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Protection for Exporters: Power and Discrimination in Transatlantic Trade Relations, 1930-2010

Author(s):Dür, Andreas
Reviewer(s):Maneschi, Andrea

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Published by EH.NET (August 2010)

Andreas Dur, Protection for Exporters: Power and Discrimination in Transatlantic Trade Relations, 1930-2010. Ithaca, NY: Cornell University Press, 2010. xv + 246 pp. $40 (cloth), ISBN: 978-0-8014-4823-2.

Reviewed for EH.NET by Andrea Maneschi, Department of Economics, Vanderbilt University.

 

Andreas Dur’s thought-provoking contribution to the political economy of trade literature examines how far governments in the North Atlantic region oriented their trade and investment policies toward the protection of their exporters, import substitute industries or both between 1930 and 2010. Dur, a Professor of International Politics at the University of Salzburg, assigns a key influence in the elaboration of trade policy to exporters when they are threatened by the loss of their markets due to preferential trade agreements proposed or concluded by their trading partners. With its focus on explaining the trade policies pursued in the transatlantic region in recent decades, his book will be of great interest to political scientists and economists among others. The documentation underlying the case studies contained in chapters 2 through 7 is meticulous and takes multiple forms, such as presidential speeches, ministerial declarations, Congressional hearings, reports by business associations and employers’ groups, and newspaper and other articles from the U.S. and other countries.

In the introduction Dur lists four main arguments for trade liberalization that have been advanced in the literature, analyzes them one by one and argues that they are less persuasive than his own thesis. The first is societal demands for trade liberalization exercised by economic actors such as firms (including multinational companies), industries and factors of production. The second is political institutions at the national or international level that favor exporting interests, such as the authority delegated to the U.S. president by Congress under the Reciprocal Trade Agreements Act (RTAA) of 1934, and the subsequent effect of the RTAA on the setting up of the General Agreement on Tariffs and Trade (GATT) and stimulating several GATT negotiating rounds that liberalized trade after World War Two. A third possible impetus for trade liberalization is a country’s geopolitical interests, where its hegemony in a security alliance or its military spending may be enhanced by expanded trade. For example the U.S. may have promoted trade with its allies as an instrument to support its conflict with the Soviet Union. A fourth explanation is decision-makers’ ideas and beliefs, such as the alleged change of heart and mind of American legislators after the protectionist Smoot-Hawley legislation of 1930 aggravated the effects of the Great Depression, leading to the RTAA and subsequent GATT rounds.

Dur’s principal rationale for trade liberalization is “the protection-for-exporters argument … based on the premise that exporters lobby more against losses than in favor of gains of foreign market access. In particular, exporters mobilize against losses inflicted on them by the discriminatory trade policies of foreign countries, such as preferential trading arrangements” (p. 3). He develops this thesis in chapter 1, finding an early antecedent in S.H. Bailey’s “The Political Aspect of Discrimination in International Economic Relations” (Economica, 1932). How protection for exporters relates to pre-nineteenth century mercantilist policies is a question that Dur does not address, and the term “mercantilism” hardly appears in his book. When international trade textbooks discuss trade policies favoring exporters in the form of production or export subsidies, they analyze the welfare effects on producers, consumers and trading partners. In common with other political scientists, Dur prefers to study the political economy of trade within a game-theoretic framework where countries react to the policies implemented by their trading partners. He pays special attention to how the implementation of a preferential trade agreement (PTA) — such as a customs union or a free trade area — can elicit a variety of responses from countries excluded from it, such as attempting to join it, pursuing multilateral trade liberalization, forming a competitive PTA with other countries, or simply adjusting to it. Economic actors tend to lobby for their own economic interests, and Dur examines the resulting collective action problem first mentioned by Vilfredo Pareto in the Manuale d’Economia Politica (1906) and analyzed in detail in Mancur Olson’s The Logic of Collective Action (1965). This arises from the fact that gains and losses are unevenly distributed, and the possibility of free riding ensures that only actors with concentrated gains or losses have the incentive to mobilize for political action. Dur notes the informational problems affecting exporters, who find it much more costly to discover opportunities to expand their markets in other countries than to react to a threatened loss of their own exports due to institutional or policy changes in their trading partners, or to a possible gain in exports due to a perceived opportunity to join an existing PTA.

The author enumerates the five key hypotheses he plans to test in the remaining chapters relating to the behavior of exporters or their governments, in terms of 1) exporters’ lobbying efforts to avert losses due to a PTA created abroad, 2) the response to their lobbying by their own governments, 3) how the strategy for retaining market access for exporters in response to a foreign PTA is tailored to a country’s vulnerability in foreign markets, 4) how a country’s international bargaining strength affects this strategy, and 5) how the final outcome depends on the willingness of the member countries of a PTA to conclude an agreement with excluded countries. Another possible response to a PTA is for firms to engage in foreign direct investment to set up subsidiaries to service the market area of the PTA directly. Whereas most economists tend to argue that import substitution and export promotion are mutually exclusive trade strategies, Dur maintains plausibly that governments that strive to maintain the market shares of their exporters are also pressed by the lobbies of import competitors to ensure that the policies that favor exporters do not come at their expense. Protection for exporters can be, and often is, accompanied by undiminished protection for import competitors.

Dur provides empirical evidence for his protection-for-exporters thesis in the case studies he presents in chapters 2 to 7 encompassing the period from the Ottawa conference of 1932 to the present day. Chapter 2 on “Imperial Preference and the U.S. Reaction, 1932-1947″ is of particular interest since British imperial preference created the first global PTA before World War II and inspired the many PTAs that followed it. Its perceived consequences for American exporters in terms of lost markets in the U.K., Canada and other countries were a catalyst for the passage of the RTAA in 1934, designed to undo the nefarious consequences of the Smoot-Hawley tariff and other countries’ retaliatory tariffs. America’s trading partners were induced to reduce their tariffs in exchange for “reciprocal” reductions by the U.S. This philosophy, and the associated “most favored nation” (MFN) clause whereby a concession granted to one country is extended automatically to all other contracting parties, played an important part in the subsequent trade negotiations under the GATT. Dur analyzes the plethora of explanations that have been advanced for the passage of the RTAA. They include institutional changes such as the trading authority that Congress delegated to the president, the ideas and beliefs of policymakers newly oriented toward what they perceived as the need to reform the world trading system in the aftermath of the Great Depression, the opportunity the RTAA presented to further the U.S.’s geopolitical interests in a changed international environment, the “lesson thesis” that the Great Depression taught legislators in terms of the dire consequences of trade protection for national output and employment, and the party explanation that focuses on the shift in the balance of power from protectionist Republicans to freer-trading Democrats. While allowing some of these to play an ancillary role, Dur picks holes in all of them, and finds the protection-for-exporters the most plausible explanation. He calls attention to Roosevelt’s Secretary of State, Cordell Hull, a key actor in marshaling the support of exporters and their lobbies in favor of the RTAA. Dur’s thesis is persuasive: since it applies to more than one country and not simply to the U.S., it captures effectively the reciprocal nature of the Act.

As Dur recounts in chapter 3, the founding of the GATT in 1947 was followed by a decade of stagnation in transatlantic trade negotiations, which he attributes to a lack of perceived threat to exporters. Chapter 4 shows that this quiescence came to an end in 1958-1963 with the founding of the European Economic Community (EEC) by six countries in 1958. In order to protect its exporters from trade diversion, the U.S. proposed and gathered support for the Kennedy GATT round of 1964-67. The next two chapters argue that the multilateral negotiations that took place in successive GATT negotiating rounds, and other trade policy initiatives taken in Europe and North America, were mainly stimulated by the establishment of EEC, its subsequent enlargement into the European Community (EC) and gradual transformation into the European Union (EU). In each case Dur provides evidence for his protection-for-exporters thesis and evaluates the strengths and weaknesses of alternative explanations. The eight negotiating rounds held between 1947 and 1994 under the aegis of the GATT, until it was replaced by the World Trade Organization (WTO) in 1995, led to substantial tariff reductions, other forms of trade liberalization and a quantum leap in world trade. The RTAA thus acted as the catalyst that set in motion the entire sequence of policies and events that characterize international trade policy after World War Two.

Chapter 5 shows how the U.S. reacted to the first enlargement of the EEC to include the U.K., Denmark and Ireland, and then to a free trade agreement between the EEC and the other countries of EFTA, the European Free Trade Association. The latter had been created by seven European countries in response to the EEC, after they had initially decided not to join it. Chapter 6 studies transatlantic trade policies in the 1980s when the U.S. sought to protect its exporting interests from the consequences of the EU’s Single Market Program, adopted by its member countries in order to deepen the integration of their economies beyond the elimination of tariffs and quantitative trade restrictions. With a completion goal of 1992, this development stimulated the last and most ambitious Uruguay round of GATT trade negotiations (1986-94), where a primary aim of the U.S. was again to protect its exporters’ interests. The U.S. also responded to the EU’s evolution with its own PTA with Canada, extending it later to Mexico in the form of the North American Free Trade Agreement (NAFTA).

Chapter 7 completes the narrative by examining the competitive trade initiatives undertaken by the U.S. and the EU over the period 1995-2010, up to and including the Doha Development Agenda (and associated lagging round of negotiations) proposed after the GATT was replaced by the WTO. Dur documents the status in 2009 of the proliferation of PTAs that both the EU and U.S. created in the Americas, Africa, Middle East and Mediterranean region. Former U.S. Trade Representative Robert Zoellick gave this policy the rather misleading name “competitive liberalization,” when to my mind “competitive PTA creation” would be more appropriate. Dur’s protection-for-exporters thesis accounts well for the ensuing competitive formation of PTAs by the EU and the U.S., where an attempt by one bloc to create a PTA with an emerging market was countered by a similar attempt by the other bloc in order to avert the harm that might otherwise befall its exporters. For example the creation of NAFTA led to an EU-Mexico free trade agreement. Dur also throws light on an issue that trade economists have argued over in the past two decades, whether PTAs are “stepping stones” or “stumbling blocks” on the road to multilateral trade liberalization. He claims that “Although much has been written on this topic, this book is one of only a few that try to outline the specific circumstances under which preferential trade agreements set off a process of multilateral trade liberalization” (p. 221). While in general PTAs have served both as stumbling blocks and stepping stones, Dur believes that the latter scenario is more likely since a PTA frequently leads to negotiations with excluded countries aimed at deflecting its unfavorable consequences for their exporters, and thus to further trade liberalization.

