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The Creative Society ? and the Price Americans Paid for It

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

Published by EH.Net (July 2012)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Creative Reconstructions: Multilateralism and European Varieties of Capitalism after 1950

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

Published by EH.Net (January 2012)

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

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

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

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

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

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

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

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

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

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

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

Economic Evolution and Revolution in Historical Time

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

Published by EH.Net (January 2012)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Published by EH.NET (September 2011)

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

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

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

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

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

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

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

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

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

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

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

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

Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke

Author(s):Axilrod, Stephen H.
Reviewer(s):Wood, John H.

Published by EH.NET (August 2011)

Stephen H. Axilrod, Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke (revised edition). Cambridge, MA: MIT Press, 2011. viii + 225 pp.? $25 (cloth), ISBN: 978-0-262-01562-2.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

This book is truly from ?inside the Fed.?? The author served the Board of Governors from 1952 to 1986, nearly half the time as senior advisor for monetary policy to chairmen Arthur Burns (1970-78), G. William Miller (1978-79), and Paul Volcker (1979-87).? He also observed William McChesney Martin, Jr. (1951-70) in action as chairman of the Federal Open Market Committee, and has kept in touch with the making of monetary policy under Alan Greenspan (1987-2006) and Ben Bernanke (since 2006).? Axilrod?s accounts of policymaking as seen from inside the Fed are interesting and informative, as are the ?anecdotes,? as he calls them, which reveal the personalities and methods of Fed chairmen, including their working relationships with advisors, fellow governors, and other central bankers.
Axilrod doesn?t deny that theory influences policy, but he suggests that the personal characteristics of chairmen and their sensitivities to the public and political circumstances are also important.? Burns, for example, was unable to deal effectively with the Great Inflation of the 1970s for several reasons.? Although he had been a student of the consistencies embodied in business cycles, he seemed to see ?each cyclical episode as embodying a unique set of events,? of which money was only one.? Rising inflation during 1974-77, when the real fed funds rate turned negative, caused the market to perceive ?that the Fed was doing too little to contain money growth to a pace that would significantly restrain inflation, and the institution?s anti-inflation credibility substantially eroded.?
Although Burns possessed substantial persuasive powers in small groups, aided by an explosive temper, his effectiveness as inflation-fighter was hampered by his inability even ?to attempt to exercise powers of persuasion and logic dramatically and compellingly enough in public speeches and congressional testimony so as to evoke the public support that might have made it easier for the Fed itself to pursue a stronger anti-inflationary policy.?? Such a ?task may seem too Herculean,? but it should be remembered that Volcker?s shift was only a year or two in the future, and Burns had a president in Gerald Ford who probably would have supported a genuine attack on inflation (which the Whip Inflation Now ? WIN ? campaign against greed was not).? Burns was further limited by his lack of a potentially persuasive policy, of something more than a maneuver ?inside the box.?
Paul Volcker, on the other hand, ?combined great sensitivity to shifting trends in political economy (he could see what the country would now accept) with a willingness to take dramatic action,? and see it through.? When a New York Fed official said ?the Fed was in the process of ?experimenting? with a new approach to policy [as it shifted from interest-rate to money targeting], Volcker … went ballistic …. The idea of an ?experiment? was anathema to him because it suggested a lack of conviction at the Fed and would most certainly not help us regain market credibility.?? Some of this might be hindsight on Axilrod?s part, but he had no difficulty finding concerns for credibility among successful Fed chairman such as Martin, Volcker, and the early Greenspan before it became a part of economic models.
He does not give high grades to Bernanke or the later Greenspan in this respect.? He shares what might be the consensus belief that the Fed contributed to the recent crisis.? Its opposition to inflation seemed half-hearted after 1998, and belief in the Greenspan-put — that the Fed would underwrite the large risks being taken — contributed to its loss of credibility, Axilrod believes.
Bernanke inherited a difficult situation and didn?t improve on it.? The Fed seemed unaware of speculative and inflationary pressures, and the real fed funds rate became negative before the Fed belatedly shifted to tight money.? Its reactions to the crisis were unusual, and how it will deal with its gargantuan balance sheet is unknown.? There may ?be no very significant technical difficulties in either reining in the monetary base or at least minimizing the extent to which some larger than normal monetary base can be transformed into excess public liquidity.? But the Fed?s ability to undertake effective monetary policies in so complicated and uncertain a transition requires more than technical capacity.? It also requires from its chairmen … a public stature that enables him to perform effectively on the national stage, [which] does not yet seem to be firmly within Bernanke?s grasp.????
?My experiences at the Fed suggest that a great leader for monetary policy is differentiated not especially by economic sophistication, but by his or her ability to perceive when social and political limits can and should be placed to make space for a significant, paradigmatic change in the approach to policy should it be required, as well as by the courage and bureaucratic moxie to pull it off.?? ?Native good judgment and plain old common sense,? as well as ?an intuitive feel for markets,? are also important.
He gives no formal ranking of the chairmen, but there is no doubt that Volcker would be at the top of his list, probably with Martin second, although the latter had no ?powerful, dramatic crises to deal with.?
Unsurprising in a ?lifer,? Axilrod?s stories of people and policies at the Fed reveal institutional beliefs that might improve our understanding of American monetary policy.? One belief that has often found expression among the governors and the staff is that the Fed is fighting inflation, which is hard to swallow when we know that inflation is fully explained by the Fed?s injections of reserves.? Statements to this effect possess the characteristics of a state of denial in an organization that has caused the greatest inflation in U.S. history, and make sense only if it means that the fight is against other, primarily political, interests for the independence to conduct a stable price policy.? There is even less reason, in light of his delivery of inflation leading up to the 1972 election, to call Burns ?unfortunate in the particular decade, the 1970s, where fate placed him as chairman … in years of quite strong inflationary winds.?? The relatively stable conditions in Martin?s term might not have been all luck. ???
One reason why the governors and senior staff have resisted academic influence is the Fed?s immersion in the money markets that are barely evident in economic theories.? The groups have different models for different interests.? There has been a circle-the-wagons reaction to the nearly universal academic disapproval of monetary policy during most of the postwar period.? Axilrod?s recollections in this area are ambivalent.? In the early 1960s, he believed that monetarist Karl Brunner?s description of the Fed?s control of the money stock ?was telling us nothing that we didn?t already know.?? However, Axilrod?s account of the Fed?s growing interest in money seemed to reflect a similar development among economists.?

