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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 Hand a cliometrician an unpublished essay by Robert Fogel or Stanley Engerman, and I am quite sure she could identify the author after reading the first couple of paragraphs (if not the first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

Kicking Away the Ladder: Development Strategy in Historical Perspective

Author(s):Chang, Ha-Joon
Reviewer(s):Irwin, Douglas

Published by EH.NET (April 2004)

Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press, 2002. iv + 187 pp. $22.50 (paperback), ISBN: 1-84-331027-9.

Reviewed for EH.NET by Douglas Irwin, Department of Economics, Dartmouth College.

Ha-Joon Chang enlists economic history to mount a provocative critique of the “Washington Consensus” — the standard set of policy recommendations that aim to promote economic development in poor countries. According to the consensus, developing countries should adopt a set of “good policies” and “good institutions” to improve their economic performance. The good policies include stable macroeconomic policies, a liberal trade and investment regime, and privatization and deregulation. The good institutions include democratic government, protection of property rights (including intellectual property), an independent central bank, and transparent corporate governance institutions and financial establishments. These policies have been embraced by the World Bank, the International Monetary Fund, and many mainstream economists, hence the term Washington Consensus.

Chang highlights the paradox that many of today’s high income countries did not pursue such policies when they were climbing the economic ladder of success in the nineteenth century. Rather, these countries implemented high tariffs and sectoral industrial policies, lagged in the introduction of democratic reforms, stole industrial technologies from one another, did not have independent central banks, and so forth. Therefore, in Chang’s view, developed countries are hypocritical when they seek to deny developing countries access to these same policy tools and when they urge them to adopt democratic reforms and protect intellectual property.

In some sense, this book pits Adam Smith (free market orthodoxy) against Friedrich List (managed intervention heterodoxy) and comes down on List’s side. In Chang’s view, developed countries preach Adam Smith’s policies to developing countries today but pursued Friedrich List’s policies themselves in the past. Developed countries are “kicking away the ladder” (in Friedrich List’s memorable phrase) that they used to become richer and instead are trying to foist upon developing countries a set of policies wholly unsuited for their economic condition and contrary to their economic interests. This book has already achieved high status as an iconoclastic critique of neo-liberal “market fundamentalism” as pronounced by establishment economics and international institutions.

Chang, who is Assistant Director of Development Studies at the University of Cambridge (UK), divides his slim book into four chapters. Each chapter focuses on the policies pursued a century ago by the leading rich countries of today (Britain, United States, Germany, Japan, and other European countries) and compares those policies to the ones that developing countries are urged to adopt the Washington Consensus. Chapter One introduces the book and asks “How Did the Rich Countries Really Become Rich?” Chapter Two looks at trade and industrial policies designed to allow developing countries to “catch up” with industrial countries. Chapter Three focuses on institutions and good governance. Chapter Four concludes with lessons from the past.

Chang’s book is provocative and interesting, but falls short of persuading. Perhaps the biggest disappointment is Chang’s extremely superficial treatment of the historical experience of the now developed countries. He has simply chosen not to engage the work of economic historians on the questions he is raising. For example, chapter one — “How Did the Rich Countries Really Become Rich?” — does not contend with the work that economics historians have done on the topic. Given the broad question posed in this chapter, one might have expected Chang to confront such landmark works as Douglass North and Robert Thomas’s The Rise of the Western World (1973) or Nathan Rosenberg’s and L.E. Birdzell’s How the West Grew Rich: The Economic Transformation of the Industrial World (1986). These works stress the importance of political systems that provide security to economic transactions and economic systems that allow for competition, broadly construed. But Chang does not explain why the lessons from these works are not relevant to developing countries today.

Rather, in chapter 2, Chang elaborates on his contention that “infant industry promotion (but not just tariff protection, I hasten to add) has been the key to the development of most nations … Preventing the developing countries from adopting these policies constitutes a serious constraint on their capacity to generate economic development.” In my view, this statement is erroneous on two counts — that infant industries were the key to economic development, and that developing countries are prevented from adopting such policies today.

Just because certain trade and industrial policies were pursued and the economic outcome turned out to be good does not mean that the outcome can be attributed to those specific policies. Yet Chang does not advance our understanding beyond this “correlation therefore attribution” approach. Perhaps the success of developed countries came despite the distortions and inefficiencies created by their earlier policies because the broader institutional context was conducive to growth.

For example, the United States started out as a very wealth country with a high literacy rate, widely distributed land ownership, stable government and competitive political institutions that largely guaranteed the security of private property, a large internal market with free trade in goods and free labor mobility across regions, etc. Given these overwhelmingly favorable conditions, even very inefficient trade policies could not have prevented economic advances from taking place. (As Adam Smith once commented, the effort of individuals to improve their condition “is frequently powerful enough to maintain the natural progress of things towards improvement, in spite … of the greatest errors of administration.”)

And yet, in Chang’s story, these other things get no credit for America’s economic success; rather, it all comes down to infant industry promotion. Chang writes: “Although some commentators doubt whether the overall national welfare effect of protectionism was positive, the U.S. growth record during the protectionist period makes this scepticism look overly cautious, if not downright biased.” But, once again, correlation is not causation. Chang produces no evidence that protectionism was responsible for the growth. He does not investigate the various channels and mechanisms by which trade policy affects growth and compare them to other factors leading to economic expansion. He does not undertake a counterfactual analysis to determine the magnitude of benefits and costs of infant industry policies. In the reasoning style of Paul Bairoch, if tariffs were high and growth was strong, then there must be a causal relationship between the two. There is no need to examine alternative explanations, such as whether any effects of tariff policy were swamped by the advantages of other aspects of the American economy. Instead, Chang makes sweeping statements like “It is also clear that the U.S. economy would not have got where it is today without strong tariff protection at least in some key infant industries.”

The implication is that protecting manufacturing industries accounts for the success of rich countries. But Stephen Broadberry (1998) has shown that the United States overtook the United Kingdom in terms of per capita income in the late nineteenth century largely by increasing labor productivity in the service sector, not by raising productivity in the manufacturing sector. Broadberry’s research is not obscure, yet Chang makes no note of it.

Attributing the economic success of various other countries to their trade and industrial policies alone grossly inflates their role. In Europe, Broadberry and others have showed that growth was related to the shifting of resources out of agriculture and into industry and services. Yet trade policies may have slowed this transition for some countries. Britain industrialized with the textile industry in the late eighteenth and early nineteenth century, but the Corn Laws during this period kept more labor and capital resources in agriculture, not industry. Similarly, to the extent that Germany’s tariff code protected agricultural goods (where it was a net importer), it actually slowed that transition and may have retarded growth in the late nineteenth century.

A broader problem afflicts Chang’s approach — sample selection bias. Chang only looks at countries that developed during the nineteenth century and a small number of the policies they pursued. He did not examine countries that failed to develop in the nineteenth century and see if they pursued the same heterodox policies only more intensively. This is a poor scientific and historical method. Suppose a doctor studied people with long lives and found that some smoked tobacco, but did not study people with shorter lives to see if smoking was even more prevalent. Any conclusions drawn only from the observed relationship would be quite misleading. Chang also overstates the degree to which developing countries today are prevented from pursuing interventionist trade and industrial policies. Trade agreements such as the General Agreement on Tariffs and Trade (GATT) pose few barriers to countries that wish to pursue activist trade policies, and indeed many countries did so during the years when import substitution was the rage among developing countries in the 1950s and 1960s. Article XVIII of the GATT allows governments to undertake trade measure to promote development, including the promotion of selected industries. Many countries are choosing not to do so because their past experience with such policies has not been successful.

No economic historian will deny the importance of lessons from history in guiding policy today. The question is “which” economic history is relevant. (This point was raised in some insightful comments on Chang’s work by Ken Sokoloff at last year’s EHA meeting.) Which historical experience is most relevant for developing countries in Asia, Latin America, and Africa today — the perceived failure of state-led development and import substitution in those countries in recent decades, or the experience of Britain and the United States in the nineteenth century? Certainly China and India have answered by saying that their past policies of inward-looking socialism have failed them. Both countries have done better over the past decade or two by shedding heavy-handed government involvement in regulating the economy and allowing a greater role for market forces, even though they have not embraced every aspect of the “Washington Consensus.” In particular, China and India have decided to become much more open to world trade and investment and have reaped benefits by exposing long protected “infant industries” to global competition.

Even if the policy lessons of the distant past are relevant, it is unwise to make policy recommendations based on America’s experience a century ago without appreciating the broader institutional context of the U.S. growth experience and its differences from many developing countries today. In the U.S. case, competitive political institutions and limited government prevented policymakers from pursuing highly damaging policies. Governments in developing countries that are unaccountable, or possess unchecked power, can implement policies that have the potential to impose much greater costs on society for much longer periods of time.

This book raises a fascinating set of questions and succeeds in being provocative, but I think it ultimately fails to be convincing. If Chang had focused in-depth on one particular question, such as the degree to which protectionist policies account for the success of today’s developed countries, and came to terms with the work of economic historians more directly, he might have made more of a contribution.

Reference: Broadberry, Stephen. “How Did the United States and Germany Overtake Britain? A Sectoral Analysis of Comparative Productivity Levels, 1870-1990.” Journal of Economic History 58 (1998): 375-407.

Douglas A. Irwin is professor of economics at Dartmouth College. Among his recent works are “Interpreting the Tariff-Growth Correlation of the Late Nineteenth Century,” American Economic Review (May 2002), “Tariffs and Growth in Late Nineteenth Century America,” The World Economy (January 2001); and “Did Late Nineteenth Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry,” Journal of Economic History (June 2000).