In the conclusion Dur argues that his thesis is confirmed by the evidence presented in the case studies of chapters 2 to 7 spanning the period 1930-2010. He speculates that it may also be applicable to countries other than the North Atlantic ones and to other time periods. As possible additional case studies for his thesis, Dur mentions the Zollverein that united an increasing number of German states over the period 1818-1870 prior to Germany’s emergence as a nation-state, the competition for colonies by European countries in the late nineteenth century, and the “new regionalism” represented by the worldwide proliferation of PTAs (including now Asia as well as the transatlantic area) since the early 1990s. He should be encouraged to explore these and other historical episodes in order to shed additional light on his thesis and confirm its robustness. Although Dur’s thesis is persuasive and well supported by the evidence he presents, it focuses attention on the reasons for trade liberalization and downplays its normative aspects that are of interest to economists. Thus the competitive proliferation of PTAs by the U.S., the EU and most recently many Asian countries raises the question of how they affect the prospects of future multilateral trade liberalization. Such prospects have been harmed according to economists such as Jagdish Bhagwati, recent author of Termites in the Trading System: How Preferential Agreements Undermine Free Trade (2008). This is an area of topical importance and increasing interest to social scientists that Dur may wish to explore further in the future.

 

Andrea Maneschi is Professor of Economics at Vanderbilt University in Nashville, TN, and the author of Comparative Advantage in International Trade: A Historical Perspective (Edward Elgar, 1998). His research focuses on the international trade aspects of the history of economic thought, among them the interpretation of David Ricardo’s principle of comparative advantage.

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

Capital Ideas: The IMF and the Rise of Financial Liberalization

Author(s):Chwieroth, Jeffrey M.
Reviewer(s):Santos, Joseph M.

Published by EH.NET (June 2010)

Jeffrey M. Chwieroth, Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press, 2010.? xvii + 311 pp. $30 (paperback), ISBN: 978-0-691-14232-6.

Reviewed for EH.NET by Joseph M. Santos, Department of Economics, South Dakota State University.

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In Capital Ideas, Jeffrey M. Chwieroth, a senior lecturer in the Department of International Relations at the London School of Economics and Political Science, attributes longstanding IMF support for capital-account liberalization to (endogenous) dynamics shaped largely by its staff, rather than to (exogenous) rules or incentives imposed on it by its member states.? As such, Chwieroth deemphasizes strict state-centric and principal-agent interpretations of how the International Monetary Fund works in this case.? Instead, he argues that IMF culture and intellectual norms in the economics profession have together constructed capital-account liberalization as desirable.

Chwieroth models the evolution of IMF culture as five so-called intra-organizational processes: professionalization, administrative recruitment, learning, adaptation, and entrepreneurship.? Taken together, professionalization and administrative recruitment describe how the economics profession, from which the IMF recruits almost exclusively, imbues the organization with practices and beliefs that prevail in the discipline for better or worse.? Once instilled, organizational beliefs about how the world should work ? so-called ?normative conceptualizations,? including the desirability of capital-account liberalization ? change slowly if at all.? Change of this sort requires learning ? a process that updates policy goals or ?desirable ends? ? as opposed to adaptation ? a process that updates policy instruments or ?desirable means.?? However, unlike adaptation, learning occurs infrequently because it requires an internal entrepreneur ? that rare staff member with strategic agency sufficient to exploit differences, however slight, in intra-organizational normative conceptualizations so as to reshape them.

In chapter two, Chwieroth builds this theoretical framework on extant sociological and constructivist analyses of how international organizations work and evolve.? Then, in the subsequent seven chapters and epilogue (on the subprime crisis), he substantiates his argument by applying this framework to what he demonstrates to be the interrelated histories of twentieth-century economic thought (and how it relates to capital controls) and the IMF.

Chwieroth explains that the IMF initially accepted and, indeed, supported capital controls as a permanent feature of the post-World War II international financial system.? As such, IMF policy reflected the Keynesian notion that market expectations (and the financial flows and market swings that they manifested) were divorced from market fundamentals ? an assumption that had prevailed in the economics profession at the IMF?s inception.? Of course, as economic thought shifted toward the neoclassical synthesis, which held that markets were efficient in the long run, the dominant normative conceptualization in the profession shifted as well: by the 1960s, long-run capital-account liberalization was desirable and, as such, the profession broadly supported only market-oriented and temporary controls on some short-term, speculative capital flows.? Later, new-classical economics and the rational-expectations revolution, which essentially asserted the efficiency of all speculative flows, further reinforced the profession?s belief in capital-account liberalization.

Chwieroth demonstrates how, from the late 1970s onward, IMF recruitment, learning, and internal-entrepreneurship patterns ultimately realigned the institution?s thinking about capital freedom with that of the profession?s.? Based on his earlier work, published in the 2007 volume of International Studies Quarterly, Chwieroth identifies academic departments most responsible for promoting, through their scholarship published from 1963 to 1980, the capital-freedom norm. And, based on original survey data, he concludes that economists trained in these so-called neoclassical departments ? other department categories include heterodox American, Keynesian, and Continental-European ? tended to subscribe throughout their careers to neo-classical norms.? This is important because these neoclassical departments are, with few exceptions, those from which the IMF has traditionally recruited.? Chwieroth explains that as the proportion of these neoclassical-trained economists at the IMF rose from the late 1970s onward, intra-organizational learning and internal-entrepreneurship patterns effectively fashioned institutional support for capital-account liberalization.

In his last chapter, Chwieroth examines how, in the wake of the Asian financial crisis, the IMF ? and, in particular, its seemingly unwavering support for capital-account liberalization ? engendered resentment in emerging and developing economies, prompting them to adopt export-led growth strategies and, in doing so, self-insure against future capital flight.? This outcome has, at best, diminished the relevance of the IMF ? an institution otherwise well suited to establish global standards for financial supervision ? and, at worst, fueled global imbalances that likely contributed to the recent financial crisis.? Chwieroth suggests reforming IMF governance so that emerging and developing economies gain significantly greater opportunities to shape intra-organizational processes and, so, IMF culture.? Doing so will, in his view, rightly enable the IMF to shift the focus of the capital-liberalization debate from means ? whether to liberalize all at once or gradually ? to ends ? whether to liberalize at all.

Hence, in Capital Ideas, Chwieroth artfully blends history, sociology, and economics to demonstrate convincingly that while developed Western states ? and, in particular, the United States and the United Kingdom ? do not direct the IMF to endorse capital-account liberalization, the intra-organizational processes that govern the institution and the segment of the economics profession from which it recruits do effectively inculcate the IMF with this and other such Western-associated economic-policy norms.

Nevertheless, Chwieroth dismisses rather easily the case for capital-account liberalization: for example, he states simply that, ?the case for capital freedom is based on an analogy with standard theoretical arguments for free trade in goods and services? (p. 44) and labels as ?hypothesis-confirming bias? the contention that disorders caused by capital-account liberalization result from unsound policies in the affected countries.? Though he need not have favored capital-account liberalization, readers may wish that he had analyzed, with the same comprehensive and theory-rich approach that he employs so successfully elsewhere in the book, specific instances where speculation divorced from sound macroeconomic fundamentals instigated destabilizing capital flight.? (In this regard, he mentions, though only in passing, South Korea in the late 1990s.)? Doing so would have strengthened the case for the IMF reforms that he recommends; reforms that would, in effect, allow the IMF to learn developing- and emerging-economy capital ideas.

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Joseph M. Santos (joseph.santos@sdstate.edu) is Professor of Economics at South Dakota State University, where he teaches courses in macroeconomics and monetary policy.? His study of Canadian and U.S. agricultural policies during the interwar period, ?Going against the Grain: Why Do Canada and the United States Market Wheat So Differently?? appears in American Review of Canadian Studies (2010).

Subject(s):Economic Planning and Policy
Financial Markets, Financial Institutions, and Monetary History
International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Human Capital and Institutions: A Long Run View

Author(s):Eltis, David
Lewis, Frank D.
Sokoloff, Kenneth L.
Reviewer(s):Mitch, David

Published by EH.NET (February 2010)

David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, editors, Human Capital and Institutions: A Long Run View. New York: Cambridge University Press, 2009. ix + 342 pp. $85 (hardcover), ISBN: 978-0-521-76958-7.

Reviewed for EH.NET by David Mitch, Department of Economics, University of Maryland ? Baltimore County.

The Cliometric movement is now a half century old and throughout its existence Stanley Engerman has been one of its leading lights. Thus it is no surprise that this volume based on papers from a festschrift conference in honor of Engerman offers some exceptionally strong scholarship. However, it also bears some of the characteristics peculiar to festschrift volumes. The human capital and institutions theme suggested by the title has been applied quite broadly and loosely in order to incorporate all the contributions in this volume. Only three of its ten contributions deal with this theme directly; of the rest, two are anthropometric, one deals with employment and income stability, two with human talent, one with legal standing of labor contracts and one with usury laws. And while about half of the contributions are based ? as best I can tell ? on fresh research, the other half are largely reprises in varying degrees of work published elsewhere. Moreover, the book?s status as a festschrift in honor of Engerman is obscured by two aspects. The same editors, David Eltis (Emory University), Frank Lewis (Queens University), and Kenneth Sokoloff (late of UCLA), put together Slavery in the Development of the Americas published in 2004 which also honors Engerman and it is that earlier volume which has the usual introductory tributes and concluding bibliography of published work of the honoree. And in addition, one of the editors, Kenneth Sokoloff, died before the volume under review was completed and this current volume begins with a two page memoriam to Sokoloff while the editor?s introduction gives as much mention to Sokoloff as to Engerman. All the same, given his contributions to economic history, one can hardly begrudge Engerman at least a second festschrift volume and I suspect that at least one memorialschrift to Sokoloff is in the works. Having now actually read the chapters of this volume, I found that their cumulative quality more than offset any lack of cohesiveness, freshness or clarity on festschrift status. In fact, the diversity of topics was a plus in at least one respect; I found a definite merit of this book as an edited volume to be the opportunity it provided to sample the range of approaches currently undertaken by some of the senior practitioners of economic history.