Whatever the intellectual causes and effects between academia and the Fed — I believe each underrates the other — Axilrod?s bilingual discussion of the development of monetary policy over time, particularly the logical and empirical connections between money and credit, is a genuine contribution to our understanding of monetary policy and the institution that makes it.?

This book by a uniquely placed participant is an interesting and informative read on its own, but those who would like to learn more about Axilrod and his times are advised to read some of the many writings that offer different perspectives of the same events, for example, Allan Meltzer, who confirms Axilrod?s warnings about lagged reserve accounting when it was adopted (A History of the Federal Reserve); the Bank of England?s Charles Goodhart, who gives Axilrod an almost equal share with Volcker for the 1979 policy shift and calls him the second most important person at the Fed, (?Review,? Economica, Jan. 2011); and William Greider, who wrote that Chairman Miller?s lack of expertise made Axilrod ?an extraordinarily powerful bureaucrat.? Axilrod contradicts this by saying that the staff tended to have ?more influence when the chairman was strong than when he was not. … I always had the feeling that in Miller?s time … my views? were received ?with a bit less intensity.?? An author and defender of the modified monetarist model that replaced interest targeting in 1979, Axilrod finds no sense in the statements ?by a policymaker or two [that] the new policy was simply a cover so that the Fed could raise interest rates while ducking direct responsibility.?? It should be noted that one of the offending parties was Volcker (Volcker and Tyoo Gyohten, Changing Fortunes).

John H. Wood, Reynolds Professor of Economics, Wake Forest University,, is the author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005) and A History of Macroeconomic Policy in the United States (Routledge, 2009). A current research project connects the economics and politics of William McChesney Martin, Jr. at the Fed and as president of the New York Stock Exchange. His Federal Reserve experience has been as a fellowship student at the Federal Reserve Bank of Chicago for two summers, an economist at the Board for three years and the Federal Reserve Bank of Dallas for two years, and further visits at the Federal Reserve Banks of Dallas, Chicago and Philadelphia.? He remembers looking down enviously from his window in the Flow-of-Funds section at the noon tennis match of which Axilrod writes, although he eventually got a chance with the afternoon group formed by Dewey Daane when he joined the Board.

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

The Big Ditch: How America Took, Ran, and Ultimately Gave Away the Panama Canal

Author(s):Maurer, Noel
Yu, Carlos
Reviewer(s):Arroyo Abad, Leticia

Published by EH.NET (June 2011)

Noel Maurer and Carlos Yu, The Big Ditch: How America Took, Ran, and Ultimately Gave Away the Panama Canal. Princeton: Princeton University Press, 2010.? xv + 420 pp. $35 (hardcover), ISBN: 978-0-691-14738-3.

Reviewed for EH.Net by Leticia Arroyo Abad, Department of Economics, Middlebury College.

In The Big Ditch, Maurer and Yu offer an exciting analysis of the creation and development of one of the masterpieces of engineering: the Big Ditch, i.e. Panama Canal. Until now, the literature fell into two dominant views: the Canal as a great waterway or as a reminder of American imperialism. By reconciling both perspectives, the authors successfully show that this imperialistic act was indeed profitable while exploring the crucial factors to the abandonment of this imperial operation. Integrating thorough quantitative evidence with engaging historical narrative, this work is a crucial contribution to the new political economy of Latin America and to the economics of colonialism.

The dimensions of the Panama Canal project are hard to grasp. Fortunately, the authors successfully portray the immensity of this enterprise. This undertaking effectively took eighteen years to complete, employed at its peak over 45,000 employees in a tiered system, displaced around 12,000 inhabitants of the Chagres basin, and dug out millions of metric tons of dirt. All for a tag price of 9 billion dollars (2009 prices).

