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A History of the Global Economy: 1500 to the Present

Editor(s):Baten, Joerg
Reviewer(s):La Croix, Sumner

Published by EH.Net (January 2017)

Joerg Baten, editor, A History of the Global Economy: 1500 to the Present.  Cambridge:  Cambridge University Press, 2016.  xiv + 369 pp. $40 (paperback), ISBN: 978-1-107-50718-0.

Reviewed for EH.Net by Sumner La Croix, Department of Economics, University of Hawaii-Manoa.

In the past two years, there has been a boomlet in global economic histories targeted to a variety of audiences.  They include a handbook oriented towards academics and graduate students (Francesco Boldizzoni and Pat Hudson, editors, Routledge Handbook of Global Economic History (2016)) and two books more oriented to undergraduates and a general audience (Robert Allen, Global Economic History: A Very Short Introduction (2015) and Larry Neal and Rondo Cameron, A Concise Economic History of the World: From Paleolithic Times to the Present, fifth edition (2015)). A new addition to this field is A History of the Global Economy, a collection of 32 essays edited by Joerg Baten (University of Tübingen), which provides a sweeping introduction to the history of the global economy from 1500.  The volume was commissioned by the International Economic History Association and the editor states that his aim is to organize a “non-Eurocentric history” that presents “economic history in a balanced way.”  The volume is anchored by essays on ten regions that each have “circa 500 million inhabitants today,” although it might have been useful to split the Southeast-Asia-Australia-New Zealand region into two parts given the disparate development paths of economies in Southeast Asia and Australasia.  The regional essays are supplemented by “interlinking notes” that summarize critical debates among economic historians and “take a global perspective” on “core indicators” of development and growth and “highlight notes” that consider particularly interesting puzzles and topics. Senior scholars specializing in each region have written the ten anchor essays, while some of the most distinguished economic historians (e.g., Jeffrey Williamson and Steven Broadberry) were recruited to write some of the interlinking and highlight notes.

Anchor chapters are by Jan Luiten van Zanden (North-western Europe), Joerg Baten (Southern, eastern, and central Europe), Price Fishback (United States and Canada), Luis Bértola and José Antonio Ocampo (Latin America), Osamu Saito (Japan), Debin Ma (China), Rima Ghanem and Joerg Baten (Middle East, North Africa, and Central Asia), Tirthankar Roy (South Asia), Martin Shanahan (Southeast Asia and Australia/New Zealand), and Gareth Austin (Sub-Saharan Africa).  Each author makes a sustained effort to incorporate four measures of the “core dimensions of development” into their analysis: Gross domestic product per capita, height as an indicator of health and the quality of nutrition, basic numeracy as an indicator of education, and the Polity IV index as an indicator of democracy.  Baten argues that while these measures are not available for all regions and times, they are sufficiently available to allow the reader to compare the welfare of populations across regions over at least some of the four dimensions.  The core dimensions of development are presented in each chapter via a unified set of figures and maps.  Another common set of nicely-conceived maps is used to identify directions and compositions of trade flows within and across regions, centers of economic activity in each region, and specialization in production within regions.

One of the strengths of this book is that the text is kept to a manageable length of 355 pages, but this also means that some important topics receive sparse coverage.  For example, the chapter on North-western Europe devotes no space to cataloging major inventions of the industrial revolution while devoting considerable space to more general interpretations of its origins.  Not much space is devoted in any of the chapters to national or international macroeconomic policy.  Instead the emphasis is placed on broader demographic trends, market integration and international trade, and institutional change.  The chapter on Japan is lucid and informative on the 1500-1868 period, but then provides just two pages of analysis for the 1868-2010 period.  This is unfortunate, as a more complete discussion of Japan’s rapid pre-World War II development, its post-war economic miracle, and subsequent stagnation over the 1990-2010 period would surely have been of great interest to many readers.  The effects of war receive little attention except in the U.S./Canada essay.  All that aside, some of the missing topics are filled in by the ten highlight notes and the twelve interlinking notes.  Examples of topics covered by the notes include brain drain from India, the Sputnik shock, the natural resource curse in Latin America, trade and poverty in the third world, women in global economic history, Alfred Chandler’s insights into business history, state finances in civil wars, and Japanese industry during the Second World War.