The essays in the volume are grouped into four parts. The first part deals with ?health and living standards.? Two of the essays in this section are anthropometric: Robert Fogel?s survey of his work on biotechnology and what he calls the technophysio evolution and its implications for current health care policy along with Richard Steckel?s overview of his project on using skeletal remains to examine very long run trends in health and nutrition. It is these two essays which truly offer long run perspectives spanning in the case of Fogel?s project several centuries and in the case of Steckel some millennia. Although both these essays stem from much larger research projects, I found each informative as overviews of the authors? work. The third essay in the section is by George Boyer on income and employment instability in Victorian and Edwardian England. Boyer extends previous work with Timothy Hatton on unemployment estimates in substantial new ways with careful marshalling of evidence from diverse sources to argue that important but not fully appreciated changes occurred between the late eighteenth and early twentieth centuries in how British society coped with income and employment insecurity. Boyer argues that provision for poverty ?was not a ?unilinear progression in collective benevolence? from poor relief to national insurance? (p. 83). Instead, compared to what came before or after, the Victorian era was dominated by the role of self-help, friendly societies and other forms of mutual assistance rather than government-funded poor relief.

The second part of the volume is the one that directly addresses the topic of human capital and institutions. While two of the chapters in this part are based on work published elsewhere, they are both fundamental contributions and thus worth bringing together in one volume. One of these chapters is Stanley Engerman, Elisa Mariscal, and Kenneth Sokoloff?s piece on the evolution of schooling in the Americas. It is a slightly revised version of Mariscal and Sokoloff (2000). In this chapter, the authors build on the now influential Engerman/Sokoloff thesis on the importance of resource endowments in shaping long run institutional change. They attribute the much more advanced state of schooling North America over Central and Southern America to the more equal distributions of land and wealth in the former area. This chapter is a model of careful comparative argument and is also valuable for its collection of schooling data for various dates for a wide range of North and South American countries. In their contribution, Claudia Goldin and Lawrence Katz, like the Engerman et al chapter, consider the comparative question of why the U.S. led in education over other countries of the world. However, they address this question by looking at variation across U.S. states throughout the early twentieth century and they focus on secondary education. Like Engerman et al, they attribute much of the advance to social homogeneity in U.S. communities but in contrast to the previous study they give less consideration to the franchise. To their credit, the authors are quite clear in opening notes on how their chapter builds on previous working papers and also on material taken up in greater depth in their recent book The Race between Schooling and Technology. And they provide a sense of the care taken in compiling their data. They thus nicely offer readers ?Goldin and Katz Concise? rather than ?Goldin and Katz Lite.? The remaining chapter in this part reports Michael Edelstein?s new time series estimates of engineering graduates in the State of New York over the nineteenth and twentieth centuries. Edelstein does a thorough job of explaining his choices in compiling his numbers and the significance of his findings on trends in a profession that he argues convincingly has been central to modern economic growth.

The third part is titled ?human capital outliers? and consists of chapters on artists and very rich Jews. In their chapter, David Galenson and Robert Jensen revisit work Galenson has been doing for about a decade on the life cycle of artists based on a distinction between incremental, experimental innovators and conceptual innovators. They provide examples of artists in each category and then some empirical support by showing fitted profiles of prices of artworks on age in each case. Edward Tufte (2006, pp. 148-50) has objected to this modus operandi of displaying fitted curves without displaying the underlying auction price data ? and that the dichotomy in creative types may over-simplify. Still the exposition is lucid and the price-age profiles are intriguing. The other chapter in this part is Peter Temin?s study of why there have been a disproportionate number of very wealthy Jews. After providing a quite cogent formulation of the problem, Temin argues that Jews attaining great wealth were able to do so not as is sometimes suggested because discrimination in large business corporations spurred their entrepreneurial endeavors but rather because of the social networks they could draw on due to their clearly defined religious and ethnic identity. He supports his argument with simulations showing contagion effects. Despite this volume?s title, neither Galenson and Jensen nor Temin give much attention to the role of institutions in shaping and influencing the factors they consider although Galenson has done so elsewhere (see for example Galenson (2001)). I was surprised that Temin did not reference Andrew Godley?s (2001) comparison of Russian immigrant Jews in London versus New York City as a way of ascertaining the role of institutional environment in influencing the promotion of entrepreneurship for groups with a common Jewish heritage.

The final part of the volume takes up the theme of constraints. Robert Steinfeld?s chapter takes up constraints in the labor market. His point of departure is the Fogel and Engerman finding in Time on the Cross that slave labor was not necessarily less efficient than free labor. He then argues that the emergence of free labor contracting and in particular the reform of the Masters and Servants Act in Victorian England was not due to market forces or the perception by employers that free labor was more efficient than coerced or constrained labor but rather to the extension of the franchise with the Reform Bill of 1867 and related political factors. Steinfeld?s is the only non-cliometric chapter in the volume making minimal use of quantification and with no tables or figures.

Hugh Rockoff?s concluding chapter deals with the non-human resource issue of usury laws in the North American British colonies and U.S. He has compiled evidence on the evolution of usury laws in the North American colonies and the U.S. He argues for the importance of both intellectual attitudes as well as competitive market forces in influencing imposition and relaxation of usury laws. Until I read his chapter, I am not sure I fully appreciated that Adam Smith had actually advocated usury restrictions in The Wealth of Nations, albeit with moderation. Rockoff gives careful attention to the usury provision of the National Currency Act of 1863, arguing that concern for promoting the flow of capital to Western states implied provisions allowing national banks in a given state to charge the highest allowed interest in that state rather than some lower uniform national level. Rockoff?s weighing of the evidence leads him to conclude that on balance usury laws in the U.S. did have an impact on capital markets, though he leaves it as an issue for future research to assess its magnitude. Interestingly, Rockoff admits (p. 313, note 36) that compared with Bodenhorn and Rockoff (1992), his current work on usury laws implies somewhat less regionally integrated capital markets in the nineteenth century U.S.

To use David Galenson?s distinction, the cliometric movement was initially perceived by many as making a conceptual breakthrough in the practice of economic history; however, this volume raises the issue of whether many of the founding cliometricians should in retrospect be classified as experimental innovators. Comparing the second section of this volume with the human capital section of the manifesto of the cliometric movement, The Reinterpretation of American Economic History (Fogel and Engerman 1972), one is certainly struck by the variety of incremental advances both conceptually and in data collection that have occurred in the interim. The current volume also highlights at least some of the interdisciplinary directions in which cliometrics has proceeded over the last 40 years. This is particularly evident in the anthropometric work of Fogel and Steckel. As Galenson (2009, p. 2) has recently acknowledged, efforts to extend quantification to art history have met with definite resistance by art historians. All the same, the use of quantification in this volume while certainly abundant is generally worn lightly and in a nuanced manner as would seem fitting for the honoree?s intellectual style. While Steinfeld?s is the only non-quantitative chapter, only three of the remaining nine chapters by my reckoning explicitly report econometric results.

It is certainly a tribute to the breadth of both Engerman?s and Sokoloff?s work as well as the reach of cliometrics that this volume features just one aspect of their endeavors. One can turn to Slavery in the Development of the Americas for an entirely different dimension of Engerman?s contributions and I would anticipate at least one Sokoloff memorialschrift dealing extensively with his work on technological innovation and other topics barely touched on in this volume.

References:

Howard Bodenhorn and Hugh Rockoff (1992), ?Regional Interest Rates in Antebellum America? in Claudia Goldin and Hugh Rockoff eds. Strategic Factors in Nineteenth Century American Economic History, A Volume to Honor Robert W. Fogel (Chicago: University of Chicago Press).

David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, editors (2004), Slavery in the Development of the Americas (Cambridge University Press).

Robert Fogel and Stanley Engerman (1972), The Reinterpretation of American Economic History (New York: Harper and Row).

David Galenson (2001), Painting Outside the Lines (Cambridge, MA: Harvard University Press).

David Galenson (2009), Conceptual Revolutions in Twentieth-Century Art (Cambridge University Press).

Andrew Godley (2001), Jewish Immigrant Entrepreneurs in New York and London, 1880-1914 (New York: Palgrave).

Claudia Goldin and Lawrence Katz (2008), The Race between Education and Technology (Cambridge, MA: Harvard University Press).

Elisa Mariscal and Kenneth L. Sokoloff (2000), ?Schooling, Suffrage, and the Persistence of Inequality in the Americas, 1800-1945? in Stephen Haber ed. Political Institutions and Economic Growth in Latin America (Stanford: Hoover Institution Press).

Edward Tufte (2006), Beautiful Evidence (Cheshire, CT: Graphics Press LLC).

David Mitch is Professor of Economics at the University of Maryland, Baltimore County. His chapter ?Chicago and Economic History? is forthcoming (2010) in Ross Emmett ed., The Elgar Companion to the Chicago School of Economics. Email: mitch@umbc.edu.

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

Agriculture and Economic Development in Europe since 1870

Author(s):Lains, Pedro
Pinella, Vincente
Reviewer(s):Grantham, George

Published by EH.NET (January 2010)

Pedro Lains and Vincente Pinella, editors, Agriculture and Economic Development in Europe since 1870. London: Routledge, 2009. xviii + 407 pp. $40 (hardcover), ISBN: 978-0-415-42487-5.

Reviewed for EH.NET by George Grantham, Department of Economics, McGill University.

The seven decades leading up to World War II represent a distinct epoch in Europe?s long agricultural history as a transitional phase between late organic agriculture based on farm-produced inputs and the modern industrial forms that since 1960 have transformed western agriculture out of all recognition. Despite intervals of stagnation (and in war-torn economies contraction) productivity rose two to three times faster than in pre-industrial times. With the exception of Britain, whose precocious industrialization prior to the transport revolution provoked industrial hyper-specialization, Europe as a whole nevertheless remained fundamentally agricultural. In industrially advanced economies agriculture occupied a quarter to a third of the work force; on the backward periphery the proportion was half to four-fifths into the 1950s. Certain features of the agricultural history of this period are well-known: the politics of agricultural protection has been exhaustively studied, as have institutional innovations like the Danish cooperatives and German land banks. For advanced countries the statistical record is fairly complete. The main gap in our quantitative knowledge concerns eastern and southeastern Europe, where boundary changes and massive displacement of rural population make it difficult to collate and interpret the statistical record, and the Iberian peninsula, where scholars were late to mine the rich veins of data deposited in Spanish and Portuguese archives. The result is that until recently, it has been difficult to get an idea of the evolution of European agriculture as a whole.