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

Institutional Change and American Economic Growth

Author(s):Davis, Lance E.
North, Douglass C.
Reviewer(s):Morris, Cynthia Taft

Lance E. Davis and Douglass C. North (with the assistance of Calla Smorodin), Institutional Change and American Economic Growth. Cambridge: Cambridge University Press, 1971. viii + 282 pp.

Review Essay by Cynthia Taft Morris, Department of Economics, Smith College and American University.

Davis and North Launch Neoclassical Institutional Theory

This book is an early major step in the evolution of the thinking of Douglass North and his collaborators on the “new” neoclassical theory of institutional change — the institutional arm of the new economic history that began to flourish in the 1960s. Among the many notable later steps are The Rise of the Western World (1973) with Robert Paul Thomas and “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice” with Barry Weingast (1989) — which ranks third in citations among articles ever published in the Journal of Economic History.

Lance Davis and Douglass North develop a theory of institutional change so familiar that it is easy to forget the theory was ever “new.” They lay out a model where the core logic of institutional change is neoclassical cost-benefit analysis and the motivating drive for institutional change is profit maximization. The goal of the authors’ “intellectual journey through American economic history [is] . . . to provide a description of the processes that have produced the present structure of economic institutions. That description, in turn, is the basis for a first (and very primitive) attempt at the formulation of a specified, relevant, and logical theory of the birth, growth, mutation, and, perhaps, death of these institutions. The book is a study of the sources of institutional change in American history. It is concerned with the relationship between economic organization and economic growth” (p. 4).

Chapter 1 presents the concepts and definitions (institutional and economic environments, institutional arrangement, institutional instruments, and institutional innovation). An institutional arrangement will be innovated if the expected net gains exceed the expected costs. Arrangements range from purely voluntary to totally government controlled and operated and seek to realize economies of scale, lowered transactions costs, internalization of external economies, reduction of risk, or redistribution of income (pp. 10-11).

Chapter 2 analyses the government’s role in redistribution. The authors’ purpose is to include the role of government in their theory of institutional change in spite of the unsatisfactory state of political theory. To exclude it would likely “yield a model of institutional change no more useful in the growth context than are the present models with their ceteris paribus assumptions about institutions” (pp.37-38). In their analysis, governments with effective coercive power will be the preferred vehicle for institutional innovations where governments are well developed but markets are not, where external benefits are large but property rights are dispersed, where benefits are substantial but indivisible, and where benefits are not increased and the goal is redistribution. The costs of using government to appropriate others’ wealth and income depends on the numbers and heterogeneity of the persons organized, the feasibility of excluding outsiders from benefiting, the complexity of political coalitions, the rules of the political game, and the character of electoral suffrage.

Chapter 3 specifies the dynamics of the model in the context of American history. The authors seek to predict both the institutional “level” of change and the time lag from first perception of profit opportunity to institutional innovation: New institutional arrangements will be innovated where profit or income opportunities appear that require institutional changes or where cost reductions can be achieved with new business forms or political moves redistributing income. Among many influences changing the benefits and costs of institutional innovations are changes in market size, technical change, changes in income expectations, organizational changes in closely related activities, cost reductions associated with government-financed information or reductions in risk, and political changes altering voting or property rights. All these except political changes have parallels in neoclassical theories of technical change. However, “to do no more than assert a relationship between income changes and arrangemental innovation is hardly a significant step; . . . it is our intention to offer a theory that helps predict (or explain) the emergence of these new or mutated arrangements. In particular, the theory predicts the level (individual, voluntary cooperative, or governmental) of the new institutional arrangement and the length of time that passes between the recognition of the potential profit and the emergence of the new arrangement” (p. 39).

The core of chapter 3 divides the causes of varying lags between the perception of an innovation and its successful emergence into four steps: perception and organization, invention, menu selection, and start-up time. (i) The time lag between perceived profit and the organization of a “primary action group” depends on how much profits there are and their certainty. (ii) Where no suitable options are immediately available, time is required for invention. (iii) Where options are available, time is required to search out and select the most profitable ones. (iv) The start-up time for the innovation will vary with the “level” of institutional change, that is, according to whether it is an individual arrangement (shortest lag), a voluntary cooperative one (a longer lag because of more complex arrangements), or a governmental innovation (a still longer lag because political organization is required).

The final chapter of Part I on the theory deals with the exogenous institutional environment, and thus the initial conditions in Davis and North’s model of institutional change. Chapter 4 sketches substantial historical changes in the institutional environment: the rules governing the extent and weighting of voting rights, the legal basis for private property, and “the expectational weights that the community chooses to apply to the future costs and revenues of particular arrangemental innovations — weights that are the product of experience triggered by events exogenous to the model” (p.65). Important sources of change in these three aspects of economic life are (i) the Constitution and its interpretation by the courts, (ii) the common law, and (iii) “the external changes in the political and economic life of the nation that affect the people’s attitudes toward government” (p. 65). A lively sketch of dramatic historical changes and fluctuations over 175 years in each of these categories follows.

Part II consists of six historical chapters in which Davis and North apply their model of institutional change to American economic history by telling vivid stories of changes in land policies, financial institutions, transportation, market structure in manufacturing, the organization of the service industry, and labor market changes affecting unions and education. These stories illustrate well the explanatory potential of their model by describing the history of business and labor responses to changing profit and income opportunities through the adoption of new institutions or adaptations of old ones. No attempt is made here to evaluate these stories since this reviewer has no specialized expertise in American economic history. Of necessity given space constraints, they are selective and reflect the specialties of the authors, as they themselves carefully state in the introduction to the book.

The great strength of the neoclassical theory of institutional change is that it yields an insightful and plausible “explanation” of a wide range of institutional changes over time in individual market economies where the private profit motive is strong and neoclassical-type market supply responses are already widespread. An enormous volume of literature has developed in response to the work of Douglass North and his colleagues. North himself has been an outstanding leader in the expansion of the scope of applications of neoclassical institutional theory.

The limitations of the theory are most evident in the study of cross-country differences in institutional responses to the challenges of opportunities for profit and higher incomes. The new economic theory of institutional change is a variant of historical challenge and response theories, all of which suffer from a similar problem. To quote Nathan Rosenberg’s discussion of David Landes’s Unbound Prometheus (1969), “the industrial world is full of ‘challenges’ and always has been. Why do some challenges in some places at certain times generate successful responses and at other times do not?” (1971, p. 498). Telling historical stories consistent ex post with theories of institutional change does not address the questions raised by many historical instances when profitable opportunities for institutional change did not bring forth historical responses that helped accelerate economic growth. Constrained by its focus on market opportunities and responses, the neoclassical institutional theory poorly accommodates institutional changes driven by nationalist, religious, or imperialist motives so intense as to sacrifice economic gain. Also, the theory accommodates poorly historical country-specific institutional developments that are the outcome of chance and strong path dependency such as are evident in historical patterns of private land acquisitions or foreign domination in some developing countries.

The limitations to the excellent work of North and his collaborators are noted here as a warning that no one theory handles well the diversity of comparative historical experience. Casual empiricism is the usual practice in delimiting the countries and periods to which each theory applies. Because of this, the entire literature on institutional change is particularly weak on the diverse consequences of similar economic, demographic, and technological changes in different institutional settings. We all need to delimit more effectively the domains to which familiar models apply (Morris and Adelman, 1988, p. 32).

References

David S. Landes. 1969. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge: Cambridge University Press.

Cynthia Taft Morris and Irma Adelman. 1988. Comparative Patterns of Economic Development, 1850-1914. Baltimore: Johns Hopkins University Press.

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

Douglass C. North and Barry Weingast. 1989. “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History, 49 (December): 803-832.

Nathan Rosenberg. 1971. “Review of the Unbound Prometheus,” Journal of Economic History, 31 (June): 497-500.

Cynthia Taft Morris is distinguished economist in residence, American University and Charles N. Clark Emeritus Professor of Economics, Smith College. She is past president of the Economic History Association.

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Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):General or Comparative

The Protestant Ethic and the Spirit of Capitalism

Author(s):Weber, Max
Reviewer(s):Engerman, Stanley L.

Max Weber, The Protestant Ethic and the Spirit of Capitalism

Review Essay by Stanley Engerman, Departments of Economics and History, University of Rochester

Capitalism, Protestantism, and Economic Development:

Max Weber’s The Protestant Ethic and the Spirit of Capitalism after Almost One Century

Max Weber’s The Protestant Ethic and the Spirit of Capitalism has had an enduring impact on the field of economic history. Ironically, Weber’s contemporary, Joseph Schumpeter (1991, 220-229) argued that, althoughWeber’s academic career began with chairs in economics, “he was not really an economist at all,” but rather a sociologist. Schumpeter (1954, 21 and 819) distinguished between economic analysis, which “deals with the questions of how people behave at any time and what the economic effects are they produce by so behaving,” and economic sociology, which “deals with the question how they came to behave as they do.” This concern with the latter question is reflected in Weber’s still important work on the development of capitalism.

Weber’s concerns within economic history, particularly in The Protestant Ethic and the Spirit of Capitalism, fit well into the general interests of the turn-of-the-century historical schools in Germany and in England. These scholars were concerned with explaining the rise of modern economies, as well as with the explanation of the institutions and conditions that influenced the development and operation of economies and societies. Weber, unlike others in the German School, spent little time describing the role played by economic policies of governments in economic change. He focused, as did Werner Sombart, more on the study of modern capitalism, its natureand the causes of its rise. As the interest in this topic waned, the interest in Weber’s work was lessened, a pattern that persisted for several decades.

