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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

One Economics, Many Recipes: Globalization, Institutions, and Economic Growth

Author(s):Rodrik, Dani
Reviewer(s):Amsden, Alice

Published by EH.NET (October 2008)

Dani Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth . Princeton, NJ: Princeton University Press, 2007. xi + 263 pp. $35 (hardcover), ISBN: 978-0691-12591-8.

Reviewed for EH.NET by Alice Amsden, Department of Urban Studies and Planning, MIT.

Dani Rodrik, professor at Harvard?s Kennedy School of Government, comes out of the closet early on in One Economics, Many Recipes: ?This book is strictly grounded in neoclassical economic analysis.? Yet Rodrik wins all hearts and minds by a careful consideration of the facts and sheer breadth of coverage. He remains ?a believer in the ability of governments to do good and change societies for the better.? He bemoans ?exaggerated rumors of industrial policy?s death.? He identifies ?institutional arrangements that best support economic development over the long term.? He claims ?national policy choices are the ultimate determinant of economic growth.? Yet he declares ?successful countries are those that have leveraged the forces of globalization to their benefit.? Thus, market mavens, policy pros, global gurus and institutional irredentists can all savor what he says!

Rodrik concludes on an institutional note: ?It will take a lot of work to make globalization?s rules friendlier to poor nations. Leaders of the advanced countries will have to stop dressing up policies championed by special interests at home as responses to the needs of the poor in the developing world. Remembering their own history, they will have to provide room for poor nations to develop their own strategies of institution-building and economic catch-up. … Perhaps most difficult of all, economists will have to be more humble.?

Rodrik promises to get his hands dirty redesigning international policies, but his first three chapters (the second is co-authored with Ricardo Hausmann and Andres Velasco) are concerned with why some countries grow faster than others. These make the greatest contribution. In chapter one, ?Fifty Years of Growth,? we meet a Martian, thought experiments, and ?flexible neoclassical economics,? meaning ?there is no unique correspondence between the functions that good institutions perform and the form that such institutions take.? Eclecticism reigns in the policy sphere ? some good, some bad. But how to pick the winners? Rodrik relies on a consensus among sensible economists. He, of course, is right that economists are sensible, but economic development is a haphazard, haywire affair, and consensus about policies tends to exist only at the extremes. No one would demur that raging inflation will wreck an economy, but how about 20 percent year after year, which characterized Korea?s early growth phase?

Rodrik is adamant that no poor country has experienced rapid growth without ?higher-order principles of sound economic governance ? property rights, market-oriented incentives, sound money and fiscal solvency.? But are all of these building blocks really irreducible?

After World War II, economists tried to predict which developing countries would succeed, and wrongly chose those with high export/GDP ratios, such as Nicaragua and Suriname. I?ve argued that if the clock starts ticking around 1900 or earlier (Rodrik?s starts in 1960), then it becomes clear that since World War II, all the developing countries that have entered the orbit of modern world industry had prewar manufacturing experience (manufacturing/GDP), including experience in forming business enterprises bigger than a single individual. There was no leap-frogging, especially in the areas of project execution and production engineering. Of these dozen or so countries, which includes Argentina, Brazil, Chile, Mexico, India and Turkey, as well as much of East Asia, the biggest winners are in Asia because at the time of de-colonization (one of the twentieth century?s most neglected upheavals), only Asian countries kicked out not just foreign rulers but also foreign companies. This didn?t happen in the Philippines. In Latin America, which was de-colonized a century earlier, politics and foreign ownership remained unchanged after World War II. Triggered by communist off-shoots from China, Asia?s convulsions gave birth to nationally-owned firms and land reforms (in China, the Koreas, Taiwan, parts of India, Malaysia, and later Vietnam), which arguably helped subsequent economic development. So, sometimes ?getting the property rights ?wrong,?? through violence, puts food on the plate of a hungry nation.

Rodrik is critical of the World Trade Organization?s failure to customize, and pleads that ?trade rules have to allow for diversity in national institutions and standards.? Does this mean tolerance of different policies (capital controls), or just institutions and standards (postal savings banks)? How customization is to occur is unclear, but maybe the world should return to the GATT, whose members could choose which protocols to honor, whereas all or nothing is the condition for WTO membership.

With a keen sense of what’s important, Rodrik takes a paper of mine to task for arguing that WTO members go about their business willy-nilly. I bet that not a single Northern country would have joined the WTO if it couldn?t subsidize science and technology, regional development, small- and medium-size enterprises, and the environment (these days, there is hardly a firm in existence that isn?t investing in the environment and getting state support). None of these areas is adjudicated by the WTO, and all increase the competitiveness of countries with money to throw at them. Meanwhile, savvy developing countries are stirring up their own brew. Korea now controls its financial markets by a creative use of technology, learned from Singapore. Korea?s computers monitor every foreign financial flow on a 24-hour basis ? a new kind of ?free? market. Thailand uses regional policies to strengthen its automobile sector. But I agree with Rodrik?s important point: forcing everyone into the same tight shoe pinches business and world peace.

The toughest item on Rodrik?s wish-list is less haughty economists. The snootiest may be American-trained foreign economists, but they have the best excuse! The U.S. knows itself, but Asia?s new elite not only knows itself, it also knows the U.S., having studied and worked there, and it knows Japan even better, having participated in its Greater East Asia Co-Prosperity Sphere. With experience and knowledge, why do you think Asia?s economies are growing so fast?

Alice Amsden?s recent books are The Rise of ?the Rest? (Oxford University Press, 2001) and Escape From Empire (MIT Press 2007). She is the Barton L. Weller Professor of Political Economy at MIT.

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

Orderly Change: International Monetary Relations since Bretton Woods

Author(s):Andrews, David M.
Reviewer(s):Officer, Lawrence H.

Published by EH.NET (September 2008)

David M. Andrews, editor, Orderly Change: International Monetary Relations since Bretton Woods. Ithaca, NY: Cornell University Press, 2008. xii + 245 pp. $50 (cloth), ISBN: 978-0-8014-7399-9.

Reviewed for EH.NET by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

Orderly Change (a wonderful title!) is edited by David M. Andrews, Associate Professor of Politics and International Relations at Scripps College. There are nine contributors, including the editor, but a total of twelve chapters. Four of these chapters, plus an introduction, are authored by Andrews. Of the other contributors, three are in the United States, three in Canada, one in the United Kingdom, one in Spain. Looked at in terms of academic field, six contributors are faculty members in political science, government, or international relations, one is a professor of law, and one is in a department of economics and business. It should not be surprising that the volume has a heavily political-science orientation. Orderly Change will be of far greater interest to the historian with a political-economy bent than to the economic historian with a cliometric orientation.

Unlike many other collections of original essays, the editor not only attempts to put all chapters within a common framework but also succeeds in doing so. This framework is respected by all the contributors, who, moreover, observe the practice of referring to one another?s essays. The result is a well-integrated volume.

The framework has three components: the Bretton Woods order, the Bretton Woods system, and orderly change. (Hereafter I will abbreviate Bretton Woods as BW.) A ?system? in this context is the legal and organizational framework underlying international monetary relations. Specifically, the BW system is the adjustable-peg system, which ended in 1973. As Andrews (p. 4) writes: ?the instrumental commitment to fixed-but-adjustable exchange rates (however elastically this undertaking was interpreted) … formed the heart of the Bretton Woods system.?

While the switch to floating exchange rates on the part of most major currencies in 1973 ended the BW system, the BW order continued to exist. The BW order is ?the broad vision of international economic relations that inspired the Bretton Woods agreement? (p. 4). The BW order incorporates two normative propositions: countries should have a high degree of autonomy in national economic policy, and international trade should be fostered so that it expands tremendously. To an economist, of course, it is obvious that these two objectives can just as well conflict as complement each other.

Orderly change connotes ?changes in practice that were in keeping with, and in fact promoted adherence to, the underlying principles of the postwar economic order? (p. 5). Orderly change occurred both during the BW system, as the system adjusted to changing circumstances, and after the BW system ended, as flexible exchange rates provided other mechanisms to foster the BW order.

The entire volume can be described as a diplomatic, institutional, and personnel history against the economics background. In fact, the volume can be viewed as a continuation of Richard N. Gardner?s classic work Sterling-Dollar Diplomacy (Oxford University Press: first edition 1958, second edition 1969). The Andrews book is a nice take on international monetary history from the end of World War II to the turn of the twenty-first century. A history of policy and of economic thought is an additional characteristic of the book. In this context, many of the contributors deserve praise for adroit use of archival evidence.

Detracting from the otherwise well-integrated nature of the volume is lack of a common list of references or even chapter lists of references; all references are in the form of footnotes. Also, the book contains relatively little economic analysis as such. Much more attention is devoted to the economic thought of actors. Extremely disappointing in an otherwise impressive volume is the lack of quantitative techniques or even quantitative information or reference to econometric or empirical studies. Another defect is that nothing is written about trade in energy (oil, OPEC, natural-gas pipelines, ?oil politics?) and no reference to an ?absorption? interpretation of the U.S. payments deficit (the United States consuming, broadly defined, more than it produces).