The present work takes a big step in that direction. It consists of twelve country studies ranging from Portugal to Poland and Sweden to Turkey preceded by three fine introductory essays by Lains and Pinella, Olmstead and Rhode, and Broadberry that set out the methodological and historical issues raised by the collection, and in Broadberry?s essay, estimate the effect on aggregate productivity of agriculture?s declining share of the work force. The editors are to be congratulated for having gotten contributors to observe a common format, which helps bring out the common threads in a fascinating tapestry of national experiences. The format is a set of questions formulated by development economists in the 1960s to measure the effect of agricultural change on developing economies. To what extent did agriculture ?release? labor and capital to modern sectors? In what measure did agricultural demand support domestic manufacturing? In what measure did agricultural exports support the import of capital? How fast did productivity grow? I would have preferred a format based on historical categories of opportunity and response, but these are useful and important questions that do good service as a framework for assembling and interpreting the statistical material.

That material constitutes one of the collection?s major strengths. The series are well-presented and many are new, making the work an indispensable reference for economic historians of late nineteenth- and early-twentieth-century Europe. Special care was taken to adjust the data for boundary changes in the case of Germany, Poland, Greece, and Turkey. The French data are an exception and those interested in the statistical record to 1914 are referred to my reconstruction of the French agricultural capital stock and its attached estimate of total factor productivity.[1] The German data are especially helpful in showing the regional diversity of productivity growth in this period. Federico?s new capital stock series alters the traditional picture of utter stagnation in the 1880s and early 1890s, putting the long-term growth record before World War I on a par with other late nineteenth-century industrializing nations.

What generalizations can one draw from the forest of country studies? The number of countries covered makes it impossible to summarize individual contributions. All are excellent, and the best, like Wolf?s essay on Poland, Petmezas?s on Greece, and Pamuk?s on Turkey, are outstanding. Perhaps the simplest way is to interpret the outcomes as the product of the responses of millions of farmers and a dozen or so governments to the period?s specific sequence of opportunities and shocks. The main opportunity was expanding markets for farm produce in regions undergoing industrialization, which sustained cash flows needed to finance agricultural investments and the purchase of modern inputs. The regional unevenness of that opportunity goes a long way to explaining the regional unevenness in agricultural development on the eve of the Second World War. Agricultural countries like Denmark and the Netherlands, which did not experience intense industrialization benefitted from their proximity to markets in Britain, Belgium, and Germany. By contrast, farmers in southern Italy obtained almost no benefit from northern Italy?s late nineteenth-century industrialization. Pre-war Poland is a special and interesting case. Divided among three occupying powers, its western German partition experienced relatively high productivity growth based on markets around Berlin and the industrial district of Silesia. By contrast, a chain of mountains separated Austrian Galicia from urban and industrial districts in Lower Austria and Bohemia, and a tariff wall separated the province from the Russian partition centered on Warsaw, which had a deficit in foodstuffs. North-south differences in dietary traditions also mattered. The comparative advantage of Mediterranean agriculture in olive oil and wine could not be exploited because the cuisine of northern industrializing districts was based on beer and animal fats. The region might still have managed to find an opportunity in the export of citrus fruits, but that market was pre-empted in the 1880s and 1890s by California. The infestation of French and Italian vineyards by phylloxera in the 1880s gave a temporary boost to Greek currant exports, but recovery of French production after 1895 ended the brief boom, precipitating massive emigration of Greek peasants to America.

On the whole then, it would appear that agricultural development in this period was tributary to industrial and urban development rather than the other way round. As to the globalization of the grain trade, about which so much has been written, its impact was felt mainly by farmers provisioning urban markets, to which it was disproportionately oriented. Overall, however, declining transport costs, of which the ?grain invasion? was a prominent consequence, contributed to productivity growth by inducing more efficient land use. As to new technologies and new inputs, the main conditioning factors were the strength of market outlets, the availability of credit, and in the case of agricultural machines employed in field operations, farm size. In northern Europe yields rose most rapidly in districts where declining transport costs made it possible to import fertilizers and soil amendments onto poor soils. These advantages were largely lacking on the periphery, where high transport cost, poorly organized markets and credit, and low demand provided little incentive to invest in new inputs.

As to the farmers? responses, nothing in the record suggests that their reaction to events was economically irrational. The same cannot be said of governments, which adopted protectionist policies supporting rural incomes at the expense of urban consumers, and attempted to soften the cost of those policies by rationing and price controls. That autocratic as well as democratic governments pursued such strategies suggests the continuing need to accommodate the landed interest, including a generally conservative peasantry that still made up half the population. Yet in a long-run perspective it is unclear whether on balance protectionist policies significantly depressed productivity growth. Tariffs were often part of a broader program of public investment. In Portugal and Spain it took the form of roads, hydroelectric projects, and irrigation projects; in Italy, Spain, and Greece autocratic governments subsidized the draining and resettlement of malarial plains; the Swedish government promoted rural electrification. The major exception seems to have been Germany. In the 1930s Germany?s nationalistic pursuit of agricultural self-sufficiency deprived her farmers of the imported feed for livestock, with the result that per capita production of meat in 1939 was less than in 1913. There is no question that agricultural protection in the 1930s depressed real incomes. Yet given worldwide contraction in agricultural demand during the Great Depression it is doubtful that productivity would have grown significantly faster under a regime of free trade. On the whole, the responses of farmers and governments seem to have mattered less for growth in agriculture than the opportunities.

The other feature of this period was war. In successively reading the agricultural histories of the peripheral countries (Poland, Hungary, Portugal, Spain, and Greece and Turkey) one is impressed by the effect of political instability on productivity growth. It does not seem to make much sense to reduce that instability to the effects of insecure property rights, however. Wars, civil or foreign destroyed property, disrupted commercial connections, and displaced hundreds of thousands of people independently of the legal protection of private property. The Civil War in Spain brought large numbers of people to the brink of starvation and malnutrition that lasted through the 1940s. The most important expropriations occurred on disputed territory on the Ionian coast and the southern Balkans that were jointly populated by Greeks and Turks. But once the ethnic cleansings were carried out, the rights of the new owners were fully protected. Even so, productivity stagnated.

Few books can be said to be ?essential reading.? The present book is one of them. The bibliographies are in general full and up to date. The interpretations are within the space limitations imposed by this kind of work sensitive to the political and social context of agricultural change in this period. It is, however, only a beginning of the effort to place the development of Europe?s agriculture through the Continent?s classic phase of industrialization in a long-run perspective that incorporates the period?s technological and social-political specificity.

Reference:

1. George Grantham, ?The French Agricultural Capital Stock, 1789-1914,? Research in Economic History 16 (1996): 37-83.

George Grantham is a recently retired Professor of Economics at McGill University. His recent work includes ?Explaining the Industrial Transition: A Non-Malthusian Perspective,? European Review of Economic History (2008); ?Creating Abundance: Biological Innovation and American Agricultural Development: A Research Perspective,? Explorations in Economic History (2009) with Jeremy Atack and Peter Coclanis; ?French Agriculture, 1250-1550: Crisis or Continuity?? (forthcoming); ?Female Labour Supply in the Industrial Revolution? (forthcoming) with Franque Grimard; ?Science and Its Transaction Cost: The Emergence of Institutionalized Science in Europe, 1650-1850? (forthcoming); and ?What’s Space Got to Do with It? Distance and Agricultural Productivity before the Railway,? Journal of Economic History (forthcoming). He is also engaged in a translation of Francois Crouzet’s La Grande Inflation: La monnaie en France de Louix XVI a Napoleon.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Finance and Modernization: A Transnational and Transcontinental Perspective for the Nineteenth and Twentieth Centuries

Author(s):Feldman, Gerald D.
Hertner, Peter
Reviewer(s):Fear, Jeffrey

Published by EH.NET (January 2010)

Gerald D. Feldman and Peter Hertner, editors, Finance and Modernization: A Transnational and Transcontinental Perspective for the Nineteenth and Twentieth Centuries. Farnham, Surrey, UK: Ashgate, 2008. xviii + 300 pp. $115 (hardcover), ISBN: 978-0-7546-6271-6.

Reviewed for EH.NET by Jeffrey Fear, Department of Business Administration, University of Redlands.

This edited volume is based on a set of papers presented in 2005 at a Vienna conference organized by the European Association for Banking and Financial History. The meeting hosted by the Bank Austria Creditanstalt coincided with the bank?s 150th anniversary. Sadly, the volume is one of the last publications associated with the late Gerald Feldman of the University of California, Berkeley. Peter Hertner of the University of Halle has picked up the proverbial editorial ball to bring this collection of twelve articles to goal. The collection is timely because it reminds us that the period prior to 1914 and the period after the 1980s parallel one another in their trends toward greater liberalization and regionalization. Prior to 1914 Vienna was the fourth largest banking center in Europe behind London, Paris, and Berlin (p. 38). Austrian banks hold a similar position today that they had a century ago (Deiter Stiefel, p. 28). The volume also reminds us that exposure to central eastern European governments and commercial ventures sometimes sparked periodic financial crises that the Viennese financial hub then passed on to global stock exchanges (1873, 1931). Those two crises act as a frame for most of the articles.

The book has four sections. Not surprisingly, the most coherent section centers on banking in Vienna/Austria (Dieter Stiefel, Peter Eigner, Aurel Schubert, and Fritz Weber). The second section has three thematically-oriented articles regarding the efficiency of German stock markets before 1848 (Hartmut Kiehling), Balkan railways and their international financing (Peter Hertner), and the information networks of the Rothschild bank (Rainer Liedtke). The third part consists of three articles on Swedish joint-stock companies (Oskar Broberg), the Holland-based Twentsche Bank (Douwe C.J. van der Werf), and the Ergasias Bank in Greece post-1975 (Margarita Dritsas). The fourth consists of two articles on the Sino-French Banque industrielle de Chine between 1900-1922 (Frank H.H. King) and a short, broad two-century survey of the State Bank of India (Abhik Ray).