Weber’s major contribution to the study of economic history no doubt remains his classic study The Protestant Ethic and the Spirit of Capitalism, first published in 1904-1905, and republished with some revision in 1920, with the addition of extensive footnotes. Weber did not originate the thesis linking Protestantism and capitalism, as he himself pointed out. Jacob Viner (1978, 151-189), among others, has indicated thatthis idea of linking religion to the onset of capitalism had a long history in regard to Protestantism and to other religions prior to Weber’s writings. Earlier writers, including the English economist William Petty, made some of these links. What Weber did was to provide the specifics for the argument, with the details of the mechanism by which the belief in a”calling” and in worldly asceticism developed, leading to modern capitalism. Nevertheless, Weber argues that these behavioral changes alone could not bring about modern capitalism as it required the appropriate set of conditions in the economic sphere.

To clarify his contention on the uniqueness of the west, Weber undertook several major studies in the sociology of religions in different areas, particularly Asia, in order to understand why other religions did not generate the emergence of a modern capitalism. These comparative religious studies have yielded insights into the impact of these different religious systems in China, India, and elsewhere, and their impacts on behavior. To some scholars, however, it was the political nature and openness to new beliefs and innovations in those countries in northwest Europe that lead to developments in science, business, and political freedom that permitted economic and scientific progress to take place.

The issue of the relation of Protestantism and capitalism remains a historic perennial, frequently cited and necessarily discussed and evaluated in all works dealing with its general time period. Weber clearly had raised a central issue for historic studies. The general question and Weber’s approach have remained important to recent works by economic historians for several reasons. First, they have made central the question of the uniqueness of western civilization and the nature of its economicand social development. Whatever might have been the relative incomes of different parts of the world before 1700, it is clear that since then economic growth has been much more rapid in Western Europe and its overseas off shoots than in other parts of the world.

Modern economic growth has taken place with a quite different economic and social structure from that which had existed earlier. Economic growth occurred at roughly the same time, or soon after, these areas experienced the rise of Protestant religions. Some may hold this similarity to be of completely different occurrences, but for many such a non-relationship would seem difficult to understand and accept. Second, Weber has pointed to the significance of non-pecuniary (or what some would call non-economic) factors in influencing economic change, at least in conjunction with some appropriate set of conditions. For Weber, the key non-pecuniary factor wasbased on a particular religion and set of religious codes; to others it was a religious influence, but from a different religion, such as Catholicism or Judaism; while to other scholars it has been some different factorleading to behavior changes, such as rationalism, individualism, or the development of an economic ethic. Some, such as R. H. Tawney (1926), invertWeber’s argument, making the economic change a basic contribution to the religious changes. To still other scholars, the major factor has been the nature of a minority group of penalized outsiders in society. These scholars include William Petty (1899, 260-264), who looked at several different areas in the seventeenth century, Sombart (1969) and Thorstein Veblen (1958) who wrote on the Jews, and Alexander Gerschenkron (1970) who examined the Russian Old Believers. Each of these explanations has been advanced in the attempt to describe the primary cause of those changes in economic behavior that have lead to the distinction between the modern and pre-modern worlds.

In explaining the rise of capitalism in the Western World, Weber makes it clear that “the impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism”; and “unlimited greed for gain is not in the least identical with capitalism, and is still less its spirit.” The desire for gain has been seen in “all sorts of conditions of men at all times and in all countries of the earth.” Rather what developed in the West was “the rational capitalistic organization of formally free labor,” which was based on “the separation of business from the household” and “rational book keeping,” although the basic factor was the presence of free labor. The ability to calculate, the development of technical capabilities, the creation of systems of law and administration – all have been important to Western culture but, according to Weber, their economic usefulness is “determined by the ability and disposition of men to adopt certain types of practical rational conduct,” unobstructed by spiritual and magical beliefs.

Since religion has always had a major impact upon conduct, the particular development of the West is attributed by Weber to “the influence of certain religious ideas on the development of the economic system,” which, in the case “of the spirit of modern economic life [is] the rational ethics of ascetic Protestantism.” That the impact of the actual teachings of the church was limited is suggested by Weber’s contention that his concerns were with “predominately unforeseen and even unwished-for results.” Hedenies that he believes that the spirit of capitalism could only have derived from the Reformation, and claims that he only wishes “to as certain whether and to what extent religious forces have taken part in the qualitative formation and of quantitative expansion of that spirit over the world.” Nevertheless, he often does suggest that is was Christianasceticism and Calvinism that provided the orientation that led to the development of such ideas as the “necessity of proving one’s faith in worldly activity,” “the preaching of hard, continuous bodily or mentallabor,” and “rational conduct on the basis of the idea of the calling” that were to provide “the fundamental elements of the spirit of modern capitalism.”The recent literature by economic historians, dealing with “How the West Grew Rich,” “The Rise of the Western World,” “The European Miracle,” “The Lever of Riches,” “The Unbound Prometheus,” and related titles, has begun, as did Weber, with the perceived uniqueness of the Western European economy. These studies, by such leading economic historians as Nathan Rosenberg ((1986) with L.E. Birdzell, Jr.), Douglass North (alone (1990),and with Robert Paul Thomas (1973)), Eric Jones (1981), Joel Mokyr (1990),and David Landes (1969, 1998), with the related writings by Fernand Braudel(1981, 1982 and 1984), Immanuel Wallerstein (1974, 1980 and 1989), John R.Hicks (1969), and Deepak Lal (1998), focus on somewhat different explanatory factors from Weber’s, but the problem to be analyzed isidentical. Posited answers include the role of political freedom, the development of property rights, changes in technology and organization of workers, the changing ratio of land to labor, the reactions to different environmental conditions, the emergence of markets, the rise of rational thought, the inflow of specie and various others. Some focus more on what might be regarded as economic factors, while others are more in theWeberian tradition, even if there is no unanimity concerning specific causal factors. Rather curious, however, is that several of these recent works by economic historians do not refer to Weber’s work on the Protestantethic, and in those that do not completely ignore him, his work is not seen as central to explaining the rise of the West, either because the role of religion is seen as more endogenous, or because other religions have been consistent with economic development during the growth of the West. Nevertheless, it is clear that as long as there is a belief that the economic performance of Western Europe has been unique, Weber has presentedan argument that must be confronted. Early in the second half of the twentieth century a non-western nation, Japan, as well as, somewhat later, several East Asian nations, came to experience some of the characteristics of modern economic and social change, with the development of a pattern of thrift and of a work ethic (even if cooperative not individualist), but with a different form of religion. This seems, however, to have done more to reawaken interest in Weber’s arguments than to lead to their dismissal.

Despite the frequency of the criticism, of the specific hypothesis in the past, the Weber thesis remains central to posing questions about the onset of modern economic growth and social and religious change in seventeenth-and eighteenth-century Western Europe. Its importance as a spiritual and ideological counter to a concentration on material conditions, as in the works of Karl Marx, provides an alternative approach to understanding economic change. In addition to the debates on economic growth there are subsidiary questions about related aspects of western development, which might be regarded as either substitutes for or complements to the Weber Thesis. These include debates on the rise of individualism, the causes ofthe development of a more deliberate and rational approach to economic and other behavior, and the link between the emergence of modern capitalism and modern science. Weber discussed the role of those climate and geographic factors that have interested such present-day economic historians as Eric Jones, arguing that the development of firstly cities, and then nation-states, left Europe, unlike Asia, with rational states and rational law. This set of developments reflected, according to Weber, initial differences in natural forces.

As with all “big theories,” there are several different types of criticisms that have been made, posing some rather different questions. First, it is often unclear what the proponent had really said, particularly crucial since we usually look only at the briefest summary of what was presented, without paying as much attention to the various qualifications and boundary conditions that the author was intelligent enough to have added. Second, there are these complications in defining precisely what are regarded ascauses, and what are the effects. In terms of the Weber Thesis, we need to be clearer both on what was to be considered the nature of religion and religious beliefs, and also what exactly we are trying to explain when we discuss capitalism. Third, is the manner by which the cause and effect can be linked, whether we believe they can be related by other than a pattern involving direct causation, and whether the same cause will yield a different effect or, alternatively, the same effects can be achieved with a broader range of causes. Variants of all these types of criticisms have been applied to The Protestant Ethic, and much more space than that available here would be needed to provide a complete examination of this debate.

Many of the disagreements about Weber’s linking of Protestantism and capitalism contain a distinct moral flavor. To those who find capitalism and the modern world morally distasteful, linking capitalism’s rise to religious beliefs places an unfortunate and unfair burden upon the religion, which can lead to a denial of any relationship between the two. Presumably those more sympathetic to modernism and capitalism would find a relationship more acceptable. Weber, himself, believed that capitalism generated important problems, and he did not believe that capitalist growth could continue indefinitely. The decline of capitalism was anticipated because of the development of rigid institutions and the rise of a bureaucratic state, posing a threat to political freedom as well as causing economic stagnation. Weber’s use of the image of the “iron cage” to describe modern society reflected his belief that certain cultural problems emerged because of capitalist development. And while Weber did not describe the same scenario for capitalism’s demise as that later presented by Schumpeter, it was similarly based upon the impact of increasing bureaucracy and rationalism on the belief system in society. Many of Weber’s works dealt with topics in the area of economic history, and even his more sociological writings were concerned with economic comparisons. Particularly rich in presenting his later views was his book devoted exclusively to the study of world economic history, GeneralEconomic History (1981), based on the transcripts of lectures in1919-1920, taken from students’ notes. A look at this work is useful inputting Weber’s economic history in a broad perspective.

General Economic History is an overall survey of economic developments,from ancient times to the modern world. It provides summary statements (insome cases, revisions) of key arguments found in earlier writings, useful descriptions of the pattern of western economic development, and insightful brief views of major economic changes that are sometimes detailed in other writings. Its major contributions include the claim that forms of what could be considered capitalism had long existed, leading to earlier accumulations of wealth, but it was only with the development of capital accounting and rational commerce, and with the need for rules and trust that arise when there are continued transactions among individuals, that the modern form of capitalism emerged in Western Europe. This development was unique to that particular geographic region. In describing this evolution Weber also provides discussions of the changing organization of the manor, the stages in the rise of industry, the impacts of slavery and other forms of labor organization upon the economy as well as the reasons for their transformation over time, and numerous other topics that are still covered, often in a quite similar manner, in today’s textbooks in European economic history.