I continue this review by making brief comments about each chapter. In an essay on ?Bretton Woods, System and Order,? Andrews outlines three major subsystems of the BW system: the Treasury system (1945-1947), involving tough terms imposed by the United States for extending official credit; the Marshall system (1947-1958), reflecting exchange-rate realignments and positive U.S. support for its Allies; and the Kennedy system (1960-1971), characterized by exchange-rate stability and defense of the gold value of the dollar. There is the paradox of ?turbulent transitions? between these ?stable systems.? Andrews also considers the argument that the current international monetary system is analogous to the BW system, with East Asia, especially China, taking the place of Western Europe. The firm (albeit changing) organization of international monetary affairs in the postwar period, which characterized the BW system in general, was in contrast to the ad hoc and fragile nature of the trading (GATT) system.

In another impressive essay, Andrews examines ?Trade and Money in the Roosevelt Administration,? on the way to the BW Agreement. My one issue with Andrews concerns his view that the International Trade Organization treaty failed in Congress because of concessions to the British. Andrews does not explain why the United States had to make concessions on trade to the British ? given the disparity in relative power of the two countries. After all, White?s views greatly dominated those of Keynes in establishing the International Monetary Fund.

In a later chapter, Andrews explores the origins of the Kennedy system. He prefers that terminology rather than the conventional term ?heyday of Bretton Woods.? His analysis makes no reference to the analytical work of this reviewer and Thomas D. Willett on foreign demand for dollars and this reviewer?s subsequent econometric study of reserve-asset preferences in the ?crisis zone? (see references in Lawrence H. Officer, Pricing Theory, Financing of International Organisations and Monetary History, Routledge, 2007, p. 307).

Perhaps the most intriguing contribution is that of Anastasia Xenias on ?Wartime Financial Diplomacy and the Transition to the Treasury System.? She concentrates on the U.S. tough financial stance. Very persuasively, she shows that U.S. policy aimed as much at reducing the economic strength of the British Empire as at influencing the international policy of the Soviet Union. The reader is left with an unanswered question: If the United States had been gentler in terms for lending to the USSR, could the Cold War have been avoided?

Jeffrey M. Chwieroth examines the roles of the IMF and World Bank during the Treasury and Marshall systems. New to monetary historians is his finding that ?it was the IBRD that provided critical balance-of-payments loans that helped bridge the financing gap in Western Europe prior to the provision of Marshall Plan aid? (p. 53). Eric Helleiner treats Canada?s floating rate of 1950-1962. As is common to many chapters, his viewpoint is a history of policy and of economic thought of policy-makers ? as well as of private policy-interested groups (bankers). The Canadian experience is viewed as a forerunner of the generalized, albeit managed, floating that would occur in the 1970s. However, the experience is clearly contrary to the movement of exchange-rate regimes in the opposite direction that also was to occur, especially formation of the euro area.

The Kennedy Round and other U.S. policies to solve the U.S. payments imbalance are analyzed by Lucia Coppolaro, who concludes: ?The Kennedy Round liberalized world trade, but U.S. plans to increase the U.S. trade surplus were frustrated? (p. 138). In a provocative essay, Wesley W. Widmaier examines U.S. incomes policies in the context of its commitment to fixed exchange rates during 1953-1974. The chapter incorporates a nice history of economic thought, including the views of John Maynard Keynes. The economist in me would have liked the author also to state the case against incomes policies (creation of suppressed inflationary forces, inefficient pattern of relative prices, etc.).

Hubert Zimmerman studies West German monetary policy in the context of the transition to flexible exchange rates, over 1969-1973. He concentrates on the domestic, political aspects of exchange-rate policy. E. Richard Gold provides a chapter on the legal foundations of the U.S. dollar in 1933-34 and 1971-78. The chapter is disappointing. The author claims to explore the relationship between private law and individual beliefs and behavior toward money (in context of the dollar and its value in terms of, and exchangeability for, gold), but fails to do so adequately.

Luis W. Pauly focuses on the evolution of IMF surveillance, which began in 1973. In perhaps the most perceptive comment in the book, he cuts to the chase as follows: ?Under the surface, however, they [U.S.-France negotiations] were about what international monetary struggles are always about ? power and differing perceptions of fairness in the distribution of adjustment burdens? (p. 198). In a similar vein, he writes: ?In a world of states, markets channel national power? (p. 202). So true!!

In the concluding chapter, Andrews, quite appropriately, pays homage to Richard Gardner?s ?magisterial study of the Anglo-American negotiations for the economic framework of the postwar world? (p. 211). He then observes that: ?Trade liberalization actually flourished once the fixed-rate element of the Bretton Woods system was abandoned, and the underlying economic order established at Bretton Woods ? composed of dual commitments to trade liberalization and national economic autonomy ? endured? (p. 214). However, even while acknowledging that world trading order has widened and deepened, he is concerned that further ?orderly change? may be difficult to achieve. Reasons include the ?Orwellian features? of Russia and China, the euro rivaling the dollar, the danger of regional economic blocs (each with its own system and order?), and the danger that ?monetary relations are unlikely to play the same supportive role with respect to trade liberalization in the future that they have in the past? (p. 215).

All in all, Orderly Change is a most impressive integrated collection of essays. One wishes there were more economics, more quantitative analysis (the entire volume contains only two tables and three figures), and at least some quantitative empirical evidence to support the analysis ? but the volume is what it is. And, for what it is, the volume makes a clear contribution to knowledge.

Lawrence H. Officer is Professor of Economics at the University of Illinois at Chicago. He is co-founder and Director of Research at MeasuringWorth.com, and also a strong supporter of EH.NET. His most recent books are Between the Dollar-Sterling Gold Points: Exchange Rates, Parities and Market Behavior, 1791-1931 (Cambridge University Press, paperback reissue 2007) and Pricing Theory, Financing of International Organisations and Monetary History (Routledge, 2007). Officer?s next book will be Two Centuries of Compensation for U.S. Production Workers in Manufacturing (Palgrave Macmillan, 2009).

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

Power and Plenty: Trade, War and the World Economy in the Second Millennium

Author(s):Findlay, Ronald
, Ronal

Published by EH.NET (August 2008)

Ronald Findlay and Kevin H. O?Rourke, Power and Plenty: Trade, War and the World Economy in the Second Millennium. Princeton: Princeton University Press, 2008. xxvi + 619 pp. $39.50 (cloth), ISBN: 978-0-691-11854-3.

Reviewed for EH.NET by ?evket Pamuk, London School of Economics and Bogazi?i-Bosphorus University.

Ronald Findlay of Columbia University and Kevin H. O?Rourke of Trinity College, Dublin have written a magisterial account of the history of international trade during the last millennium. They provide a theoretically coherent account of the interaction between the patterns and evolution of inter-regional trade, on the one hand, and long-term global economic and political developments, on the other. The two way interaction between power and plenty as formulated by Jacob Viner but going back much earlier in its origins, constitutes the analytical backbone of the volume. Findlay and O?Rourke argue convincingly that no history of international trade can ignore conflict, use of force, military exploits, and in turn, geopolitics. They draw upon a large volume of secondary historical and political literature as well as economic theory and succeed in integrating a vast amount of detail as well as their own research into their conceptual framework.

A large part of the exposition and analysis of the major developments in international trade proceeds in terms of the interaction between the seven regions of Eurasia as defined by the authors and the contributions arising from these interactions, in terms of the movements of people, crops, ideas, and techniques as well as commodities. A good deal of emphasis is placed on the importance of geography in explaining the interactions between the seven regions with very different physical features and endowments. This skillfully written volume is a work of extraordinary scope, a major achievement.

For the first half of the millennium, the authors should be commended for focusing on two key events, the Pax Mongolica and the Black Death, both of which involved most, if not all, of the seven regions. The unification of the central Eurasian landmass by the Mongols in the thirteenth and early fourteenth centuries facilitated the interaction of Western Europe and different regions of Asia from the Atlantic to the Pacific Ocean. Mongols encouraged trade and made the routes across Eurasia safer and busier. Arguably, this was the first episode of globalization in history. Moreover, it was the disintegration of the Pax Mongolica and the shift of the trade to the southern routes across the Indian Ocean and the Middle East that led to the search for alternative ways of reaching Asia by western Europeans. As the authors point out, the ultimate legacy of the Pax Mongolica was not, perhaps, the increase in the interaction between Europe and Asia but the mutual discovery of Europeans and native Americans.

The Black Death, which originated in Mongol-controlled Asia but ended up in the Middle East and Europe, brought about far-reaching consequences for these regions. The sharp decline in the population led to an even sharper rise in wages. This high-wage environment, which lasted for at least two centuries, brought about very different demographic, economic, social and other responses not only between Europe and Asia but also within Europe, between the northwest and the south. As the authors make clear, the long-term consequences of the Black Death have not been fully analyzed and deserve more attention from economic historians.

For the second half of the millennium the focus of the volume is on the rise of an international economy and its contribution to the Industrial Revolution. The authors see the Industrial Revolution as the culmination of a long historical process involving the interaction of all the world?s regions through trade and transfer of technology. Findlay and O?Rourke emphasize that any account of the ?Rise of the West? that focuses purely on domestic developments ? such as western institutions, cultural attributes or endowments and ignores the vast web of interrelationships between Western Europe and the rest of the world ? is hopelessly inadequate. They argue that the Industrial Revolution needs to be understood as the outcome of a historical process with multiple causes going back to the medieval era in which international movements of commodities, warriors, microbes and technologies all played important roles. They also make clear that the Industrial Revolution not only transformed the international trading system but also gave rise to huge disparities around the globe as the spread of industrialization has been very uneven in the two centuries since.