This volume highlights some new directions in banking literature that need further research. In line with much historiography on German banking (pp. 42-45), Peter Eigner finds Alexander Gerschenkron?s notion of the universal bank as an institutional substitute for the missing prerequisite of ?original accumulation? wanting. Especially after the 1873 crash, Austrian universal banks were risk-averse, preferring safer public borrowing rather than industrial financing (p. 31) and with an ?aversion to shares? (p. 33). Not until the post-1900 boom did banks turn to industrial lending, but still could not be said to play the role of true venture capitalists (p. 35); more often banks had to rescue industrial firms rather than promote them (p. 47). Aurel Schubert stresses the contradictions during banking crises between monetary and financial stability, whereby the lender-of-last resort policy that might help maintain (short-term) bank and financial stability potentially harms monetary, i.e. currency and price, stability over the long-term ? a dilemma all too real in the crisis of 2009/2010. Schubert argues that during periods of intense crisis, central bankers made decisions under considerable uncertainty so that the risks of lending were often less than the risks of not lending, especially when political pressure comes to bear. With a subtle reading of bank balance sheets, Fritz Weber demonstrates how the 1931 crash that marked a new stage in the Great Depression (unlike the 1873 crash that purified the air); the 1931 crisis was a culmination of a long erosion of bank solvency (a ?creeping crisis,? p. 93) beginning with World War I and the collapse of the Monarchy. Eigner, Schubert, and Weber tend to view the conflation of banking and industry capital not as an efficient solution to informational asymmetries or as a solution to agency problems nor as a way in which banks ?dominated? industry, but as a highly leveraged, inefficient, and downright dangerous institutional arrangement; especially during downturns such bank gearing quickly translated downturns into systemic crises (contagion) and into the domestic ?real economy.? The entwinement of large weakened banks with a deteriorating industrial sector heightened systemic risk levels by the very act of trying to reduce them.

As a whole, the volume lacks a broader theoretical framing and misses a number of opportunities to examine important questions in spite of the virtues of the individual contributions. What might these interlocks and banks at the heart of industrial groups (keiretsu, chaebol, Indian or Mexican family groups with tight ties to banks, or even Swedish Wallenbergs with its myriad interlocks with major industrial firms) mean for understanding financial crises more generally? Did universal banks crowd out or weaken stock exchanges? In spite of/because of (?) the purest forms of universal banking that inspired both Rudolf Hilferding and Joseph Schumpeter, both Berlin and Vienna were important stock exchanges prior to 1914. Hartmut Kiehling tests efficient market hypothesis assumptions and argues that early German stock markets before 1848 began approaching a level of efficiency, broadness, and transparency that enabled a certain volume of fair trading for important stocks. What exactly is the relationship between universal banking and stock exchanges? Vienna would be an important test case.

What ?lessons? does the Vienna story tell us about the rise and fall of financial centers more generally? First, it appears that finance and international diplomacy are important. Vienna could only remain a major financial center as long it was part of the Empire. At most it could become a regional player after the empire collapsed, but its historical importance made it a particularly crucial but weakened player with more potential for crisis than other centers. In spite of the inclusion of two articles on India and China and some references to the 1997/98 Asian financial crisis, more contextualization, theorization, or reflection would have been helpful. Large banks apparently play a special role in the economy as a flywheel between the macroeconomic and microeconomic, most explicit in Fritz Weber?s contribution about the Austrian Creditanstalt (p. 79).

The volume could use greater analytical sharpness on its own themes of modernization and transnationalism. It is stronger on issues of personal and limited liability, systemic risk and contagion. In the concluding remarks, Alice Teichova notes that the contributors made ?no special attempt? to define a concept of modernization (p. 273). Except for Peter Hertner?s contribution on international capital flows into railway corporations of southeastern Europe or Frank King?s on French banking in China, the transnational perspective promised in the subtitle is not highlighted or theorized beyond the individual, local contribution ? somewhat disappointing considering Vienna was one of the most multiethnic cities in Europe with pan-European political and financial connections.

Yet the individual contributions offer many chances to theorize issues of transnational relations ? often within one firm or family. Peter Hertner follows the truly remarkable business ventures of Moritz von Hirsch, whose family connections bridged most of the main western European banking centers, whose business executives were hired all over Europe to promote a railroad to ?European Turkey? ? from Vienna to Constantinople ? that eventually became known as the ?Orient Express.? To help finance it, von Hirsch innovated a new type of Turkish lottery bond that became popular ? and controversial ? all over Europe with small investors. Its directors ranged from Paris, Zurich, and Vienna to Constantinople (Istanbul). Its headquarters lay in Zurich with Credit Suisse handling the day-to-day administration as a ?neutral instance? (pp. 140-142). Hertner?s weaving of financial, business, and diplomatic threads that undergird this venture is impressive. The story of the Orient Express and other Balkan railroads is truly a pan-European one, a European one that we are again seeing today but that was destroyed by increasingly virulent nationalist sentiment, for instance, Macedonian nationalism that targeted the symbol of foreign imperialism ? the railway ? much as terrorists target airlines today.

Frank King focuses on the failed Sino-French joint-venture Banque industrielle de Chine between 1900 and 1922 ? which should have asserted French influence in China. King notes how the ?Powers? attempt to control China?s financial development actually undermined China?s creditworthiness and stunted its modernization. Abhik Ray examines ?two centuries of apex banking? of the State Bank of India, but it had its origins as the Bank of Calcutta/Bank of Bengal by the British. Ray argues that these apex banks built on Scottish banking principles, provided the ?best banking service obtainable in India,? stressing customer service and once going so far as to rebuke a European officer for rudeness vis-?-vis a Indian native clerk who wrote and spoke English (baboo) (p. 265). Douwe C.J. van der Werf, examines the relationship between family succession, legal liability issues, and corporate governance, yet the Twentsche Bank had offices and branches in Amsterdam, Rotterdam, London, Paris, and northwest Germany. What exactly does it mean to operate trans-nationally during this period of globalization? Rainer Liedtke analyzes the pan-European quality of the Rothschilds? network of agents; the Rothschilds needed a multiethnic network of agents to operate in a multi-ethnic world to improve the quality of the information received (p. 158). The Rothschild advantage was not speed ? initially wary about the telegraph ? but the ?precision, the reliability and most importantly the exclusiveness of the information? based on their agents? network. Oskar Broberg examines the rise of the modern joint-stock company with limited liability laws for Sweden, but contextualizes Sweden in the broader pattern of its introduction throughout Europe and America. How exactly did this transnational diffusion process occur? What and how did Sweden learn from these other countries? Broberg?s article highlights that an intellectual-legal history of the diffusion of limited liability throughout Europe is still needed. Margarita Dritsas breaks the general timeframe of the volume yet provides a fascinating account of the Ergasias Bank in Greece since its founding in 1975. Constantinos Kapsaskis conceived of the new bank as one dedicated to small-and-medium sized businesses and drew upon American models of banking, including that of the Small Business Administration, and forced a widely dispersed shareholding (no more than 5% by one person) and transparency based on international accounting standards. Before its merger into Eurobank in 2000, it became one of the largest and most profitable in Greece, if not Europe. In all of these contributions, the transnational element could have been highlighted more.

One remarkable quote taken from Austria Creditanstalt?s 1872 report, written at the height of the speculative wave of company promotions might act as a timely reminder (p. 79): ?It would not have been hard for us to raise our margins through extraordinary profits, had we gone on to found new commercial or industrial enterprises with a laxer method of selection as we had such frequent opportunities, and if we had thought to follow the general mood, only thinking of the momentary advantage to turn our activities to the creation of value that offered only more material for the day-to-day speculation instead of encouraging participation of the public who possessed capital in solidly established corporations.? This volume reminds us how much banks play a special role in the economy between macroeconomics and microeconomics, special intermediaries between depositors and investors, potential guardians of investors on boards of firms, as transmission mechanism between national and international economic developments, and balancing rewards and risks. Woe to those economies whose bankers fail them.

Jeffrey Fear authored Organizing Control: August Thyssen and the Construction of German Management (2005) and ?Cartels? in the Oxford Handbook of Business History, edited by Geoffrey Jones and Jonathan Zeitlin. He is working on a series of comparative articles on German and American banking and corporate governance. jeff_fear@redlands.edu

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

After Adam Smith: A Century of Transformation in Politics and Political Economy

Author(s):Milgate, Murray
Stimson, Shannon C.
Reviewer(s):Frey, Donald E.

Published by EH.NET (January 2010)

Murray Milgate and Shannon C. Stimson, After Adam Smith: A Century of Transformation in Politics and Political Economy. Princeton, NJ: Princeton University Press, 2009. x + 309 pp. $35 (cloth), ISBN: 978-0-691-14037-7.

Reviewed for EH.NET by Donald E. Frey, Department of Economics, Wake Forest University.

The ambitious goal of Milgate and Stimson is to demonstrate how classical political economy “sought to influence and alter the understanding of politics and political life,” especially in Britain (p. 1). They produce a very careful and detailed analysis of early economists’ ideas on issues shaping the modern concept of the political order, in the process displaying a rich array of competing ideas. Milgate and Stimson cast a wide net, catching in it thinkers around the edges of economics, especially the Utilitarian philosophers and a variety of other reformers. However, discussion of continental Europeans and Americans is sparse. Milgate and Stimson use Adam Smith as a benchmark for the developments they discuss, although later ideas often deviated significantly from Smith’s due to his eighteenth-century outlook. Indeed, Milgate and Simson are very systematic in exposing how various later writers, who sometimes cloaked their ideas in Smith’s authority, were simply attributing to Smith what wasn’t unambiguously there. Consider the authors’ approach on a few topics they examine.

A major early chapter addresses the uneasy relationship between the concept of civil society and economic society. Prior to Smith, feudal thinkers and mercantilists had interpreted both civil and economic developments through the lens of state, or government, actions. Their premise was that society operated only with intentional control from the top. However, if society had its own inner, independent dynamic, then any state role would be greatly diminished; further, any explicit public morality, or virtues, would become irrelevant.

It was precisely this latter view ? that society has its own inner dynamic ? that the political economists advocated, thereby revolutionizing the concept of civil society. For Smith, the market system, at the center of society, diminished the significance of “both the state and the direct influence of statesmen” (p. 48). In addition, public virtues were displaced; for Smith, morals reflected the highly particular and individual relationships that people developed with those closest to themselves. Yet, according to Milgate and Stimson, Smith did not go to the extreme in which “the concept of the self-regulating market … came to play the more politically constraining role” that eventually emerged with modern economics (p. 50). David Ricardo added a new element to the notion of the self-guiding market system, arguing that economic classes, not individuals, were the relevant locus of economic and social action. This sharply contradicted the harmonious individualism of many other early economists’ theories. Milgate and Stimson consistently demonstrate that classical economics opened the door to multiple interpretations of civil society.