In sum, Joerg Baten has brought together some of the best people in the field of economic history, and they have written a great set of essays that is surprising unified by the questions they consider as well as by the use of core indications of development and a unified set of maps and figures.  The book is particularly noteworthy for its avoidance of economic jargon and its clear writing.  Authors avoid extensive citation of sources in the text, keep footnotes to a minimum, and provide a brief list of references for each chapter. Students in an introductory or upper-division course in global economic history could easily digest its contents while specialists in economic history could also benefit from reading this volume, as its regional syntheses incorporate the larger literature on regional and economic growth that has emerged in the last 25 years.

Sumner La Croix is the author (with Alan Dye) of “The Political Economy of Land Privatization in Argentina and Australia, 1810-1850,” Journal of Economic History 73(4), 2013.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (January 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):General, International, or Comparative
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Information Nexus: Global Capitalism from the Renaissance to the Present

Author(s):Marks, Steven G.
Reviewer(s):Dudley, Leonard

Published by EH.Net (September 2016)

Steven G. Marks, The Information Nexus: Global Capitalism from the Renaissance to the Present. New York: Cambridge University Press, 2016.  xiv + 250 pp. $28 (paperback), ISBN: 978-1-107-51963-3.

Reviewed for EH.Net by Leonard Dudley, Economics Department, Université de Montréal.

In this disruptive study, Clemson University historian Steven Marks redefines capitalism by breathing new life into concepts recycled from nineteenth-century German sociology. In 1877 a young German philosopher, Ferdinand Tönnies, published Community and Civil Society, a book based on his habilitation thesis. Tönnies contrasted two types of social structure, each of which he had come to know during the preceding years of dramatic and often violent change in German society.  The Gemeinschaft, or community, was an “organic” society like that of the small town in an agricultural region of northern Germany where he had grown up. Here relationships were “natural,” governed by the proximity of family, neighbors and friends. In contrast, the Gesellschaft, or civil society, was the “mechanical” industrial society like that of the cities he had come to know as a student living in different regions of Germany. Whereas relationships in the Gemeinschaft were governed by familiarity and custom, those in the capitalist Gesellschaft were determined by markets and prices.

In The Information Nexus, Steven Marks presents a very similar dichotomy between two types of society. In pre-capitalist societies of medieval Europe or China, he argues, while there were local markets and long-distance trade, the flow of information was limited either by technology or government policy. The first true capitalist economies appeared in the Dutch Republic and England/Great Britain in the seventeenth and eighteenth centuries, where unrestricted publication permitted the rapid circulation of information among a literate population. Although Marks criticizes the “reductionist” approach of the German sociologists (p. 53), Tönnies too distinguished capitalist from non-capitalist economies by the nature of their information technologies. Tönnies’s Gemeinschaft is bound together by oral communication — “the general use of a shared language” — whereas at the initial core of his Gesellschaft lie two of Gutenberg’s offspring, printed debt instruments and newspapers.

The Information Nexus is divided into two sections, each of which is composed of three self-standing essays. In the Part I, Marks presents a review and critique of previous studies of capitalism. Chapter 1 describes the origin of the word capitalism itself. Writing in 1850, French socialist Louis Blanc defined it as the appropriation of capital by the few, whereas in 1911 for German social scientist Werner Sombart, capitalism was control by the Jews. In Chapter 2, Marks proceeds to a description of changes in the meaning of the term capitalism in the United States over the twentieth century. From 1917 onward, capitalism came to represent the American political and economic system in contrast to the communism of Russia or the Soviet Union. In Chapter 3, the author then criticizes previous studies, arguing that features often identified with capitalism — the protection of property, the presence of a monetized commercial economy and production based on the division of labor — are all to be found in many pre-capitalist societies.

In the Part II, Marks offers his own definition of the concept of capitalism. The reader learns in Chapter 4 that the essence of capitalism in the early-modern period was the “free flow of information about capital markets and business opportunities” (p. 100).  Although there were precedents in the Renaissance Italian city states, as mentioned, the crucial development came in seventeenth-century United Provinces and England. In Chapter 5, the story then jumps to the Second Industrial Revolution in the United States. After 1850, in rapid succession, Marks explains, the railroad, the telegraph, the telephone, the typewriter, the large-circulation newspaper and radio made possible the mass market in what became world’s largest economy. Finally, in Chapter 6, Marx turns to current trends in the global economy. He recognizes that automation and globalization present challenges for the rich world. However, the digital revolution holds great promise for emerging economies — provided that their governments permit the “clear signaling of rules and prices.” China, he asserts, despite its rapid economic growth, is having difficulty in switching from imitation to innovation, in part because “government intrusion … raises transaction costs and hampers the flow of information” (p. 227).  Marks concludes that capitalism is essentially “informationism” — an “intensification of information gathering” (p. 234).  Its presence in Europe and its offshoots along with its absence elsewhere account for the “great divergence” between the West and the rest over the past 400 years.

The Information Nexus is a remarkable study, not only for the power of its message, but also for the clarity of its prose and for the vast field of research compressed into its 250 pages. However, I suggest three additions that would help to complete Marks’s story of the rise of capitalism. A first point is the role of language. It is hard to imagine the efficient functioning of financial markets without the standardization of the vernacular — first written and then spoken — as described by Milroy (1994) for the case of England.

A second point concerns cooperation. Although Marks emphasizes price competition, it required a high willingness to cooperate in order for capitalist markets to function efficiently. Paradoxically, it was the intense military tournament between emerging nation states in Europe described by Philip T. Hoffman (2015) that seems to have provided the incentive for the citizens of each state to work together to improve their nation’s position. David Hounshell (1984), for example, has described how the collaboration between the French and American governments and their private entrepreneurs led to the development of interchangeable parts during the eighteenth and early nineteenth centuries.

A final issue is innovation. Ultimately it was the unprecedented divergence in innovation rates between capitalist and non-capitalist societies that led to dominance of the West. Marks mentions the Industrial Revolution only briefly, and fails to discuss the unprecedented burst of technological creativity between 1700 and 1850 described by Mokyr (1990).

As the late William McNeill (1963, p. 567) observed, “the career of Western civilization since 1500 appears a vast explosion, far greater than any comparable phenomenon in the past both in geographic range and in social depth.” Steven Marks’s study of the role of information flows in the creation of this capitalist Gesellschaft definitely merits a place on history bookshelves, whether real or virtual.

References:

Philip T. Hoffman, Why Did Europe Conquer the World? Princeton: Princeton University Press, 2015.

David Hounshell, From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States. Baltimore: Johns Hopkins University Press, 1985.

William McNeill, The Rise of the West: A History of the Human Community. Chicago: University of Chicago Press, 1963.

James Milroy, “The Notion of ‘Standard Language’ and its Applicability to the Study of Early Modern English Pronunciation,” in Dieter Stein and Ingrid Tieken-Boon van Ostade, eds., Towards a Standard English, 1600-1800. Berlin: Mouton de Gruyter, 1994, 19-30.

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

Ferdinand Tönnies, Community and Civil Society. Cambridge: Cambridge University Press, 2001 (original 1887).

Leonard Dudley, Honorary Professor and Lecturer, Economics Department, Université de Montréal, leonard.dudley@umontreal.ca, is the author of Mothers of Innovation: How Expanding Social Networks Gave Birth to the Industrial Revolution (Cambridge Scholars, 2012) and “Language Standardization and the Industrial Revolution,” Oxford Economic Papers (forthcoming).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economywide Country Studies and Comparative History
History of Technology, including Technological Change
Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Institutions and Small Settler Economies: A Comparative Study of New Zealand and Uruguay, 1870−2008

Author(s):Schlueter, Andre
Reviewer(s):Bértola, Luis

Published by EH.Net (August 2016)

Andre Schlueter, Institutions and Small Settler Economies: A Comparative Study of New Zealand and Uruguay, 1870−2008.  New York: Palgrave MacMillan, 2014. xvi + 290 pp. $115 (hardcover), ISBN: 978-1-137-44828-6.

Reviewed for EH.Net by Luis Bértola, Department of Economic and Social History, Universidad de la República (Uruguay).

The aim of the book, based on a doctoral dissertation, is to test whether the social order approach developed by North, Wallis and Weingast (NWW) (2009), fits the particular development of two small settler societies, New Zealand and Uruguay, which otherwise were not considered in the referred authors’ work.

The book presents the problem in chapter 1, discusses the research strategy in chapter 2 and discusses three different periods in chapters 3-5 (“The Golden Age of the Two Settler Economies” up to the 1920s; “The Great Divergence between New Zealand and Uruguay,” the period 1930-1970; and “Decades of Stop and Go” since the 1970s). Chapter 6 concludes and adds some references to later research on social orders in a somewhat confusing way. This discussion should be placed in the introduction, or in chapter 2.