Plunder or primitive accumulation may not have fueled the Industrial Revolution directly, but the authors emphasize that by expanding markets and ensuring the supply of raw materials, mercantilism and imperialism were an important part of the story. Violence did matter and often shaped the environment in which this exceptional event took place. The authors acknowledge that Asians and those from other regions of the world were not passive actors. They also ask two key questions with regard to the Industrial Revolution: why Britain and why Europe? The answers to both include not only the domestic factors but also control of long distance trade, overseas markets and raw materials. They emphasize in many parts of the text the key role played by the British navy in a world in which nations systematically excluded their enemies from protected markets.

The remaining chapters of the book are devoted to the analysis of the unprecedented expansion of international trade during the last two centuries, based on the ?Great Specialization? (manufactures vs. agriculture) that emerged in the aftermath of the Industrial Revolution and remained in place until recently. The ratio of world trade to GDP is sharply higher today than it was two centuries ago, but this rise has not been continuous. The powerful trend for globalization during the nineteenth century was followed by the collapse of world trade or deglobalization after 1914 and a more or less steady expansion of trade once more or reglobalization since the end of World War II.

One theme that is conspicuously absent in this volume is institutions ? which have occupied center stage not only in the economic history literature but also in economic theory in recent years ? and their impact on trade and economic development. While the authors emphasize the importance of international trade for the ?Rise of the West,? they could have focused more explicitly on the linkages between international trade and institutional change. One can think of at least two major channels through which long distance trade facilitated institutional change in Europe. During the period before 1000 and even until 1500, trade with other regions allowed Europe to learn about and then adapt some commercial, monetary and financial institutions. The transmission of the Islamic institution of business partnership or the mudaraba to the north of the Mediterranean in the form of the commenda is an important example of such borrowing and adaptation. These exchanges were very important for the development of western European institutions and the authors mention some of them. In the early modern era (that is after 1500) trade with other regions of the world led to institutional change in Europe through another mechanism. By giving greater power to merchants, long distance trade enabled them to shape the institutions in early modern Europe more forcefully in the direction of capitalism, as Acemoglu, Johnson and Robinson have recently emphasized. Arguably, greater political as well as economic power for merchants is an important characteristic that sets Europe apart from the other regions. It also provides another dimension to Viner?s power and plenty couple which is at the analytical center, as well as the title, of this book.

This is a well researched volume which is simply delightful to read. In most of the topics about which I have some knowledge, I found the analyses and the judgments offered by the authors both balanced and insightful. I expect this book will remain the standard text for many years to come.

?evket Pamuk teaches economic history and political economy at the London School of Economics and Political Science and Bogazi?i-Bosphorus University, Istanbul. His recent publications include A Monetary History of the Ottoman Empire (Cambridge University Press, 2000) and ?The Black Death and the Origins of the Great Divergence inside Europe, 1300-1600,? European Review of Economic History, 2007. s.pamuk@lse.ac.uk

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):Medieval

The American State Constitutional Tradition

Author(s):Dinan, John J.
Reviewer(s):Wallis, John J.

Published by EH.NET (May 2008)

John J. Dinan, The American State Constitutional Tradition. Lawrence, KS: University Press of Kansas, 2006. ix + 430 pp. $35 (cloth), ISBN: 0-7006-1435-4.

Reviewed for EH.NET by John J. Wallis, Department of Economics, University of Maryland.

As I get older and learn more American history, the stronger my suspicion grows that the traditional approach to our history is seriously flawed. John Dinan’s book on state constitutional conventions raises those suspicions even higher. Our monomaniacal emphasis on the national government, the national constitution, and the time line of national events introduces a bias into our view of what happened in history, as well as into our interpretation of why what happened, happened.

Our focus on national history causes the most basic problems for economic historians. Twice in the twentieth century economic historians went back to the founding era and early nineteenth century to see if the United States was really a laissez-faire society (Callender, 1902; Cole, 1970). Both times they returned a unanimous verdict: early America wasn’t a laissez-faire society. State and local governments actively and consciously tried to promote economic and social development throughout the century. Questions about American government’s role in promoting or retarding economic development in the nineteenth century can only be adequately answered by focusing our attention on state and local governments. Conclusions about government’s role in American growth based primarily on the national government will simply be (and are) wrong.

The problem is even more acute for constitutional historians. When the second national constitution was written at Philadelphia in 1787, there were already thirteen state constitutions in effect. Since then states have written another 135 or so constitutions (depending on how they are counted), amending them over 10,000 times. State constitutions govern the chartering of corporations, the provision of education, investment in infrastructure and finance, and the civil rights and freedoms of individuals. Despite this plethora of constitutional activity, American scholars continue to write of the American constitutional tradition as the history of one, short, rarely-amended national constitution.

John Dinan’s book on The American State Constitutional Tradition is a good place to start revising our histories. Dinan’s book is not a full blown history of state constitutions, but an examination of several key constitutional issues and their treatment in the 233 state constitutional conventions from the eighteenth century to the present. Dinan located extant records of the debates for 114 conventions.

After an introduction to state constitutional history and constitutional conventions in particular, Dinan considers six areas of constitutional authority and structure: amendment and revision, representation, separation of powers, bicameralism, rights, and citizen character. In each of these areas the federal constitution established arrangements in 1787 and the first ten amendments in 1791 that have gone largely unchanged. Slavery was ended and black civil and voting rights assured in the 13th, 14th, and 15th amendments. The 14th amendment carried greater implications for the behavior of states and is the major federal change with respect to rights in general and, by altering the relationship of the federal to state governments with respect to rights, it is the largest single constitutional alteration since 1791. Representation was changed by the 17th amendment, direct election of senators. Suffrage was changed by the 19th amendment (women), 23rd (residents of the District of Columbia), and 26th (18 to 20 year olds). The other amendments are primarily technical, although many will argue with the income tax amendment as a technicality.

In contrast, states have written an average of three complete constitutions in their history, the leader is Louisiana with twelve. State constitutions have been amended roughly 10,000 times. All of the areas Dinan emphasizes have seen substantial changes, with the exception of bicameralism which has proven to be a durable form, although the structure of bicameralism has been subjected to some modification over time as well.

There is no definitive history of state constitutions and Dinan’s prodigious research into just six areas of constitutional structure shows why. His primary sources are the published debates of the state constitutional conventions. His source notes occupy 115 pages and make up over a quarter of the book’s text! G. Alan Tarr’s Understanding State Constitutions is a good introduction to the history, but no one has managed to master even a small amount of the material in the state constitutions.

And yet, if we are to understand the development of the American economy, polity, and society, it is imperative that we understand state constitutions. As Dinan persuasively argues, the federal government has been almost silent with respect to issues about citizen character, including education, while the states have been quite willing to undertake constitutional and legislative initiatives to change and, hopefully, improve the quality of their citizens through a number of methods. How can we understand how governments affect people’s lives and the larger aggregate patterns of behavior that make up politics and economies if we only look at the level of government that rarely tries to affect people’s morals and character?

I draw two major lessons from Dinan’s excellent treatment of these six issues. First, things constantly change in American history. Government structure and governance institutions cannot, in any remotely reasonable way, be regarded as fixed over time. By embedding basic concepts about government structure and the reach of government authority into people’s lives in their constitutions, rather than only in legislation, states have attempted to provide these institutional rules with as much stability as possible, despite the continual process of change in the institutional rules themselves. Second, the constitutional history of the United States cannot be accurately written if it is based primarily on our experience with the federal constitution. The text of the federal constitution changes glacially, perhaps as Dinan suggests, because it is so difficult to amend. Credible commitment to political institutions does not mean unchanging institutions. There is a much richer laboratory of institutional experience and change available to social scientists in the American historical record. We should learn about it and exploit it.

References: Guy Stevens Callender, “The Early Transportation and Banking Enterprises of the States.” Quarterly Journal of Economics 17 (1), 1902.

Arthur H. Cole, “The Committee on Research in Economic History: An Historical Sketch.” Journal of Economic History 20 (4), 1970: 723-41.

G. Alan Tarr, Understanding State Constitutions, Princeton: Princeton University Press, 1998.

John Joseph Wallis is Professor of Economics at the University of Maryland and Research Associate at the National Bureau of Economic Research. He is currently a visiting Professor of Economics at Harvard University. Recent publications include “Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852,” Journal of Economic History (2005) and “The Concept of Systematic Corruption in American Economic and Political History,” in Edward Glaeser and Claudia Goldin, editors, Corruption and Reform (University of Chicago Press, 2006). He is finishing a book with Douglass North and Barry Weingast, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, to be published by Cambridge University Press. wallis@econ.umd.edu.

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

Rails through the Wiregrass: A History of the Georgia and Florida Railroad

Author(s):Grant, H. Roger
Reviewer(s):Beck, Bill

Published by EH.NET (April 2008)

H. Roger Grant, Rails through the Wiregrass: A History of the Georgia and Florida Railroad. DeKalb, IL: Northern Illinois University Press, 2006, xvi + 223 pp. $36 (cloth), ISBN 0-87580-365-2.

Reviewed for EH.NET by Bill Beck, Lakeside Writers’ Group.

Earlier this year, the Wall Street Journal featured a front-page article on the resurgence of the nation’s rail system. The article reported that the nation’s major railroads are in the midst of an aggressive program of building rail corridors from the West Coast to the Mexican Border and the Great Lakes, and from the Gulf Coast to New England. The program, estimated to cost upwards of $10 billion, is designed to accommodate the tremendous increase in container traffic to and from the nation’s ports.