This richness of possibilities, however, was killed by the ultimate arrival of neoclassical economics. Milgate and Stimson put it this way: “Economics moved from thinking of civil society composed of social classes, professional groups, corporate entities, trade unions, and cooperative societies, to a civil society of isolated individual utility maximizers” (p. 56; emphasis added). They quote Ronald Meek approvingly: “the new starting point became, not the socioeconomic relations between men as producers, but the psychological relation between men and finished goods” (p. 58). In short, civil society was reduced to a neoclassical oxymoron as the isolated castaway Robinson Crusoe became their favored model of what was worth understanding about society! Milgate and Stimson obviously find that true political economy died with the ascendancy of neoclassical economics. They are not any kinder to the various theories of society (e.g., public choice) that have lately emerged from the neoclassical perspective. Their conclusion on the neoclassical vision: no social values exist beyond efficiency, no moral or social obligation remains, only arbitrary individual preferences matter, and anti-institutionalism saturates the literature (p. 59). For Milgate and Stimson, classical economics is always seen in tension with neoclassical theory.

Another significant political issue (covered in two chapters) was extension of the franchise in early nineteenth-century Britain. Milgate and Stimson give major attention to James Mill and David Ricardo, who each favored widening the electorate, but for very different reasons. Because everyone’s individual utility mattered to Mill, government by the rich was intolerable from a Utilitarian perspective. Yet, equally intolerable would be a vote for the ignorant, or those with no stake in the community, thus leaving out the large poor and working classes. Mill, however, favored the vote for the (reliable and safe) middle classes. Before being enfranchised, workers and the poor would need to be educated to know their own true interests, which Mill blandly equated with those of the middle class. They should also acquire the middle-class propensity to accumulate, as property presumably was the most meaningful stake in society that one could have. Mill favored enfranchisement provided it created a bourgeois republic.

Ricardo, on the other hand, did not believe that workers needed conversion to a middle-class mentality, for workers correctly assessed their interests, which also tended to coincide with those of the larger community (p. 176). As defined by Ricardo, the interest of the nation was to increase its net product, and this depended on accumulation (from profits, not middle-class savings). In turn, this required ending the diversion of income to land rents, luxuries, and even general government, an agenda Ricardo believed the working class would accept as being in their interest. In short, Ricardo meshed his case for voting rights to his understanding of economics. Milgate and Stimson drop the subject at this point, leaving implicit some key questions: for example, whether the enfranchised workers would really have an affinity with Ricardo’s essentially capitalist agenda. Implicitly, the authors also expose how tentative and limited was the reasoning that passed for significant reform in the classical era. The very richness of this book’s scholarship sometimes leads the authors away from their main thread. For example, the entire chapter on nineteenth-century utopias and stationary states seemed to have little relationship to political philosophy, politics or statecraft. In general the early political economists (in line with Smith) disparaged reformers as “utopian” if reform ventured in directions that would change the status quo too much. For their part, the political economists predicted the coming of a stagnant steady-state future. The relation of this to the interface of economics and politics is not clear to this reader. However, an exception occurred when colonies, and government policies toward colonies, were debated as an antidote to the steady state. Provocatively, this chapter closes with an interpretation of neoclassical economics as the victory of a sort of utopianism, in which competitive efficiency defines the best world (subject to constraints imposed by the status quo, which lie outside economics of course).

As noted, the authors compare classical economics as much to neoclassical economics (at its endpoint) as to Adam Smith at the starting point. Ironically, according to the authors, neoclassical economics reflected Utilitarian philosophy more than the actual classical economics. Neoclassical economics reduced a variety of classical questions by considering them in merely two dimensions ? individualistic utility and competitive efficiency. This, argue the authors, destroyed the interplay of economics and politics by its narrow focus on the self-oriented individual. This judgment applies as well to more recent neoclassical developments such as public choice; the putative “citizens” populating public-choice “societies” are simply homo economicus of the neoclassical world. At the conclusion of the book the authors contrast Smith’s “tenuous, equivocal, and open-ended” views on the affirmative roles of government against the “quite otherwise” views of neoclassical economics (p. 267).

In short, this book provides a striking perspective on classical political economy. The reader will benefit from some prior familiarity with Smith, Malthus, Ricardo and J. S. Mill, along with the Utilitarians. Some digression from the main thread may be forgiven as it always explores interesting concepts. The book makes only rare references to American thinkers, some of whom could have added a dimension lacking among the British authors. Alexander Hamilton, for example, clearly possessed a philosophy of politics and government informed by economic ideas and pragmatic financial experience; and his outlook clearly differed from that of the major British figures. In addition, nineteenth-century American thinkers often provided a religious interpretation to their economic and political ideas, which could have provided a welcome counterpoint to the predominantly secular outlook of the British classical economists considered.

Donald Frey is author of America’s Economic Moralists: A History of Rival Ethics and Economics (Albany, NY: SUNY Press, 2009; paper 2010).

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):19th Century

War and Taxes

Author(s):Bank, Steven A.
Stark, Kirk J.
Thorndike, Joseph J.
Reviewer(s):Brownlee, W. Elliot

Published by EH.NET (May 2009)

Steven A. Bank, Kirk J. Stark, and Joseph J. Thorndike, War and Taxes. Washington, DC: Urban Institute Press, 2008. xix + 224 pp. $26.50 (paperback), ISBN: 978-0-87766-740-7.

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

In early March, 2003, Secretary of the Treasury John W. Snow explained to the House Ways and Means Committee how a Bush administration proposal for a round of massive tax cuts would be consistent with fighting a war in Iraq. Snow declared that ?The cost of the war will be small,? and went on: ?We can afford the war, and we?ll put it behind us.? In reporting in the New York Times on this testimony and the Bush administration?s ?determination to cut taxes even while waging war in Iraq,? the late David E. Rosenbaum observed that ?President Bush is bucking history.? Rosenbaum explained: ?With the exception of the war against Mexico in the 1840s, taxes have been increased for every war the United States has fought.?[1] War and Taxes responds to propositions that Bush (and the Congress) were ?bucking history? by attempting to write ?a thorough and balanced account of the politics of U.S. tax policy during wartime.? The authors ? Steven A. Bank and Kirk J. Stark, who are professors of law at the University of California, Los Angeles, and Joseph J. Thorndike, who is director of the Tax History Project at Tax Analysts and scholar in residence at the University of Virginia ? explain that ?our chief objective has been to put the tax cuts enacted during the war in Iraq in historical perspective? (p. 174).

In the introduction and conclusion, which set forth the book?s key interpretations, the authors assert that in one sense the Bush administration was, indeed, bucking history. The contrast ?between an active war effort on one hand and substantial tax cuts on the other … has no precedent in American history,? they write (p. xii). Further, it is ?an inescapable fact,? the authors declare in their introduction, that ?the United States has a strong tradition of wartime fiscal sacrifice, and the Bush tax cuts mark an abrupt departure from that tradition? (p. xiii). However, the authors seek to diminish the extent and significance of this departure. Most important, they discount the historic force of the tradition of fiscal sacrifice: ?Our commitment to wartime fiscal sacrifice has always been uneasy ? and more than a little ambiguous? (p. xiii). While they find evidence for a ?strong? tradition of fiscal sacrifice that appears ?in the extraordinary tax changes wrought by World War II and, to a lesser (through still significant) extent, during World War I and the Korean War, … in many of the wars we examined the tradition is better described as one of reluctance, resistance, and opposition? (p. 167). Thus, the authors suggest, the politics of wartime taxation during the Iraq war have not been fundamentally different from the politics of ?many? wars. Sacrifice has been debated, but three factors, the authors assert, have worked against any form of increased financial sacrifice and in favor of tax cuts. These crucial elements of contingency have been: (1) relief from the kind of fear of inflation that helped drive tax increases in earlier wars; (2) ?increased partisan polarization and the corresponding marginalization of deficit concerns? (p. 172); and (3) the end of the military draft in 1972, which means that ?arguments for the ?conscription of wealth? simply no longer have the same moral force that they once did? (p. 173).

The authors? crucial chapter on ?9/11 and the War in Iraq? follows five chapters which provide discrete narratives of tax politics during the American Revolution and the War of 1812; the Civil War; World War I; World War II; and Korea and Vietnam. The book gives only cursory treatment to the Mexican War, the Spanish-American War, and the Gulf War, and does not discuss the Indian wars or the Cold War. In the narratives, the authors focus on the provisions of wartime tax laws and the legislative process, paying special attention to ?the influence of arguments concerning ?shared sacrifice? in shaping wartime tax policy? and the role of ?wartime opposition to increased taxes? (pp. xiii-xiv). In doing so, they stay close to the surface of politics. For example, they ?offer no single definition or methodological answer to the question of what constitutes a tax cut.? They explain: ?We have … let our subjects define the terms. If political leaders in a particular era called something a tax cut, then so do we? (p. xvii). They also do not develop their own definitions of ?shared sacrifice?: ?Although we use the term throughout the book, we have deliberately avoided assigning it any particular definition, choosing the let historical actors speak for themselves when invoking ? or refusing to invoke ? principles of shared sacrifice? (p. xviii). The resulting narratives, each one self-contained, are exceptionally informative yet compact. Indeed, there is no more thorough and efficient survey of, and introduction to, wartime tax politics in the United States than this collection of essays. In addition, the essays, particularly those on World War II, Korea, and Vietnam, make lively reading, providing the human depth and drama often missing from tax history.

The authors are successful in indentifying the diverse ways in which politicians have invoked ?shared sacrifice,? but I believe they overemphasize the force of ?sacrifice? arguments on behalf of higher levels of aggregate taxation, and neglect the influence of ?sacrifice? arguments for more progressive taxation. It was the especially powerful role of the arguments for progressive taxation that distinguished the mobilizations for World Wars I and II, and profoundly shaped, in path-dependent fashion, subsequent federal taxation. At the same time, the authors have some difficulty placing the ?sacrifice? arguments in historical context because they rarely engage the social, economic, institutional, and intellectual forces that shaped wartime tax regimes. The influence of important factors such as political learning from earlier wars, growing administrative capacity, and changing economic structure, for example, are largely unexamined in the book.