Weber gave some attention to the importance of non-pecuniary tastes in actions within the economy. Following a strand of argument raised by a member of the Older German Historical School, Karl Knies, he argued that people did not necessarily profit-maximize at all times. Non-economic factors play a role in human behavior. Weber believed that it was certainly possible that there may be less extensive attempts at the maximum degree of maximization within a market economy, at least as a short term goal, than in other forms of social organization. Weber argued that “the notion that our rationalistic and capitalistic age is characterized by a stronger economic interest than other periods is childish,” and claims that while Cortez and Pizarro had strong economic interests, they certainly did not have “an idea of a rationalistic economic life.” Weber distinguished between economic interests, found in many past societies, and arationalistic, capitalistic channeling of those interests. To Weber, the market system was not an idealized means of solving social problems. He recognized the conflicts that existed within the market system, suggesting that price and market outcomes should be seen as the result of conflict, since people disagreed over the use of the economic surpluses that could exist. But to Weber the market, with its various difficulties, seemed to provide a reasonable way to resolve conflicts and to allocate resources with some limitations on destruction and loss of freedom.

While attention was given to the cultural problems due to capitalism, in Weber’s view the rise of capitalism was related to favorable changes in the distribution of economic resources within society. It was what Weber called the “democratization of luxuries” that was the key source of early market demand, rather than “Army, Luxury, or Court Demands.” None of these factors, important as they may have seemed at the time or to subsequent scholars (for example, Sombart), based on demand from a limited segment of the population, had led to prolonged economic growth anywhere. Prolonged growth, rather, was the result of growth of the mass market which arose with capitalism, and which lowered prices permitting the broad masses to imitate the consumption patterns of the rich. Weber argued that “first the prices fell relatively and then came capitalism,” the price declines being due to preceding shifts in technology and economic relations.

One of the major substantive legacies of Weber is his description of the characteristics of modern capitalism. Weber regarded capitalism as an evolving system, so that present-day capitalism has some features rather different from those at the onset of modern capitalism. He did not, however, regard commercial and capitalist activity as something new in the modern era, since such behavior had existed in most societies in earliertimes, as well as in other societies considered non-capitalist at the present time. Under modern capitalism, however, activities of a somewhat different pattern and nature occurred from those in the other forms of capitalism.

The principal characteristics of modern capitalism that Weber points to are the centrality of rationality and those measures that help to implementrational behavior. The emergence of a rationally organized formally free labor market to replace the various forms of labor institutions that had characterized earlier forms of capitalism, the development of rational law and administration in large firms and governments, the evolution of forms of rational bookkeeping and capital accounting, and the growth of bureaucracies in the public and private sectors to order the behavior of the larger-scale units in economic society – all these represent those factors developed out of Protestantism which permit continued capitalist accounting procedures to separate business and household capital in the interests of determining growth. Other accounting procedures of the modern capitalist economy include the use of interests of rational decisionmaking, and the increased number of business leaders whose leadership is based upon their personal charisma, not on either traditional or legal influences. Weber’s argument that charisma weakens the growth of bureaucracy resembles Schumpeter’s contention of the decline of the entrepreneurial function in modern capitalism, leading to a declining social appeal of capitalism. Recent studies in leadership of management, however, have focused upon so-called “change agents” and shapers of corporate culture, leading to attempts to determine what are the crucial characteristics of successful business leaders and what they have done to achieve their success.

Weber’s contribution to the study of economic history includes both methodological approaches and substantive conclusions. His general questions on the role of changing institutions and human behavior have again come into vogue, as has his interest in the law, legal rationality, and the process of historical development. Thus, in a number of ways, Weber reads very much like a present-day economic historian, a development that has taken place after a long period in which Weber was relatively ignored by economic historians. In part his loss of influence was due to a shift in questions, to those mainly dealing with only a relatively short, recent period in the history of the west, based, in the 1930’s, on a primary focuson the relatively short-run set of economic cycles, and, in the 1940’s, ona belief that with the right economic conditions all societies could achieve economic growth. As it became clear that the process of economic growth was rather more complex than believed in the mid-twentieth century, and that its understanding was based on happenings over a much longer timespan than was being examined, Weber’s analysis, with its broad chronological, spatial, and intellectual sweep, again became more central.

Bibliographical Note:

There have been several publications of The Protestant Ethic and The Spirit of Capitalism since the first English-language translation in 1930. All use the original translation by Talcott Parsons, differing only in their introductions. Among them are: – New York: Scribner, 1930, 1948, and 1958 (foreword by R. H. Tawney). – London: Allen & Unwin, 1976; London: Routledge, 1992 (introduction by Anthony Gidden)- Los Angeles: Roxbury Publishing Company, 1996 and 1998 (introduction by Randall Collins) and- Los Angeles: Roxbury Publishing Company, 2000 (introduction by Stephen Kalberg). A recent analysis of the work of Weber is in Stephen P. Turner, editor,Cambridge Companion to Weber (Cambridge: Cambridge University Press,2000). This includes my essay on “Max Weber as Economist and Economic Historian,” parts of which have been drawn upon here.

References:

Braudel, Fernand. 1981, 1982, and 1984. Civilization and Capitalism, 15th-18th Century. New York: Harper and Row (French edition published in 1979).

Gerschenkron, Alexander. 1970. Europe in the Russian Mirror: Four Lecturesin Economic History. Cambridge: Cambridge University Press.

Hicks, John R. 1969. A Theory of Economic History. New York: Oxford University Press.

Jones, Eric L. 1981. The European Miracle: Environments, Economies, and Geopolitics in the History of Europe and Asia. Cambridge: Cambridge University Press.

Lal, Deepak. 1998. Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance.Cambridge, MA: MIT Press.

Landes, David S. 1969. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present.Cambridge: Cambridge University Press.

Landes, David S. 1998. The Wealth and Poverty of Nations: Why Some Are SoRich and Some So Poor. New York: W. W. Norton.

Mokyr, Joel. 1990. The Lever of Riches: Technological Creativity and Economic Progress. New York: Oxford University Press.

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

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

Petty, William. 1899. The Economic Writings of Sir William Petty. Cambridge: Cambridge University Press.

Rosenberg, Nathan and L. E. Birdzell, Jr. 1986. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books.

Sombart, Werner. 1969. The Jews and Modern Capitalism, New York: BurtFranklin (originally published 1913).

Schumpeter, Joseph A. 1954. History of Economic Analysis. New York:Oxford University Press.

Schumpeter, Joseph A. 1991. “Max Weber’s Work,” in Richard Swedberg,editor, Joseph A. Schumpeter: The Economics and Sociology of Capitalism.Princeton: Princeton University Press.

Tawney, R. H. 1926. Religion and the Rise of Capitalism. New York: Harcourt, Brace & World.

Veblen, Thorstein. 1958. “The Intellectual Pre-eminence of Jews in Modern Europe,” in Max Lerner, editor, The Portable Veblen. New York: Viking Press (originally published 1919).

Viner, Jacob. 1978. Religious Thought and Economic Society. Durham: Duke University Press.

Wallerstein, Immanuel. 1974, 1980, and 1989. The Modern World- System,New York: Academic Press.

Weber, Max. 1981. General Economic History. New Brunswick, NJ: Transaction Books (originally published in English in 1927).

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Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

National Duties: Custom Houses and the Making of the American State

Author(s):Rao, Gautham
Reviewer(s):Brown, Kate Elizabeth

Published by EH.Net (October 2018)

Gautham Rao, National Duties: Custom Houses and the Making of the American State. Chicago: University of Chicago Press, 2016. xiii + 273 pp. $45 (hardcover), ISBN: 978-0-226-36707-1.

Reviewed for EH.Net by Kate Elizabeth Brown, Department of History, Western Kentucky University.

 

 

Historians have long called attention to the fact that the American marketplace, and the capitalists doing business in it, rely on the power of the state. For example, Sven Beckert’s recent tome, Empire of Cotton, makes this case for the U.S. as well as across the globe, while William Novak’s The People’s Welfare: Law and Regulation in Nineteenth-Century America highlights the many regulatory interventions made by the federal and state governments in nineteenth century America. The marketplace and the state have never existed in separate spheres from each other; instead, they are mutually dependent. This interconnectedness is at the heart of National Duties: Custom Houses and the Making of the American State by Gautham Rao, who further demonstrates how law, commerce, and state-building went hand-in-hand in the early American republic.

Rao, an associate professor of history at American University, focuses on the revolutionary and early republic eras to explore how merchants and shippers helped to “define the boundaries of the state” during the United States’ decades-long transition from imperial colonies to established republic (p. 10). The key to building and sustaining a thriving American republic, Rao tells us, lay in the customs house. For the young, indebted republic to survive — let alone to become the fiscal-military state the founders envisioned — the U.S. would have to understand the “negotiated authority between officeholders and merchants that had helped cohere the British Empire [and] would help sustain the early federal government on its maritime frontier” (p. 12)

This negotiated authority was a discretionary authority, and Rao’s excellent narrative describes how political crises of the era oftentimes were precipitated by a disintegration of negotiations between merchants and customs officers. When, for example, the British Parliament decided to raise revenue in the wake of the Seven Years’ War, the ensuing crack-down on smuggling as well as collecting customs revenue helped precipitate imperial crisis and ultimately, American independence from the bonds of British empire. The next crisis — what to do now that the United States won its independence — raised the question of whether or not American statesmen had learned anything from the 1760s and 1770s. Atlantic-world trade remained the most important way for individual states as well as the United States to raise revenue; but could the new secretary of the treasury, Alexander Hamilton, raise enough revenue to stave off national bankruptcy without alienating merchants (as the British failed to do)?

As usual, Hamilton proved up to the task. But the real heroes of Rao’s story are the many collectors of customs, naval officers, surveyors, and inspectors who ultimately reported to the secretary of the treasury, but were on the front-lines of negotiations with local merchants. These customs officials realized the need for discretionary authority when dealing with importers, and thus they did the real work of negotiating when to assert the power of the state, and when to let merchants do as they wished. Note, however, that this negotiated authority was not corruption; most of the discretionary authority wielded by customs officials arose from the fuzziness of statutory law. This allowed collectors to plausibly interpret the law in ways that benefited merchants, allowing them more time before paying back duty bonds, for example. Statutory vagaries and customary practice even prompted customs officials to allow smuggling during the embargoes put into place by the Washington and Jefferson administrations.

Rao’s exploration of the power of the maritime frontier is particularly good when he explores the nitty-gritty of the customs house, including the myriad duties of personnel stationed at the waterfront or the many ways in which Congress’s poorly constructed laws created the necessary gray areas for negotiated authority. The Federalists in charge of the customs houses in the 1790s were good at turning imprecise statutory language and loopholes into opportunities to please importing merchants, all the while collecting revenue for the U.S. Treasury. But revenue collection was not the only benefit for the young republic. As Rao explains, “The cozy relationship between customs houses and commerce did much to legitimize the new federal government” because the collectors’ “careful manipulation of the laws” illustrated how the government gained authority over and credibility with local merchants, and by extension, the local community (p. 88).

Federalists successfully negotiated the first implementation of revenue laws. But after the uncertainties of transatlantic trade under Washington’s neutrality policy as well as the heightened tensions of the Quasi-War with France, Republican customs officials had their turn to negotiate with local merchants. They, too, understood the benefits of negotiated authority at the waterfront — even if it meant defying policies set by the Jefferson administration — and remained exercising it until revenue-related scandals, new administrative oversight, and Jacksonian patronage ultimately ended the customs officers’ authority to interpret the law with discretion.

Rao is an excellent legal historian and National Duties reflects this through the compelling case it makes for state building at the waterfront in the early American republic. Still, Rao occasionally cannot fully account for the successes of this negotiated authority — for example, why importing merchants were more willing to pay into the U.S. treasury than the British treasury. But this never diminishes the strength of his argument, or his account of a young republic gaining legitimacy through difficult geo-political circumstances. He excels when he describes legal forces at work — particularly when he takes us into the courtroom, something I wish he would have done more of at the outset of the book. The only substantive oversight in his story might be Rao’s lack of attention to the other government agents influencing the waterfront: the district attorneys and district court judges who, along with customs officials, helped to hold importers accountable to the law. Also there are some copy editing issues that proved distracting. Nevertheless, National Duties is a well-researched, well-written account of statebuilding, law, and commerce in the formative years of the young American republic.

 
Kate Elizabeth Brown is an assistant professor of history at Western Kentucky University. The University Press of Kansas recently published her first book Alexander Hamilton and the Development of American Law.

Copyright (c) 2018 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 (administrator@eh.net). Published by EH.Net (October 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Government, Law and Regulation, Public Finance
International and Domestic Trade and Relations
Geographic Area(s):North America
Time Period(s):18th Century
19th Century

The Source: How Rivers Made America and America Remade its Rivers

Author(s):Doyle, Martin
Reviewer(s):Kaiser, Brooks A.

Published by EH.Net (October 2018)

Martin Doyle, The Source: How Rivers Made America and America Remade Its Rivers. New York: W.W. Norton, 2018. 349 pp. $27 (hardcover), ISBN: 978-0-393-24235-5.

Reviewed for EH.Net by Brooks A. Kaiser, Management and Economics of Resources and the Environment (MERE) Research Group, University of Southern Denmark.

 
Martin Doyle’s The Source provides an excellent new source for anyone interested in understanding how the natural environment of American waterways, the public and private economic landscapes that have developed in response to them and (re-)shaped them in return, and the institutional frameworks that have evolved to govern them have come together at various scales throughout American economic history. Through its integrated approach to these topics and the dynamics of riverine development, it is also a useful primer on where to expect tensions and challenges in adapting to future demands on rivers as both human demands and climatic uncertainties evolve.

The book would make an excellent addition to American Economic History syllabi at the undergraduate level and beyond. In collecting relatively well known but disparate strains of economic, legal, institutional, and environmental history with aquatic and river science, Doyle provides new insights into how rivers, their uses and governance have co-evolved with demands for transportation, irrigation for agriculture, power generation, flood control, waste removal, recreation and conservation.

In the last chapter of the book, Doyle introduces Scott Campbell, a western rancher who is successfully and cost-effectively replicating the benefits of missing beaver from his riverine ecosystems. He does this by placing small boulders and beaver-dam-like structures at key locations. Like Campbell with his boulders, Doyle has artfully placed the cowboy, the scientist, the river navigator, the politician, the lawyer, the underemployed housewife, the businessman, the farmer, the fisher, the Native American, and most frequently, the engineer and the public or private financier and their individual scale stories throughout the text to direct the flow and pace of his narrative. Their stories create the rifts, pools, and eddies that form the flowing, efficient exposition that scales up to broader impacts on the rivers, their users, and the regulations that govern them. The result is a well-paced and interesting read that covers a great deal of complex literature in clear and informative ways.

The book particularly brings out the important interplay between river systems and government finances at multiple scales, from local municipalities through to the federal level. Water presents a particularly complex set of goods and services. It can create value through consumptive or non-consumptive uses, which vary with water quality at different rates. These myriad water uses can create hard-to-value indirect and/or passive-use values, including those driven by a host of supporting, provisioning, regulating and cultural ecosystem services. River water that flows among individual, state, regional, national and international properties, that may change paths easily, and that flows with variability that both humans and nature can affect, adds to the complexity.

The history of American economic development is such that the use of rivers for everything from irrigation to sanitation has rapidly and visibly become more congested both within and across these uses. Doyle has picked episodes in American river history that highlight the origins of these congestions, their impacts, their proximate solutions and the longer term impacts of the solutions and their additional unintended consequences. As such, his selection of cases emphasizes the path dependency created by the choices of technology, skills, budget concerns, and institutions used to navigate the problems created by rivers’ intricacies. A reliance on engineering and science that, for example, first regraded the Chicago landscape for waste flow and then eventually reversed the flow of Chicago River to reduce complications to the freshwater supply led to cost-sensitive engineers defining policy that favored upstream waste producers. These sorts of interactions between a water quality or quantity dilemma and its technical resolution have directly affected the overall net benefits available from river resources as well as the distribution of those benefits.

In many cases, the upstream user has benefited at the expense of the downstream, so that the solution is primarily spatially determined; in others, such as the prior appropriation doctrine used in western water law, the solution is primarily temporally determined. The tradeoffs involved in these choices are generally well understood. Doyle, however, delves further into the spatio-temporal implications of America’s decisions over water resource priorities and conflict resolutions by connecting them to the stories behind the massive infrastructure financing requirements. He shows how the budgetary decisions and crises tied up with rivers almost always had the predictable temporal challenge of borrowing today for an uncertain and rapidly developing future, and that this temporal problem is intertwined with the spatial realities of federalism in ways that increased the effects of water crises as they evolved. The budgeting and finance concerns have ranged from early canal and related transportation financing primarily through state borrowing until the Panic of 1837, to flood control and local power generation from municipal sources until the Great Depression and World War II brought significant increases in federal spending to many rivers for many purposes, and then back to a Reagan-era push to return these responsibilities to private-public partnerships between the states and municipalities and financiers.

In essence, Doyle uncovers a nuanced ratchet effect where the ratcheting up of interventions varies with not only the dimensionality of the crisis presented by the stressor to the water resource, but also by the contemporaneous ideology of the country and the tolerance for the scale of risk accepted in efforts at taming rivers for evolving uses. This makes the book not only excellent economic history, but particularly relevant for today’s audiences who wonder how we should be building and financing resilience for our vital river systems and the benefits they provide in light of the increasing number of river and water uses and uncertainties we face.

 

 

Brooks Kaiser’s publications include “Watershed Conservation in the Long Run,” Ecosystems (2014).

Copyright (c) 2018 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 (administrator@eh.net). Published by EH.Net (October 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Historical Geography
Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Routledge Handbook of the History of Global Economic Thought

Editor(s):Barnett, Vincent
Reviewer(s):McCann, Charles R. Jr.

Published by EH.Net (October 2018)

Vincent Barnett, editor, Routledge Handbook of the History of Global Economic Thought. London: Routledge, 2015. ix + 348 pp. $255 (hardcover), ISBN: 978-0-415-50849-0.

Reviewed by Charles R. McCann, Jr., Department of Economics, University of Pittsburgh.

This volume, viewed by the editor as a Cosmoconomy or Economographia, is but a “modest attempt to map the global contour-lines of economic ideas” — modest, that is, with respect to Ptolemy’s Cosmographia, itself “an early attempt to delineate the world’s physical geography” (p. 1). The editor freely admits to a lack of comprehensiveness, instead opting for “a condensed introductory overview and regionally coordinated analytical account of a significant number of national/regional traditions in economics . . . that will facilitate comparisons across nations and between historical eras” (p. 1).

In addition to Barnett’s Introduction and Conclusion, there are twenty-eight substantive chapters surveying the progress of economic thought as it developed in more than forty countries and regions. The volume is divided into five parts: Europe, the Americas, the Middle East, Africa, and the Asia-Pacific. Coverage includes not merely individual countries, but as well entire regions and even cultural groups, such as Spanish-speaking South America, Arab-Islamic Economics, North Africa (included among the Middle-Eastern countries), West Africa, Southern Africa, and the Asian Tigers.

Given the scope of the coverage, and the different approaches employed, it is not surprising that the quality and tone of each is uneven. The chapters are, for the most part, approximately ten pages or less in length, with two notable exceptions, these being the chapter on the United States (John King, 27 pages) and the one on England (Roger Middleton, 21 pages). It seems rather obvious why each would require more extensive coverage. Given the material and the manner of its presentation, it seems best to comment briefly on each chapter.

The United Kingdom is represented in the first three substantive chapters – England (Middleton), Scotland (Alexander Dow and Sheila Dow), and Ireland (Renee Prendergast). This is perhaps understandable, as their cultural and intellectual environments differed and to a somewhat great extent. Middleton, having noted the difficulty in identifying an “English” economics as distinct from a “British” variant, nonetheless defined “English economics” as “that produced by ‘English economists,’ with these defined as those working (at least for a major part of their career) in England which, in turn, encompasses Wales and Ireland (Northern Ireland from 1923)” (p. 17). Notably, however, this excludes Scotland, which, as Dow and Dow explain, became, with the development of an Enlightenment philosophy that “combined reason and evidence within a theory of human nature,” itself the product of a uniquely Scottish cultural and social milieu, the catalyst for the emergence of classical political economy (p. 38). As to Ireland, Prendergast informs us that, while Ireland may have produced economic theorists of great renown, nonetheless “there was nothing specifically Irish about their contribution.” Their recognition may be in the “models” they employed, “designed to facilitate an understanding of the real economy,” inspiring an awareness “of both specific institutional features, and the dangers of general maxims” (p. 56).

With respect to the development of economic thought on the continent, we have chapters on Italy (Pier Luigi Porta), Greece (Michalis Psalidopoulos), Spain and Portugal (José Luis Cardoso and Luis Perdices de Blas), Germany (Erik Grimmer-Solem), Sweden (Lars Magnusson), and Russia and Ukraine (Francois Allisson). Curiously, there are no chapters on the development of French or Austrian economic thought! The Italian Enlightenment is “the greatest contribution of Italian culture to the development of a common European tradition of civil rights and enlightened governance,” distinct from its French and Scottish counterparts “in its attention to the interplay between legislation and moral sentiments, civic culture and economic development, fiscal technique, and social structure” (p. 60). Significantly, the core of Italian economic thought lies in the civil tradition, “the product of a special blend of lay and religious motives, which stems from the re-discovery . . . of antiquity or the pre-Christian world” (p. 58). This focus continued through the nineteenth century. The presentation of the Greek tradition is somewhat disappointing, as its primary focus is on the period from 1830 to the present, thus omitting what should have been a fascinating discussion of the development of the ancient roots of modern economic thought. By contrast, Cardoso and Perdices de Blas set the stage for a review of the development of Spanish and Portuguese economics beginning in the sixteenth century with the works of the Scholastics, the contributions of which “were some of the side effects of their musings on the spiritual salvation of human beings in all their activities, especially those related with dangerous trading activities completely divorced from the honorable, virtuous life in the countryside” (p. 78). Sadly, note the authors, Spanish economists in the eighteenth century in particular, while cognizant of European contributions, nonetheless produced little in the area of economic theory, “showing a noticeable preference for studies on applied economics” (p. 81).

The chapter on the development of economic thought in Germany focuses primarily on the nineteenth and twentieth centuries, with the occasional nod to the eighteenth, due perhaps to the fact that Germany as a unified nation-state was formed only in 1871. Of significance is the influence it was to have in the United States and Japan, where the transfer of German ideals were implanted in the universities and ultimately became the foundation for the emergence of the American welfare state. Sweden is something of a late-comer if one employs the metric of “printed works,” which date only from the early eighteenth century; prior to this, Swedish economics “was defined in its Aristotelian meaning as an Art of Household Management” (p. 96). English, French, and German, and later Austrian, influences are particularly noticeable in early Swedish economic thought into the early twentieth century, when an identifiable Swedish School emerged. Finally, economic thought in Russia and the Ukraine, combined here due to the common history, did not really come into their own until the nineteenth century; again, the seventeenth and eighteenth centuries saw the publication of legal, political, and religious texts presenting economic ideas.

Part II, the Americas, is comprised of six chapters – the United States of America (J. E. King), Canada (Robin Neill), Mexico and Central America (Richard Weiner), the Caribbean (Mark Figueroa), Spanish-speaking South America (Veronica Montecinos), and Brazil (Patrice Franko). While American economic thought may be said to antedate independence from Britain, King’s primary focus is on the development of economic thought from the early nineteenth through the twentieth century. The story has been told numerous times, but the presentation is nonetheless quite compelling. Canadian economic thought is inextricably entwined with that of the United States, with Canadian economists having held important posts in American universities. The chapter on Mexico and Central America focuses primarily on Mexico, noting the influence of outside forces on the development of economic thought until the twentieth century, when there came into being a Mexican variant, rooted in culture and history (p. 145). The Caribbean economies suffered greatly from colonial administrations; the approaches to economics in these societies vary greatly, from Keynesian to Marxist, focusing primarily on issues of development and administration. Economic thought in Spanish-speaking South America developed in a highly-politicized atmosphere, with the influence of the Catholic Church assuming a prominent role. Finally, Brazilian economics tends to pragmatism, with approaches tuned to the needs of the times.

Part III, the Middle East, contains five chapters — Turkey and the Turkic linguistic zone (Eyüp Özveren), Israel (Yuval Yonay and Arie Krampf), Arab-Islamic economics (S. M. Ghazanfar), Persia/Iran (Hamid Hosseini), and North Africa (Hamed El-Said). The chapter of Turkish economics is more an excursion into economic history than the history of economic thought, as much of Turkish economics was absorbed from outside. In Israel, Don Patinkin and the “Patinkin boys” assume a starring role in the Americanization of an “Israeli economics” (pp. 194-97). The Arab-Islamic and Persian/Iranian contributions are taken to have roots in the seventh and eighth centuries with the writings of Arab and Islamic scholars; indeed, many of these scholars were producing important, if neglected, works during the European Dark Ages! Finally, the history of the economics of North Africa — Algeria, Egypt, Libya, Morocco, Tunisia, and Sudan — “suggests that the impact of economic ideas as pure theory has (at least in the short-run) been limited,” with economic policies “often generated by factors outside the economics profession” (p. 238).

Part IV, Africa, includes three chapters — West Africa (Gareth Austin and Gerardo Serra), Southern Africa (Tidings P. Ndhlovu and Nene Ernest Khalema), and Angola and Mozambique (Steven Kyle). African economics in general is a development of and reaction to colonialism and dependence on western European ideals. In West Africa, competition developed between those who advocated the assimilation of Western economic ideas and those who advocated an indigenous West African model, and, following independence from colonial rule, there emerged a sort of pan-African model, incorporating elements of Leninist socialism (pp. 246-47) and the identification of backwardness with dependency (p. 250). In southern Africa, colonialism “imprisoned the African ways of understanding commerce, utilising indigenous economic ideas, traditions, beliefs and ideologies” (p. 266). In Angola and Mozambique the Marxist ideology that came to dominate following the collapse of Portuguese colonial rule “is virtually indistinguishable from general justifications for authoritarian extractive regimes of any political stripe,” and so the post-independence ideologies “are in many ways simply extensions of the old colonial regimes under new management” (p. 270).

Part V covers, in five chapters, the Asia-Pacific Region — Australia and New Zealand (William Coleman), China (Zagros Madjd-Sadjadi), Southeast Asia (Cassey Lee and Thee Kian Wie), the Asian Tigers (Takashi Kanatsu), and India (Balakrishnan Chandrasekaran). Again it is curious that no chapter appears on the development of Japanese economic thought. Coleman begins with the assertion that “any story of economic thought in Australia and New Zealand will necessarily tell of the attempt to plant and cultivate in uncleared ground the long developed vine of older societies” (p. 281), and concludes with the observation that “there is no Australia in economics any longer. Australian economics is at an end” (p. 290). With respect to China, it is culture and religion more than anything else that influenced the development of economic thought, with Confucianism and Taoism, legalism and Maoism, at various times competing for dominance (p. 295). Indonesia and Malaysia, representative, we are told, of Southeast Asia, developed under Dutch and British rule, respectively, and so there emerged “no singular or identifiable school of thought in these countries.” Such writings on economic matters as there were centered problems of “reconstruction and development,” and a concern with ethnic conflict (p. 312). The Asian Tigers — Hong Kong, Singapore, South Korea, and Taiwan — to varying degrees relied on state-directed development, with the government working in concert with the private sector to achieve high levels of industrial growth. Finally, culture has been a dominating influence in Indian economic thought, which is seen as being “based fundamentally on the liberty and freedom of individuals within the ambit of the family system” (p. 323). Chandrasekaran argues that any commitment to a unique, indigenous economics was abandoned after independence, with academic economics focusing on Marxism and neoclassicism (p. 374).

This is indeed an interesting project, one that by its nature requires a great degree of selection as to the material to be included. One may point to flaws in the coverage — obvious choices excluded, unusual ones given treatment; the choice is quite idiosyncratic. Yet in many of the offerings there is much to find that should provoke more extensive study.

 

Charles R. McCann, Jr. is a Research Associate at the University of Pittsburgh, and the author of Individualism and the Social Order and Order and Control in American Social Thought, both published by Routledge, and, with Mark Perlman, the two-volume Pillars of Economic Understanding (University of Michigan Press), among other publications.

Copyright (c) 2018 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 (administrator@eh.net). Published by EH.Net (October 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

Organizations, Civil Society, and the Roots of Development

Editor(s):Lamoreaux, Naomi R.
Wallis, John Joseph
Reviewer(s):Troesken, Werner

Published by EH.Net (July 2018)

Naomi R. Lamoreaux and John Joseph Wallis, editors, Organizations, Civil Society, and the Roots of Development. Chicago: University of Chicago Press, 2017. ix + 380 pp. $130 (cloth), ISBN: 978-0-226-42636-5.

Reviewed for EH.Net by Werner Troesken, Department of Economics, University of Pittsburgh.

 
Freedom of association has long been viewed as a tenet of individual liberty, and a prerequisite of any well-functioning social order. In this way, institutional rules protecting the individual’s right to voluntarily organize with others around friendship, shared beliefs, and economic goals, are not only bulwarks against political oppression but also sources of community, religious and creative expression, social and political change, and economic progress. Growing literatures among development economists and economic historians suggest the connection between freedom of association and economic progress is particularly relevant to economists. Perhaps the simplest way to appreciate this connection is to note the obvious: a state that suppresses the ability of economic agents to organize new business arrangements is also a state that is likely beholden to entrenched monopolistic interests hostile to innovations that would otherwise enhance consumer welfare and long-term growth prospects.

The history of freedom of association, and its relationship to political economy, runs throughout Organizations, Civil Society, and the Roots of Development, an NBER conference volume edited by Naomi Lamoreaux and John Wallis. In organizing the conferences and volume, the editors appear to have drawn much of their motivation from North, Weingast, and Wallis (2009). Consistent with this motivation, the editors write that “the central question of this volume is how societies transition to open access” (p. 10). Or more precisely, how do societies transition from closed (natural-order) states that limit access to markets and the political system to open-access orders that allow a broad range of individuals and groups to engage in market activities and organize politically to influence the state?

For much of history, states undermined the ability to freely associate and form voluntary organizations by refusing to formally incorporate groups that could potentially threaten the existing social order. This, in turn, hampered the ability of these groups to engage in collective action and affect change, whether political or economic. At the same time, the groups most likely to enjoy the protections and benefits of incorporation were those favored by the state, which helped to protect and perpetuate the status quo and suppress changes that were potentially welfare improving. It is unsurprising, therefore, that many of the essays in this volume use the history of incorporation law as a setting in which to explore the transition from natural states to open-access orders. Yet the assumption that state recognition of voluntary associations through formal incorporation is a defining feature of an open access order, might also have been worthy of circumspection.

In the first essay, Dan Bogart uses the decline of the East India Company to explore England’s transition to open access. Before 1750, the East India Company “was a privileged company with monopoly over all trade between England and Asia,” and as such, is an “excellent example of limited access.” First granted its charter in 1600, the company shared its rents with the monarch in return for special protections and privileges. A key move to open access occurred in 1813 when Parliament passed the Charter Act, revoking the company’s monopoly and allowing others to freely engage in Indian trade. Bogart suggests this move toward open access stemmed from a growing ideological commitment to free trade, the declining revenues and relevance of the East India Company, and the assassination of Prime Minister Perceval. Perhaps the central historical message to emerge from Bogart’s essay is that the fortunes of the East India Company waxed and waned with the company’s political influence, which is precisely what you would expect under a limited access order.

In the volume’s second essay, Barry Weingast recasts Adam Smith’s arguments about the centrality of violence in deterring economic growth. Liberally quoting Smith, Weingast explains that “given the risk of violence, rational investors will not” save or accumulate capital. The state has the potential to protect potential capitalists from plunder, but enforcing property rights itself requires a requisite level of growth and resources without which the state cannot act effectively. In this way, societies get caught in a violence trap: because there are no resources for the state to control violence and protect private property rights, there is no investment or growth, and because there is no investment and growth, there are no resources for the state protect private property. Escaping this trap requires a non-incremental change in either resources or in the relative capacity to do violence across players: once one player gains an advantage in violence it can prevent others from plundering the resources of the industrious while at the same charging (taxing) the industrious to provide such protection. On the heels of such a change, sustained growth can follow.

To highlight how the escape from the violence trap might proceed, Weingast follows Smith’s history of feudalism. Under feudalism, there was constant fighting among the feudal lords and little growth. Only when the King combined forces with local governments and merchants did these groups gain the upper hand, and replace the violence of feudalism with inter-city trade and long-term economic progress. The history Weingast and Smith recount brings to life Mancur Olson’s classic essay on roving and stationary bandits — the competition and fighting among feudal lords seems reminiscent of a world with roving bandits, while the alliance among the monarchy, municipal burghers, and merchants seems akin to world with a single bandit.

Two of the essays use the origins of general incorporation laws in the United States as a laboratory in which to explore the transition from closed to open access. Before general incorporation, businesses could only incorporate after lobbying for, and securing, a corporate charter from the state legislature. Corporate charters in this setting were most likely to have been granted to businesses with close political connections and firms without such connections would not have been able to incorporate. Because incorporation promotes access to capital markets, limiting access to corporate charters likely would have deterred market entry and economic growth. In “Corporation Law and the Shift toward Open Access in the Antebellum United States,” Eric Hilt gathers data on twenty-nine states and shows that states with large agricultural and commercial sectors were slower to adopt general incorporation. He also presents evidence that the introduction of general incorporation laws was often more a change in degree than in kind; the exact construction of general incorporation laws varied across states; and some states adopted general incorporation earlier than is often thought.

Similar to Hilt, Qian Lu and John Wallis explore the transition to open access in the chartering of banks in Massachusetts. Before 1812, banking and politics exhibited a close and unhealthy relationship, with more than 70 percent of all bankers in the state having been a legislator at some point in their lives. During this period, the Federalists in Massachusetts dominated banking in state. Critics complained that this domination was not only contrary to American values, but given the importance of credit to industry and commerce, also a burden on economic development. This domination broke down when a competing political party (the Democrat-Republican) gained control of the legislature and implemented reforms allowing for free entry into banking in the state. Although these reforms were not wholly successful in eliminating the connection between politics and entry into banking (as late as 1860 roughly 40 percent of the bankers in the state had been legislators at some point), non-elite banks without political connections were growing increasingly common.

In their essay, Victoria Johnson and Walter W. Powell use the concept of “poisedness” to explain when and why new organizations emerge, persist, and spread. Poisedness, they write, refers to “the availability or vulnerability of a social and historical context to the reception of an innovation and subsequent reconfiguration by it.” Their analysis then focuses on the history of botanical gardens in New York City during the nineteenth century.

One of the most compelling and important contributions to this volume is the Ruth Bloch and Naomi Lamoreaux chapter, “Voluntary Associations, Corporate Rights, and the State.” Challenging a large body of Tocqueville scholarship, they “contend that the voluntary associations so admired by Tocqueville never really operated independently of the state. Instead, nineteenth-century lawmakers systematically discriminated against certain groups by constraining their access to valuable entity and personhood rights” (p. 235). To make their case, Bloch and Lamoreaux show how throughout the early nineteenth century, state legislatures restricted access to corporate charters for groups that might threaten the status quo, such as antislavery organizations, labor groups, and women’s charitable groups.

In “The Right to Associate and the Rights of Associations: Civil-Society Organizations in Prussia,” Richard Brooks and Timothy Guinnane extend Bloch and Lamoreaux. They begin by noting that a 2012 survey of all the constitutions in the world found that 93 percent included a right to assembly and 94 percent a right of free association. Focusing mainly on Prussia but drawing many comparisons to the United States and other countries in Western Europe, they argue that it is a mistake to think that the West always had open access and protections for freedom of association. Much as Bloch and Lamoreaux, they suggest Western governments were reluctant to formally recognize associations that might pose a threat to existing political elites, even when the threat seems minor to historical observers. In the case of the United States, they uncover a South Carolina law that discouraged free blacks from associating with slaves during antebellum period, and show that even when African American citizens sought to organize for something as innocuous a park they could engender opposition from the state. They also suggest, however, that at least in Prussia the state was most concerned about social and political unrest and seems to have shown more openness in relation to business organizations.

Equally compelling is Jacob Levy’s “Pluralism without Privilege.” Social observers have long seen federalism and the devolution of power to state and municipal governments as a source of individual liberty and a check on the power of the state. Such a structure promotes competition across competing jurisdictions and the sort of oppositional politics that discourage agglomerations of economic and political power. This idea has been expressed and re-expressed in a myriad ways by scholars across the social sciences. Recent examples include the highly cited work of North, Wallis, and Weingast (2009) and Barnett’s (2013) notion that polycentrism might secure the consent of the governed. Levy is skeptical and suggests that jurisdictional competition by itself might by insufficient and that free societies can draw sustenance from privilege and entrenched institutional arrangements that exist outside the state. He begins by quoting Montesquieu’s argument that without the nobility, monarchy descends into despotism. He then turns to Smith, Constant, and Tocqueville. The central theme here is that while elites and privileged groups are odious in themselves, they can also help forestall more despotic regimes.

Absent Levy’s essay, nearly all the essays assume that free association is desirable because it promotes access to the state and the desirability of state access increases in a non-monotonic way: more is always better and unfettered populism is political bliss. Factions, the tyranny of the majority, and rent seeking are forgotten or secondary. While he never invokes rent seeking and only briefly mentions the Federalist, Levy’s suggestion that elite extra-legal institutions might help constrain the state, democratic or otherwise, serves to counter-balance the unqualified embrace of open access. More generally, throughout nearly all of the volume there is a quiet celebration of giving all comers equal access to the levers of state power. Amidst that celebration it would have been useful to at least consider the possibility that administrative independence, whether in the context of the judiciary, central banking, or scientific agencies, might serve to protect individual liberties and/or promote human welfare.