The rebound of the nation’s freight rail system is little short of amazing, considering that just thirty years ago economists and pundits were predicting the imminent demise of the American railroad. But as history as demonstrated, the account of the nation’s rail system’s death was greatly exaggerated.

So it is refreshing, and somewhat wistful, to read H. Roger Grant’s Rails through the Wiregrass. Grant, professor of history at Clemson University, has made a life’s work out of chronicling the rise and fall of the nation’s railroads, with books on the history of the Chicago & North Western, the Erie Lackawanna, the Wabash, and the Chicago Great Western Railways all to his credit.

Grant’s Rails through the Wiregrass is the workmanlike history of what contemporaries would call a short line, a rail system that ran through the piney woods of Georgia from Augusta on the Savannah River southwest to Madison, just across the state line in Florida’s Panhandle. The Georgia & Florida was one of hundreds of short line railroads that were the result of merger and acquisition activity in the late nineteenth and early twentieth centuries and that combined smaller roads into a short line that was often eventually acquired by a larger regional line.

Organized in 1906 as an amalgamation of more than a half-dozen small short lines, including the Valdosta Southern, the Augusta & Florida, and the Sparks Western, the Georgia & Florida served wiregrass sawmill towns such as Sparks, Valdosta and Vidalia. Its perceived need was to tie the region more firmly to markets in Virginia and the Mid Atlantic states, and entrepreneurs saw the potential for vast new markets for Georgia agricultural commodities, such as tobacco, watermelons and onions, in the markets of the North.

Virginian John Skelton Williams had nearly a dozen years in forming and running railroads, including the mighty Seaboard Air Line, when he was ousted as the Seaboard’s chairman in a 1903 proxy fight. Three years later, Williams assembled the Georgia & Florida and became its first president.

Williams and his Richmond and Baltimore investors expected that the wiregrass region of interior Georgia would become an agricultural and natural resources powerhouse. Those expectations never worked out, and the railroad was always undercapitalized with aging rolling stock. Even more debilitating to the Georgia & Florida’s future was the road’s lack of a northern terminus in Augusta for much of its history.

The disruptions caused by World War I dealt the Georgia & Florida a blow from which it never really recovered. The Georgia & Florida went into receivership in 1915, was almost dismembered during the agricultural depression of the early 1920s, was reorganized in 1925, expanded to South Carolina and went back into bankruptcy at the beginning of the Great Depression in 1929, three years after the death of its founder, John Skelton Williams.

The G&F ? what locals called “the Gone & Forgotten” ? operated in receivership for more than three decades. While in bankruptcy, the Georgia & Florida weathered the Depression and the Interstate Highway Act of 1956, prospered during World War II, converted to diesel locomotives and dropped passenger service. Grant tells the fascinating story of the G&F during the period against the backdrop of monumental change in the nation’s rail industry during the middle years of the twentieth century.

Finally, in 1961, the Southern Railway entered talks to acquire the Georgia & Florida as a wholly-owned subsidiary. Southern had to up its offer to outbid the Atlantic Coast Line Railroad, and it took more than two years for the federal bankruptcy courts and the ICC to approve the sale. The G&F name disappeared in 1971, and in 1982, when the Southern and the Norfolk & Western merged into the Norfolk Southern, much of the Georgia & Florida rail system was abandoned. A picture on page 186 of a scrub pine tree growing through an abandoned section of G&F main line is eloquent testimony of the fate of America’s early twentieth century transportation legacy.

Grant has written a fascinating corporate history of a forgotten chapter in the South’s economic history. He has mined contemporary sources well, most notably the business pages of the weekly and small daily newspapers of the Georgia wiregrass region that covered the G&F during its heyday. He has also made excellent use of corporate annual reports, minute books, trustee reports and the John Skelton Williams papers.

Rail buffs also will enjoy Rails through the Wiregrass. Grant includes several dozen photographs and maps, all of which will help introduce another generation of readers to the era of steam locomotives. He calls the G&F “a hard luck road,” and notes that Southern roads have not enjoyed the same scrutiny from historians as have Northern roads. Let’s hope that historians use Grant’s history of the Georgia & Florida as a steppingstone to more top-flight historical accounts of Southern railroads.

Bill Beck is an Indianapolis-based independent corporate and institutional historian. His latest book is Pride of the Inland Seas: An Illustrated History of the Port of Duluth-Superior.

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

Economics in the Shadows of Darwin and Marx: Essays on Institutional and Evolutionary Themes

Author(s):Hodgson, Geoffrey M.
Reviewer(s):Mongiovi, Gary

Published by EH.NET (March 2008)

Geoffrey M. Hodgson, Economics in the Shadows of Darwin and Marx: Essays on Institutional and Evolutionary Themes. Cheltenham, UK: Edward Elgar, 2006. viii + 265 pp. $100 (cloth), ISBN: 1-84542-497-2.

Reviewed for EH.NET by Gary Mongiovi, Department of Economics and Finance, St John’s University.

Charles Darwin and Karl Marx, each in his own way, radically transformed our understanding of human history. Marx developed a powerful theory of how economic systems change over time. But Darwin’s theory of natural selection has become the preferred metaphor of social scientists who want to understand how institutions emerge, take root and evolve. One recent example of this “evolutionary turn” is the hypothesis put forth by Gregory Clark in A Farewell to Alms (Princeton University Press, 2007), that England’s industrialization in the early nineteenth century can be explained by the high fertility of the medieval nobility, who, through a process of natural or cultural selection, infused the country’s population with traits conducive to economic growth. In another recent book, Niall Ferguson draws upon Darwinian principles to account for, and justify, the modern financial system (see The Evolution of Financial Services , Oliver Wyman, 2007). In the book under review, Geoffrey M. Hodgson, Research Professor in Business Studies at the University of Hertfordshire, argues in the same vein that Darwin rather than Marx provides the appropriate model for making sense of socio-economic change.

Marx read On the Origin of Species in late 1860. His initial reaction was positive; he wrote to Ferdinand Lassalle in January 1861 that “Darwin’s work is most important and suits my purpose in that it provides a basis in natural science for the historical class struggle” (K. Marx and F. Engels, Collected Works, Vol. 41, p. 246; International Publishers, 1985). But Marx’s enthusiasm began to wane as soon as it dawned on him how much Darwin owed to Malthus. In June 1862 Marx commented to Engels that “Darwin rediscovers among the beasts and plants, the society of England with its divisions of labour, competition, opening up of new markets, ‘inventions,’ and Malthusian ‘struggle for existence.’ It is Hobbes’ bellum omnium contra omnes …” (Collected Works, Vol. 41, p. 381). Marx anticipated that reactionaries would appeal to Darwin’s theory as “a conclusive reason for human society never to emancipate itself from its bestiality” (Collected Works, Vol. 43, p. 217). By 1866, Marx was championing Pierre Tr?maux’s Origine et Transformations de l’Homme et des autres ?tres (Paris, 1865) ? now justly forgotten ? as a “significant advance over Darwin.” For Marx, Tr?maux’s great improvement was that he placed progress at the center of his conception of evolution, whereas “Darwin regards [progress] as purely accidental …” (Collected Works, Vol. 42, p. 304).

Marx’s endorsement of Tr?maux over Darwin was a serious lapse in judgment. But the misstep is explained by the affinities between Tr?maux’s theory and Marx’s project to expose a set of forces that drive socio-economic development. Opposition to this idea that history has a “logic” is at the heart of Hodgson’s coolness toward Marx. Whereas Darwin recognized that biological systems are open ? subject to external forces like climate change or species migration ? Marx, Hodgson charges, explains capitalism’s historical trajectory almost entirely in terms of internal mechanisms. Hodgson further contends that Marx ascribes to these mechanisms a teleological character that is incompatible with the open-endedness of Darwinian evolution: they propel the system toward collapse, and set the stage for the next phase of human history, socialism. In biological systems, new traits originate as random mutations, and proliferate if they confer some survival advantage on an organism or population in the prevailing environmental conditions; these new traits may in turn react back on the natural environment. Because the biological system is open, and its constituent elements interact with one another in complex ways, the outcome of the process is not susceptible of prediction: there is no determinate end-point. In this respect, Darwin’s perspective is closer than Marx’s to the “old institutionalist” tradition that has inspired Hodgson’s work over the past two decades.

Hodgson wrongly asserts that Marxism overlooks the indispensable social functions of customs and institutions as repositories of collective knowledge. Marx knew that institutions evolve as solutions to problems that individuals and groups encounter in going about their business; in his account of how capitalism develops, custom is a crucial element of the superstructure that reinforces the underlying economic basis of society. Marx saw also that institutions exhibit inertia: they persist long after the circumstances that gave rise to them have disappeared. As often as not, the new institutions themselves helped to bring about the transformation of the material conditions of society. This disjunction between institutions and the evolving mode of production, Marx hypothesized, generates tensions, or contradictions, that lead eventually to the withering of old institutions and their replacement by new ones: a socio-economic system is pushed forward through history by the tensions generated by the production relations which form the system’s institutional core. Hodgson does not consider whether this bold hypothesis is a fruitful way to approach the analysis of socio-economic change; he simply dismisses it as “teleological” and moves on.