Even without systematic analysis of the political economy of war, the authors have successfully identified, I believe, most of the key elements that explain (thus far) the departure of public finance during the war in Iraq. However, they do not have the space to discuss these factors in depth and leave unexplored at least one critical element: the power of the continuing ?Reagan revolution.? During the Iraq war, George W. Bush and the Republican leadership in Congress were able to implement a fiscal strategy based on their reading of the historic legacy of wartime finance. They were determined to break out of a historic process (unexamined in this book): the upward ratcheting of taxing capacity, domestic spending, and tax progressivity associated with the financing of the world wars of the twentieth century. They did not want the Iraq war to disrupt their effort to increase the downward fiscal pressure on entitlements and other domestic spending, and to shift the base of taxation toward regressive consumption taxation. Their strategic effort required muting or countering traditional calls for ?shared sacrifice? via taxation. The outcome of the 2008 elections, however, may well have marked a defeat for the strategy and signaled a future revival of the two-pronged tradition of ?shared-sacrifice? in public finance during national crises.

Note: 1. Snow quoted in David E. Rosenbaum, ?Threats and Responses: Washington Talk; Tax Cuts and War Have Seldom Mixed,? New York Times, March 9, 2003.

Professor Brownlee is the author of ?Wilson?s Reform of Economic Structure: Progressive Liberalism and the Corporation,? in John Milton Cooper, ed., Reconsidering Woodrow Wilson: Progressivism, Internationalism, War, and Peace (Washington, DC: Woodrow Wilson Center Press and Johns Hopkins University Press, 2008), 57-89; and ?The Shoup Mission to Japan: Two Political Economies Intersect,? in Isaac W. Martin et al., The New Fiscal Sociology: Taxation in Comparative and Historical Perspective (Cambridge: Cambridge University Press, 2009), 237-55.

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Trust and Power: Consumers, the Modern Corporation, and the Making of the United States Automobile Market

Author(s):Clarke, Sally H.
Reviewer(s):Offer, Avner

Published by EH.NET (April 2009)

Sally H. Clarke, Trust and Power: Consumers, the Modern Corporation, and the Making of the United States Automobile Market. Cambridge: Cambridge University Press, 2007. xviii + 296 pp. $50 (cloth), ISBN: 978-0-521-86878-5

Reviewed for EH.NET by Avner Offer, Department of History, University of Oxford.

Making, selling, buying, and using cars involves risk. This fine book investigates the interactions of three groups of stakeholders: manufacturers, consumers, and dealers. The organizing idea is the allocation of this risk between stakeholders in bilateral transactions. The risks and their incidence altered as technologies matured, as experience accumulated, and as institutions developed. Consequently, the book proceeds chronologically in three parts, up to 1916, from then up to 1941, and the post-war period to 1965. Some issues are specific to a period, others recur. The initial years presented high risks both for makers and for users. Factories faced new challenges as they learned to design and assemble their vehicles, and strove to sell them. Buyers and users faced radical unreliability, and risks to life and limb. Chapter 2 is about what the author calls “the problem of social costs.” The term is taken from Coase, but its use here is confusing: it describes the infliction of private costs on individuals in the form of mechanical breakdown and physical harm. The author tells how judges gradually shifted liability away from the user, and towards manufacturers. One of the puzzles of industrial organization is the outsourcing of retail car sales to franchised dealers. The author has an interesting explanation: it was to insulate the manufacturer from product liability. I do not find this entirely convincing. In the New Institutional Economics risk ends up with those who are best placed to bear it. A large corporation can cope with risk and rectify it better than a car dealer or user. The Coasian insight suggests that in a competitive market, manufacturers should be willing to accept the risk and incorporate it in prices; indeed, that is what the courts nudged them to do. If risk has indeed ended up with the factory, then it is not clear why franchise has persisted, unless one invokes path dependence, which is not an elegant explanation, and appears unlikely. Chapter 3 deals with marketing strategies, and focuses on the General Motors policy of product differentiation and updating, Alfred Sloan?s “car for every purse and purpose.” Chapter 4 explores the uncertainty that arose out of engineering innovation, and its effect on quality control and the competitive position of different companies. Chapter 5 is about styling risk, with a focus on Harley Earl and his design studios. The final chapter here extends our understanding of the dealer?s role in helping to match supply to demand. The dealer was paid to absorb pressures from both the factory and the buyer. My own hunch (which requires further research) is that effective selling requires a type of motivation and local knowledge which the factory was not able to supply. Dealers could refine the arts of price discrimination, and the factory twisted their arm to go the extra yard. The final substantive chapter describes the mature car economy of the first two post-war decades. It depicts the car in American household life, the problems of affording it, and its larger meanings in those early Cold War years.

For an industry that has been so thoroughly studied, it is not easy to come up with something new. The book is full of incident, anecdote, argument, and detail ? a bonanza for highbrow car buffs. Documentation is deep. Footnotes often occupy a quarter of every page, and the proportion is sometimes reversed. Every subsequent investigator will begin with this book. I was particularly impressed by the breadth and depth of the primary sources cited. Uncertainty, risk, trust, and bargaining, are excellent framing devices and flag the right questions. Some fascinating legal discourse is cited, both conceptual and from case law. At heart the method is historical. The author goes out, reads everything, and reports back. The narrative is well paced, full of new detail and observational insights. But it does not work so well as social science. If an issue is found in the sources, the author will flag it and report the evidence in detail. But the issues provide signposts rather than structures. The task is not conceived as using evidence to resolve analytical questions. Conundrums are richly illustrated, but we do not get much closer to their resolution. For example, the division of labor between manufacturers and dealers is a fascinating problem. The author puts forward arguments, but does not seem to realize what kind of evidence would be required to clinch them. With regard to product differentiation, she does not cite the analytical literature on fashion cycles in the industry. The issue of depreciation is not properly dealt with, although it is the main cost of car ownership, is influenced by model change, and has also produced a literature. The engineering implications of model changes are not dealt with deeply. Credit is described impressionistically rather than analytically or structurally. The cost of ownership and how it fitted into family budgets is addressed at length, but only discursively. Likewise, the neglect of small cars is not approached as a strategic problem, but anecdotally. But no book can do everything. There is a great deal here, and other writers will take these issues further.

There is also a poignant quality which is almost elegiac, even if this may not be intended. As the book appeared, the great North American car firms appeared to be driving into their sunsets. General Motors, at the heart of this study, is on the brink of bankruptcy; Chrysler and Ford are ailing too. A decade or two down the road, we can glimpse the end of the internal combustion car. This book will stand as a memorial to the times when the highway still beckoned. (This book?s author, Sally H. Clarke, is Professor of History at the University of Texas at Austin.)

Avner Offer, All Souls College, University of Oxford, is the author of ?The Markup for Lemons: Quality and Uncertainty in American and British Used-Car Markets, c. 1953-1973,? Oxford Economic Papers, vol. 59, 5, Supplementary issue (2007), pp. i31-i48. His book The Challenge of Affluence: Self Control and Well-Being in the United States and Britain since the 1950s (Oxford University Press, 2006) includes a chapter titled ?The American Automobile Frenzy of the 1950s.?

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Race between Education and Technology

Author(s):Goldin, Claudia
Katz, Lawrence F.
Reviewer(s):Lindert, Peter H.

Published by EH.NET (November 2008)

Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology. Cambridge, MA: Harvard University Press, 2008. vii + 488 pp. $40 (hardcover), ISBN: 978-0-674-02867-8.

Reviewed for EH.NET by Peter H. Lindert, Department of Economics, University of California ? Davis.

Claudia Goldin and Lawrence Katz have produced a definitive economic history of American education. This reviewer?s high hopes for their book project have not been disappointed. The final product is tightly reasoned and easy to grasp by anyone who cares about the country?s educational history. Even those who are shy of mathematics can simply slip past the occasional show of regressions and equations, guided by the authors? trouble-free prose. Those of you who have seen several Goldin-Katz papers from this project are assured that the whole is greater than the sum of those parts.

Two featured insights tie the whole book together, with the first of these leading logically to the second. The first insight: It?s home grown education that has mattered, not technology or immigration. That is, contrasting historical movements in American wage inequality are explained mainly by revolutions in education, not by shifts in technology or by waves of immigration. Goldin and Katz make this argument persuasive by wisely choosing to focus on the task of explaining contrasts in wage movements between long periods. Wage inequality, by occupation or by educational level, rose in the late nineteenth century, fell dramatically in the first half of the twentieth, and then rose in most decades of the second half (though not in the 1970s). In any one period, all three of those forces ? home grown education, technology, and immigration ? shared in determining the width of the pay gaps. Similarly, trends in all three shared in the task of explaining trends in the pay gaps. Yet the key insight emerges from contrasting those long trends, a temporal contrast analogous to economists? ?differences in differences? analysis. What made periods of rising inequality different from periods of falling inequality is that the rate of advance in education was stronger in the latter periods. In the title roles, technology has been the steady tortoise, while education has raced like the erratic hare. At times it ran ahead, at times it fell asleep, and now it races to catch up.

The first featured insight introduces their search for the second. How did America achieve those revolutions in education, and what explains their timing? The second insight is that American education had a unique set of egalitarian virtues, which weakened or were subverted later. The six original virtues were public funding, public provision, the separation of church and state, fiscal decentralization, forgiveness of youthful errors, and gender neutrality. Some of these virtues waxed and waned, though not because of any unifying dynamic. Three of them ? public funding, public provision, and secularization ? rose across the middle and late nineteenth century and never retreated, for better and for worse. Two others – forgiveness and gender equality ? have been permanent American strengths, with a couple of wrinkles in the mid-twentieth century. Fiscal decentralization has the most complicated dynamic of all.

The opening part of the book (Introduction and Chapters 1-3) previews everything, especially the first key insight about the technology-education race. Its factual summaries deserve to be worked into our reading lists and lectures. For an overview of the distinctive history of American educational progress across the data-rich twentieth century, see Chapter 1. Chapter 2 fixes our attention on earnings inequality, the dependent variable that dominates the book. Reading lists could well combine this chapter?s summary of wage inequality in the twentieth century with the Piketty-Saez overview of what happened up at the very top of the distribution. Chapter 3 on skill-biased technological change debunks the notion that the computer era is a radical departure, and drives home the point that skills bias has advanced more evenly over the decades than most people think. It ends with the key pivot point that ?It?s not technology,? which turns us toward the second key insight, namely that fluctuations in educational progress play the leading role in explaining inequality movements.