From a methodological view, the authors cleverly combine analytical narratives using rational choice assumptions together with social savings calculations ? la Fogel. To estimate the social savings, Maurer and Yu use counterfactual analysis or ?economics by strategic bombing force? (p. 48). By comparing the costs under the non-existence of the Canal to the actual cash flow generated by it, they conclude that while during the first year of operation the project merely yielded 2.9% of return, the following year it exceeded 10%. The bulk of these savings were due to the dramatic decline of intercoastal freight rates leading to a ?transportation revolution? (p. 145). As such, the authors claim that the rents from this imperial initiative had a broad base: American consumers. Yet, the benefits to Panamanians were limited.

The book also takes into account the impact of the Canal on Panama. Before the Canal?s inauguration, Panamanians? optimism was palpable. This impressive engineering marvel was supposed to be Panama?s ticket to growth and development. This promise failed to materialize as the U.S. devised explicit policies to restrict Panamanian access to the Canal project. These measures ranged from the import of cheap foreign labor to the establishment of the Commissary. This institution was initially in charge of feeding and housing the workforce, but then extended its activities to the sale of general goods and supplies to passing ships. Numerous complaints from the Panamanian government and merchants proved unsuccessful. The local economy had little chance to compete with imported goods, exempted from tariffs or taxes, which enjoyed preferential shipping costs. An unintended benefit arose from this institution as imported goods trickled down through the black market to the domestic economy at convenient prices.

While the Canal did not contribute to the development of the domestic economy, the authors ask whether favorable influence may be found elsewhere. Panama under the tutelage of the American empire could have benefited from improvement in institutions. Had the U.S. made property rights more secure and increased the stability of the country, Panama could have achieved a higher rate of investment at lower interest rates. As a consequence we would expect a significant reduction in the cost of capital due to the consistent and deep U.S. intervention in Panamanian domestic affairs.? However, the evidence suggests that the ?empire effect? was virtually nonexistent in this case. In the end, the benefits to Panama were reduced to health improvements due to the eradication of malaria and yellow fever.

While the end of World War II substantially changed the net benefits of the Canal project, the authors argue that even during the war the Canal?s relevance has been overstated. By exploring potential American costs in the absence of this alternative waterway, the evidence indicates the Canal was not too valuable from an economic or military point of view. In addition, the enlargement of military vessels and the expansion of the U.S. strategic needs from two to five oceans further diminished the Big Ditch?s value. The social savings further declined with the sharp drop in the domestic freight costs. The consolidation of trucking-based transportation rooted in the development of the highway system and containerization outstripped the initial comparative advantage of the Canal.

From an economic standpoint, Maurer and Yu show that the Canal made little sense after World War II; however, politically it proved to be difficult to ditch the Ditch. It was not until 1977, under President Carter, that the Panama Canal Treaty was signed leading to the handover of the Canal in 1999 with U.S. participation in a special regulatory commission. The Panamanians were widely in favor of the Treaty manifested in two-thirds support in a national plebiscite.

From a key asset in economic and national security to a liability, the history of the Panama Canal supplies a long-run example of the ever-changing costs and benefits associated with imperial endeavors. We learn how economic and institutional constraints changed over time affecting the net benefit of this imperial endeavor. Judged by social savings, America?s engineering marvel was good business, yielding a 6.4% return for the first two decades. The Big Ditch shows us that this project was not as revolutionary as other public enterprises but still quite useful to the U.S. For Panama, the imperial legacy is restricted to health improvements with no clear favorable institutional development. Overall, this book teaches us important lessons on the global consequences of imperial ventures with particular insights on institutional development, economic and political constraints and power.

Leticia Arroyo Abad is an assistant professor in Economics at Middlebury College. She works on inequality and standards of living in Latin America since colonial times.

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

Subject(s):Economywide Country Studies and Comparative History
Historical Geography
Transport and Distribution, Energy, and Other Services
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

American Power and Policy

Author(s):Leeson, Robert
Reviewer(s):Domitrovic, Brian

Published by EH.NET (June 2011)

Robert Leeson, editor, American Power and Policy. New York: Palgrave Macmillan, 2009. viii + 278 pp. $100 (hardcover), ISBN: 978-1-4039-4956-1.

Reviewed for EH.Net by Brian Domitrovic, Department of History, Sam Houston State University.

If somehow one could concoct a ratio between the amount of economics and the amount of business in a given time and place, one thing would be clear. The ratio as it ran from the nineteenth to the twentieth century in the Anglophone world would take the shape of a hockey stick.

There was economics in the nineteenth century, to be sure, but it was an episodic and essayistic (if often luminous) affair. Business, however, was going absolutely gangbusters in Britain and the United States. In the first half of twentieth century, roles reversed. Economic growth met with variability, and economics exploded.

Why economics mushroomed in the twentieth century is an imperative historical question on several grounds. The phenomenon was large; it was sophisticated; and most probably, it was consequential. Getting a bead on the enormity of this discipline?s tremendous rise is very much not a trivial preoccupation, and it is in this spirit that Robert Leeson?s new edited collection in the series Archival Insights into the Evolution of Economics must be welcomed.