Social Darwinists like Herbert Spencer, William Graham Sumner and, in our own day, Charles Murray maintain that natural selection accounts for the misery that market economies inflict on large numbers of people: the poor are poor because they are inferior or unfit in some objective sense. This is not an application of a metaphor, but a claim about actual social and biological processes. Though its environmental niche is small, Social Darwinism, now generally regarded as morally repugnant and empirically vacuous, poses something of a difficulty for anyone who wants to argue that the theory of evolution provides an apt template for the explanation of social processes. In Chapter 3 Hodgson rescues Darwinism from this ditch. He points out that the term “Social Darwinism” was rarely used before the mid-1920s, and when it was used it was usually deployed by progressives against free-market fundamentalists. We learn also that the writers conventionally labeled Social Darwinists were in fact not genuine Darwinians. But the misapplication of allegedly Darwinian ideas in support of “an ethics of rapacity and greed” (p. 47; the words belong to the sociologist Erville Woods) ? a development that, as we have noted, Marx foresaw ? led to a reaction among social scientists, particularly sociologists, who sought to purge their disciplines of all traces of biological causality. Talcott Parsons plays a malign role in Hodgson’s story. Parsons, who wanted to carve out a secure and influential professional niche for sociology, strategically broadened the definition of Social Darwinism to encompass “anyone who applied biological ideas in the social sciences” (p. 54). He then distorted the views of those who fell within the definition, demonized the distorted views, and erected a barrier between the social sciences and biology.

Hodgson makes a persuasive case that the history of the term “Social Darwinism,” in particular its transformation into an epithet, contributed to the disappearance of biological reasoning from the social sciences. But a few loose ends remain. For a start, Hodgson doesn’t explain why Parsons thought a full-throttle attack on Social Darwinism would advance the professional interests of sociologists. Nor is it clear how Veblen and the American institutionalists fit into the argument. They recognized the evolutionary character of social phenomena, were never tarred with the Social Darwinist brush, and were an influential presence in American economics into the 1950s, long after Parson’s crusade had succeeded in marginalizing the ideas of Spencer and Sumner. The near-demise the Veblenian tradition owes little to the assault on biological approaches that Hodgson describes. In economics the dominant metaphors had, from early on, been drawn mainly from physics. The institutionalists showed that a “biological” outlook might be more appropriate for understanding a large class of human activities; but they were swimming against the current.

In Chapter 4 Hodgson elaborates his critique of Marx. The charge that Marx’s theory is teleological is here connected to another criticism ? that he lacks an adequate theory of human agency, of why people behave as they do. While a Marxian theory of agency would be useful to have (and a good deal of work, ignored by Hodgson, has been done in that direction), the fact that Marx did not himself provide one doesn’t invalidate his general approach. Marx was primarily interested in how the system as a whole reproduces and evolves, and at that level of analysis, some degree of abstraction about individual behavior is not only permissible but necessary. To be sure, class interests and material conditions do not compel people to behave in ways that bring about some inevitable path of social development. Marx knew this, even if he was confident that capitalism would eventually collapse under the weight of its internal contradictions. He knew too, though, that those material conditions have ramifications for what people believe about the world, for how they make choices, and consequently for how society evolves. Hodgson’s remarks on these matters were initially made in 2001, as the opening contribution to a debate with Alex Callinicos, whose rebuttal, presented here as the second part of the chapter, makes short work of Hodgson’s caricature of Marx’s views.

The book loses its thematic focus after Part 1. Readers looking to find direct engagement with the ideas of Darwin and Marx can put the book aside once they have gotten through Chapter 4. Darwin recedes into the background, and Marx receives no attention at all after Chapter 6. This is not to say that the remaining sections of the book lack interest.

In Part 2 Hodgson scores some hits against the critical realist school. He begins by dismantling the claim often made by critical realists that their methodological tenets support an emancipatory left-of-center politics. He then moves on in Chapter 6 to critique several concrete analytical applications of critical realism ? its utilization in defense of Marx’s theory of the tendency of the profit rate to fall; and the attempt to explain Britain’s late-twentieth century industrial decline as the result of trade union resistance to technological change and workplace reorganization. In these chapters Hodgson delivers a penetrating dissection of critical realism’s vulnerabilities, though the effect is marred by the occasional cheap shot, as when he writes that critical realism “is a means for Marxist academics to make political postures while simultaneously earning their crust doing serious academic work” (p. 93).

Chapter 7 is an insightful assessment of “The Problem of Formalism in Economics.” Hodgson identifies two extreme positions on mathematical formalism: (1) rejection of formalism out-of-hand, a view which is close to the critical realist stance; and (2) the treatment of formalism, in itself, as the criterion of scientific legitimacy, without due regard to whether the formal techniques utilized in a particular argument cast light on the real world ? an attitude that is all too evident in modern economics. Hodgson advocates a middle-of-the-road approach: formalism can be useful if we are attentive to the interpretative context in which any given formal model is developed and applied. This sensible view, however, then raises the question, left unaddressed by Hodgson, of what other criteria are necessary to gauge the usefulness of a model.

The third part of the book is concerned mainly with taxonomic issues: how are institutions, habits, rules, routines, customs and norms different from one another, and how are they connected? Much of the ground covered here is familiar, and there is a good deal of hair-splitting on display. These chapters flunk the MEGO test (“My Eyes Glazed Over”).

Hodgson has less to say than one might expect about how new institutions originate, or why they take this or that particular form. Marx provides a potential answer to such questions, but Hodgson consigned Marx to the dustbin of history in Part 1, and wants to leave him there. When, in Chapter 10, Hodgson does take a stab at the problem of how institutions and rules come into existence, his analysis lets us down. With coauthor Thorbj?rn Knudsen, he approaches the issue via a technical exercise that has become common in the new institutionalist literature, a game-theoretic computer simulation aimed at showing how a particular rule ? in this case, the convention about whether cars are to be driven on the left or right side of the road ? might emerge from the undirected choices of atomistic agents. It is a curious exercise for Hodgson to undertake because it seems to be fundamentally at odds with the “old institutionalist” injunction not to treat social actors as atomistic entities. If institutions really do matter, our default setting ought to be skepticism toward any attempt to explain even a simple rule in terms of a model that abstracts from social and political context. Hodgson’s simulation results undermine the view that habits must be grounded in given individual preferences; but I’m not sure we need this sort of analysis to tell us there’s something fishy about the crude reductionism of utility-maximization models. That the convention under examination involves no issue of conflict also limits its interest.

The book’s central message is that “Explanations of socio-economic phenomena [ought not to be] reduced … to individuals [or] to institutions alone” (p. 201). Few would disagree. In elaborating this message, Hodgson overstates the differences between his own methodological approach and Marx’s; herein lies the book’s principal flaw. Hodgson presents Darwin and Marx as mutually exclusive alternatives, when they are in many respects complementary to one another. Darwinian evolution is indeed “random” in a way that Marx’s capitalist dynamics are not. There’s a good reason for this. Social systems are different from biological systems, and the Darwinian metaphor can carry us only so far. One has the impression that Hodgson wants to shield institutionalism from being tarnished by too close an association with Marxism. Yet his perceptive and careful reflections on social transformation would be considerably enriched by a more liberal assimilation of Marxian insights.

Gary Mongiovi teaches economics at St John’s University. He and Steve Pressman co-edit The Review of Political Economy.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

John Maynard Keynes and International Relations: Economic Paths to War and Peace

Author(s):Markwell, Donald
Reviewer(s):Lawlor, Michael S.

Published by EH.NET (February 2008)

Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace. Oxford: Oxford University Press, 2006. xv + 320 pp. $85 (hardcover), ISBN: 0-19-829236-8.

Reviewed for EH.Net by Michael S. Lawlor, Department of Economics, Wake Forest University.

This book will be of interest to economists in general, and to Keynes specialists in particular. It focuses on the topic of the international relations views expressed by Keynes over his long career, from his involvement in the First World War as a Treasury official and as Lloyd George’s economic advisor at the Paris Peace Conference; through his interwar position as a prominent analyst of international monetary problems; to the part he played in the British Treasury during the Second World War. There he was very influential on the policies of how Britain would pay for the war, the form that the post-war international payment systems would take under the Bretton Woods system, and the negotiation of the terms of the American post-war loan to Britain in 1946, shortly before his death.

The fact that this book solely focuses on this limited facet of Keynes’s multi-dimensional career, that Markwell is a political scientist and therefore uses much non-economic material, consisting mostly of primary internal memoranda from the Treasury office and other governmental units, and that he frames his arguments in terms of the secondary scholarship on international relations in political science ? both of which are unfamiliar territory for most economists ? adds to the freshness and usefulness of this study. It should also be added ? and I don’t think Markwell would disagree ? that some of the debates and contexts for Keynes’s activities in this regard have already been well discussed in both Robert Skidelsky’s (2000) and Donald Moggridge’s (1992) biographies of Keynes. These books provide a thorough background and context for the many issues, events and personalities surrounding Keynes’s involvement in international relations. I would suggest one of these volumes for further reading to those who find this to be an area of interest. Markwell’s book goes beyond them, and is a useful companion to them, in its bringing together the various strands of Keynes’s ideas, writings and activities with respect to international relations in one place. This treatment adds focus to the material in a way that Keynes’s biographers, necessarily more focused on the grand sweep of his career, were not able to do.

