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The New South’s New Frontier: A Social History of Economic Development in Southwestern North Carolina

Author(s):Taylor, Stephen Wallace
Reviewer(s):Phillips, William H.

Published by EH.NET (March 2002)

Stephen Wallace Taylor, The New South’s New Frontier: A Social History of

Economic Development in Southwestern North Carolina. Gainesville:

University Press of Florida, 2001. xix + 186 pp. $55 (cloth), ISBN:

0-8130-2116-2.

Reviewed for EH.NET by William H. Phillips, Department of Economics, University

of South Carolina.

In this book, Stephen Wallace Taylor, assistant professor of history at Macon

State College, has written a descriptive view of economic conditions in North

Carolina’s southwestern tip since 1880. This mountainous region, bordered by

Asheville on the east and Gatlinburg, Tennessee on the north, is identified

today by its proximity to the Great Smoky Mountains National Park. In the

modern mind, it is a recreational area that was never affected by American

industrialization. However, Professor Taylor recounts the history of an area

that was actively engaged in timber and mining operations, with local boosters

dreaming of future industrialization based on water-generated electrical power.

This future was sidetracked in the twentieth century by wider national

concerns: the rise of the conservation movement in the early 1900s, and the New

Deal showcase of government regional planning, the Tennessee Valley Authority

(TVA).

Taylor gives an important role in his story to postbellum writers who

stereotyped the region as one of isolated mountainfolk. This included the

popular writings of Horace Kephart, who idealized a pioneer lifestyle that had

disappeared from commercialized America. In fact, the inhabitants of the

mountains were survivors, who rotated between agriculture, mining and timber as

economic opportunities warranted. Of necessity, they were more mobile than the

writers imagined, and the region had many seemingly timeless villages that had

once been boomtowns.

In the early 1900s the booming sectors were copper and lumber. Although the

copper expansion was limited by marginal ores, large scale clear-cutting fed

major lumberyards that required company town housing. The future of the area

seemed to ride on Alcoa and the aluminum industry. With massive power

requirements for plants in eastern Tennessee, Alcoa begin buying land in

anticipation of building a massive dam at Fontana, on the Little Tennessee

River. Although the reservoir would result in the loss of precious farmland,

boosters hoped that surplus power from the dam could fuel a local industrial

boom.

The 1920s and early 30s were a critical time for the Smokies. Forest depletion

in the most accessible areas led to timber industry decline. Then the Great

Depression reduced mineral demand. Besides the direct impact on the local

copper mines, concern about over-capacity led Alcoa to put its water power

plans on hold. Into this gloomy atmosphere came a national drive by

preservationists and conservationists to create national parks and forests in

the eastern United States. The fascination with America’s mountain regions

began with the health resorts favored by wealthy industrialists. Attention was

further focused on southwestern North Carolina by Vanderbilt’s estate in

Asheville.

Local boosters argued that the region could get tourism dollars now, while

industrial development would come with the eventual construction of Alcoa’s

dam. The first decision to be made was whether to create a national park,

favored by preservationists, or a national forest, favored by conservationists.

The park option would generate the most tourism, while the forest option would

enable the timber industry to continue operations. Despite significant

opposition from lumber companies, who still had large land holdings, Congress

approved the Smoky Mountains Park in 1925.

The park was not actually formed until the onset of the Depression, by which

time another institution with interest in the area entered the scene. The

Tennessee Valley Authority’s business was regional planning. The key to that

planning was complete control over the water flow of the Tennessee River

watershed. This meant that Alcoa’s control of a future dam on the Little

Tennessee River would permanently hamstring its operations. Alcoa’s monopoly

position in the aluminum market further intensified the hostility of TVA’s New

Deal progressives, who sought to purchase the dam site and run the dam in the

agency’s interest.

Before this political battle could completely play out, World War II raised the

stakes. Aluminum for airplanes was now a critical need, and the power from the

Fontana Dam was needed as soon as possible. A bid by Alcoa to retain ownership

and have the Federal Government pay for construction costs backfired

politically. The result was that Alcoa was forced to sell the Fontana site to

the TVA in return for a guaranteed power supply. Professor Taylor believes that

with the TVA in charge of the dam and its uses, the interests of the Smoky

Mountain region and its inhabitants were inevitably given little weight. TVA’s

main contact with the local area was during the dam’s construction, after which

it concentrated on distributing the power into eastern Tennessee. Even the

recreational use of the reservoir was limited, as annual summer draw downs to

meet power needs left docks and boat ramps stranded.

The perception that Tennessee was getting most of the benefits of federal

policy was reinforced by the actions of the Park Service in the Smokies. Many

inhabitants of land included in the park felt that officials misled them over

how long and under what conditions they could continue to reside there. Some of

this was due to changing views of what the park should be. The final policy was

one that attempted to eradicate traces of the land development that had already

occurred within park boundaries. This created more dislocation on the North

Carolina side, where more development had taken place.

The final battle revolved around the “North Shore Road.” This was a road that

the Park Service had agreed to build along Fontana Lake to replace a route

inundated after dam construction. Such a road would have given Bryson City,

North Carolina immediate entry into the park, enhancing its value as a tourist

stop. Park officials came to feel that such a road would create too much damage

to park land, and they successfully lobbied for abandonment of the original

plan. As a result, the Cherokee Reservation became North Carolina’s entryway to

the park, with the subsequent diversion of tourist dollars. Local civic

boosters especially resented the success of Gatlinburg, whose entryway on the

Tennessee side became the most popular destination for visitors.

The only shortcoming in this well written book is the lack of a critical

assessment of the area’s true industrial potential. In the absence of a

concrete proposal of what industries would have moved into the area had not the

TVA diverted the dam’s power, it is difficult to take the dreams of civic

boosters at face value. Unless an industry was to develop around some unique

mineral resource in southwestern North Carolina, the region was only left with

the standard Southern industrialization strategy: labor-intensive

manufacturing. But if labor is mobile, it is easier for Southern manufacturers

to entice the local population to more convenient locations for plant

operation. In their early years, Piedmont textile firms regularly sent labor

recruiters into the mountains offering train tickets. Perhaps a look at the

North Carolina furniture industry or Dalton, Georgia’s carpet industry might

reveal how the region could have forged an industry built around local craft

skills. Despite this reservation, the book will be very useful to historians

interested in the economic development of the Appalachian region.

William H. Phillips is Associate Professor of Economics at the University of

South Carolina. He is currently researching the development of the Southern

cotton gin manufacturing industry and, more generally, patents issued to

Southern inventors before World War I.

Subject(s):Urban and Regional History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The World Economy: A Millennial Perspective

Author(s):Maddison, Angus
Reviewer(s):Brezis, Elise S.

Published by EH.NET (November 2001)

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

OECD, 2001. 384 pp, $63 (hardback), ISBN: 92-64-18654-9; $26 (paperback),

ISBN: 92-64-18608-5.

Reviewed for EH.NET by Elise S. Brezis, Department of Economics, Bar-Ilan

University.

In the past few years, there has been a resurgence of interest in long-term

economic growth, and consequently, the need for long-term data on the

countries of the world has become more acute. The data provided by the

Heston-Summers Penn World Tables are available, but they start in 1950, which

is too short a period to analyze the elements that are important to

development and growth. So those who study macroeconomics and economic growth

and who use long-term data have anxiously awaited the arrival of The World

Economy: A Millennial Perspective. This book, which provides data on GDP

and population growth for the past millennium, enables quantification of

long-term changes, and is therefore of exceptional interest; for research, it

is a must.

World Economy is a continuation of Maddison’s 1995 book, Monitoring

the World Economy, which covers the period 1820-1992 (which itself was a

continuation of his 1991 book Dynamic Forces in Capitalist

Development). What is new in World Economy is that the data are

provided from the year 1000 (although not for all countries).

Like his other two books, there are two distinct parts to World

Economy: In the first part, Maddison presents a succinct historical view

of world economic development, while the second part provides data, which is

Maddison’s specialty.

In Part One, Maddison attempts to identify the factors that explain the

economic success of some countries, and he analyzes the reasons for the

backwardness of others in light of the new data. He places the main onus of

economic performance on conquest, international trade, and technological

innovations.

In the first chapter, Maddison presents an extensive survey of world economic

development from 1 CE to the present, but focuses mainly on the last

millennium. He analyzes the data on population and GDP per capita, pointing

out the differences over the continents — the Western strength and Asian

weakness around 1800. Comparing the two millennia, he shows that in the last

millennium, the world’s population increased 22-fold, world GDP nearly

300-fold and per capita income increased 13-fold, while in the first

millennium there was no advance in per capita income.

In the second chapter, Maddison attempts to explain changes in the character

of economic leadership that have occurred over the past millennium. He

presents four case histories: the Venetian Republic, Portugal, the

Netherlands, and Britain, and shows how it is misleading to treat the Western

experience as universal. This chapter describes at length the geographic

discoveries and trade that took place in the middle of the millennium; it also

focuses on colonialism.

The third chapter treats the second half of the twentieth century, a period

for which data are easier to find, but still not as easy for some non-Western

countries as for the West. Consequently, Maddison focuses on Asia and Africa,

as well as on the transition process in the countries of Eastern Europe.

Writing a history of the world for 1,000 years in 170 pages is an admirable

achievement which nevertheless has its unavoidable flaws. Maddison does not

attempt a full listing of the various elements that play a role in

development, but rather places an emphasis on what for him is important in

light of his new data. Therefore, he concentrates on discoveries and on trade,

a subject on which he goes into much detail. For example, describing

discoveries, he mentions that “Da Gama got back to Lisbon in August (having

stopped to bury his brother in the Azores)” (p.62). However, treatment of

other subjects, such as government policies and institutions, is absent.

Despite including details that are not relevant to economic development, Part

One is indeed fascinating, and it is interesting to see where Maddison now

places his emphasis, which is very different than in his 1991 and 1995 books,

which focused more on the factors of production.

The second part of the book is the appendices with the data provided by

Maddison, who is the expert today on providing economy-related data on

the past. Producing data is important, since it permits us “?to separate

stylized facts from stylized fantasies which are sometimes perceived to be

reality” (p.45). Maddison’s main contribution to the field is his data on

population, GDP, and likewise, on GDP per capita (although the book also

contains some other data such as data on exports, but these series are not as

lengthy).

Appendix A presents data on 1820-1998. As in his 1995 book, Maddison explains

the way the data are converted into PPP values, permitting a comparison

between countries and over time. He also explains the differences in the

population and GDP data between World Economy and his 1995 book. There

are substantial revisions to the data on Asia, where the detailed coverage has

increased from 11 countries to 37. (As a small but upsetting detail, I was

astonished to see the West Bank + Gaza listed as a country. Because the

amounts involved are small and without any influence on the regional data, I

think that Maddison could have avoided this faute de gout). For African

countries, the coverage has increased from 10 to 57 countries. This increase

will certainly encourage economic research on these countries.

Appendix B is the main new offering of World Economy. It presents the

data from 1500-1800 as well as aggregate data from the year 1. Maddison shows

the alternative estimates of world population, comparing his results with

other research. This appendix is certainly the main contribution of this book.

The other four appendices present the GDP estimates for 1950-1998, the data

for the Eastern European countries during the transition, data on employment,

on labor productivity, and data on exports for 1870-1998.

Today Maddison is nearly the only source for historical macro data of the

world, and only he could rise to the challenge of presenting data for the

entire millennium, even if there are still holes. David Landes in his recent

book (1998) wrote that Paul Bairoch and Angus Maddison are the collectors and

calculators of the numbers of growth and productivity. Since Bairoch is not

with us any more, Maddison now has a “monopoly” on this field.

In World Economy Maddison presents not only data “created” by others

but mainly much data of his own “creation.” The accuracy of his data might

occasionally be questionable, since some of it is merely educated guesswork. A

couple of illustrations of Maddison’s simply guessing are: “For Western Europe

as a whole, I made proxy estimates for Austria, Denmark, Finland, and Sweden,

assuming that per capita real GDP increased at 0.17% a year for 1500-1820″ (p.

248); “For the other Western Offshoots, Canada, Australia, and New Zealand .

. . I assumed a per capita GDP of 400$ for 1500, 1600 and 1700″ (p.249); “For

the Americas . . . and the area of the former USSR, I have assumed that more

or less subsistence levels of income (400$ per capita) prevailed from the

first century to the end of the first millennium” (p. 260).

Despite the many approximations, only Maddison could carry off guessing data

for this period, yet readers will accept his guesses favorably. However, two

issues should be raised.

The first is: If the data that we have are fraught with errors, should we

present data at all? Should we publish data that are highly problematic, or is

it better not to publish data at all? These are serious questions and the

answers are not clear-cut. Data by Maddison have an immediate impact, and

research will be immediately launched based on it. Conclusions and

implications will be drawn in light of these data, and if they are flawed, the

resulting studies could be completely wrong.

On the other hand, there is such a demand for data now that many macro

specialists are engaged in the subject of economic growth, and they certainly

need data to test their models. In the past, the subject of economic growth

and industrialization was mainly studied by economic historians, who were

aware of the danger of working with erroneous data, and so were more cautious.

The field is now studied mainly by economic growth theorists, who are less

cautious, and will make use of whatever data can be found. Since the field

needs data, more and more will be produced. In other words the demand will

create the supply. If data are going to be “created,” better that they come

from Maddison than anyone else.

Moreover, Maddison studiously presents the way he “creates” his data. He

explains what he calls the “proxy procedure to fill gaps in the data set,” and

is aware that proxy estimation is problematic, since one can fill gaps in many

ways. Furthermore, after Maddison presents a first guess and estimate, it is

usually a catalyst for improving the data. His data estimation should

therefore be seen as a trial-and-error mechanism.

This brings me to the second issue: If the first guess leads to more research

and therefore to better data, then this would seem to be a positive outcome.

However, the theoretical question that should be asked is: Does the first

move, i.e., the first estimate influence the entire ensuing quest for the

“true” data? In other words, does the first guess influence the data estimated

even after many corrections? If the first guess can affect the ensuing

research, then despite the fact that Maddison is the best candidate “to throw

the dice and create” the data, then — like every monopoly — this one is also

undesirable. In order to reduce first-move error by removing this “monopoly,”

I suggest that the next book should be the result of the work of an entire

group of specialists. The OECD Development Centre, which is aware of and

understands the importance of data, should organize seminars for each

historical period, where experts from different parts of the world would meet

and discuss the various alternatives, and then publish their common “guess.”

This procedure would result in a better first approximation of the entire

trial-and-error mechanism, and lead therefore to better data.

References:

Landes, D.S. 1998. The Wealth and Poverty of Nations. London: Little

Brown.

Maddison, A. 1982. Dynamic Forces in Capitalist Development. Oxford:

Oxford University Press.

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

Development Centre.

Elise S. Brezis is editor (with Peter Temin) of Elites, Minorities and

Economic Growth (1999, Elsevier) and author of “Social Classes,

Demographic Transition and Economic Growth,” European Economic Review,

45, 2001, 707-17.

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

The Rise of “The Rest”: Challenges to the West from Late-Industrializing Economies

Author(s):Amsden, Alice
Reviewer(s):II, John R. Hanson

Published by EH.NET (September 2001)

Alice Amsden, The Rise of “The Rest”: Challenges to the West from

Late-Industrializing Economies. New York: Oxford University Press, 2001.

vi + 405 pp. $35 (hardback), ISBN: 0-19-513969-0.

Reviewed for EH.NET by John R. Hanson II, Department of Economics, Texas A&M

University.

This book is a landmark in a large and now-familiar literature touting the

“developmental state” as a workable alternative to the hands-off state as an

instrument of economic development for poor nations. Amsden asks what lessons

can be learned from the experience of a group of twelve middle-income

countries — for example, Argentina, Mexico, and Taiwan — which have enjoyed

at least a modicum of success in the international growth race and especially

an expanding manufacturing sector in recent decades. To her and others they

represent a new paradigm, perhaps the elusive Third Way of which economic

reformers have dreamed for so long. The developmental state sets clear

policies and goals for the economy — for example, export promotion,

investment in human capital, and credit allocation through development banking

– and carries these out through innovative means of solving basic economic

coordination problems while simultaneously minimizing corporate rent-seeking

and bureaucratic failure. The developmental state represents a

remarkable combination of official pride — it has the wisdom to set proper

goals — and humility — it knows that bureaucrats may err and adopts measures

to mitigate the consequences of this. It also has the stomach to guide and

discipline powerful corporations with a clever combination of carrots and

sticks. Yet, withal, it is hospitable to markets and foreign investors. If

this sounds naive, let it be said that Amsden is not an uncritical apologist

for this style of economic management. Her book contains many examples of

failure, despite its fondness for this approach.

The bloom, however, is off this rose. The Asian Miracle, after recent crises

in various Asian economies, has gone the way of its predecessor, the

late-lamented Japanese Miracle. Academic research has cast doubt on industrial

policy — another name for the developmental state — as the reason for

several non-Western success stories. There is now a counter-literature

suggesting that, in Asia particularly, regulatory reform should be a top

priority and rent-seeking remains unconquered. So there seems to be a growing

opinion, if not consensus, that hallmarks of the developmental state may not

be the solution to poverty but part of the problem. More generally, one might

agree with Paul Krugman, who has observed in his book Pop

Internationalism that institutional fads come and go — Soviet communism

was one such in the 1950s. The developmental state could be just the latest of

these.

So the book is ill-timed, and the argument will convince fewer people than

would have been true only two or three years ago, although hardcore industrial

policy advocates will no doubt welcome it as a magisterial statement. I

generally agree with the skeptics because the book, its considerable expertise

and thoroughness to the contrary notwithstanding, does not meet the highest

standards of rigor, even in a non-mathematical sense. Many assertions it makes

about economic principles as well as the reasons for events in particular

countries remain to be proved. The book is a massive research agenda, as well

as expert summary, synthesis, and interpretation from Amsden’s point of view

of a large secondary literature. Thus, many phrases of the “it was only

natural that” or “it was to be expected that” variety are sprinkled throughout

the text. Economists are as susceptible to ad hoc arguments as anyone else —

the egregious Paul Samuelson comes to mind — but the frequency with which

they appear in Amsden’s treatise should not be lightly forgiven despite her

otherwise careful documentation of assertions. I also wondered at times

whether, Margaret Mead-like, Amsden could have been yet more critical of the

operation of the developmental state in her sample countries, but declined

because of a suppressed desire to make a point with domestic applicability:

industrial policy works! Yet, to be fair to her, she does not delve into

domestic policy explicitly.

Amsden might be better appreciated as having written a useful work of economic

history that reinforces iconoclastic but salutary trends in modern economics.

Although the glories of laissez-faire economics are now widely appreciated by

policymakers and the public, professional economists have been exploring

subtleties in the operation of markets — the role of asymmetric information,

for example — which at least admit the possibility of effective official

action for the public good. Some scholars are portraying Adam Smith as a

pragmatist (correctly in my view) rather than as a free-market absolutist. It

is well to recognize that the world of experience has produced successful

economic cases which are not explicable in popular laissez-faire terms even if

one is suspicious of Amsden’s apparent sentiment that these successes are

easily replicated or can serve as models for remaining impoverished

countries. Many Third World leaders treated Rostow’s stages-of-growth analysis

as a blueprint for development, with dreadful consequences. Amsden writes in a

Rostovian spirit and likewise could be overinterpreted by policymakers and

leaders. Still, Amsden provides a useful reminder that the old development

scholars, though excessively bold in their claims, accurately sensed or

anticipated the insufficiency of the strict market models so many revere

today.

John R. Hanson II is Professor of Economics at Texas A and M University. His

article “Culture Shock and Direct Investment in Poor Countries,” appeared in

the Journal of Economic History in March 1999.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Gold for the Sultan: Western Bankers and Ottoman Finance, 1856-1881

Author(s):Clay, Christopher
Reviewer(s):Tabak, Faruk

Published by EH.NET (August 2001)

Christopher Clay, Gold for the Sultan: Western Bankers and Ottoman Finance,

1856-1881. London and New York: I.B. Tauris Publishers, 2000. xx + 698 pp.

$65.00 (hardback), ISBN: 1-86064-476-6.

Reviewed for EH.NET by Faruk Tabak, Walsh School of Foreign Service,

Georgetown University.

Christopher Clay’s Gold for the Sultan is a detailed and painstaking

study which reconstructs, in all its historical richness and specificity, a

story which is all too familiar in its general outlines and yet always

arresting when skillfully couched in the labyrinthine details of the

relationships it relates. The story is that of the conflict-laden and

systemically-forged relationship between money, or capital if you will, and

political power. Here, the former assumes the form of loans extended to a

perpetually cash-strapped Ottoman state by a myriad of banks domiciled in

London, Paris and elsewhere, and the latter is personified by a Sublime Porte

which, in the wake of two decades of reforms starting with the Tanzimat, was

forced during the Crimean War to resort to borrowing in world capital markets

for the first time in its history. Christopher Clay, Professor of History at

the University of Bristol, gives a blow-by-blow account of the mercurial

relationship between the handlers of the world-economy’s wealth, i.e. the

banking institutions and bankers inhabiting global centers of accumulation,

and the Ottoman state from the onset of the Crimean War in 1856 to the

installation in 1881 of the Public Debt Administration after the default of

1875-76. Here, the well-known scenario of spiralling indebtedness culminating

in bankruptcy owes its peculiar twist to the founding of the Banque Imp?rial

Ottomane (BIO), the governmental bank of the empire, by no less than the

lenders themselves. Owned, controlled and managed from London and Paris, the

Bank was expected to lay the foundations of a modus vivendi between the

lenders and the Sublime Porte. The relationship between the two, when viewed

from the imperial seat of power, was more adversarial than not, especially in

times of pressing need which not incidentally was the case for most of the

twenty-five years covered in the book. In the eyes of those associated with

the Bank, however, the interests of the Ottoman state and western bankers were

not almost always divergent, they were closely intertwined.

Clay examines the dynamics of this relationship from the vantage-point of the

Bank, through the eyes of its major decision-makers. The book traces the

historical trajectory of the Bank from the growing presence of western bankers

in Ottoman finances during the Crimean War (Chapter 1) to the successful

raising of a series of loans until 1875 under the watchful eyes, but not

always with the intermediation, of the Bank (Chapters 2 to 5); from the

bankruptcy and the crisis that ensued in 1876-77 (Chapters 5 to 7) to the

securing, with the help of the Bank in particular, of a partial rehabilitation

that led to the creation of the Public Debt Administration (Chapters 8 to 11).