American Power and Policy is a compendium of case studies of some half-dozen major economists who broadly speaking put themselves in the public service in the 1930s and 1940s, though there is some treatment of the decades that follow. Some of the names are familiar (Marriner Eccles, Harry Dexter White), while others ring bells (Jacob Viner, Allyn Young, John H. Williams). The recurrent theme, one might say the pulse of the book, is that every one of these people was ensconced at the top places, from the premier universities, typically Harvard, to governmental posts near the pinnacle of power and influence. As Paul Samuelson said (if inexplicably) of one of influentials here canvassed, ?The world owes Lauchlin Currie a great debt. … Hail Caesar! Hail Nestor!? (p. 106)

Arguably the most important figure in the book is not one of the chapter subjects, but a recurrent name across the volume: Frank Taussig. Taussig, as American Economic Power and Policy repeatedly infers, was the anchor of the Harvard department which eventually did so much to place economists in positions of prominence. The other major force in the department was Young, an AEA president and (while at Cornell) Frank Knight?s advisor. Young remains unfamiliar to us only because his profound influence was mainly felt in the classroom. These two mentored any number of the high economic practitioners of the New Deal and Bretton Woods, above all Currie (who established the prototype of the CEA chair) and White (who, we learn to our amazement, failed his generals).

It was Taussig who over his long career bestrode the two vastly different worlds of economics — that of the nineteenth and twentieth centuries. In Taussig?s initial heyday, as he composed the Tariff History of the United States in the 1880s, the economist was very much a scribe who rather sat at the feet of businessmen and politicians and recorded the methods of their operations, if offering sage advice and abstracting a theory here and there. This was the golden era of historical political economy.

Yet the department in which Taussig was the grand old man four and five decades later was one which deliberately sought to rush its charges into the power nexus of the economy in order to perform emergency surgery, indeed to assume the role of prime mover. Clearly the Great War and the onset of the Depression had much to do with this remarkable turn of events, but there is more to it than that. The sense that haunts this volume is that the crisis years of 1919-1933 are when the profession realized that it could seize the moment; in turn, the profession proved that it had the outsized ambition required to do just that.

Economists, like scientists, have often taken a dismissive view toward archival research. If something is important and intellectually legitimate, surely it is in the published articles, the argument runs. This view has begun to lose its grip among economists, however, what with the exertions of the journal History of Political Economy and the enormous Economists? Papers Project at Duke University.

American Power and Policy does this change-of-heart good by identifying certain unpublished insights from these economists that ended up being remarkably prescient –and unheeded. In one exchange of letters between Viner and Keynes, the two agree in 1943 that the abundant talk of a dollar shortage was unfounded, and that the real problem that would stalk the world not on a full gold standard was inflation. This view was vindicated by events.

Then there is the exchange between Williams and Keynes (reprinted in the book), also of 1943, in which the former contends that in the postwar world, the United States will be disinclined to conduct economic policy such that domestic stability correlates with international equilibrium. In a few years, this view would be codified in the Triffin dilemma, the Samuelson-Tobin synthesis, and the ?impossible trinity.?

During a brief chapter on the 1970s, an archival source of Arthur Okun is quoted as follows: ?During those good old days, U.S. performance fit the Phillips curve like a glove!? (p. 99). The quotation is telling, in that it indicates the incredible primacy that theory had achieved by the latter decades of the twentieth century. Economic cogitation had become so developed, sophisticated, and institutionalized that it could became a source of disappointment — if not angst — if practical developments made favorite theories inoperative.

Okun could have only thrived in the 1960s and 1970s. A figure with experience at a top university (Yale), a top governmental post (CEA chair), and a top institution (Brookings) getting melancholy about the decline of a theory on account of news from the realm of the hurly-burly was unthinkable among economists of Frank Taussig?s early years. Yet somehow, within three quarters of the century — and ultimately this is the origin of this book?s fascination — economists had reached a point where as intellectuals they could make demands on the world of affairs.

Brian Domitrovic teaches at Sam Houston State University and is author of the history of supply-side economics, Econoclasts (2009).

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

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

The Illusion of Free Markets: Punishment and the Myth of Natural Order

Author(s):Harcourt, Bernard E.
Reviewer(s):D'Amico, Daniel J.

Published by EH.NET (April 2011)

Bernard E. Harcourt, The Illusion of Free Markets: Punishment and the Myth of Natural Order. Cambridge, MA: Harvard University Press, 2011. 328 pp. $30 (hardcover), ISBN: 978-0-674-05726-5.

Reviewed for EH.Net by Daniel J. D’Amico, Department of Economics, Loyola University (New Orleans).

The Illusion of Free Markets is a fascinating attempt to understand public policy. There are both effective and ineffective responses to social problems. Human welfare requires interpreting complex social phenomena and affecting social change. To be fooled by an illusion is to be guided by a bad map.

Neoclassical models of political economy distinguish between markets and governments. Markets are presumed efficient when producing and allocating resources, but in some institutional environments, where property rights are poorly defined and information asymmetric, said to fail. Governments are presumed necessary and sufficient to solve market failures. Society suffers when either problem is misdiagnosed and/or either solution incorrectly prescribed. Bernard Harcourt thinks markets have been overrated. Histories of penology and economic thought help correct this.