More broadly, this book is instructive to this reviewer for the opportunity it offers to ponder the importance of context for the application of some of the fundamental tenets of economic theory. Ironically, perhaps this is precisely because of Markwell’s lack of focus on economics and due to his use of the aforementioned wealth of policy evidence on Keynes’s extensive involvement in government and international affairs. Markwell’s analysis requires the economic reader to follow Keynes into the task of applying economic theory to knotty problems of international politics and thereby to think hard about the validity of the abstract nature of economic principles in various real geopolitical scenarios of great import (like the two World Wars), to consider what role economic factors may play in the development of hostilities between nations, and to consider seriously the compatibility of microeconomic truths with macroeconomic truths when their application is not just a hypothetical example, but a real live political circumstance.

To first take up the issue of the contextual nature of the application of economics to political situations consider the situation that Keynes, and all western economists and political analysts, faced in the period from the end of the First World War, through the slump and depression of the thirties. What concerned them most was the question of how to re-create the era of rising prosperity and smoothly functioning world trade that had characterized Europe and America in the period before 1914. From the end of the First World War and the Paris Peace Conference on, Keynes was one of the first and most prominent (but by no means the only) international figures who felt that this goal required a lasting peace that would allow Germany to regain its rightful place, for reasons of geography and size, as the economic engine of Europe.

This was Keynes’s message in the book that first made him internationally famous, The Economic Consequences of the Peace. This book, as Markwell shows, grew from Keynes’s fears that restoring prosperity to Europe was wholly lost sight of in the blind rush to revengefully heap reparations and crippling terms of defeat upon a prostrate Germany. Keynes’s sometimes over-the-top criticism of the principals at the conference ? with Lloyd George, George Clemenceau and Woodrow Wilson coming particularly under extensive personal attack, some thought bordering on ridicule ? stemmed from the fact that Keynes believed that their actions, as opposed to their hypocritical words, would lead to an unstable peace.

Thus, at some risk to his own influence and career, Keynes quit his role in the negotiation of the Paris peace treaty and returned to England to hastily write his reaction to that experience in the form of The Economic Consequences. It was a book that both criticized the leaders of England and France for cowardice, in being unwilling to challenge the popular clamor for revenge upon Germany, and that laid bare the flaws of the peace terms that the French and British political leaders had, Keynes thought, bamboozled President Wilson into signing. These plans, he felt, were counterproductive of a lasting peace and unrealizable to boot, because Germany could never meet its reparations obligations so long as its internal economy was crippled by the terms forced upon it by the treaty.

All this is well known to Keynes scholars and to students of the World War One period. What Markwell adds is context and detail to Keynes important role in the struggle to win both the war and the peace. What can be learned by all economists from his experience is that the dire nature of the post-war European economies, particularly those of the losing Axis powers, could not automatically be reversed unless attention was paid both to their immediate needs in the form of relief aid of one kind or another and also to their more long-term need to foster investment and trading institutions that would ensure the growth and permanence of economic prosperity. In asking how this would be achieved, Markwell classifies the nature of Keynes’s arguments at this crucial historical juncture as a species of a “liberal-idealist” one.

At the end of 1918, Keynes had a clear view of some of the elements of the post-war order he wished to see. His liberal-idealist faith in free trade, on which he had been brought up, was unshaken. He had urged the abandonment of inter-Allied debt and Britain’s forgoing her share of reparations, which he hoped would go to assist the new states. He had urged a moderate approach to reparations; and clearly wished the defeated powers to be treated so that they would not need assistance to avoid starvation, unemployment, anarchy, or perhaps Bolshevism. The fundamental views which underlay his action at the peace conference, and which were to be expounded in The Economic Consequences, were already formed and were shared by many others (p. 53).

Thus Keynes began his career, as many economists have before and since his time, as a solid proponent of free trade as the primary means to bring about international peace. This brings us to the second issue raised above: to what extent, and how, are economic factors causative of acrimony and war between nations? Any modern economist could profit by considering this question in light of Markwell’s book. Here, Markwell writes, Keynes’s view matured over the course of his career. The standard argument pits free trade against imperialism. Free trade, it is thought in the standard liberal argument, may have peaceful benefits as an unintended consequence, if it make customers out of potential enemies. Moreover, since mutually beneficial gains for any two countries can be shown (and this is one of the principle lessons of a liberal economics) to lead to rising prosperity for both trading partners, there is a potential for any two countries to both benefit from trade. Trade, so this argument goes, would make traders reluctant to upset trading by aggression and war, and so free trade may tend to reduce international aggression and war.

On the other side, the argument of imperialism starts from the premise that it is beneficial for a country to run a favorable balance of trade, and an expanding export market, in that this tends to keep manufacturers and producers of tradable goods and services at home in a prosperous and expanding state. By this argument developed countries (note not firms directly, but perhaps state action spurred by firms) will seek means to maximize export opportunities in particular and may also vie to receive exclusive preferences for their goods and services in these markets, as well as trying to ensure scarce inputs to the production process, such as raw materials and/or natural resources that are in short supply at home. How is this accomplished? By the argument of imperialism, it is accomplished by military and diplomatic maneuvers that allow powerful states to dominate weaker states and to assemble official or semi-official trading empires.

The economic analysts of the liberal tradition in England ? Smith, Ricardo, Burke, Mill, and Marshall ? can be identified as the major proponents of the former idea. Dissenters from this tradition both in England and on the continent ? like Hobson, Lenin and Luxembourg ? can be identified with various twists on the latter idea in Keynes’s time. Markwell makes it clear that Keynes early in his career came down exclusively on the side of the liberal conception of free trade ? hence his categorizing of Keynes’s earliest arguments into those of a “liberal-idealist” camp. He recognized and believed in the potential of free trade to promote peace and harmony among nations, and he thought that by reestablishing Germany’s power to participate in trade with it neighbors, a lasting peace could be established in Europe after World War One.

It must be said, though, that the history of Europe and the world in the nineteenth century and leading up to the war in 1914, offered evidence supportive to both sides of this debate. On the one hand Britain, France, Germany and in fact most of Europe, had all grown prosperous in this period by trading with other nations, particularly was this so in the case of Britain, a small island economy with vast global trading interests. But each had also sought to carve out for itself some exclusive markets for its exports, and some exclusive sources of raw material for it own producers, through the conquest of overseas empires. This vying for power internationally had become so commonplace among European governments that part of this activity became known in England by the playful title of the “The Great Game.”

But imperialism and empire were not topics that engaged Keynes, either by upbringing or by temperament. In order to reassert the classical liberal argument he had been brought up on in this context he, like many of his fellow British liberals, made a crucial distinction between empires and exclusive trading blocks. “Empires,” according to Keynes (in 1903), need not lead to exclusive trading blocks. An empire that was founded and run on proper political principles, as he thought was the case of the British Empire, could lead to a loose confederation of states for which association with Britain was “to provide facilities for the growth under freedom and justice without molestation from abroad of these young nations … [W]hen a country becomes part of the Empire it is free to pursue it own destiny, in its own way. Because our ideal is democratic” (p. 19).

This somewhat condescending (to the colonial countries) and benign view of empires was in sharp contrast to both the imperialism theorist’s view of empires, as well as to those of other English political and ideological leaders (of the so called “Round Table”) who, after World War One, wanted to work for the imperial unity and exclusivity of trade relations between the various members of the British Empire. Keynes criticized the notion that empires necessarily would form into exclusive trading blocks that excluded all others, and that empires should lead to this state of affairs. He excoriated the latter in particular, exemplified for Keynes by the “German dream of Mittel-Europa.” It was a conception of empire based on “exclusivity” and the attempt to “monopolize” for the home country producers’ markets for their exports and sources of food and raw materials. This, he lamented, led to new frontiers “between greedy, jealous, immature, and economically incomplete, nationalist states” (p. 20). Worse, competing for such imperial preferences by nation-states, such as the British Round Table thinkers advocated, could lead to conflict and war.

Thus, the question that formed the international relations context in which Keynes wrote during and immediately after the First World War, was whether war could only stem from a perverse international policy in pursuing the potential gains from free trade (what Markwell calls the liberal-idealist position) or whether war was a natural outcome that could be expected from an inevitable imperialist-capitalism by which states would naturally vie for national power by assembling competitive exclusionary trading blocks (what Markwell identifies as the “realist” view).. Keynes, at this stage, as we have seen, favored the first argument ? that free trade only caused war when it was perversely pursued along the lines of imperial, exclusive terms. If trade and empires could be based on openness of markets and democracy, such as British experience in the pre-war period showed to Keynes was possible, then empires could be a beneficial source of cosmopolitanism and peace.

So what did Keynes at this early stage in his development think were the economic causes of war? Wars could result, said the younger, classical liberal Keynes, from “impoverishment, population pressure, penetration by foreign capital and the ‘competitive struggle for markets'” (p. 3). Note this fits our conclusion in the previous paragraph, by carefully excluding free-trade from those causes, so long as it is not pursued in exclusionary terms. So the interesting questions for economists today ? trained to believe unreflectively and in the abstract in the eternal verity of the potential for mutual gains from trade ? to take from this study of Keynes are as follows: Are there some possible circumstances under which this gain will not automatically arise in the context of actual situations of international relations? Does economic theory itself suggest conditions in which we may want to abandon a dogmatic attachment to what seems like a species of economic Truth? It turns out that the historical analog to these questions in the present case is “how did Keynes’s view of the role of economics in international relations evolve over his career?”