The final essay is “Opening Access, Ending the Violence Trap: Labor, Business, Government, and the National Labor Relations Act” by Margaret Levi, Tania Melo, Barry Weingast, and Frances Zlotnick. Here, Levi et al. argue that before the passage of the NLRA in 1935, the United States failed “two critical conditions” of a true open access order: the denial of access to labor (a variety of legal institutions inhibited the formation of labor unions), and the use of violence to suppress labor. In this setting, violence frequently emerged because it was impossible for all parties (labor, business, and government) to commit to non-violence. After the NLRA and the creation of the National Labor Relations Board, however, the law constrained actions and made it costly for any one of the players to engage in violence. According to Levi et al., with the passage of the NLRA and creation of the National Labor Relations Board, government became an impartial arbiter of the law, rather than an advocate and enforcer for business interests.

It is not clear me, however, that the state’s hostility to unions in the pre-NLRA era stemmed from an unholy alliance between business and the state as Levi et al. and others in this volume suggest. The common law had always been hostile to combinations that had the potential to restrain trade, and that hostility was not unique to unions (Hovenkamp 1991). Indeed, corporate charters frequently included provisions that if the chartered firms engaged in restraints of trade or otherwise acted monopolistically the state had the authority to revoke those charters, which states sometimes did through quo warranto proceedings (Troesken 1995). Moreover, during the late nineteenth and early twentieth century, state antitrust laws were unconstitutional if they exempted labor and agriculture from antitrust prosecution (Connolly v. Union Sewer Pipe Co., 184 U.S. 540 1902). The courts saw such exemptions as evidence of unequal treatment under the law (capital was being treated differently than labor) and a violation of the Fourteenth Amendment. One, of course, can challenge the underlying premise here and reject the idea that there is no fundamental difference between firms organizing than workers (Cox 1955). However, if one is willing to at least entertain the logic of nineteenth century courts, the reluctance of state governments to recognize unions appears similar (though not identical in terms of violence) to their reluctance to incorporate potentially monopolistic enterprises.

Despite these criticisms, my overall assessment is positive and enthusiastic. This well-done volume merits a wide ridership among economic historians and other readers that find North, Wallis, and Weingast (2009) a relevant framework. I found the contributions by Bloch and Lamoreaux, Levy, and Weingast especially important and thought provoking, independent of any connection to debates about open access and the origins of economic development.

References:

Barnett, Randy E. Restoring the Lost Constitution: The Presumption of Liberty. Princeton University Press, 2013.

Cox, Archibald. “Labor and the Antitrust Laws. A Preliminary Analysis.” University of Pennsylvania Law Review 104.2 (1955): 252-284.

Hovenkamp, Herbert. Enterprise and American Law, 1836-1937. Harvard University Press, 1991.

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

Troesken, Werner. “Antitrust Regulation before the Sherman Act: The Break-up of the Chicago Gas Trust Company.” Explorations in Economic History 32.1 (1995): 109-136.
Copyright (c) 2018 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 (administrator@eh.net). Published by EH.Net (July 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
History of Economic Thought; Methodology
Labor and Employment History
Geographic Area(s):Europe
North America
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII

The Invisible Hand? How Market Economies Have Emerged and Declined since AD 500

Author(s):van Bavel, Bas
Reviewer(s):Rubin, Jared

Published by EH.Net (May 2018)

Bas van Bavel, The Invisible Hand? How Market Economies Have Emerged and Declined since AD 500. Oxford: Oxford University Press, 2016. xi + 330 pp. $60 (hardcover), ISBN: 978-0-19-960813-3.

Reviewed for EH.Net by Jared Rubin, Department of Economics, Chapman University.

 
What are the key drivers of economic prosperity? Why do societies that were at one point world economic leaders often end up falling behind? What role do factor markets play in this process? These are the questions addressed in Bas van Bavel’s fascinating entry into the “big think” literature, The Invisible Hand? How Market Economies Have Emerged and Declined since AD 500. In this book, van Bavel proposes a theory of cyclical economic growth and decline, and he supports this theory with three case studies: early medieval Iraq (c. 500-1100), high medieval northern Italy (c. 1000-1500), and the late medieval and early modern Low Countries (c. 1100-1800).

Van Bavel’s framework can be conceptualized as an economics counterpart to Ibn Khaldun’s political cyclical theory of empires. The (somewhat neo-Marxian) argument suggests that economic decline is a natural consequence of the type of economic growth that happens via factor markets. In other words, the growth of factor markets is a self-undermining process. This is a fairly significant departure from conventional economic history accounts, which largely view the development of market economies as more of a linear process.

Van Bavel’s argument can be summarized as follows. In societies with some sufficiently high level of personal and economic freedom as well as some degree of prosperity (due to non-market mechanisms of exchange for land, labor, and capital) factor markets are likely to emerge. In the process, a positive feedback loop occurs in which underutilized resources are more productively used, specialization and division of labor arise, economic growth results, which results in greater use of factor markets, and so on. However, with factor market growth comes inequality — both economic and political. As those who own the factors of production gain more political power, they use this power to dominate the markets for land, labor, and capital, as well as financial markets, making these markets less free in the process. This precipitates the economic decline of the society, as vested interests squeeze the little remaining productive power out of the economy, leaving little for the rest of society. The decline that van Bavel proposes is therefore endogenous to the very processes that contributed to the rise in the first place.

Perhaps the most ambitious aspect of The Invisible Hand? is the cases to which van Bavel applies the theory: early Islamic Iraq, Commercial Revolution Italy, and the late medieval and early modern Low Countries. These are not randomly plucked cases: one could make the case that they represent the world’s (or, at a minimum, western Eurasia’s) economic frontier from about 750 to 1700. Van Bavel must be commended for picking these three cases: few scholars have the breadth of knowledge to dig so deeply into three such vastly disparate cases. And indeed, the cases work quite well for the theory. Iraq of the Abbasid period was probably the wealthiest and most advanced region of the world. Indeed, in 800 the population of Baghdad was greater than the top thirteen Christian cities of Western Europe combined! Yet, it clearly started to fall behind at some point well before the Mongol invasion crushed what remained of the Abbasid Empire in 1258. Van Bavel convincingly points to the rise and decline of factor markets as a culprit. Although the evidence is scanter than it is for the others cases, van Bavel makes a strong case that the development of markets in labor, capital, finance, and especially land (and land lease) played an important role in the region’s growth, while the accumulation of these factors of production in a small number of hands ended up stifling growth and, ultimately, the very markets that spurred growth in the first place. Indeed, van Bavel presents data indicating that the Gini coefficient on wealth inequality in tenth century Iraq was a startling 0.99, making it one of the most unequal societies in world history.

Similar evidence is provided for the cases of northern Italy during and after the Commercial Revolution and the Low Countries in the late medieval and early modern periods. For these cases, the data and secondary sources are much more complete and the narratives are quite compelling. Indeed, one might suspect that the Low Countries case that van Bavel has researched so deeply was the motivating example behind the book (and it is indeed a good example). In both of these cases, societies that were wealthier than their neighbors — but not by much — saw a growth in factor and financial markets, with the resulting proceeds initially being relatively widely distributed. Over time, it was precisely access to these factor and financial markets that enabled the accumulation of wealth in a small amount of hands. This gave the economic elites access to political power and the capacity to buy up most of the rural hinterlands, which ultimately led to the (relative) decline of factor markets and, more generally, these economies. Seen from this perspective, the cultural achievements of the Renaissance or the Dutch Golden Age — funded as they were by the ultra-wealthy — were a symptom of decline, not vibrancy.

As one is reading the book, it is natural to think, “an economic rise followed by the accumulation of factors of production in a small amount of hands sounds a lot like the modern day U.S.” While historians are often hesitant to make such conjectures on more recent events, van Bavel provides a quite welcome chapter overviewing (in only slightly less depth) the trajectories of the UK and U.S. since the eighteenth century. Not surprisingly, he argues that both are reflective of the cyclical theory of economic development propounded throughout the book. These are important insights, as they suggest that modern day inequality may be a structural feature of the American and British economic rise.

I began reading this book not knowing what to expect (beyond the fact that I know and like van Bavel’s other academic work), but I came away convinced that factor markets can help explain both the rise and decline of economic fortunes. One always has a few small quibbles with any book — for instance, I think van Bavel misses a golden opportunity to discuss how the rise of socialist and communist thinking in the nineteenth century was a direct result of the processes he describes in the book — but these are mostly not important enough to include here. That said, there is one rather important question the book leaves largely unaddressed: on balance, what role have the rise and decline of factor markets played in the “great divergence” between the “West and the rest”? The Dutch Republic, England, and the U.S. — three of the five societies discussed in the book — played an enormous role in the rise of the modern economy. Even if these societies eventually declined in relative terms, they are still rich (a point that van Bavel concedes) and, more importantly, these riches have spread to some degree to the rest of the world. Indeed, even if the intra-society income and wealth distributions have become much more unequal in the past four decades, the inter-society income and wealth distributions have become somewhat more equal, at least if one is most concerned with the well-being of the poorest among us. The economic forces unleashed in the last two centuries have lifted billions out of poverty. This is a true economic achievement, and it finds its roots in the historical cases studied in this book.

In short, any social scientist interested in “big think” questions will benefit greatly from reading The Invisible Hand? While it presents only a piece of the “great divergence” puzzle, it is an understudied piece that is an important complement to existing theories based on institutions, culture, and governance.

 
Jared Rubin is an associate professor of economics at Chapman University. His recent book Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not (2017, Cambridge University Press) analyzes the role that religious authorities and institutions played in the economic development — or lack thereof — of Western Europe and the Middle East.

Copyright (c) 2018 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 (administrator@eh.net). Published by EH.Net (May 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economywide Country Studies and Comparative History
Markets and Institutions
Geographic Area(s):Europe
Middle East
Time Period(s):Medieval
16th Century
17th Century
18th Century