The market versus government dichotomy dates to the classical school, when economists thought in terms of natural law. Markets were called natural because the price system is self-adjusting and socially coordinative. Neither shortages nor surpluses persist because prices change on the margin. Self-interest guides social welfare “as if by an invisible hand.” While economists favor markets because they produce and distribute tangible wealth, Harcourt is concerned that they under account social costs. In particular, natural law has supposedly borne complex consequences upon American criminal justice.

Markets were heavily regulated during the time of the classical school. Detailed codes of conduct governed all manner of commercial trade. Harcourt observes that Adam Smith and other classicals used the term ?policing? to refer to both commercial and criminal regulations. Harcourt prefers Foucault’s focus upon discipline over economists’ hard dichotomy. Historically, both markets and governments regulated behavior. Both were backed by physical punishments. The market was as disciplinarian as the state.

Harcourt is concerned, and rightly so, with features of American criminal justice. It appears racially biased, excessively severe and uniquely modern. He argues that these are the theoretical consequences of applied natural law. His historical narrative suggests that as the commercial realm was deregulated, disciplinary resources were directed into the penal sphere. Markets were presumed to be self-regulating, which drove a conceptual schism between lawful market behaviors and unnatural criminal actions. Theorists underrecognize the costs of social change invoked by deregulation because they presume the market natural. Today’s penal excesses are the presumed result of a growing network of anonymous contracts. Harcourt’s message: the notion that markets are free from coercion is an illusion, both yesterday and today. Privatization and deregulation are insufficient policy solutions to mass incarceration.

Harcourt’s comments are a welcome update to neoclassical orthodoxy, which has failed to give an explanation or policy reaction to mass incarceration. If one looks — as Foucault would suggest –? at different enforcement techniques (physical punishment versus torts and fines) used within the different legal spheres (criminal versus civil); or if one looks at the historical specialization of those techniques across those legal spheres, one notices the world is a very different place than it used to be.

Today the market versus government distinction parallels the civil and criminal law. Contract enforcements are maintained by the civil law. Criminal laws are enforced by incarceration. These separate legal spheres were not always distinct, nor were their enforcement resources specialized. Originally there was no criminal law. Physical punishments, such as arrest and jailing, facilitated market exchanges and resolved civil disputes; afterwards a separate criminal law developed. Then physical punishments became more reserved to enforce against crime.

Harcourt argues the doctrine of natural law ushered this process, and led to problematic criminal justice outcomes. Alternatively, Foucault’s historical perspective compliments an Austrian and Public Choice framework of political economy. Neither markets nor governments should be presumed to resolve each other’s failures. The efficient-market hypothesis and traditional public goods theory both risk misguidance by illusion. Enforcement technology is an important focus in so far as it affects the production and distribution of knowledge and incentives.

Austrian political economy emphasizes the distribution of economic knowledge throughout society. Governments differ from markets in how they produce and distribute economic knowledge — who, what, how, when and where to make and distribute goods. Public Choice political economy emphasizes the incentives that affect rational choice. Bureaucracies produce systematically different incentives than do for-profit markets.

An Austro-Public Choice political economy insists upon the behavioral assumptions applied to governments and markets being symmetrical. Neither market nor government decision-makers are perfectly informed nor perfectly incentivized to accomplish goals. The subsidy and administration of criminal punishments yesterday and today appear not to be an exception.

Harcourt interprets history as a slight against the characterization of commerce as non-coercive. Foucault says markets are disciplinary. Though not emphasized by Harcourt, the inverse also seems true. The history of physical punishments within the market sphere weakens the characterization of governments as particularly necessary for optimal criminal punishment. Presuming criminal punishment a public good may be just as illusionary.

When markets wielded physical punishments they appeared constrained from excess by the self-interests of disputants. Conflicts among traders were self-sorted for profit seekers. Punitive threats made compliance with financial and service court rulings more appealing. Contract violators were inclined to settle and civil plaintiffs sought tangible compensation for loss.

Contemporary criminal justice problems coincide with expanded market economies and decentralized government in the market sphere. An Austro-Public Choice perspective must reference how changes in knowledge and incentives yield such outcomes. On net federal government has grown, as has its role within the criminal justice system in conjunction with mass incarceration’s disconcerting results.

Physical punishment has become relegated to the enforcement of criminal law. Though contrary to Harcourt’s narrative, driven by the segregationist logic of natural law, this can be seen as driven by the self-interests of market and government actors. While market traders sought low cost and quantitatively predictable methods to resolve conflict, government capitalized as the monopoly provider of physical enforcements.

Today’s greater quantities of physical enforcement are not deployed to enforce civil contracts or tort compliance. Drug and immigration violators occupy most new prison space, unlikely prohibited by contract law. Rather than necessary and sufficient, democracy has proven ineffective to correct the racial, generational, gender, and substance-abuse disproportionality of criminal sentencing. Policy makers have little incentive to change such policies and ordinary citizens lack the necessary knowledge to implement institutional reform.

Daniel J. D’Amico is the author of “The Prison in Economics: Private and Public Incarceration in Ancient Greece,” in Public Choice. He is currently engaged in a long-term research project focused upon the political economy of mass incarceration.

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

Subject(s):Government, Law and Regulation, Public Finance
History of Economic Thought; Methodology
Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Capital and the Colonies: London and the Atlantic Economy, 1660-1700

Author(s):Zahedieh, Nuala
Reviewer(s):Walsh, Lorena S.

Published by EH.Net (February 2011)

Nuala Zahedieh, The Capital and the Colonies: London and the Atlantic Economy, 1660-1700. Cambridge: Cambridge University Press, 2010. xvii + 329 pp. $95 (hardcover), ISBN: 978-0-521-51423-1.

Reviewed for EH.Net by Lorena S. Walsh, Colonial Williamsburg Foundation (retired).

Several recent investigations of early modern economic growth have emphasized the critical importance of overseas expansion — especially the rise of Atlantic commerce — in encouraging economic development and in inducing institutional changes initiated by new mercantile groups operating outside of royal circles (e.g., Robert C. Brenner, Merchants and Revolution: Commercial Change, Political Conflict, and London?s Overseas Traders, 1550-1653 [Cambridge, 1993]; Kenneth Pomeranz, The Great Divergence: China, Europe, and the Making of the Modern World Economy [Princeton, 2000], and Daron Acemoglu, Simon Johnson, and James Robinson, ?The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth,? American Economic Review, 95 (2005), 546-579).? Some have also stressed the dynamic role of Atlantic port cities, London in particular, in bringing together strategically favorable combinations of financial and commercial expertise; skilled, well-paid workforces; and high levels of demand for food, fuel, manufactured goods, and new tropical products (e.g., Robert C. Allen, The British Industrial Revolution in Global Perspective [Cambridge, 2009]; and Acemoglu, et al, ?Rise of Europe?).

Nuala Zahedieh, a senior lecturer in economic and social history at the University of Edinburgh, provides a masterful account of Londoners? central role in facilitating economic development in the later seventeenth century that integrates literatures on colonial empire, commerce, the consumer revolution, and the Industrial Revolution.? A main focus of research is how merchants ?responded to the opportunities and challenges? offered by Britain?s early overseas expansion ?and set in place a durable mercantile system which underpinned both extensive and intensive growth and made the Industrial Revolution more likely?(p. 3).? She sees the later seventeenth century as a critical period when ?the rules of the game were established and the incentive structure that shaped investment and the accumulation of financial and human capital took lasting form?(p. 7).? Readers will find her discussion of the mercantilist system familiar, but less so her argument (developed from long years of research on colonial, especially West Indies, trade) that the seventeenth-century state ?did not have the resources to enforce commercial legislation which seriously raised private costs,? leading her to take evidence of general compliance with the Navigation Acts by the 1680s as ?a measure of increasing convergence between English and Dutch commercial capabilities and costs rather than as a forced shift towards inefficient providers?(pp. 6-7).?

Scholars? relative neglect of London?s later seventeenth-century commerce is understandable given the scarcity of aggregated commercial statistics, the loss of many London portbooks, and the daunting volume of those that have survived.? The Capital and the Colonies employs a systematic analysis of portbooks for 1686 (a peacetime year for which the records survive in full) and more limited samples of data from the 1660s and c. 1700 to provide a detailed statistical portrait of London?s Atlantic trade.? In addition to data on exports and imports, Zahedieh compiled a biographical database of colonial merchants identified in the 1686 portbooks which she uses to trace their careers and trading networks.? Less systematic research in mercantile papers and court records, promotional tracts, and economic literature supplements the portbook materials.? Extensive period illustrations of metropolitan and colonial cityscapes, public and commercial buildings, mercantile publications, ships, manufactories, and plantations lend visual concreteness to the text.

London was unique among European cities in the size of its population and manufacturing sector, its concentration of national political and legal institutions, and in its possession of three quarters of the nation?s merchant fleet, including most shipping devoted to lucrative West Indian and African commerce.? Atlantic trade not only constituted a growing proportion of overall trade, but, Zahedieh argues, had a qualitative significance beyond its actual volume and value in that it encouraged diversification in manufacturing and provided a high proportion of commodities traded in the new re-export sector, enabling London to challenge Amsterdam as Europe?s main redistribution center.

Colonial commerce was distinctive in its competitiveness, in its high transactions costs, and in its requirements for long credits and a high volume of shipping.? These characteristics all encouraged efficiency gains from take-up of best practices and from innovation. The trade was open, unregulated, and conducted by individuals rather than corporations.? As a result it stimulated modernized mercantile education, new associational activities, strenuous efforts to reduce transactions costs (including improvements in sorting, marketing, processing, and distribution of colonial products), and more effective solutions to risk mitigation and problems of trust and poor information (e.g., partnerships, marine insurance, bills of exchange, published price-currents, and multilateral settlements).?