The second part of the book dwells on the unevenness of that progress. This country went through three great waves. In the nineteenth century America?s (and Canada?s) public primary schooling became the envy of the world. Chapter 4 on the ?origins of the virtues? sketches this wave, with definitive coverage of the six egalitarian virtues. Chapters 5 and 6 explain the second great wave, in which America became the world pioneer in public high schools with its own egalitarian emphasis on a wide menu of courses for all. Goldin and Katz show that several economic forces explain why the timing of this grass-roots movement differed across regions. Their quantitative accounting downplays compulsory school laws and child labor laws, which they find had only small, though statistically significant, effects. Rather, the analysis hints at a political economy in which some regions developed high schools faster than others because their political structures were more egalitarian. In the high school wave, as in the earlier primary school wave, the willingness to raise taxes for school unquestionably raised total schooling, and did not just crowd out private schooling.

Chapter 7 on the evolution and current state of America?s private and public colleges and universities is jam-packed with useful information. It belongs on everybody?s reading list in education economics. The main theme here is triumph: The Americans did a better job than any other country at financing higher education, and at making its institutions compete against each other. Only at the end of the twentieth century have other countries caught up in high-education enrollments, though the United States continues to dominate in research.

Two subplots in the twentieth-century advance of higher education relate to gender and to regions. The gender story exposes one of the main wrinkles in the triumph of gender equality in American education. With higher education, as with careers in teaching, women lost ground at one point in the twentieth century, though they overtook males later. Their college education fell behind a bit in the Great Depression of the 1930s, and especially in the postwar quarter-century when the GI Bill did so much for males? higher education. This wrinkle was ironed out in the 1970s, when male graduation rates stagnated and females soon became the majority of college graduates, as they continue to be in this and several other countries.

The regional story includes some reverse crowding out: The Northeast has remained behind in its tax support for higher education because it has always been so well endowed with private universities. That might not have been so remarkable if the overall attendance rate had been higher in the Northeast. Yet Goldin and Katz show us the opposite: Overall attendance remains higher in the vast North and West from Minnesota to the Pacific. In other words, something about the presence of excellent private universities actually lowered college attendance in the Northeast, other things equal. Might this quantity difference have outweighed the quality advantage of private institutions in the Northeast? Did influential ivy alums in northeastern states suppress public higher education enough to hold back regional growth?

In the final part of the book Goldin and Katz return to the race between technology and education in explaining twentieth-century movements in earnings inequality, this time with Chapter 8?s tidy quantitative analysis. The early wage compression and the later wage widening were driven by the supply and demand for the skills tied to educational attainment, with a little help from institutional movements in the power of unions and wartime wage controls. As we were warned in Part 1?s preview, the wage movements were dominated more by swings in the supply of education-related skills than in the demand for them. And on that supply side, the swings in home grown educational attainment were more important than the swings in immigration.

In Chapter 9?s finale on ?How American Can Win the Race for Tomorrow,? the authors tread warily in the minefields of current policy debates. They do not take clear sides in the war over whether extra money will improve education, despite citing Krueger?s evidence that paying for smaller class sizes does seem to help. They also refrain from judging No Child Left Behind, though they note that testing and accountability is an important issue. On local school choice mechanisms, such as vouchers and charter schools, they take a cautious position shared by this reviewer: the evidence is mixed, but school choice ?could improve the situation? for low-income families. The idea of school choice is also supported, of course, by its success in raising the productivity of higher education, covered back in Chapter 7. They also seem to accept the evidence that the country has underinvested in infant education.

Where next for research in the economic history of American education? This is the perfect time to ask, now that Goldin and Katz have achieved closure on so many questions. The view from their shoulders reveals two key areas to explore.

First, who was it that under-invested in education? Did private individuals pass up money lying on the sidewalk, or was it the political process failing to realize high social rates of return that took into account both fiscal effects and knowledge externalities? For the purposes of their book, Goldin and Katz are able to finesse these tough questions. By focusing on contrasts between American epochs, they successfully explain the contrasts in ?returns? in terms of movements in wage ratios that were dramatic enough to drive movements in all definitions of the rate of return on education. Yet we still need to explore the separate levels of the private versus ?social? (private and fiscal only) versus overall rates of return, the last being the one that draws on the recent literature on externalities. Only then can we distinguish private irrationality, or private capital constraints, from a failure of policymakers to capture high societal returns to extra years of education. The new research will have to proceed on different levels for different time periods. For the present day debate, scholars will have to jump the higher econometric hurdles imposed by Heckman, Lochner, and Todd in their rejection of the convenient Mincer return analysis. For earlier periods, it should suffice to make rougher contrasts between the likely private and fiscal returns for different eras and different places.

A related frontier is the political economy of education finance. Who voted for or against taxes for schools, in which states, and why? Goldin and Katz have advanced the political economy agenda with econometric evidence on the determinants of high school and college attendance, and the funding for public state universities. Yet there is much more to be done.

On both these research frontiers, our progress will be accelerated because Goldin and Katz have paved the way.

Peter H. Lindert is Research Professor of Economics at the University of California – Davis. His latest book is Growing Public: Social Spending and Economic Growth since the Eighteenth Century, two volumes, Cambridge University Press, 2004.

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

The Making of the State Enterprise System in Modern China: The Dynamics of Institutional Change

Author(s):Bian, Morris L.
Reviewer(s):Wright, Tim

Published by EH.NET (November 2008)

Morris L. Bian, The Making of the State Enterprise System in Modern China: The Dynamics of Institutional Change. Cambridge, MA: Harvard University Press, 2005. xi + 331 pp. $49 (hardcover), ISBN: 0-674-01717-X.

Reviewed for EH.NET by Tim Wright, School of East Asian Studies, University of Sheffield.

Scholars are paying ever greater attention to continuities between China under the Nationalist government and under the post-1949 Communist regime, and are increasingly questioning the idea that 1949 marked an unbridgeable watershed. Morris L. Bian of Auburn University contributes to this new scholarship with a study of the origins of the State Owned Enterprise or ?danwei? (unit) system in urban China under the People?s Republic. He argues these origins can be found in state enterprises in the ordnance and heavy industries in Nationalist China during the Second World War.

At the most basic level this book is a study of the running of the defense-related industries in China under the Nationalists. After an introduction outlining the theoretical concepts he is about to employ ? particularly ?path dependency? and (much less usefully in my opinion) the idea of ?mental models? from cognitive science ? in Chapters 1 and 2, Bian deals with the modern history of the Chinese ordnance and other heavy industries. Three further chapters then cover governance structures (Chapter 3), management and incentive mechanisms (Chapter 4) and the provision of social services and welfare (Chapter 5) in those industries. In these three chapters, Bian draws on a range of published and archival sources, and uses the Dadukou Iron and Steelworks in Chongqing as his major case study. Chapter 6 traces the origin of the use of the term ?danwei? in the meaning of ?work unit,? which came to prominence during the War, but originated in American theories of public administration. Chapter 7 deals with the emergence of the ideology of the developmental state in Nationalist China, as involving an emphasis on state-owned as against private enterprises, heavy as against light industries, defense as against livelihood considerations and (socialist) economic planning as against market mechanisms. Finally, a conclusion draws out the implications of the book?s findings.

The book makes more ambitious claims than to be a study of wartime industry in China. As its title suggests, it argues that industrial organization during the war provides the key to the origins of the ?danwei? system that dominated urban China from the 1950s into the 1990s. It rejects the idea that this system originated in the Soviet model, earlier patterns of Chinese labor organization or indeed enterprise organization in the 1920s and 1930s.

Bian argues that the Nationalists? adoption of the patterns of organization used in the defense industries was path dependent, in that they had to draw on the institutional and ideological endowments available to them ? the traditional model of China?s state administrative bureaucracy had a profound influence on the management organization of these industries. He also maintains that the Communist adoption of the ?danwei? system was path dependent, rather than path independent as it would have been in his terminology had they taken the idea from the Soviet Union. He stresses that the path on which the later ?danwei? were dependent consisted of the organizational patterns specifically emerging as a result of the national crisis during the Second World War ? he frequently stresses that patterns or ideas that were only incipient or competing with many others in the early Nationalist period during the late 1920s and early 1930s became dominant during the war because of the exigencies of national defense.

The first part of this argument, focusing on path dependency in industrial organization during the war, is well developed and quite convincing. Bian clearly demonstrates that the immense pressures generated by the War led to the adoption of organizational patterns and ideas that had been around, but not dominant, in the earlier period. He argues that these new ideas represented a change of ?mental models,? though perhaps others might wonder whether they were in part temporary responses to the exigencies of war.

The extension of the argument to the contention that the Communist State Owned Enterprise or ?danwei? system originated in these organizations is much less convincing. It is also less explicit and developed: for example Chapters 3, 4 and 5 make virtually no mention of the post-1949 period, though Chapter 6 does, albeit in broad terms. The argument seems to be that merely because certain patterns existed both before and after 1949, therefore the later versions were ?path dependent? on the earlier. If one was to argue that there were similar outcomes because both Nationalists and Communists were drawing on similar institutional endowments inherited from traditional China, most scholars would probably agree (I think that, despite the author?s claims, few would unambiguously locate the ?danwei? system as a legacy of the Soviet Union). However, it is a major further step to go on to suggest that the Communists were specifically influenced by the pattern of organization in the enterprises studied in this book. Surely such a step requires evidence that these Nationalist enterprises were perceived as an important part of the institutional resources inherited by the Communists, but no such evidence is presented. The argument becomes even more strained in relation to labor emulation campaigns, which, Bian argues, the Nationalists adopted from the Stalinist Stakhanovite campaigns ? but are we then to believe that the Communists took the idea from the Nationalist ordnance industries rather than from the Soviet Union?

In conclusion this is an informative and worthwhile study of industrial organization in Chinese defense industries during the war, which also raises interesting but less tested ideas about the influence of this form of organization on the Communist regime after 1949.

Tim Wright is Professor of Chinese Studies in the White Rose East Asia Centre and the School of East Asian Studies at the University of Sheffield. He is currently working on the economic fluctuations in China in the 1920s and 1930s, and on economic reform in the contemporary Chinese coal industry. His recent publications include ?The Manchurian Economy and the 1930s World Depression,? Modern Asian Studies, 41:5, (September 2007): 1073-1112.

Subject(s):Military and War
Geographic Area(s):Asia
Time Period(s):20th Century: WWII and post-WWII