One way to answer these questions is by following Markwell in identifying three further stages in Keynes’s evolution in this regard ? identified as his “early liberal institutional, protectionist and mature liberal institutionalist” (p. 3) positions. All three stages could be thought of as instances where Keynes did not so much abandon the above-listed catalogue of the potential economic causes of war, but rather thought of extensions to the first cause ? economic “impoverishment.” His extensions were of two varieties. First in the 1920’s, and again in the 1930’s, Keynes suggested extensions from the contextual perspective of then current national and international events. Later in the 1930’s, and from the theoretical perspective of his General Theory, he suggested further, more economically fundamental extensions to this factor. Put another way, as he matured in terms of both experience and theoretical framework, he added to this list of the potential economic causes of war the crucial factors of monetary disorder, trade imbalances and unemployment. Even later, with special reference to Hitler and Germany, he added that there is no proper economic cause that extended to a nation’s possible reaction to “impoverishment” by embracing what he called a “brigand.” That is to say, economics had no explanation or remedy for a nation that was led by “a madman or a gambler” that was willing to risk war for personal power (p. 198). (Markwell convincingly shows on pp. 197-203 that Keynes was never pro-German or an appeaser, as he has sometimes been accused.)

Let us take the first stage of the evolution of Keynes’s views to begin. As Britain suffered through the slump of the twenties and as most of the West similarly suffered though the worse experience of the Great Depression in the thirties, Keynes came to blame these continued difficulties in restoring prosperity on the lack of existence a of well-functioning international monetary order. In particular, he was convinced that the gold standard had become a shackle on Britain, and on western expansion in general, because it forced weakened economies, such as he identified Britain as being since the First World War, to run a high-interest-rate policy for international reasons (to protect its gold reserves) that was wholly inconsistent with a needed internal low-interest-rate policy to restore employment and prosperity. This again deviated from the belief that free trade would automatically restore prosperity in any political context. In this case, and barring international agreement on an alternative system that bitter experience had taught him was not likely, it would be better for Britain to unilaterally either peg its pound below its pre-war parity rate ? and by such a devaluation encourage the output of its exporters – or, as eventually transpired in 1931, to abandon the gold standard altogether.

Even as this was his best counsel on short-term policy, Markwell shows Keynes was continuously preoccupied in this period, roughly 1922-1932, with finding a solution to the question of what possible type of international arrangement could be agreed upon by many nations and managed with some high degree of efficiency that would not rely upon what Keynes considered the immiserating and trade-inhibiting policies of the gold standard [1].

So the second-stage of the development of Keynes’s views on international relations was that he came to feel strongly that a return to the pre-1914 prosperity in Europe required the adoption by international agreement of an alternative to the former gold standard that would attract wide participation. This could only happen, he thought, if there were strong international leadership (which he long looked for from the U.S., as far back as the end of the First World War, but did not actually witness until World War Two). Moreover, Markwell clearly shows that in all of his many writings and participation in conferences devoted to this topic, Keynes was very fluid and pragmatic about the form that such a system should take. He was willing to compromise his own vision of a U.S./British-led system of managed (flexible) fixed exchange rates and the form that a managed stock of international liquidity reserves and payment media would take, if it would encourage wider agreement. (He stressed that the search for unanimity was an evil to be avoided.)

This fluidity as to details was to serve him well when he was negotiating with America during the Second World War over Lend-Lease and especially the post-war monetary system in that the Americans had firmly held demands and alternative plans of their own, which when added to Britain’s weak financial position, meant that Keynes was forced to negotiate from a distinctly weak position. Thus, the 1923-30 period was the stage of Keynes’s developing international relations views that Markwell calls “early liberal institutionalist.” Free trade could be beneficial, he was saying, but only if a properly functioning international monetary institution was adopted.

Briefly, we proceed on to the third stage of Keynes’s views on the economic element in international relations. Here the question becomes more starkly the universal nature of the coincidence of free trade and peaceful international relations. This stage arose out of Keynes’s participation on the Macmillan Committee on Trade and Finance (1929-31), the Economic Advisory Council set up by Ramsey McDonald, and particularly its Committee of Economists (created in July 1930, and to which also belonged William Beveridge, A. C. Pigou and Lionel Robbins) and in the pages of the political affairs journal that he headed at the time, the New Statesman. All of this activity arose from the need to respond to the international crisis that arose from the Great Depression and its particular impact on Britain.

In this and the fourth stage of Keynes’s grappling with international relations questions, Markwell emphasizes continuity in Keynes’s evolving views. The economist in me wants to call the first issue one of political context and, therefore not economically fundamental. But Markwell makes a good case that the last two stages of Keynes’s thought in this regard should be seen as merging into, and reinforcing, one another. The fourth phase he identifies is the period after 1933, sometime between 1934 and 1936, depending on when one judges Keynes to have been in control of the central propositions of his General Theory.

To go back, we should start with describing the third stage of Keynes’s views that Markwell describes as his “protectionist” phase. This occurred when, in the early years of the Great Depression, 1929-33, and to quite a bit of controversy, Keynes advocated protectionist measures for Britain, especially higher tariff barriers, as a way of combating the British unemployment of that period. He contextualized this recommendation by arguing that this unemployment had unfortunately occurred within a world system where the gold standard made the pursuit of free trade for “creditor” countries (such as Britain was since 1914) a road to even higher domestic unemployment than it was already experiencing. This was because, in order to maintain its balance of payments, it was forced to run a high-interest rate policy and deflation to protect its reserves. In this circumstance, and again barring a better international monetary system that seemed so impossible to him at that dark stage in history, Keynes gave a limited endorsement to British protectionist policy in the then-current economic emergency and for the short term. One detects almost a reluctance on his part to do so. And, indeed, his about-face was controversial enough on the Economists Committee that Robbins found it necessary to both author a dissenting minority report, attack Keynes’s position in the press and later author, with Beveridge and other LSE economists, a book defending free trade even in this context (Beveridge et al. 1931).[2] Consider Markwell’s comment on Keynes in this period: “Keynes’s renunciation of free trade came, hesitantly, and then boldly, in proposals, first, for emergency tariffs, and, secondly, for greater national self-sufficiency and economic isolation. Keynes moved from admitting that the classical connection between free trade and peace was an argument against a tariff, but one outweighed by the economic emergency; through saying that his proposed tariffs could also help international amity; to denying that free trade did in fact promote peace” (p. 153).

His argument in the context of such an economic emergency as the Great Depression seems to have been analogous to the old saw that “the patient cannot stand the cure.” He thought that Britain was in such a crisis with regard to unemployment, that her money wages were too rigid for deflation to work its classic role in bring down costs, that the gold standard had so limited the range within which domestic economic policy had to maneuver, and that so many other countries were reacting to this crises by erecting tariff barriers of their own (effectively exporting their unemployment problems to Britain), that he had become “reluctantly convinced” (p.154) that protectionism was the best temporary policy Britain could pursue in this circumstance.

Economists, and particularly specialists in macroeconomics and in Keynes’s thought, might immediately wonder if the drafting of the General Theory of Employment, Interest and Money did not have a profound effect on Keynes’s ideas on this question. Less historically minded economists might also wonder if, and how, the perspective of macroeconomics might alter one’s view of the universal argument for the benefits from trade. Again the history of Keynes’s own international relations positions offers examples of him facing exactly this question. Consequently, the fourth and last stage that Markwell identifies in Keynes’s evolving views on international relations ? what he calls the “mature liberal institutionalist” phase ? was based on just this issue. Again depending on when one judges the proposition of the General Theory to have been drafted, in some period during the middle part of the 1930s, Keynes developed a more fundamental economic theory framework in which to argue the point about protectionism that we have seen him making on pragmatic policy grounds in the early years of the Great Depression. In the General Theory and after, Keynes insisted that the question of the economic causes of war and the advisability of protectionist, anti-trade measures depended on how close the economy was to full employment ? and this extended to his advice to the government during the Second World War, when he judged the economy to have met this condition. Short of this internal goal, Keynes said that countries were unlikely to reap the potential benefits from free trade described by classic liberal economics. This was because the temptation was too strong for any one country to erect tariff barriers around itself to boost the demand for domestic producers. It was Keynes’s view that the policies of many nations since 1929 offered examples of this. Since competitive attempts to export domestic unemployment to another country eventually ended in lowering employment in them all, protectionist policies became a second best solution in this context. Better that each county should act in isolation from international forces to raise domestic employment to its full potential, by lowering interest rates and bolstering demand for domestic industry in any way possible. According to Keynes, “if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as practicable, the classical theory comes into it own again from this point onwards” (p. 186).

Here we can quote Markwell to the effect that Keynes hereby modified his position on the economic causes of war in a fundamental way:

In short, Keynes’s argument was both that laissez-faire did not have the tendency to peace claimed for it, and that a reformed capitalism along the lines he advocated would much improve the prospects for peace. Keynes said that ‘the new system might be more favourable to peace than the old has been.’ It is not clear whether by this Keynes meant simply that past causes of war would be absent, or that with these gone and free trade, some of the mechanisms classical liberals claimed were the means by which free trade actively promoted peace would work again. Such mechanisms included the creation by trade of vested interests in peace, and the promotion of moral solidarity between nations trading with each other.

Here is the final issue that modern economists might profit from pondering as a result of reading this book. Keynes was saying in the 1930s that countries had first to ensure full employment before they could anticipate the mutual economic gains and the possible peace dividends that trade holds out. If the economic system of a free-market economy does not automatically tend toward full employment, but needs to be managed to attain this goal consistently through time (and surely this is the basic lesson of macroeconomics even to this day), then it is a mistake to think and preach that free trade is some sort of divinely given cure for all economic ills, in all contexts, domestic and foreign.