Zahedieh finds increasing concentration of plantation commerce among large merchants specializing in particular commodities and regions in the 1680s, when falling commodity prices and increased taxes eroded profit margins and drove out small traders.? Colonial merchants seldom invested in overseas property, but made a massive contribution to expansion of empire in the form of short-term credit extended to settlers. The larger operators accumulated enough capital to diversify investment into shipbuilding, slave-trading, joint-stocks, insurance, wharves, industry, landed property, loans, and public credit. This decade was a turning point, as merchant concentration and specialization led to improved productivity, economies of scale, and reduced costs.? Zahedieh portrays the attempts of the later Stuarts to corner the profits of empire by restricting free trade among Englishmen as having limited success.? On the other hand, she sees the effect of the Glorious Revolution, not as leading to an economically optimal political arrangement, but as consolidating the capacity of the transatlantic trading elite to enforce regulation in its own interests and enhance ?the value and scale of rent-seeking enterprises at the expense of competition and efficiency? (p. 127), leading to a period of slower growth in colonial trade and shipping at the end of the century.

Unlike trade with Europe, colonial commerce required an unusually large fixed capital investment in the greater tonnage needed to transport large volumes of bulky goods over long distances.? Zahedieh argues that English- and plantation-built ships were better suited to most colonial commerce than were Dutch prototypes, and that it was long-distance commerce, rather than the protection of the Navigation Acts, that revived the English shipbuilding industry.? By 1700 plantation shipping accounted for 40% of London?s overseas trading capacity. Atlantic trade led as well to increased education among mariners in mathematical, mechanical and managerial skills, and expanded the market for navigational instruments.? It also contributed to London?s prosperity by stimulating the construction of wharfs and warehouses, and increasing the scale of naval refitting, repair, and provisioning trades.? Although technology and unit input costs were fairly stable across the period, increased volumes and growing experience with colonial conditions led to organizational improvements which made more efficient use of inputs. Greater awareness of seasonality and the accompanying need for careful timing, along with standardized containers, greater use of marine insurance, and the development of multilateral voyages all led to fuller use of shipping capacity and to reduced costs.

The volume of colonial imports more than trebled between the 1660s and 1700, when they accounted for a fifth of London?s inward trade and a third of its re-export trade to Europe.? And, as Zahedieh?s discussions of the fish, fur, timber, tobacco, sugar, cotton, and dye-stuffs trades demonstrate, merchants achieved efficiency gains in both production and distribution. Plantation products provided incentives to invest in improving skills, techniques, commercial infrastructure, and organization of industry, intensifying use of resources and strengthening manufacturing capacities.? Colonial imports proved a catalyst in changing domestic consumption patterns.? Innovations in retailing expanded aggregate demand, while availability of alternative beverages to beer, such as tea and coffee, along with increased use of sugar in alcoholic drinks and as a food preservative, reduced pressure on the nation?s grain supply.? Colonial imports also supplied industrial raw materials and provided a surplus of exotic commodities that were re-exported to pay for European goods.? Their prominence in domestic trade induced investment in an improved national transport network that reduced not just the cost of plantation products for British consumers, but also the cost of bringing goods to the metropolis.? Processing of colonial products, reserved by the Navigation Acts for the mother country and aided by access to skilled workers and cheap fuels in the metropolis, promoted diversification of the capital?s manufacturing sector.?

Zahedieh considers London?s export trade with colonies — which, fueled by colonists? voracious appetite for English goods and services, grew faster between 1660 and 1700 than did imports — to be equally influential as imports in driving expansion and change.? Included and valued in Zahedieh?s survey are the trades in servants and slaves and freight earnings, exports not listed in the portbooks.? Due to limited markets, high labor costs and skills shortage — rather than mercantilist regulations — colonists remained dependent on the mother country for most manufactures.? The high profits merchants could earn in this most profitable branch of colonial commerce ?focused entrepreneurial attention on different problems from those facing the high-fashion, high-cost, craft industries catering for the London elites? (p. 276).?? Making goods for distant American and African markets encouraged restructuring of industries around bulk production at low unit cost, while the growing re-export trade encouraged investment in new processing industries.? A surge in colonial demand in the late seventeenth century had a radical impact of the volume and character of the English export trade away from traditional wool fabrics to a wider array of textiles and ready-to-wear clothes, as well as metalwares, miscellaneous manufactures, and foods.

This sophisticated study in Atlantic economic history will interest metropolitan and colonial as well as Atlantic scholars, challenging them to take more account of the feedback effects and linkages for economic growth generated by overseas expansion, and the potential role of competitive long-distance trade in a wide array of ostensibly mundane commodities in helping to precipitate the Industrial Revolution.

??? ?
Lorena S. Walsh is the author of Motives of Honor, Pleasure and Profit: Plantation Management in the Colonial Chesapeake, 1607-1763 (Chapel Hill: University of North Carolina Press, 2010).

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

Subject(s):International and Domestic Trade and Relations
Markets and Institutions
Geographic Area(s):Europe
North America
Time Period(s):17th Century

Power and the Governance of Global Trade: From the GATT to the WTO

Author(s):Kim, Soo Yeon
Reviewer(s):Dalton, John T.

Published by EH.NET (December 2010)

Soo Yeon Kim, Power and the Governance of Global Trade: From the GATT to the WTO.? Ithaca, NY:? Cornell University Press, 2010.? xi + 182 pp.? $40 (hardcover), ISBN: 978-0-8014-4886-7.

Reviewed for EH.Net by John T. Dalton, Department of Economics, Wake Forest University.

Commodore Perry.? The Opium Wars.? These two hackneyed examples from the historical record have come to symbolize what Jacob Viner referred to as the interdependence of ?Power? and ?Plenty.?? Both political power and economic considerations determine a state?s incentives and capacity constraints when acting on the world stage.? The distribution of incentives and capacity constraints across states then influences the emergence of commercial contours throughout the globe.? Potential feedback occurs.

In her new book, Soo Yeon Kim, Assistant Professor of Government and Politics at the University of Maryland, analyzes the Vinerian interdependence in the case of global trade patterns during the Pax Americana.? She asks two questions.? First, how did the institutional form of the GATT and WTO emerge?? Second, given this form, are the benefits, as measured by increased trade, to GATT and WTO membership skewed in favor of some countries over others?? The first answer is unsurprising, the second less so.?

Kim?s book consists of two parts, each structured around answering one of her two main questions.? Part of the book?s methodological contribution relates to this division.? The first part of the book uses qualitative analysis to answer the first question about the emergence of the GATT and WTO.? The second part of the book incorporates quantitative methods to measure the impact of GATT and WTO membership on the growth of trade.? This methodological mix contributes mightily to the persuasiveness of Kim?s argument and also ensures the book?s wider appeal to a variety of scholars.? Each part can stand alone if the reader so chooses (indeed, one of the two chapters in the second part is based on a previously published article appearing in World Politics), but taking in the complete product is the more satisfying experience.

Kim?s answer for why the GATT and WTO emerged the way they did will ring familiar for scholars in political economy.? After the power vacuum created by two world wars, the U.S. emerged as the sole economic and political power among industrialized economies.? The architecture supporting the global economy after World War II, including those traditionally cited institutions as the IMF, World Bank, and GATT, was fundamentally shaped by U.S. interests.? These interests were not adopted out of enlightened benevolence but rather out of domestic considerations and the looming fear of cold war.? Kim provides an analytical framework for understanding the role of U.S. interests in the creation of the GATT and highlights numerous incidences in the evolution of the GATT as supporting evidence for this framework.? This part of the book provides a concise overview of the key forces explaining the evolution of the GATT and how these forces continue to define the areas of conflict between WTO members to this day.? Kim?s lucid prose makes the discussion readily accessible to most audiences, and I highly recommend the first part of the book as a source for teaching undergraduates the history of the GATT and WTO.

The case of agriculture exemplifies well the impact of U.S. interests on the GATT and its lasting consequences for global trade patterns.? To be brief, in 1955 the U.S. obtained a waiver to its obligations to reduce barriers on agricultural imports.? Demand for the waiver was a direct consequence of domestic interests seeking extension of protection granted under the U.S. Agricultural Adjustment Act.? The unintended consequence of the U.S. exerting its power to obtain the waiver, however, was that agriculture became the sacred cow for industrialized economies in all future trade negotiations.? The Common Agricultural Policy protecting European agriculture stems from the precedent set by the U.S. waiver.? Agricultural protection remains to this day one of the main sticking points dividing industrialized and non-industrialized economies from further reducing barriers to trade.? Agriculture is the mercantilist trap of the post-World War II era.

For Kim?s purposes, the larger point about agricultural protection is that the GATT and WTO are designed by and for U.S. and industrialized interests.? Does this, however, lead to different outcomes in the form of trade creation for industrial and non-industrial economies when joining the GATT and WTO?? The second part of the book answers this question by using a standard gravity model approach common in the international trade literature.? Gravity models measure the impact of variables like distance, language, GDP, and, in the case of Kim?s book, entry into the GATT and WTO on bilateral trade flows.? Kim finds GATT membership increases trade for only a set of industrial countries.? Non-industrial countries experience no trade benefits from being GATT members.? In the case of the WTO, membership results in increased trade between industrial countries, increased trade between non-industrial countries, but decreased trade between industrial and non-industrial countries.? These results lead Kim to conclude the benefits from GATT and WTO membership are highly skewed towards advanced industrial countries.

The book?s most important finding is the result showing trade actually decreases between industrial and non-industrial WTO members.? Policy makers should be concerned.? This suggests the institutional rules, dictated largely by U.S. interests after World War II, fail to accomplish the stated goals of the organization.? As the failure of the Doha Development Round shows, concerns over these rules remain a significant obstacle to further trade negotiations.? But, Viner would have predicted as much.? The distribution of power and plenty changes.? These changes bring with them uncertainty about the future of international trade policies.????

In summary, Soo Yeon Kim makes a fine contribution to the study of international trade patterns in the Vinerian tradition.? International trade economists in particular would do well to study her methodological approach.

John T. Dalton is Assistant Professor of Economics at Wake Forest University.? His recent research is on the impact of Just-in-Time logistics on the growth of international trade.

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (December 2010). All EH.Net reviews are archived at

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):20th Century: WWII and post-WWII