In essence, the book discusses, through the prism of the BIO, whether a

working relationship can be established between a “state bank” marching to the

tune of world capital markets and an imperial seat of power inclined or forced

to live beyond its means yet not willing to bow down to the demands of

capital markets precisely because it was given access to a bank which it

invested with imperial privileges and expected, in return, to be given some

financial breathing space. The author clearly demonstrates that the answer is

more nuanced than not. The first two decades of the Bank’s existence were not

happy ones indeed, because it was forced to compete with other lenders who

were more than willing to extend funds to the Ottoman state on better terms.

The relationship between the two turned cordial only at the end of the 1870’s

and in the early 1880’s. The taxing times following the default created a more

cordial environment. It is this brief “moment” that Clay silhouettes in his

conclusion and highlights the value of the service the Bank had then rendered

to the Ottoman state.

To make his point, Clay scrutinizes conditions surrounding the timing and

nature of each and every loan and analyzes whether it was more or less likely

for the Porte to get better terms. By design, the cases are handled on an

individual basis rather than systemically. This detailed account, by

clarifying the motives of each agent engaged in the process of negotiation and

the course of action available to each under the circumstances, turns, in

Thomas Hardy’s words, “a bag of bones and a quarter pound of blood” into

flesh and soul. Yet, overall, the approach is not without its drawbacks. When

seen from a bird’s eye-view and not from the vantage-point of the BIO, it was

not incidental that the bankruptcy came after 1873, the start of the Great

Depression of the nineteenth century. Neither was it serendipitous that during

the mid-Victorian boom when money was chasing after borrowers, there were

scores of lenders willing to outcompete the BIO if not undermine its

foundations. Nor was it by chance that conditions of cohabitation between the

Sublime Porte and the BIO improved during the Great Depression precisely

because borrowers started chasing after money after losing the freedom of

choice the expansionary phase offered them between 1850 and 1873.

That these two sets of events, closely interlinked, are not presented as one

cannot be attributed to oversight. Far from it. It is reflective of the

priorities the author has set for himself for this enterprise. As clearly

expressed in the introductory chapter, this is a book about Ottoman and global

financial history, and not about the Ottoman economy or the world-economy at

large. Yet, respecting this self-imposed demarcation, and unwaveringly so, has

its drawbacks. For one, in a setting where agricultural production was

overwhelmingly dominant and in-kind tax collection the order of the day, as in

the Ottoman case, fluctuations in prices that agricultural goods fetched in

world markets found immediate reflection in the fluctuations in state

revenues. With the onset of the Great Depression around 1873, global terms of

trade between agricultural and manufactured goods were tipped to the detriment

of the former, and this had a direct –and negative– bearing on the size of

Ottoman state revenues as elsewhere. The reversal in terms of trade was not a

short-term phenomenon either; agricultural prices picked up only after the

mid-1890’s. In the interim, the number of defaults and debt reschedulings

increased around the globe notwithstanding the specificity of each case

involved.

The absence of a larger frame of reference makes itself evident in the

author’s contention that “the financial failure of 1856-75 thus led directly

to the further disintegration of the empire after 1908 and its final collapse

in 1918″ (p. 1). Yet, the global economic environment changed drastically from

the mid-1890’s, the start of an expansionary phase that lasted until the

1920’s. Doubtless, the burden of debt weighed heavily on the state in the

long-run, but from the turn of the century capital flows resumed their inward

course and agricultural prices resumed their upward course. Moreover, the

imperial rivalry between the Great Powers allowed more funds to be injected

into the Ottoman economy in the form of loans than were repatriated in the

form of interest payments and repayments. The line of causality linking the

third quarter of the nineteenth century to the final collapse of the empire is

not necessarily a linear one. After all, periods of downturn (and

accompanying defaults) were, and are, as much part of the functioning of the

world-economy as periods of boom. The aftershocks of a default may linger on,

but unless compounded by new misfortunes, its ability to singlehandedly

determine the direction of change in the long-run is not unlimited.

Analyzing historical developments through the prism of the Bank does not

obscure larger forces only. The Bank’s principal local competitors, the Galata

bankers, who did not leave behind as copious a documentation as the Bank,

appear as mostly enigmatic if not shady characters whose mores were radically

different from the Bank’s western competitors (p. 181). The view from Galata,

one could surmise, was quite different. Overall, however, it is impossible not

to agree with the author that the number of substantive works on the Ottoman

state’s dependence on world capital markets and on the Bank is inversely

proportional with that of theoretical works on it, and that this gap in the

empire’s vital information data base has to be filled in if the impact this

institution had on the trajectory of the Ottoman state is to be charted rather

than simply inferred. This Christopher Clay has done impeccably.

Faruk Tabak is coeditor of Landholding and Commercial Agriculture in the

Middle East (SUNY Press, 1991) and Informalization: Process and

Structure (Johns Hopkins University Press, 2000).

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Middle East
Time Period(s):19th Century

The Great Divergence: China, Europe and the Making of the Modern World Economy

Author(s):Pomeranz, Kenneth
Reviewer(s):Lal, Deepak

Published by EH.NET (October 2000)

Kenneth Pomeranz, The Great Divergence: China, Europe and the Making of the

Modern World Economy. Princeton, NJ: Princeton University Press, 2000. x

+382 pp. $39.95 (cloth); ISBN: 0-691-00543-5.

Reviewed for EH.NET by Deepak Lal, Department of Economics, University of

California, Los Angeles.

Kenneth Pomeranz (Professor of History at the University of California,

Irvine) has written an important and scholarly book. Yet, despite his

scholarship, at the end of the day I was not convinced by his basic thesis.

The question he asks is one that has tantalized scholars for over a century:

Why did Europe alone of the great Eurasian civilizations escape the binding

land constraint and initiate that process of unbounded Promethean intensive

growth which has transformed humankind’s economic prospects, so that, mass

structural poverty need no longer be the universal scourge it has been for

millennia? As a scholar of China he uses the comparative method to see if any

advantages can be discerned which led core areas in Europe to diverge so

markedly from the core areas primarily in southern China, but also in Japan and

India. In this task, he brilliantly deconstructs the various materialist

explanations that have been advanced by economic historians to explain this

great divergence.

He shows quite convincingly that, until the turn of the eighteenth century,

there was no marked divergence in living standards between the Chinese and

European cores. He then painstakingly shows with an impressive command of the

Chinese literature (much of it recent) that various purported differences in

demography, ecology, accumulation and the pervasiveness of markets which have

been claimed to have given the Europeans an inherent advantage do not stand up

to scrutiny. As late as 1750, the similarities between the Yangtze Delta and

England were greater than the differences. So why did England and subsequently

Europe not follow the labor-intensive path of the “industrious revolution” of

their Far Eastern cousins, and instead take the capital-intensive path of the

industrial revolution?

His answer is in two parts. The first is that coal, which fueled the English

industrial revolution, was geographically not as readily available to the

eighteenth-century core in southern China, since it was concentrated in the

Northwest. The spectacular development of the coal and iron complex in the

northwestern China in the eleventh century, documented by Hartwell, was

dismantled and depopulated by the invaders of the twelfth century, and by the

fifteenth century when the region was stabilized China’s economic and

demographic center of gravity had shifted to the South. He notes that,

retrospectively, the returns to linking the Yangtze delta with the northwestern

coal deposits were huge, but that these returns were invisible ex ante, and it

is not clear what could have been done to realize them. But this explanation

surely will not do, for the Chinese state had acted under the Sung to

disseminate the new wet rice technology to southern China. If the coal-steam

technology had been available to China — as it was in principle but not

developed for reasons to be taken up below — could the powerful bureaucratic

authoritarian state that has ruled China not have taken the necessary action to

link these two geographical regions under its sway?

Nor does the relative geographical distribution of coal reserves in the various

Eurasian civilizations bear up as the decisive factor in the European

divergence, if we consider their location in another Eurasian civilization —

India. Its core lay in the eastern Gangetic plain — in modern Bihar — because

it was here that they found the iron deposits they needed for the iron

implements needed to clear the forests and the iron ploughshares for deep

ploughing. We now know that this area also contains India’s coal reserves. But

despite this, no one has claimed that the Indians could have developed the

coal-steam industrial revolution. By contrast, we know China had nearly all the

ingredients of this revolution in place by the eleventh century, and it still

did not take place. It is highly dubious that the geographical distribution of

its coal reserves had anything to with this lapse.

The second part of Pomeranz’s answer about the causes of the great divergence

is Europe’s discovery and exploitation — partly through trade — of the New

World. There can be no doubt that this extended Europe’s land frontier. But how

decisive was it and why could China not do something similar?

Pomeranz, himself in his last chapter in a section called “Comparisons and

Calculations: What Do the Numbers Mean?” admits the increment to the supply of

land- intensive products from the New World to Europe could not have been

large, but then uses various forms of handwaving including an appeal to chaos

theory to justify his thesis that they were the basis of the great divergence!

But it is the larger question — why did China not seek to exploit areas where

free land was available overseas to overcome its growing land constraint —

which points to the basic flaw in Pomeranz’s and other purely materialist

explanations for the great divergence. As Pomeranz shows, there were empty

lands in South East Asia which “like the post-contact New World, was sparsely

populated and capable of supplying vast quantities of land-intensive resources

that were in demand ‘back home.’ Chinese went there in significant numbers, but

South East Asia never became for coastal China what the New World was for

western Europe” (p. 200). Why? Because unlike Europe’s New World empires, “the

Chinese merchants . . . established themselves in South East Asia without state

backing” (p.200). This is the crucial point. To see why, it is important to

note two important points not even taken into account by Pomeranz.

First, under Kublai Khan the Chinese had created a powerful navy. The famous

admiral Cheng Ho took his “treasure ships” on expeditions to the India Ocean in

the fifteenth century, and William McNeill (The Pursuit of Power:

Technology, Armed Force, and Society since A.D. 1000, University of Chicago

Press, 1982) notes that these expeditions eclipsed anything that the later

Portuguese explorers could muster. Nor did Cheng Ho desist from coercion. He

sealed Chinese suzerainty everywhere he went if necessary by force. McNeill

argues that if the Chinese had continued to expand their overseas empire “a

Chinese Columbus might well have discovered the west coast of America half a

century before the real Columbus blundered into Hispaniola in his vain search

for Cathay. Assuredly Chinese ships were seaworthy enough to sail across the

Pacific and back. Indeed, if the like of Cheng Ho’s expeditions had been

renewed, Chinese navigators might well have rounded Africa and discovered

Europe before Prince Henry the Navigator died (1460)” (p.45).

But instead — the second point — after 1433 the Chinese abandoned their navy

and began to restrict foreign trade and contacts. The shipbuilding and

sea-going skills thereafter degenerated, and China continued in relative

isolation until the “new barbarians” came knocking at its doors in the

nineteenth century.

To understand this shift in policy and the accompanying closing of the Chinese

mind — and the comparable one in Japan following its adoption of the policy

sakoku under the Tokugawa — one has to look at what I have elsewhere (in

Unintended Consequences) called the “cosmological beliefs” of the

various Eurasian civilizations. As these cosmological beliefs are also related

to the different polities, they also help to explain the divergences in state

policy. It would take me too far afield to outline this story here. But without

bringing the mind back in, there is no way to explain China’s failure to

generate the coal-steam industrial revolution and the overseas empire, which

Pomeranz with so many other economic historians rightly see as the proximate

causes of the European miracle.

The great historian of Chinese science, Joseph Needham, used to maintain that

the rise of the West could not be explained in terms of a single or a few

factors but was due to a “package.” Pomeranz’s greatest service is to show that

the material differences in this “package” cannot account for the great

divergence — particularly once one discounts his own materialist differences

as being unconvincing. So as both Weber, and more recently Landes have

maintained, we are back to culture. Both, however, in my judgment got the date

of this cultural divergence wrong. I have argued in Unintended

Consequences that it goes back to at least the sixth century. But that is

another story.

One indication of this cultural divergence is provided by a visit to the great

archeological museum in Xian. The first few rooms of the collection show the

great cultural and scientific efflorescence in China from neolithic times to

the middle ages, and then in room after room there are the same shapes, the

same forms continuing in unending repetition — at least to this untrained eye.

It is to see a civilization that seemed to have seen itself as reaching

perfection and then being frozen in aspic from about the sixteenth century. By

contrast in England this was to be the age of Shakespeare, followed by those of

Locke, Newton, Hume and Smith. The sheer intellectual curiosity and

creativeness of these centuries preceding the industrial revolution are in

stark contrast to what was happening in the other great Eurasian civilizations.

If we are to understand the modern world it is this great divergence which

needs to be explained, and which Pomeranz’s book does not even touch upon.

Deepak Lal is James S. Coleman Professor of International Development Studies,

University of California, Los Angeles, and the author of Unintended

Consequences: The Impact of Factor-Endowments, Culture and Politics on Long Run

Economic Performance (MIT Press, 1998). A third collection of his essays

entitled Unfinished Business, was published by Oxford University Press

in 1999.

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

The Rise of African Slavery in the Americas

Author(s):Eltis, David
Reviewer(s):Hogendorn, Jan

Published by EH.NET (July 1, 2000)

David Eltis, The Rise of African Slavery in the Americas, Cambridge,

Cambridge University Press, 2000. xvii + 353 pp., $59.95 (cloth), ISBN:

0-521-65231-6.

Reviewed for EH.NET by Jan Hogendorn, Department of Economics, Colby College.

David Eltis of Queen’s University, Canada, has produced an ambitious

explanatory survey on the emergence of African slavery in the Americas. Why, he

asks, should a slave system have arisen in the New World under western European

auspices when the countries involved were in so many other ways leaders in

developing political and economic freedoms?

Eltis explores the issue in a lengthy, densely-written volume that serves to

highlight three decades of advance in the study of American slavery and the

Atlantic slave trade, an intellectual progress in which he has been a major

player. A significant innovation in this book is the way it integrates analyses

of labor and commodity markets in Africa, Europe, and the Americas with

transport costs to arrive at conclusions based broadly on demand and supply.

Any attempt to achieve such breadth is a daunting task with the danger that the

thread of the argument will be lost, but Eltis has succeeded in making his

story plausible and coherent — though not an easy read.

The first analytical chapter (Chapter 2) undertakes to show the relationship

between the rise of the Atlantic slave trade and the development of a free

labor market and modern labor force in Europe. Here the focus is on how the

competing demands for labor on both sides of the Atlantic together with

improvement in the position of labor in Europe put limits on the labor supply

in the Americas, giving the necessary opening for African slavery to emerge in

that area.

In Chapter 3, “Europeans and African Slavery in the Americas,” Eltis turns to

the question of why European slaves were not an adequate substitute for

Africans in bondage. He notes that military captives and criminals were

available in quantity and reminds us (in interesting detail) of the long

tradition of galley slaves at the oars of Mediterranean shipping. But in this

case the implicit debate on who was eligible for slavery, who an insider and

who an outsider, the balance went against the use of European slaves — a

decision made the easier by the availability of African slaves. He continues

the analysis into issues of gender, probing why women were far more important

in the African slave trade than they were among other migrant flows of labor

indentured and free. The position of European women in the eyes of the

Europeans themselves was a cultural norm that kept them from plantation gang

labor but such norms did not protect African women.

These basically cultural explanations become more explicitly economic in

Chapter 5, on productivity in the slave trade. In his treatment Eltis

emphasizes the role of transport costs. The focus is apt because as he points

out the high cost of organization, financing, shipping, handling, and insurance

together with the long delays often experienced in trading on the African

coasts raised the price of both imports of goods to Africa and slaves exported

from that continent to about double their respective prices at the source. The

slave trade was “possibly the most international activity of the pre-industrial

era” (p. 136), with huge transport bills for the assembly of the goods shipped

from Europe and Asia (with textiles from India a major method of paying for

slaves), for transporting these goods to Africa, and then for the movement of

slaves to the New World.

At about the halfway point of the book, the focus shifts to Africa and the

supply side. The first question of Chapter 6 is why European enterprise

resulted in a movement of labor to the Americas when the same commodities could

have been produced by Europeans in Africa itself. An interesting review of

European attempts to establish farms and plantations on or near the African

coast leads to analysis of technical and ecological constraints but concludes

that the main barriers were political and military, with Europeans generally

unable at this stage to penetrate any significant distance inland from their

ships’ guns. So with commodity production in Africa foreclosed but possible

across the Atlantic, the most profitable alternative was to deal with African

suppliers of slaves. The establishment of these contacts and their

productivity-enhancing improvement concludes this chapter. An absorbing thread

of this discussion and that of the following chapter, “The African Impact on

the Transatlantic Slave Trade,” is how the trans-Atlantic shippers had to

confront resistance by slaves who, particularly at or near the coast, often

attempted to seize their floating prisons and escape. Eltis concludes that in

spite of the many productivity-increasing improvements in transport, one

economic fact of life was that costs of policing this risk were much higher

than otherwise. The main impact was on labor costs, where, he estimates,

outlays were higher by about two-thirds compared to a situation where policing

was not necessary. The effect of these higher costs was to reduce the quantity

of slaves exported by nearly ten percent, or about half a million people,

between 1700 and 1800, but as he notes, the extent of such resistance was very

different from one coastal location to another.

Another feature of the chapter on the “African Impact” is the description of

the complicated task facing European shippers of wares that had to be tailored

to the variegated demand patterns along the coast. The differences in demand

were striking, certainly not indicative of homogenized tastes. For example, in

1662-1703 according to Royal African Company records, imports of textiles to

the Bight of Biafra were 1 percent of all RAC shipments compared to 77 percent

along the Gold Coast; while for the same two areas metals were respectively 80

percent and 6 percent of total shipments. Almost all of the RAC’s cowries went

to the Slave Coast, with few arriving at any other destination. By commodity,

rarely did the average percentage share for the coast as a whole reflect the

percentage for any single one of the five regions shown in the data.

The volume concludes with chapters providing a comparative perspective on the

English plantations in America, on ethnicity in the trade, on the ultimate

impact of the trade on Europe, and with three appendices (on age and sex of the

Africans shipped to American bondage, on slave prices, and on the merchandise

imports to West Africa that served to purchase slaves).

Overall, Eltis’s impressive book does good work in two different arenas.

Specialists in research on the Atlantic slave trade and slavery in Africa and

the Americas will see better than before the integration among markets and

regions that characterized this trade. Economists and historians who are not

specialists will see this as well, but they will also find the book a

proficient and well-sourced overview of a massive subject.

Jan Hogendorn is the Grossman Professor of Economics at Colby College and the

author (with Paul Lovejoy) of Slow Death for Slavery: The Course of

Abolition in Northern Nigeria, 1897-1936, Cambridge University Press 1993.

Subject(s):Servitude and Slavery
Geographic Area(s):North America
Time Period(s):18th Century

World of Possibilities: Flexibility and Mass Production in Western Industrialization

Author(s):Sabel, Charles F.
Zeitlin, Jonathan
Reviewer(s):Jaffe, James A.

Charles F. Sabel and Jonathan Zeitlin, eds., World of Possibilities: Flexibility and Mass Production in Western Industrialization. New York: Cambridge University Press, 1997. x + 510 pp., $80.00 (cloth), ISBN: 0-521-49555-5.

Reviewed for EH.NET by James A. Jaffe, Department of History, University of Wisconsin-Whitewater.

The essays gathered in this collection build upon the ideas presented more than a decade ago in Charles Sabel and Jonathan Zeitlin’s influential article “Historical Alternatives to Mass Production” (Past & Present, No. 108, August 1985, pp. 133-76). Indeed the arguments laid out then bear so significantly upon this collection that some recapitulation is in order. Based in large part on Sabel and Michael Piore’s earlier work, that 1985 essay emphasized the persistence of small firms in “advanced” industrial societies as well as the economic success of “flexible” firms using multi-purpose machines and skilled labor to make specialized products for niche markets. Moreover, Sabel and Zeitlin expanded upon those observations and launched a broader attack on some of the more fundamental tenets of the economic historiography of industrialization. Foremost among their objectives was to reconsider the received wisdom elaborated by such prominent authors as David Landes and Alfred Chandler who, it was argued, privileged the role played by mass production in the development of the modern industrial economies. The explanatory power of the mass production model of industrialization, Sabel and Zeitlin wrote at the time, was weakened by a number of historical inconsistencies, including the obvious persistence of small firms using batch-production techniques. They also questioned the dominant assumption that self-interest and economic rationality ultimately determined economic decision-making and industrial development rather than political institutions or cultural predispositions. Indeed the mass production factory-based model, Sabel and Zeitlin concluded, was “merely a restatement of what happened, not the summary expression of an inevitable logic of interest and efficiency.”

In contrast to what they perceived to be an overly-deterministic model, Sabel and Zeitlin repeatedly emphasized a “many-worlds history of industrialization” that shifted attention toward a more protean approach to technological development, an approach based principally upon the recognition that a “craft alternative” continued to thrive in “industrial districts.” These districts developed a self-reinforcing dynamic. In them, small firms used highly skilled labor and adopted new technology; they were as likely to cooperate as they were to compete; and they successfully produced a wide range of products for a variety of differentiated markets. Moreover, these districts constructed an alternative community of sentiments in which children brought up to a trade acquired a set of tacit rules governing their conduct. These rules promoted forms of “fair” competition at the same time that they attached moral sanctions to destructive economic behavior. Therefore, these districts tended to be characterized by hitherto unrecognized forms of collaboration both between employers and employees and among the small firms themselves.

Such a wide-ranging thesis did not go unchallenged, of course. The flexible specialization model in general drew criticism from those who argued that it did not adequately characterize the nature of mass production, that it misrepresented the effects of small-scale specialization on labor, and that it replaced one set of teleological assumptions with another.

Generally, the essays presented in this collection do not attempt to directly respond to these criticisms. Instead they seek to amplify and elaborate the historical and institutional contexts within which the “craft alternative” was tried and tested. Moreover, the articles are discursively located within Sabel and Zeitlin’s alternative reading of the history of western economic development that was also briefly suggested in their original article. At that time, Sabel and Zeitlin had offered a “reconceptualization” of the industrialization process that emphasized the fact that the history of mechanization was not necessarily the history of throughput. They proposed instead a tripartite historical schema and it is roughly this periodization that informs this collection. Thus the first essays in this collection focus on why and how some regional ancient regime industries adapted and survived through the means of flexible specialization to changing markets and competition; a middle group of essays, roughly covering the late nineteenth and early twentieth centuries, illustrates the struggles that took place in several sectors between models of mass production and those of flexible specialization; and a final group emphasizes the contemporary success of several flexibly-specialized industrial sectors.

The essays on late eighteenth and early nineteenth-century manufacturing constitute some of the most compelling case studies in the book as well as nearly one-half of its bulk. Taken together they investigate not only the adaptability of several trades to both changing markets and technology, but perhaps more significantly emphasize the social, political, and institutional foundations for their relative success. The exceptionally interesting essays by Alain Cottereau and Beatrice Veyrassat adopt comparative approaches that highlight the sources of the flexible specialization’s competitive advantage over mass production techniques. Under conditions of what Cottereau has called “collective manufacture,” (p. 82) institutional practices and social relations developed that both shared risks and tamed competition among both domestic workers and manufacturers. One such institution, whose essential importance remains largely understudied, was the mutually-respected price-list (“tarif” in France and “Preisverzeichnisse” in Germany), but there were others including the important regulatory functions performed by the Conseil de Prud’hommes in France or more local organizations such as the Societe d’emulation patriotique in the Swiss canton of Neuchatel. These institutions, it is argued, reflect a corporate or collective response to competitive pressures that ensured the viability of craft production and facilitated a flexible approach to production through negotiation rather than conflict. Moreover, their survival apparently contradicts the so-called “British model of industrialization” not only in terms of the advent and introduction of mechanization, but also in terms of its assumed structural supports of private property, free trade, and “cynical individualism” (p. 107). These arguments, it should be added, are extended in different ways in the contributions of Carlo Poni on Lyons silk merchants and Rudolf Boch on the Solingen cutlery trades. When taken together, these essays may serve not only to draw attention to the distance that separated the ideological thrust of the British model, or more accurately the Lancashire cotton-spinning model, from contemporary practice but also to stimulate further research into that model’s own historical viability.

The second set of essays, on the conflict between mass production and flexibly-specialized systems, elaborates the ways in which individual sectors responded to both the threat and temptation of de-skilling, the adoption of single-purpose machinery, and the cultivation of mass markets. The contributions here, including those by Alain Dewerpe on the Italian engineering firm Ansaldo, Zeitlin on British engineering, and Peer Hull Kristensen and Sabel on Danish dairy cooperatives, are highlighted by Philip Scranton’s sparkling essay on American textile manufacturing. Rather than succumb to the idea that there is an “immanent logic to historical change,” (p. 342) Scranton emphasizes the “situational particularities” (ibid.) that characterized different sectors of the trade and which led some branches to adopt mass production and others batch production techniques. Not only does Scranton outline the comparative risks and advantages to both bulk and batch production, he also attempts to establish the fact that different branches of the industry exhibited relatively coherent “clusterings of decisions” (p. 313) on a wide variety of issues including finance, marketing, management, and labor relations. Such attempts to delineate a spectrum of industrial possibilities are similarly characteristic of Zeitlin’s contribution, which argues that British engineering firms “selectively adapted” to mass production techniques giving rise to hybrid forms, and Dewerpe’s interesting case study of the ways in which the same firm adopted both craft and mass production methods under different market and political conditions.

The final group of essays emphasizes three regional success stories of flexible specialization: Vittorio Capecchi on the Bologna packaging industry, Jean Saglio on the transition from comb-making to the plastics industry in Oyonnax, France, and Hakon With Andersen on Norwegian shipping, brokerage, and insurance. They share as well an emphasis on the importance of social and institutional linkages that served to share information, encourage collaboration, and reduce risks. In the case of Bologna, Capecchi argues that the Bolognese packaging industry developed first as an “industrial subsystem” (p. 393) of engineering through the creation of a multitude of new firms from one “mother” firm, relying on both indigenous skills and local university talent. For Norway, Andersen discusses the creation of links between many small “frontline” shipping and shipbuilding firms and “supporting” groups, such as brokers and insurers. Through the creation of a complex of marketing and sales organizations, certification and classification organizations, shipbuilders’ associations, collaborative research projects, and the like, small Norwegian shipping firms from the north-west were able to compete with large-scale integrated firms by sharing information. Finally, Saglio’s essay is most notable for its innovative attempt to understand the situational rationality of local actors as they comprehend the ways in which their trade and local society functions as well as their own place in the scheme of things.

These essays, therefore, are a welcome contribution to the historical debate that began with the publication of Sabel and Zeitlin’s article in 1985. They attempt to extend our knowledge in several critical areas as well as offer a nuanced approach to the way in which the industrialization process needs to be understood. Naturally, in a project of this scope some discordant elements creep in. For example, there seems to be a relatively weak consensus on the precise nature of mass production, many authors preferring to adopt alternative terms such as “serial production,” “routinization,” or “standardized production.” Similarly, the fundamental dynamism of the “industrial district” is replaced at times with alternative classificatory schemes such as the “industrial subsystem” or the “collective manufacture.” Finally, the editors themselves, in a relatively brief introduction, appear to be pushing the argument in newer directions, towards the understanding of economic history both as a postmodern narrative project and as a rule-making process. Such arguments may not immediately resonate among economic historians, and indeed deserve to be pushed further, but they may very well help to refashion the questions they ask.

James A. Jaffe Department of History University of Wisconsin-Whitewater

James Jaffe is author of The Struggle for Market Power: Industrial Relations in the British Coal Industry (Cambridge, 1991) and the forthcoming Asymmetries: Work and Labor Relations during the Industrial Revolution.

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Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Douglass C. North

written by John Wallis

Douglass C. North passed away at the age of 95 at his home in Benzonia, Michigan.  He was among the most important and influential economic historians and economists of the late 20th century.  He will be deeply missed by his family, friends, colleagues, and students.

Douglass Cecil North was born on Nov. 5, 1920, in Cambridge, Massachusetts, the youngest of three children. He attended the University of California-Berkeley, graduating in 1942.  He received his PhD from Berkeley in 1952.  He began teaching at the University of Washington Seattle in 1950, and in 1983 moved to Washington University in St. Louis, where he remained a professor for the rest of his career.  He was co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences with Robert Fogel.

He is survived by his wife Elisabeth Case and his three sons Douglass, Christopher, and Malcom.

The following description of his intellectual accomplishments are taken from John Wallis “Persistence and Change: The Evolution of Douglass C. North,” in Institutions, Property Rights, and Economic Growth: The Legacy of Douglass North.” Edited by Sebastian Galiani and Itai Sened. Cambridge University Press, 2014.

North long emphasized the importance of history and of neo-classical economics.  He criticizes both disciplines for their complacency about the adequacy of the current conceptual and methodological consensus on how history or economics should be done.  He always operated within a framework of individuals who act intentionally (neo-classical economics matters) and who perceive the world through cognitive lenses that are part inherited from their culture and part derived from their own experience (history matters).  Individual actions are governed by interests shaped by relative prices, endowments, and constraints (institutions) as well as by perceptions of how the world around us works (cognition and beliefs).   Social outcomes are the sum of individual actions, but the summation process is not a simple adding up, since interactions between individual decisions and beliefs critically influence the behavior of everyone.

The evolution of North’s thinking continuously shaped his willingness to pursue the interesting questions he was unable to address in his last book or paper, not by the what was currently hot in the profession.  Testimony to the power of his insight is that the profession has followed him, for he certainly didn’t followed the profession. Nowhere is it easier to see this process than in his first book, The Economic Growth of the United States, 1790-1860.  The introduction, page vii, states his conceptual approach:

This study is based on the proposition that U. S. growth was the evolution of a market economy where the behavior or prices of goods, services, and productive factors was the major element in any explanation of economic change. Institutions and political policies have certainly been influential.  They have acted to accelerate or retard growth on many occasions in our past, primarily by affecting the behavior of the prices of goods, services, or productive factors either directly or indirectly.  But they have modified rather than replaced the underlying forces of a market economy.

It is hard to imagine a conceptual statement that more inaccurately predicts the path that North’s research eventually followed.

Economic Growth was one of the first examples of quantitative economic history, or cliometrics, North’s first major contribution to economics and economic history.  The book presented a very neo-classical theory of economic development that emphasized the importance of geographic specialization and division of labor, which led him to investigate the sources of falling transportation costs over the nineteenth century.  His 1958 paper in the Journal of Economic History laid out a technology based neo-classical framework for thinking about declining freight rates, but ten years later, in his 1968 Journal of Political Economy paper, North concluded that: “The conclusion one draws is that the decline of piracy and privateering and the development of markets and international trade shared honors as primary factors in the growth of shipping efficiency over this two-and-a- half-century period.” (p. 967).  Essentially, the costs of shipping were falling because costs other than the costs of operating ships were falling.  Those cost reductions were the result of institutional change.  The paper marks North’s turn toward both transaction costs and institutions as important elements of economic change over time.

The turn towards transaction costs and institutions did not mean a turn away from neo-classical economics, however.  The assumption of zero transaction costs and unchanging institutions could be relaxed within the context of neo-classical theory, as North argued in 1971: “What we need is a body of theory which encompasses the traditional models of the economist and both widens its scope and allows us to include an explanation of the formation, mutation and decay of organizational forms within which man cooperates or competes.”  North was moving toward a neo-classical theory of institutions in which the form of institutions, or organizations, was itself determined by traditional neo-classical rationality and constraints:

Let us begin on a positive note. Briefly stated, the model specifies the process by which an action group (an individual or group) perceive that some new form of organization (institutional arrangement) will yield a stream of benefits which makes it profitable to undergo the costs of innovating this new organizational form. These new arrangements have typically been profitable to realize potential economies of scale, reduce information costs, spread risk, and internalize externalities. These institutional arrangements account for a vast array of the “economic institutions” with which economic historians have traditionally been concerned. However, the formation (and mutation and decay) of these organizational forms can now be an integral part of the economic analysis rather than a descriptive addition to the analysis. Moreover, since a great many were realizable without substantial redistribution of income, their formation is at least in principle predictable from the model. Perhaps even more significant than the ability to integrate economic analyses and institutional formation is the implication of this theoretical model for the study of productivity increase. Economic historians have focused on technological change as the source of growth but the development of institutional arrangements from the above mentioned sources are a major historical source of the improvement in the efficiency of product and factor markets. The development of more efficient economic organization is surely as important a part of the growth of the Western World as is the development of technology, and it is time it received equal attention. The few cases of which I am aware that have attempted to measure productivity change attributable to improving economic organization certainly support this contention. (1971, pp. 119-120)

The idea that neo-classical theory could be used to explain why institutions functioned as they did was a fundamental breakthrough and North’s second major conceptual contribution.  The idea was implemented in a series of papers with Lance Davis and with Robert Paul Thomas, that led to two more books: Institutional Change and American Economic Growth, published in 1971 with Davis and The Rise of the Western World published in 1973 with Thomas.  The heart of the argument in both books is that we can explain changes in the organization of human interaction (institutions) on the basis of the rational interests of individuals attempting to structure the world around them in ways that maximize net benefits.  The classic application of the technique is North and Thomas’s explanation of how the rising price of labor in 14th century Europe as a result of the Black Death, led to the institution of wage labor in western Europe and a return to the institution of serfdom and slavery in eastern Europe.  The same relative price shock led to two different, but both rational, institutional changes.

Two lines of thinking emerged from the idea of neo-classical institutions, and they were not entirely consistent with one another.  In one line, institutional change occurs because of short-run variations in relative prices that create, at some point in time, the incentives to restructure human organizations.  For some reason these changes persist.  This led North to investigate both path dependence and transaction costs.  Transaction costs play a key role, because they are both a reason to change institutions to reduce (or increase) transaction costs and because transaction costs subsequently can make it difficult to change institutions and so contribute to institutional persistence.

The other line of thinking was a growing dissatisfaction with neo-classical economics altogether as a way to understand the process of economic growth specifically, and more broadly to understand the process of economic change over time.   His third significant breakthrough was the realization that neo-classical theory was not just inadequate, but unable to explain long term economic and institutional change in any society, growing or not.

He directed his first clear criticism at economic historians. While acknowledging the important contribution that economic theory and quantitative techniques made to advancing our understanding of historical processes, nonetheless:

From my quite subjective perspective, the new economic history has made a significant contribution to revitalizing the field and advancing the frontiers of knowledge. Yet I think it stops short — far short – of what we should be accomplishing in the field. Our objective surely remains that of shedding light on man’s economic past, conceived in the broadest sense of those words; and I submit to you that the new economic history as it has developed has imposed strictures on enquiry that narrowly limit its horizons-and that some of my former revolutionary compatriots show distressing signs of complacency with the new orthodoxy.  (1974, p. 1)

His criticism of neo-classical theory in economic history, development, and growth would culminate in Structure and Change in Economic History, 1981, what many (including myself) believe is North’s best book.  The introduction and a second chapter extend the argument that we must have more than a history of markets to understand economic change.  The third chapter titled “A Neoclassical Theory of the State,” lays out a logical neo-classical argument for why, in the presence of transactions costs, political systems do not inevitably evolve institutions that promote economic growth.  Indeed, as long-term economic history suggests, the tendency is for political systems to evolve that do not support growth. Chapters four and five argue that we need a theory of organizations as well as a theory of beliefs and ideology if we are to understand long run change, particularly long run change that does not inevitably produce growth and development.

The contradiction is clear in Structure and Change.  On the one hand, there is a strong argument that neo-classical economics is incapable of delivering the full range of explanations necessary to understand economic change, particularly ideologies and beliefs.  On the other hand, there is a strong argument that rational individual behavior is consistent with institutional choices that retard, rather than promote, economic growth.  Is the question to be neo-classical or not be neo-classical?

The real question the book is trying to grapple with is: persistence or change?  Going back to Rise of the Western World, institutions change when there are gains from doing so, but then  persist because of the high transaction cost of changing them.  In Structure and Change, beliefs and ideologies persist.  Because beliefs (and norms and culture) are based on the cumulative experience of society passed down through culture and formed through repeated interaction of many people through norms of behavior, beliefs do not change quickly and it is extremely difficult to for social actors to manipulate beliefs in current time.  As a result, beliefs are always a function of what happened in the past and can impede change in the present for good or ill.  It is the persistence of beliefs and institutions from the past (culture) that explain why changes in the present often produce results that impede rather than promoting growth and development.  The importance of beliefs in North’s framework plays a major role in Institutions, Institutional Change, and Economic Performance (1990) and is the central focus ofUnderstanding the Process of Economic Change (2005).

The Structure and Change framework includes two different time patterns of institutional change.  One is episodic and discontinuous, like the move toward wage payments after the Black Death in western Europe.  The other is continuous and marginal. Changes in beliefs and ideologies, in norms, and in informal and formal rules occur constantly and, while changes sometimes persist, they need not.  Neither continuous or episodic institutional change is necessarily persistent.

Fleshing out these ideas in the 1990s produced a classic example of change during a crisis that persists: “Constitutions and Commitment” with Barry Weingast (1989).  The paper’s emphasis on institutional mechanisms explains why particular institutions are self-enforcing and persist over time.  At the same time North was writing Institutions, Institutional Change, and Economic Performance.  Persistence plays a large role in Institutions, which regularly emphasizes that the function of an institution is to provide stability and predictability to human behavior.  The big contribution of the book, however, is the definition of institutions that North calls the sports analogy.  Institutions are the rules of the game and the means of enforcement, and organizations are the teams that play the game.  The definition motivates three behavioral choices that organizations can make.  1) maximize under the rules; 2) devote resources to changing the rules; and/or 3) cheat.  The alternatives are not mutually exclusive, and they comprise a framework for understanding the dynamics of institutional change.

North’s fourth major contribution was to separate institutions and organizations.  Since his earliest books, North always included a discussion of organizations as important, but organizations were treated as manifestations of institutions.  Organizations usually disappeared from the conceptual framework, which was always neo-classical in its focus on individuals.  By defining institutions as the rules of the game and means of enforcement and then separating the rules from the organizations that actually play the game, the possibility of a dynamic relationship between the interests and incentives facing the organizations and the structure of the rules became possible.  The descriptive concept that comes out of the dynamics is ‘adaptive efficiency.’  In some societies, the interaction of institutions and organizations produces a series of institutional changes that get incrementally better, rather than a sequence that is sometimes good and sometimes bad for economic performance.  This is North’s fourth fundamental contribution.

Rather than resolving (or integrating) the tension between the long and short term forces  leading to institutional change, Institutions exacerbated it.  The rules of the game included formal rules, informal rules, and norms of behavior.  By stressing the function of institutions as providing stability and predictability, and emphasizing the importance of beliefs and norms, the book effectively claimed that the persistence of institutions was not a matter of real-time economic and political forces, but an outcome of the natural limits to human capacities for cognition and culture.  North pressed farther down this road with his 2005 book, Understanding the Process of Economic Change.  The interaction between organizations and institutions was a central point in his last book with John Wallis and Barry Weingast, Violence and Social Orders in 2009.

 

Partial Bibliography

North, Douglass C. 1958. “Ocean Freight Rates and Economic Development 1750–1913.” Journal of Economic History, 18(4): 537–555.

North, Douglass C. 1961. The Economic Growth of the United States 1790–1860. Englewood Cliffs, N.J.: Prentice-Hall, Inc.

North, Douglass C. 1966. Growth and Welfare in the American Past. A New Economic History. Englewood Cliffs, N.J.: Prentice-Hall, Inc.

North, Douglass C. 1968. “Sources of Productivity Change in Ocean Shipping, 1600–1850.” The Journal of Political Economy. 76(5): 953–970.

North, Douglass C. 1971. “Institutional Change and Economic Growth.” Journal of Economic History, 31(1): 118–125.

Davis, Lance E., and Douglass C. North. 1971. Institutional Change and American Economic Growth. Cambridge, UK: Cambridge University Press.

North, Douglass C. 1974. “Beyond the New Economic History.” Journal of Economic History, 34(1): 1–7.

North, Douglass C. 1978. “Structure and Performance: The Task of Economic History.” Journal of Economic Literature, 16: 963–978.

North, Douglass C., and Barry R. Weingast. 1989. “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England.” The Journal of Economic History, 49:4.

North, Douglass C. 1981. Structure and Change in Economic History. Cambridge: Cambridge University Press.

North, Douglass C. 1986. “The New Institutional Economics.” Journal of Institutional and Theoretical Economics, 142(1): 230–237.

North, Douglass. C. 1990a. Institutions, Institutional Change, and Economic Performance. New York: Cambridge University Press.

North, Douglass C. 1990b. “A Transaction Cost Theory of Politics.” Journal of Theoretical Politics, 2(4): 355–367.

North, Douglass C. 1991. “Institutions.” In The Journal of Economic Perspectives, 5(1): 97–112.

North, Douglass C. 1993. “Douglass C. North, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1993: Autobiography.” Vol. 2010. The Nobel Foundation.

North, Douglass C. 1994. “Economic Performance through Time.” American Economic Review, 84: 359–368.

North, Douglass C. 1995. “The New Institutional Economics and Third World Development,” in John Harriss, Janet Hunter, and Colin M. Lewis, eds., The New Institutional Economics and Third World Development, New York: Routledge.

North, Douglass C. 2005. Understanding the Process of Economic Change. Princeton: Princeton University Press.

North, Douglass C., and Robert Thomas. 1973. The Rise of the Western World: A New Economic History. New York: Cambridge University Press.

North, Douglass C., John Joseph Wallis, and Barry Weingast. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Human History. New York: Cambridge University Press.

North, Douglass C., John Joseph Wallis, Steven B. Webb, and Barry R. Weingast, ed.  2013. In the Shadow of Violence: Politics, Economics, and the Problem of Development.  Cambridge University Press.

Manpower in Economic Growth: The American Record since 1800

Author(s):Lebergott, Stanley
Reviewer(s):Margo, Robert A.

Classic Reviews in Economic History

Stanley Lebergott, Manpower in Economic Growth: The American Record since 1800. New York: McGraw-Hill, 1964. xii + 561 pp.

Review Essay by Robert A. Margo, Department of Economics, Boston University.

Manpower after Forty Years

During the first half of the twentieth century classical musicians routinely incorporated their personalities into their performances. One recognizes immediately Schnabel in Beethoven, Fisher in Bach, Cortot in Chopin, or Segovia in just about anything written for guitar. As the century progressed performance practice evolved to where the “text” — the music — became paramount. The ideal was to reveal the composer’s intent rather than putting one’s own stamp on the notes — the performer as conduit per se rather than co-composer.

Personal style played a major role in the early years of the cliometrics revolution. Hand a cliometrician an unpublished essay by Robert Fogel or Stanley Engerman, and I am quite sure she could identify the author after reading the first couple of paragraphs (if not the first couple of sentences). No one can possibly mistake a book by Doug North for a book by Peter Temin or an essay by Paul David for one by Lance Davis or Jeffrey Williamson. To some extent this is because personal style mattered at the time in economics generally — think Milton Friedman or Robert Solow. But mostly it mattered, I think, because these cliometricians were on a mission. Men and women on a mission put their personalities up front, because they are trying to shake up the status quo.

So it is with Stanley Lebergott. Indeed, of all the personalities who figured in the transformation of economic history from a sub-field of economics (I am tempted to write “intellectual backwater”) that eschewed advances in economic theory and econometrics to one that embraced them (I am tempted to write “for better and for worse”), Lebergott’s style was perhaps the most personal. In re-reading Lebergott’s most famous book — his Manpower in Economic Growth: The American Record since 1800 (1964) — one sees that style front and center on nearly every page, as well as the conflicting emotions as its author tried, not always successfully, to marry the anecdotal and archival snippets beloved by historians with the methods of economics. Manpower was (and is) substantively important for two reasons. First, prior to Manpower, the “economic history of labor” meant unions and labor legislation. By contrast, Lebergott made the labor market — the demand and supply of labor — his central focus and in doing so elevated markets and market forces to a central tendency in the writing of economic history. Second, Lebergott produced absolutely fundamental data — estimates of the labor force, industrial composition, unemployment, real wages, self-employment, and the like — that economic historians have relied on (or embellished) ever since.

These two accomplishments aside, I emphasize style not because, in Manpower‘s case, it is light years from the average article that I accept for publication in Explorations in Economic History. Economic history, like all economics, is vastly more technical than it was in the early 1960s. Burrowing into the style of Manpower reveals an author transfixed with what he perceived to be the grandness of the American experiment, the transformation of a second-rate colony into the greatest economy the world had yet seen. The core of Manpower would always be its 33 appendix tables and 252 (!) pages of accompanying explanatory text lovingly produced and so relentlessly documented as to drive any reader to distraction (or tears). So much the line in the sand, daring — indeed, taunting — the reader to do better. Lebergott knew that, in principle, one could do better, because he did not have ready access to all the relevant archival materials. I would conjecture, however, that he would always be surprised if anyone did, in fact, do better. Tom Weiss, himself one of the great compilers of American economic statistics, spent several years redoing Lebergott’s labor force estimates using census micro data rather than the published volumes that Lebergott relied on (Weiss 1986). In commenting on Weiss’s work, Lebergott (1986) characterized the differences between his original figures and the revisions as “very small beer” and then took Weiss to task for failing (in Lebergott’s) view to fully justify the revisions. “One awaits with interest,” he concluded, “further work by the National Bureau of Economic Research project of which this is a part.” When Georgia Villaflor and I (Margo and Villaflor 1987) produced a series of real wage estimates for the antebellum period drawing on archival sources that Lebergott did not use, I received a polite letter congratulating me but requesting more details and admonishing me to think harder about certain estimates that Lebergott felt did not mesh fully with his priors. There are thousands of numbers in those 33 appendix tables and one’s sense is that each number received the undivided attention of its creator for many, many, many hours.

But numbers do not a narrative make. Chapter One, “The Matrix,” has little in common with the archetypal introduction that gives the reader a roadmap and a flavor of the findings. It begins rather with an 1802 quote from “The Reverend Stanley Griswold” about the frontier that lay before the good minister. “This good land, which stretches around us to such a vast extent … large like the munificence of heaven … [s]uch a noble present never before was given to any people.” (Reviewer’s note: any people? Which people?) The first sentence goes on to describe an incongruous scene from Kentucky in 1832, “a petit bon homme” and his wife and their “little pile of trunks” sitting in a restaurant in the middle of (literally) nowhere. We then learn of a “great theme” of American history, that which motivated those who wrested the land from the “wilderness” — a belief in an open society, of which there were three elements. First, “hope” — an unabashed belief that things will always get better, and were better in America than in Europe. Second, “ignorance” — Americans were always willing to try something new, no matter how crazy. Third, America had a huge amount of space for people to spread out in. OK, the reader says, but where’s the economics? Ca. page 13 Lebergott emphasizes that the three elements made Americans unusually restless people, willing to move all the time. Ordinarily, Lebergott opines, it is the smaller (geographically-speaking) countries that have higher labor productivity because, ordinarily, people do not like to move. But Americans liked to move, he claims, and they did so on the slightest provocation. Excessive optimism, misinformation, and folly are core attributes of the American spirit and key factors in the American success story. In the end, the errors didn’t matter anyway (“small beer” indeed) because the land was so rich. More people moved to California in 1850 than could be rationally justified by the expected returns to gold mining but, as a result, California entered the aggregate production function sooner than otherwise. Labor mobility per se was a Good Thing, and American had it in abundance.

Chapter Two asks where all the workers would come from. Lebergott notes that certain labor supplies were highly predictable — slaves, for example. But once the slave trade was abolished the supply of slave labor grew at whatever the natural rate of increase. If the riches of America were to be tapped, free labor would have to be found — all the more difficult if the required number of workers to be assembled in any given spot was very large.

Another element of the Lebergott style is a dry wit, as evidenced in his exchange with Weiss. In a section on “[t]he Labor Force: Definition” we are told that ‘[t]he baby has contributed more to the gaiety of nations than have all the nightclub comics in history. We include the comic in the labor force … as we include [his] wages in the national income but set no value on the endearing talents provided by the baby.” In discussing the then-fashionable notion that the aggregate labor force participation rate (like other Great Ratios) was “invariant to economic conditions” Lebergott notes that small changes can nevertheless have great import. “The United States Calvary,” he observes, “was sent to the State of Utah because of the difference between 1.0 wives per husband and a slightly greater number.” The remainder of the chapter considers segments of the labor force whose labor was, indeed, “responsive to economic conditions” — European immigrants, internal migrants, (some) women and children as well as the impact of social and political factors on labor supply; it demonstrates the extraordinary flexibility of the American labor force and its responsiveness to incentives. While this conclusion would not surprise anyone today it was, I think, quite revolutionary at the time. It is as good an example of any I know of the power of historical thinking to debunk conventional wisdom derived from today’s numbers.

By now the reader is accustomed to Lebergott’s modus operandi — the opening paragraph that sometimes seems to be beside the point but really isn’t; quotations in the text from travelogues, diaries, plays, literature and what-not; obscure (to say the least) references in the footnotes; all interspersed with economic reasoning that has more than a tinge of what would be called today “behavioral” economics. In Chapter Three Lebergott talks about the “process” of labor mobility, which is really one extended probing into the relationship between mobility of various sorts and wage differentials. We get to see some univariate regression lines, superimposed in scatter-plots of decade-by-decade changes in the labor force at, say, the state level, against initial wage rates. Generally, labor flows were directed at states with higher initial wage rates, although Lebergott is quick to assert that “[m]igrants suboptimized” because the cross-state pattern was far less apparent at the level of regions. Next, Lebergott takes on the notion that economic development is an inexorable process of labor shifting out of agriculture. The American case, Lebergott claimed, challenges this notion. American workers shifted out of agriculture when the economic incentives were right; that is, when the value of the marginal product of labor was higher outside of agriculture.

The remainder of Chapter 3 is divided into two brief sections, both of which contain some of the most interesting writing in the book. In “Social Mobility and the Division of Labor,” Lebergott examines the relationship between occupational specialization and growth. In the nineteenth century most workers possessed a myriad of skills, farmers especially. They were jacks of all trades, masters of none. Lebergott speculates that this was a good thing because the master of none was more inclined to try something new, rather than assume he was, well, the master and therefore knew everything. If some fraction of novel techniques were successful, this could (under strong assumptions) lead to a higher rate of technical progress. “Origins of the Factory System” considers the problem posed earlier in the book of assembling large numbers of workers at a given location. Rather than pay higher wages, manufacturers turned to an under-utilized source of labor, women and children. Some years later, the ideas presented in this section would develop in full bloom in a celebrated article by Claudia Goldin and Kenneth Sokoloff (Goldin and Sokoloff 1982) on the role of female and child labor in early industrialization.

At 89 pages, Chapter Four, “Some Consequences,” is the longest chapter in the book. The first few pages, highly influential, are given to the formation of a national labor market, revealed by changes over time in the coefficient of variation of wages across locations. We are then given an extended tour of the history of American real wages, back and forth between the relevant tables in the appendix, quotations from contemporaries and other anecdotal evidence. The “Determinants of Real Wage Trends” comes next. The first, productivity, is no surprise. The second, “Slavery,” isn’t really either, but here Lebergott’s contrarian instincts, I think, get the better of him. Lebergott would have the reader believe that, first, free and slave labor were close to perfect substitutes; and, second, slave rental rates contained a premium above what the slave would have commanded in a free labor market. Consequently, when slavery ended, wages fell and there was downward pressure on real wage growth for a time. No question that wages fell in the South after the Civil War but Lebergott’s analysis is incomplete at best. Slave labor was highly productive before the Civil War because of the gang system, and when the gang system ended, the demand for labor fell in the South. Because labor supplies were not perfectly elastic, wages fell too. “Immigration,” the third purported influence, had negative short run effects on wages but positive long run effects via productivity growth.

What follows next is a 25-page section that years later produced two high-profile controversies in macroeconomics. This is the (celebrated) section where Lebergott presents his long-term estimates of unemployment. In thinking today about his work, we would do well to remember that, at the time he prepared his estimates, the United States had only a relatively brief experience with the direct and regular measurement of unemployment, courtesy of the 1940 Census and the subsequent Current Population Survey (CPS). (By “direct” I mean answers to questions about a worker’s time allocation during a specific period of time — if you did not have a job during the survey week, were you looking for one?)

Like all the estimates in the book, Lebergott’s unemployment figures were the product of detailed, painstaking work that, inevitably, required strong assumptions. The fundamental problem was that, if one wanted annual estimates of unemployment, there was no way to obtain these directly from survey evidence prior to the CPS. For some benchmark dates one could produce tolerable direct estimates from the federal census, but the federal census was useless if one wanted to generate an estimate, say, for 1893 or, for that matter, 1933.

Lebergott’s solution was to rely on an identity. By definition, the labor force was the sum of employed and unemployed workers. One might not know the number of unemployed workers but perhaps one could extrapolate between benchmark dates the number of workers in the labor force and employment, one could estimate unemployment levels via subtraction.

The first high profile controversy involved Lebergott’s estimates for the 1930s, which included in the count of unemployed workers persons on work relief. After 1933 there were many such workers, and so, by historical standards, unemployment looks, of course, rather high. This generated a lot of theoretical work for macroeconomists who thought they had to explain how unemployment rates could remain above 10 percent while real wages were rising (after 1933).

Michael Darby (1976) suggested that this effort was misplaced because Lebergott “should” have included the persons on work relief in the count of employed workers. Darby showed that doing so made the recovery after 1933 look much more normal. I’ve written a few papers on this issue, and my view is somewhere in-between Darby and Lebergott (Margo 1991; Finegan and Margo 1994; see also Kesselman and Savin 1978). Ideally, in constructing labor force statistics we should be consistent over time, so if persons on work relief were “employed” in the 1930s we should consider adding, say, “workfare” recipients to the labor force (or, possibly, prisoners making license plates) today, but this ideal may not be achievable in practice. The real issue with New Deal work relief is not the resolution of a crusty debate between competing macroeconomic theories but whether the program affected individual behavior. Here I think the answer is a resounding yes — unemployed individuals in the 1930s did respond to incentives built into New Deal policies. Wives were far more likely to be “added workers” if their unemployed spouses had no work whatsoever, than if the spouse held a work relief job, so much so that, in the aggregate, the added work effect disappeared entirely in the late 1930s, because so many unemployed men were on work relief.

The second high-profile debate involved Christina Romer’s important work on the long-term properties of the American business cycle. Prior to her work it was (and in some quarters still is) a “stylized fact” that the business cycle today is less volatile than it was in the past. Lebergott’s original unemployment series combined with standard post-war series were often used to buttress claims that the macroeconomy become much more stable over time. Statistical measures of volatility estimated from the combined series clearly suggest this, whether volatility is measured by the average “distance” (in percentage points) between peaks and troughs or standard deviations.

Romer (1986) argued that, to a large degree, this apparent decline in volatility was a figment of the way the original data were constructed. In particular, in constructing his annual series, Lebergott assumed (among other things) that deviations in employment followed one-for-one deviations in output. Romer invoked Okun’s law, arguing that the true relationship was more like 1:3. Constructing post-war series by replicating (as close as possible) Lebergott’s procedures produced a new series that was not less volatile than the pre-war series, thereby contradicting the stylized fact that the macroeconomy became more stable over time. This was, needless to say, a controversial conclusion, with many subsequently weighing in. Now that the dust is settled, my own view — a view I think that many share, although I could be wrong — is that there is definitely something to Romer’s argument; at the very least, she demonstrated (as she claimed in her original article) that before one draws conclusions from historical time series, one should be very familiar with how the series are constructed. Chapter Four ends with another of Lebergott’s meditations on the alleged constancy of aggregate parameters — in this case, factor shares.

Chapter Five (“Some Inferences”) concludes the narrative portion of the book. It repeats the book’s earlier mantra that “Yankee ingenuity” and initiative, especially that embodied in immigrants, were central to American success as opposed, say, to “factor endowments.” It ruminates on how highly mobile labor influenced the choice of technique, in ways familiar to the first generation of cliometricians, especially those who found H.J. Habakkuk a source of (repeated) inspiration. It notes how “thickening markets” made finding continuous work easier over time, reducing the wage premium associated with unemployment risk. Today’s economic historians, infatuated with “institutions” v. “geography” would probably disagree with the emphases in the chapter but I think there is much to admire in Lebergott’s “inferences.”

Some economic historians make their mark as much through their graduate students as their writings. Lebergott spent his academic career in a liberal arts college and did not, therefore, directly produce graduate students like a William Parker, Robert Fogel or (more recently) Joel Mokyr. In certain ways he was an outsider to economic history, an economist with a vast and deep appreciation for history in all of its flavors, who saw the past for what it can say about the present, not as an end in itself like a more “traditional” historian would. Compared with other classic works of cliometrics such as Fogel’s Railroads and American Economic Growth or North and Thomas’s The Rise of the Western World, Manpower‘s quirkiness can be a frustrating, more suitable for dabbling than a sustained read. By today’s standards the book falls short in its treatment of racial and ethnic differences (gender is more balanced) although this would hardly distinguish it from most other work in economics and economic history at the time. Yet Lebergott’s influence on economic history has been profound. There are few activities that economic historians can engage in of greater consequence than reconstructing the hard numbers. In this line of work Lebergott had few peers. Manpower put the labor force — people — at the center of economic history, not the bloodless “agents” of economic models but real people. As if to underscore this, the style asserts, like a triple fff in music: a real person not a (bloodless) “social scientist” wrote this book, one in deep and abiding awe of the economic accomplishment of his forbearers.

References:

Darby, Michael. 1976. “Three and a Half Million US Employees Have Been Mislaid: Or, An Explanation of Unemployment, 1934-1941,” Journal of Political Economy 84 (February): 1-16.

Finegan, T. Aldrich and Robert A. Margo. 1994. “Work Relief and the Labor Force Participation of Married Women in 1940,” Journal of Economic History 54 (March): 64-84.

Goldin, Claudia and Kenneth Sokoloff. 1982. “Women, Children, and Industrialization in the Early Republic: Evidence from the Manufacturing Censuses,” Journal of Economic History 42 (December): 741-774.

Kesselman, Jonathan R. and N. E. Savin. 1978. “Three and a Half Million Workers Were Never Lost,” Economic Inquiry 16 (April): 186-191.

Lebergott, Stanley. 1964. Manpower in Economic Growth: The American Record since 1800. New York: McGraw-Hill.

Lebergott, Stanley. 1986. “Comment,” in Stanley Engerman and Robert Gallman, eds., Long Term Factors in American Economic Growth, pp. 671-673. Chicago: University of Chicago Press.

Margo, Robert A. 1991 “The Microeconomics of Depression Unemployment,” Journal of Economic History 51 (June): 333-341.

Margo, Robert A. and Georgia Villaflor. 1987. “The Growth of Wages in Antebellum America: New Evidence,” Journal of Economic History 47 (December): 873-895.

Romer, Christina. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94 (February): 1-37.

Weiss, Thomas. 1986. “Revised Estimates of the United States Workforce, 1880-1860,” in Stanley Engerman and Robert Gallman, eds., Long Term Factors in American Economic Growth, pp.641-671. Chicago: University of Chicago Press.

Robert A. Margo is Professor of Economics and African-American Studies, Boston University, and Research Associate, National Bureau of Economic Research. He is also the editor of Explorations in Economic History.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Understanding the Process of Economic Change

Author(s):North, Douglass C.
Reviewer(s):Field, Alexander J.

Published by EH.NET (February 2005)

Douglass C. North, Understanding the Process of Economic Change. Princeton: Princeton University Press, 2005. xi + 187 pp. $29.95/?18.95 (hardcover), ISBN: 0-691-11805-1.

Reviewed for EH.NET by Alexander J. Field, Department of Economics, Santa Clara University.

Douglass North’s latest book addresses fundamental issues in understanding change and variation in economic performance. Early North (Davis and North, 1971; North and Thomas, 1973) treated institutional structures as epiphenomenal — largely reflective of resource endowments or available technologies. In later books (North 1981, 1990) his views evolved, acknowledging that some persisting rule structures might be dysfunctional, and that ideologies and social norms could play a role in explaining such outcomes. In this, his most recent book, he delves deeper, exploring the cognitive processes whereby individuals construct mental models of the world, and how such processes can, in the aggregate, influence economic performance.

Those familiar with North’s prior work on institutions will find that this contribution shares many characteristics. Although critical of economics as it is practiced, he never engages in a jeremiad. North wants to point the way forward rather than become mired in criticism, and as befits a Nobel Prize winner in economics, he has recruited and absorbed the ideas of many prominent scholars, both inside and outside the discipline. As in the earlier works, there is little original research reported here. This is a work of synthesis.

The book has two parts. The first addresses “Issues Involved in Understanding Economic Change,” and the second, presumably with no objections from Bill Gates, “The Road Ahead.” On the dustcover Barry Weingast describes the book as “vintage North.” When we refer to a vintage automobile, or vintage wine, we often refer to something with a provenance at least two or three decades earlier, and this characterization is most applicable to the second part of the book. For example, chapter 10, “The Rise of the Western World,” is largely derivative of arguments first advanced in the early 1970s. But Part I of the book contains generally newer material, and for those who have not been following the latest developments in North’s thinking, this is a good place to catch up.

More so than in North’s writings from the 1970s, the claims of the book are modest. In the preface the author asks rhetorically whether “we can develop a dynamic theory of change” and answers “probably not” (p. vii), claiming as his objective the old German objective of verstehen, or “understanding,” a word which also, of course, figures prominently in the book’s title. But “understanding” is not enough if we truly aspire to do social science. “Understanding” opens the door to “just so” stories that may be comforting and enjoyable to read, but have the appearance of giving us more insight than they do. One searches in vain in this book for hypotheses that could be tested against historical or contemporary data, and although North has, I think, situated the play in the right arena, he has done little to move the explanatory ball forward. Thus the book is ultimately disappointing for those seriously interested in these issues.

Let me briefly summarize what I see as our current state of knowledge. First, there are a number of universal features of human societies which almost certainly have a genetic substrate, either in terms of innate behavioral predispositions or differential preparedness to learn in certain directions. North seems to be on the same page here, acknowledging, for example that our abilities to cooperate in small groups, and our receptivity to religious/supernatural explanations have a biological basis (pp. viii-ix, 28-29, 45, 72). As is probably appropriate for a book of this scope, he avoids discussion of the processes or mechanisms of natural selection that would have been necessary for such predispositions to take hold.

Secondly, there is substantial variation in human culture, even where available technologies and resource endowments are similar, and such variation is consequential for economic performance. Third — and this for North is the new ground broken here — this variation reflects the consequences of different learning or acculturation, which results in different groups of people having different “mental models” of the world, particularly the world of human relationships.

Although I would probably choose somewhat different vocabulary from North, I’m with him on most of this. But for me, the frustrating feature of this book is that it does not really advance the discussion beyond this framing of the problem. Some of this is reflected in assertions that lack adequate substantiation. For example, a theme reiterated at several points is that “Problems posed by the transition of a belief system from one constructed to deal with the physical environment to one constructed to confront the complex problems of the human environment are at the core of the problems of economic development …” (pp. 44, see also p. 71). Are they? It’s not at all clear that the problems of navigating the human environment are fundamentally different from what they were two millennia ago or even earlier, one of the reasons students of politics and philosophy can still read with profit the writings of classical Greeks, or fifteenth-century Italians.

Another problematic area is the treatment of the cognitive sciences. North acknowledges lack of competence to choose among the various models of learning that have been set forth (p. 24), although he does seem to favor proponents of the neural networks or connectionist program. This approach attracted a great deal of excitement in the 1980s, but the enthusiasm for it, like that for the earlier AI (artificial intelligence) program, is now waning in many circles. If North is right about the importance of the formation of mental models in understanding economic change, we will have to be more definitive in making judgments about which seem to be the most promising lines of inquiry, and how specifically they can help us understand economic and political change.

North’s identification of the key issues that confront us is valuable, although some of the logic borders on the circular. For example, the “foundation of the study” (p. 36) seems to be the claim that societies that have successfully addressed big variations in their environment are likely to be able to successfully address big variations in their environment in the future, and therefore are likely to survive and prosper. Compared to earlier formulations there is novelty in identifying the mechanism for more flexible response in a population’s diversity of mental models of human interaction; this relates closely to the subsequent discussion of the benefits and costs of political conformity (p. 42) which is in turn linked to the role of political fragmentation in encouraging growth in the West that was prominently featured in North and Thomas (1973). But of course this is one of those statements that is true except when it is not, that is, when a previously diverse society becomes more ideologically conformist and less flexible. If we are to make progress, we are going to need to do better than simply offer ex post “understanding” of why such a change takes place.

Here is my most fundamental area of disagreement. North sees institutions “as an ongoing response to the … uncertainties that humans have confronted” (pp. 14-15). But institutions reflect more than this. They reflect the behavioral predispositions that make possible orderly interaction among humans, and some of these have little to do with uncertainty or strategies to reduce it. North’s framing of the problem comes from placing too much emphasis on the legacy of Herbert Simon’s work, particularly its emphasis on bounded rationality, as the most significant limitation to the rational choice approach. The Simon influence is reflected, for example in the statement that “If individuals have perfect perception, then there may not be any need for institutions even in the face of uncertainty” (p. 22)

Some of the most basic human predispositions, particularly those enabling orderly social interaction, have nothing to do with reducing uncertainty. Experimental evidence makes quite clear that some of us, some of the time, are prepared to cooperate in a one-shot prisoners’ dilemma, even though this represents the choice of a strictly dominated strategy, and even though the logic of choosing otherwise is completely independent of any uncertainty about what the counterparty will do. The willingness of substantial numbers of humans to violate the unambiguous predictions of game theory in both cooperating and in engaging in third party punishment underlies our ability to initiate and sustain social order.

It is true that we find throughout the book statements such as “Informal norms develop that blend the moral inference of genetic origin with the intentional aims of humans, which together provide the backbone of what we should mean by the term culture” (p. 42). But we also read that “If the highest rate of return is to piracy we can expect that the organizations will invest in skills and knowledge that make them better pirates” (p. 61). Well, not necessarily. If “informal norms … that blend the moral inference of genetic origin …” are strong enough, this won’t happen. The statement about piracy contributes no more to understanding an outcome than stating, as something so self evident that it requires no empirical validation, that if a player has a strictly dominant strategy she will play it. As the experimental evidence for PD games shows, this game theoretic conclusion may be quite unambiguous, but also, as an empirical matter, it is frequently wrong.

Here is another example: “the rash of entrepreneurial malfeasance in large U.S. corporations in 2001-02 has reflected the evolution of an institutional framework that has altered relative prices to provide incentives for such anti-social behavior” (p. 77). If the institutional framework is defined broadly enough so as to incorporate social norms and the mental models that undergird them, this cannot be wrong. But the statement gives us little insight into whether we should search for the explanation in some identifiable change in formal rules or whether this behavior reflected a broader cultural development.

Readers interested in North’s latest thinking about what sorts of issues we need to explore in understanding economic growth and development will find much in the book that is useful. Those looking to push out the frontiers of our scientific understanding will be disappointed. We face great challenges as well as opportunities in trying to make operational the types of explanations suggested by North’s roughly sketched out framework.

Alexander J. Field is the Michel and Mary Orradre Professor of Economics at Santa Clara University, and the author of Altruistically Inclined? The Behavioral Sciences, Evolutionary Theory, and the Origins of Reciprocity (University of Michigan Press, 2004, paperback).

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