Keynes, of course, should not be looked on as an infallible guide in pondering this issue. He was fallible in judgment even within the field of international relations that Markwell surveys here. For one, his self confidence about his cleverness in designing policy fixes often led to disastrous negotiations on his part with his official American counterparts during the Second World War. Harry Hopkins, the special advisor to U.S. President Franklin Roosevelt, reportedly expressed this irritation in his comment that Keynes was “one of those fellows that just knows all the answers” (Chandavarkar, 2001).

Moreover he showed a complete lack of understanding of the American political process. Used to dealing exclusively with ministers and their Whitehall staff in the more centralized English system, he was dismayed by the power of individual Congressman. Also, not only was Keynes unnecessarily rude to these Congressman, who he often gave the impression that he considered them provincial and beneath him, but his haughty behavior was also unwise, in that those very Congressmen could hold up American aid for British needs. He similarly accused the White House and State Department of being too timid in its relations with Congress, not realizing that the American Constitution gave Congress control of appropriations, whatever the White House may have negotiated for with the British.

But Keynes’s faults were more than outweighed by his many talents. Keynes’s insight into how economies work, combined with his ability to understand and exert influence over the process of policy creation, is unlikely to be seen again in today’s era of extreme specialization. As such, modern economists, whether they agree with his judgments or not, can learn valuable lessons in the political economy of policy application from following his career in international relations in the context of numerous actual international crises. Markwell does a fine job in showing, over numerous issues, how difficult and how much skill is required to apply economic reasoning in the realm of international relations. Markwell’s greatest attraction for an economist is that he shows how Keynes pursued this activity with skill and subtlety in the context of many of the weightiest geopolitical issues to face the West in the twentieth century. It is one measure of Keynes’s and others’ ultimate success in this context that it is hard now to even imagine Germany and England at war. We, as economists, can learn a great deal from a recounting of his experiences in establishing this peaceful and prosperous state of affairs in Europe. Perhaps it might even make us a bit humble to contemplate that it may be in large part due to Keynes’s own work both in economics and politics, to the wisdom of the architecture and implementation of the Marshall Plan, which was surely in the spirit of Keynes’s ideas, and to the way in which economies have been managed since his time, that we have the luxury of not facing his unpalatable choice between free trade and full employment.

Notes:

1. Also note that Keynes therefore wanted to destroy what he considered a “barbarous relic” of the nineteenth century, the belief that the gold standard operated “automatically” to restore international imbalances and that this meant it would encourage trade. Alternatively, a major message of Keynes throughout this period was that the gold standard was not, in fact, operating automatically by the pre-war rules of the game in the period after World War One because the U.S. and the Federal Reserve System refused to let its own eventual control of the majority of the world’s monetary gold cause U.S. prices to rise. Keynes thought this unfairly forced upon all other “creditor” nations the problems, noted above, of choosing to abandon international monetary arrangements, to competitively devalue its currency or to run a ruinous deflation.

2. It is instructive to modern economists that Robbins later, in his autobiography (Robbins, 1971), recanted his opposition to Keynes during those depression years.

References:

Chandavarkar, A. 2001. “A Fresh Look at Keynes: Robert Skidelsky’s Trilogy.” Finance and Development, Vol. 38, no. 4, December.

Moggridge, Donald. 1992. Maynard Keynes: An Economist’s Biography, Routledge.

Robbins, Lionel C. 1971. Autobiography of an Economist, Macmillan.

Skidelsky, Robert. 2000. John Maynard Keynes: Fighting for Britain, Macmillan.

Michael S. Lawlor is Professor of Economics, Wake Forest University, Winston-Salem, North Carolina. His most recent publication on Keynes is The Economics of Keynes in Historical Context: An Intellectual History of the General Theory (2006).

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

The Decline of Latin American Economies: Growth, Institutions, and Crisis

Author(s):Edwards, Sebastian
Esquivel, Gerardo
Márquez, Graciela
Reviewer(s):Salvucci, Richard J.

Published by EH.NET (January 2008)

Sebastian Edwards, Gerardo Esquivel and Graciela M?rquez, editors, The Decline of Latin American Economies: Growth, Institutions, and Crisis. Chicago: University of Chicago Press, 2007. viii + 418 pp. $85 (cloth), ISBN: 978-0-226-18500-1.

Reviewed for EH.NET by Richard J. Salvucci, Departments of Economics and History, Trinity University

This book is something of a disappointment, but certainly for no intellectual reason. The papers in it, the results of an NBER conference, are almost uniformly excellent. Their authors are a distinguished group. Chances are if you’re interested in Latin America, you will learn something new, come away stimulated, and wish you could read the conference commentaries, which do not appear. So what’s not to like, aside from proofreading that does the University of Chicago Press no credit?[1]

Well, there is the title, The Decline of Latin American Economies. It is a clich? that you can’t judge a book by its cover. You can’t judge this one from its title, either. True, the lead paper, by Leandro Prados de la Escosura, “When Did Latin America Fall Behind?” is probably destined to become a classic reference. Not only can I do his effort no justice in a brief review: Prados’ paper probably merits a conference (or at least a critical response) of its own. Subtleties aside, the paper sensibly asks “decline relative to what?” and then sets out to frame a proper answer drawing on something other than the usual suspect sources. You may not agree with Prados’ quasi-postmodern “it all depends” conclusion, but then we are reminded that, in the final analysis, index numbers are, perish the thought, constructions. Yet after this really promising start, the volume simply falls apart. It is about everything. To be sure, it is an absorbing, sophisticated, even pioneering everything. But the only thing that “declines” is coherence. I guess you really can’t publish a volume entitled “We had a conference, invited a bunch of really smart people to do their thing, and this is the result.” But honestly, that’s what you get.

And, boy, you do get some great stuff. As usual, what you rate “best” is mostly a matter of preference, but there are some real gems included. The briefest and most badly edited paper in the volume, by Gerardo (aka “Geraldo” in its references) della Paolera and Mart?n Grandes, “The True Measure of Country Risk … (its baroque title is almost as long as the text that follows) may be the single most perceptive piece written about nineteenth-century public finance in some time. Looking at sovereign and subsovereign (provincial) bond spreads in Argentina from 1886 through 1892, they conclude “the economic effects of the political structures of emerging nations are an important consideration in analyzing their economic development … [and] should be priced accordingly” (p. 210). Their insight cuts through all the noise about liberals, conservatives, centralists, federalists, revolts, rebellions and “revolutions” ? the political chatter that contaminates the few decent time series we have (for any country in the region) and provides both a coherent framework for analysis as well as an indication of how mid to late-century Namierist politics might actually affect macroeconomic outcomes. My colleagues in history, to the extent they think about economic history at all, rather confusingly contend that economic models either prove the obvious or the impossible. Too bad they probably won’t read della Paolera and Grandes.

As usual, things Mexican are overrepresented, as if Mexico and the purely notional “Latin America” were coterminous. That’s OK with me (again, personal preference), since the papers by Aurora G?mez-Galvarriato, by Gerardo Esquivel and Graciela M?rquez jointly, by Noel Maurer and Stephen Haber jointly, and by Pedro Lains (more for his rehabilitation of Donald Keesing’s neglected work than for the empirics) are essentially what you’d expect from scholars of this caliber. G?mez-Galvarriato’s superb research on the textile industry not only endogenizes protection in Mexico, it endogenizes the “perfect dictatorship” of the PRI as well and puts to rest once and for all the simplistic, economically chauvinist and wildly ahistorical notion that the commercial policies followed in Mexico before the 1980s were just a “mistake.” Shortsighted they may have been, and increasingly out of sync with structural changes in the world economy already evident by the early 1970s as well. But by then, Mexico’s politics were a matter of institutional inertia too. Yes history matters. It took until 2000 to get the PRI out of Los Pinos, but then it had been in power since 1929. Such changes are hardly costless.

I would be remiss if I did not mention that there are also very thoughtful papers by Luis Catao, by Sebastian Edwards, by Michael Bordo and Christopher Meissner jointly, and by the late Kenneth Sokoloff and Eric Zolt jointly. They deal expertly with international capital flows; establishing the credibility of stabilization programs; variations, mostly venial, on ‘original sin'; and the way in which stark inequalities in wealth and power have contrived to reproduce themselves in Latin America since the nineteenth century. Of most interest to historians would probably be the paper by Sokoloff and Zolt. I can only hope that one of Sokoloff’s coauthors, colleagues, or students will bring what had already become a very influential research program to the conclusion presumably envisioned.

I offer no ritualized concluding paragraph. A book which is not a book, however outstanding, really does not deserve one. You say something’s missing, right? Join the club. That’s the best way to convey the experience of reading this frustratingly directionless “publication.”

Note: 1. For one example, see the footnote on p. 197, with the priceless Portuguese title, “Brazil: 1824-1957: Born on Mau Pagador.” That sounds more like a line from “The Ballad of Davy Crockett” than the title of Marcello (sic) de Paiva Abreu’s article. And this is the sloppiness you can see.

Richard Salvucci is author of the forthcoming book, La Deuda Eterna: Politics and Markets in Mexico’s “London Debt,” 1823-1887.

Subject(s):Markets and Institutions
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII