institutions and efficient markets that allowed the Indian economy to work well. Its cottons were in high demand world-wide, and its abilities in a host of other industries were more than respectable.

If everything in India was so good, why was everything so bad? Parthasarathi?s argument depends heavily on his interpretation of the British Industrial Revolution. For him the Industrial Revolution was above all policy-driven. In his interpretation, the Industrial Revolution was the result of deliberate industrial policies by its governments, protecting domestic industry and encouraging import-substitution. What was true for Britain, Parthasarathi continues, was even more true for the Continental countries. Industrial policies shaped the speed and form of economic development. The one country that had as much potential as Belgium or Germany was India. But the British Raj mercilessly pressed their advantage against the hapless Indians, denied them access to the British market, and forced them to buy the cheap cotton products with which Lancashire after 1820 increasingly flooded the Indian market. India was ruled by the British, and they not only did nothing to encourage the development of manufacturing there; they did all they could to obstruct it. The power of states could determine successful economic development and prevent it elsewhere.

The argument is, of course, not new, and much of the evidence that Parthasarathi relies on has been used by other scholars. A notable example of an important essay published more than three decades ago (not cited by Parthasarathi) is Subramanian Swamy?s ?The Response to Economic Challenge: A Comparative Economic History of China and India, 1870-1952? (Quarterly Journal of Economics, 1979). Swamy fully anticipates Parthasarathi?s argument: ?The slow industrialization, or at least the lack of rapid industrial growth in India … can, be ascribed to the unwillingness of foreign capital to enter into the basic industries, and to the British Indian Government for placing obstacles in the path of indigenous investment … It was the combination of ?British interests? and the underlying social ethos of the Government of India that they were there ?to govern, to stabilize, and to administer,? but not to transform that proved to be the main cause of India?s slow development? (pp. 37?38).

Yet it is far from clear whether we have fully disposed of ?deep? cultural differences between Asia and Europe. Eight years after Swamy?s paper, Gregory Clark published a famous paper with a disturbing finding, comparing the Indian cotton mills in Bombay to those in Lancashire. He found that although Indian wages were only a sixth of British wages and they were using essentially the same equipment, the Indians had no major cost advantage over their British competitors, because Indian labor?s efficiency was only a fraction of their counterparts in Manchester. Clark left the reasons for this open, but subsequently in A Farewell to Alms he returns to the issue and argues that labor quality was remarkably low in poor countries, because of high absenteeism, poor discipline and similar matters. Whether Clark is right or not, Parthasarathi pays no heed to his work. Perhaps he can show us that low labor productivity can somehow be chalked up to the Raj as well, but until he does, his case is simply unpersuasive.

By blaming the Raj squarely for everything that went wrong with India?s nineteenth century development, Parthasarathi offers us a warmed-up old nationalist chestnut, and his waving at the post-colonial literature does not add much credibility to his case. While he is surely right that one can easily overstate the weaknesses of the Indian economy on the eve of the Industrial Revolution, his cherry-picking of examples (there are only a few tables in the book and only one of them pertains to India) simply does not persuade. Had Britain and India been at the same level of economic and institutional development in 1750, why was there no ?Western Europe Company? set up in Delhi that would have exploited the political divisions within Europe, established an Indian ?Raj? based in London and forced Europe to accept Indian calicoes without tariffs? Moreover, there were Asian nations, from Persia to Siam, which were never controlled by European Imperialists, yet they never seem to have developed much modern industry either. Neither, for that matter, did Imperial China, which poses a logical problem for anyone trying to blame imperialism for economic backwardness in Asia. The case of China is brushed off by Parthasarathi as the result of an ecological disaster due to deforestation and the feckless policies of the Q?ing government which did nothing to encourage the exploitation of Chinese coal deposits. But why would we believe that a counterfactual Indian independent government would have performed like Belgians or Prussians and not more like the Q?ing? To make his case stick, Parthasarathi ought perhaps have argued that India?s society was much like Japan?s, and that in the absence of colonial domination it would have made its own rules work for it. But such arguments are never made, and I suspect for good reason.

Parthasarathi is a learned and well-read historian, and he is no-doubt correct in pointing out that scholars have underrated the vitality and strength of the Indian economy in the eighteenth century. There were enclaves of highly skilled craftsmen and craftswomen in India, and it is easy to overrate the advantage that Britain and Europe enjoyed over Asian countries such as India and China. But in his justifiable indignation over the disrespect shown by ?Eurocentric? scholars to Indian civilization, he lets his rhetoric get the better of him and so hopelessly overstates his case as to undermine the credibility of those corrective elements he provides to the standard story that are most valuable.

First, he exaggerates the role of the British government in the first Industrial Revolution. There was no real industrial policy except for letting the new industrialists do their thing. With a few exceptions such as the Longitude Board, the demand for military hardware and royal dockyards, and running a patent office, the government played a remarkably modest role in fostering the Industrial Revolution. On the Continent this role was clearly larger, but even in Belgium and Prussia, the fact that the government supported and abetted the process does not prove that the government was a ?critical factor? as Parthasarathi repeatedly asserts. What these governments did (far more than Westminster) was to invest in infrastructure or encourage and subsidize others to do so. But this is precisely what the British did in India: they invested in its infrastructure. Lord Dalhousie, governor general of India 1848?56 (never mentioned by Parthasarathi) famously said that he introduced three ?great engines of social improvements?: railways, electric telegraph, and uniform postage (Suresh Chandra Gosh, ?The Utilitarianism of Dalhousie and the Material Improvement of India? in Modern Asian Studies, 1978, p. 97). One might add the Ganges irrigation canal, the brainchild of a single-minded Briton, Colonel Proby Cautley, was a huge success.

The exact dimensions of the impact of the Raj on the Indian economy will remain in dispute. Did the British extinguish an intellectual community comparable in quality and achievements to the one in eighteenth century Europe? We are told (p. 266) that the British colonial order led to a lossof patronage for institutions that produced and diffused knowledge, and that this, presumably, contributed to the decline of science and technology in the entire subcontinent. It is true that some of the libraries collected by Maharajas were dispersed and looted, but it seems implausible that a handful of British officials and soldiers could have wiped out the human capital of a population of close to 200 million people and reduced them from a vibrant intellectual community to a largely illiterate mass. The Indian society that emerged in the nineteenth century, Parthasarathi maintains, was radically different from what was there before. There is no question that there is truth to this argument, and that for much of the nineteenth century the British discouraged the formation of human capital and local centers of technology.

But it is frustrating that so little is known about Indian progress in the pre-Raj era and that the experts differ so much. Indian science and technology was surely not as primitive as contemporary Western observers described, but was it really at a par with Europe as we are told in this book? The complexity of the matter is wholly reflected in the writings of the Indian scholar Dharampal (not cited by Parthasarathi) who conceded that ?It is possible that the various sciences and technologies were on a decline in India around 1750 and, perhaps, had been on a similar course for several centuries previously? but that it was hard to know because of the ?general incommunicativeness of eighteenth century Indian scholars and specialists in the various fields? which may have been due to ?the usual secretiveness of such persons? (, p. 5, accessed on Dec. 31, 2011). The difference between that kind of insider science and the growth of public science in eighteenth-century Western Europe, which was at the very core of the Industrial Enlightenment, is symptomatic of the weakness of the argument made in this book. At the very least, Parthasarathi seems to fall into the trap of what Deepak Kumar has called ?a naive (perhaps revivalist) appreciation of pre-colonial science and technology.?

Part of the book?s weakness is the author?s very limited and minimalist concept of the Industrial Revolution, which he sees as purely a revolution in cotton and coal. He closely examines one key industry, cotton, and points out that British consumers were exposed to the high-quality, brilliantly colored calicoes coming from India. The Act of 1721 prohibited the importation and wearing of these textiles and thus stimulated British manufacturers to make their own, thus creating powerful incentives for the invention of machinery in the cotton industry. In this way, the British Industrial Revolution was indebted to India. Perhaps, but the Calico Act had quite a few exemptions, and its enforcement was far from water tight. But more to the point, the Industrial Revolution consisted of improvement on a much broader front than India?s example can account for. Thus in the woolen textiles ? never mentioned by Parthasarathi ? the introduction of shearing frames in the finishing stages was completely novel. In many other industries there were critical innovations, some of them the result of unscientific serendipity, but at least in some cases they were related to scientific advances. In cotton, the most famous example is of course chlorine bleaching, but Parthasarathi may also find a new book on the British gaslighting industry instructive (Leslie Tomory, Progressive Enlightenment: The Origins of the Gaslight Industry, 1780-1820, MIT Press, 2012). Such examples can be multiplied at will.

In Parthasarathi?s opinion, British coal developed in large part because of the wise policies of the Hanoverian government which regulated prices and protected coastal shipping. They also taxed coal quite heavily, which may not have been such an advantage. But more to the point, British coalmining, from the surveying and viewing stage all the way to the market, was in private hands. So were education, turnpikes, canals, healthcare, railroads, and most law enforcement. There was a fair amount of state regulation, but it is not clear how much of it was actually enforced and what effect it had. The same is true a fortiori for protectionism. The argument that Britain succeeded because of and not despite of the mercantilist policies of the eighteenth century is repeated over and over but never supported with much evidence. The one area in which British government may get some credit (but oddly never mentioned by Parthasarathi) is the Old Poor Law, a unique English institution which may have helped bring about social stability and raised the material quality of life for the bottom third of the income distribution.

This is a polemical book. Parthasarathi criticizes much of the literature on the British Industrial Revolution and its effect on the rest of the world, and often his critiques are well-aimed and deserved. There is no question that the initial differences between Asia and Europe on the eve of the Industrial Revolution have been overdrawn, and that Europe?s success was not quite as predetermined and inexorable as it was made out to be by scholars from Max Weber to David Landes. Yet there is an equal risk to exaggerate in the other direction and to argue that there was no difference whatsoever. More often, Parthasarathi succumbs to the unfortunate habit to take nuanced and subtle arguments of his opponents, oversimplify them into a cartoon, and then energetically proceed to take these strawmen apart; this is a time-honored custom in all rhetoric, but if applied too thickly it can be counterproductive. All in all, this is a provocative and eloquent book that will modify our views of the Great Divergence, if not nearly as much as its author would hope for.

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

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

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economic Planning and Policy
Economywide Country Studies and Comparative History
Industry: Manufacturing and Construction
Markets and Institutions
Geographic Area(s):Asia
Time Period(s):17th Century
18th Century
19th Century