The book attempts to provide further answers to the question “Why the West?,” considering that “the transfer of institutions from the European core to overseas colonies before the industrial revolution facilitates a natural experiment concerning the impact of initial institutional frameworks on long-term economic development.” New Zealand represents the British institutional framework, and Uruguay the Spanish.

The research strategy, presented in the second chapter is as follows. As North, Wallis and Weingast’s verbal model “needs to be applied more consistently in order to remedy its perceived disadvantages in comparison with other more formal theories” (p. 45), the author summarizes a set of key hypotheses with the help of which ideal types are constructed. The historical cases are then read in the light of these ideal types searching for similarities and anomalies.  The stories must find the stylized causality: beliefs → institutions → organizations → policies → outcomes.

The analysis is performed at two levels, both in a comparative way. First, and for the general propositions to hold, New Zealand should show higher and more stable growth rates and levels of per capita income than Uruguay. The former should also show a more sophisticated institutional framework and higher degrees of national organized violence than the latter. These aspects are studied in the following chapters with use of macroeconomic data and different proxies for institutional quality and violence.

While the first level of analysis is somewhat descriptive of the main features of both societies, the second level presents the historical narrative in order to find the causality between organizations, policies and outcomes. The narrative tries to identify the three doorstep conditions for the transition from Limited Access Society to an Open Access one:  1) the rule of law for elites; 2) perpetual forms of public and private elite organizations, including the state itself; and 3) consolidated political control of the military.

Schlueter concludes that, in broad terms, the general approach is valid. However, he finds some anomalies that seem to contradict some hypotheses. For instance, New Zealand achieved some features that should allow for the transition to the Open Access Order much later than expected, and, her relative economic decline after the 1960s is not something to expect. Thus, the author proposes making some adjustments and addenda to the discussed approach. “The reasons for the deviations of both settler societies from their theoretical ideal types lay within and outside of their national borders. NWW’s framework needs further amendments to account for local adaptations to inherited social structures, that is, a theoretically idealized British heritage, as well as for complex influences of exogenous powers on the rules of the game, its players, and their interaction” (pp. 203-05).

The book is well-written and interesting. The author makes an important effort to understand the history of these two countries. He is, however, open to criticism on several details of his interpretation. My main criticism is two-fold, or even contradictory. In the first place, he misses the opportunity to criticize at least two aspects of the NWW approach. One the one hand, he ignores problems in NWW´s approach to international relations and the formal and informal institutions at that level. In NWW´s approach, external forces act only at time zero, establishing the local institutional environment that later reproduces itself, while the international sphere almost completely disappears from the analysis, even when it experiences radical changes. On the other hand, the book is missing a more critical discussion of the deterministic way in which causal relations are considered and a more serious evaluation of alternative explanations. An example is the use of contract-intensive money as a proxy for institutional stability. At least in the case of Uruguay, this proxy does not explain economic stagnation, but is the result of it. This is just an example of the need for a more in-depth discussion of causal relations, which are presented in a very deterministic way. Nevertheless, my second criticism goes in the other direction; I want to make a defense of NWW. It seems somewhat unfair to 1) criticize these authors for being vague and imprecise, 2) reduce their approach to a set of testable hypothesis, and 3) show that the facts do not completely fit the testable hypothesis. From my point of view, NWW had very good reasons for not being too precise. And this is because they have tried to understand real historical processes. Their courageous attempt to construct a comprehensive conceptual framework, even if subject to many criticisms, requires a flexible approach that tries to explain a wide variety of particular developments. Maybe the right question to ask is how these authors would have tried to explain these anomalies.

Reference:

Douglass C. North, John J. Wallis and Barry Weingast (2009), Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, New York: Cambridge University Press.
Luis Bértola is the author of “An Overview of the Economic History of Uruguay since the 1870s” in the EH.Net Encyclopedia of Economic and Business History at https://eh.net/encyclopedia/bertola-uruguay-final/.
Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War

Author(s):Gordon, Robert J.
Reviewer(s):Margo, Robert A.

Published by EH.Net (July 2016)

Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War.  Princeton, NJ: Princeton University Press, 2016. vii + 762 pp. $40 (cloth), ISBN: 978-0-691-14772-7.

Reviewed for EH.Net by Robert A. Margo, Department of Economics, Boston University.

This is the age of blockbuster books in economics. By any metric, Robert Gordon’s new tome qualifies.  It tackles a grand subject, the productivity slowdown, by placing the slowdown in the context of the historical evolution of the American standard of living.  Gordon, who is the Stanley G. Harris Professor in the Social Sciences at Northwestern University, needs no introduction, having long been one of the most famous macroeconomists on planet Earth.

The Rise and Fall of American Growth is divided into three parts.  Part One (chapters 2-9) examines various components of the standard of living, in levels and changes from 1870 to 1940.  Part Two (chapters 10-15) does the same from 1940 to the present, maintaining the same relative order of topics (e.g. transportation appears after housing in both parts).  Part Three (chapters 16-18) provides explanations and offers predictions up through 2040.  There are brief interludes (“Entre’acte”) between parts, a Postscript, and a detailed Data Appendix.

Chapter 1 is an overview of the focus, approach, and structure of the book.  Gordon’s focus is on the standard of living of American households from 1870 to the present.  The approach is both quantitative — familiar to economists — and qualitative — familiar to historians.  As already noted, the organization is symmetric — Part One considers the pre-World War II period, and Part Two, the post-war.  The fundamental point of the book is that that some post-1970 slowdown in growth was inevitable, because so much of what was revolutionary about technology in the first half of the twentieth century was revolutionary only once.

Chapter 2 draws a bleak picture of the standard of living ca. 1870, the dawn of Robert Gordon’s modern America.  From the standpoint of a household in 2016, conditions of life in 1870 would appear to be revolting.  The diet was terrible and monotonous to boot; homemade clothing was ill-fitting and crudely made; transportation was dependent principally on the horse, which generated phenomenal amounts of waste; indoor plumbing was all but non-existent; rural Americans lived their lives largely in isolation of the wider world.  In Gordon’s view, much of this is missing from conventional real GNP estimates.  Chapter 3 continues the initial story, focusing on changes in food and clothing consumption.  Gordon contends there was not much change in underlying quality but he argues that, by the 1920s, consumers were paying lower prices for food — having shifted to lower-priced sources (chain stores as opposed to country merchants) — and that most clothing was store-bought rather than homemade.

Chapter 4 studies housing quality.  As with other consumer goods, housing also improved sharply in quality from 1870 to 1940.  Gordon argues that much farm housing was poor in quality, while new urban housing was typically larger and more durably built.  Indoor plumbing, appliances and, ultimately, electrification dramatically enhanced the quality of life while people were indoors.  As elsewhere in the book, reference is made to hedonic estimates of the value of these improvements as revealed in higher rents. Chapter 5 details improvements in transportation between 1870 and 1940. These are grouped into three categories.  The first is improvement in inter-city and inter-regional transportation in rail.  This occurs chiefly through improvements in the density of lines and in the speed of transit. The second is intra-city which occurred with the adoption of the electric streetcar.  The third, and most important arguably, is the internal combustion engine and its use in the automobile (and bus).  Gordon especially highlights improvements in the quality of automobiles, noting that the car is not reflected in standard price indices until the middle of the Great Depression.

Chapter 6 details advances in communication from 1870 to 1940.  By current standards, the relevant changes — the telegraph, telephone, the phonograph, and the radio — might not seem like much but from the point of view of a household in 1870, these technologies enabled Americans to dramatically reduce their isolation.  As Gordon points out, one could phone a neighbor to see if she had a cup of sugar rather than visit in person, or listen to Enrico Caruso’s voice on the phonograph if it were not possible to hear him in concert.  The radio brought millions of Americans into the national conversation, whether it was to hear one of Franklin Roosevelt’s fireside chats or listen to a baseball game.  Chapter 7 discusses improvements in health and mortality from 1870 to 1940 which, according to Gordon, were unprecedented.  After summarizing these, he turns to causes, chief among which are improved urban sanitation, clean water, and uncontaminated milk.   Gordon also highlights improvements in medical knowledge, particularly the diffusion (and understanding) of the germ theory of disease.  Chapter 8 studies changes in the quality of work from 1870 to 1940.  These changes were wholly for the better, according to Gordon.  Work became less dangerous, more interesting, and more rewarding in terms of real wages.  Most importantly, there was less working per se, as weekly hours fell, freeing up time for leisure activity.  There was a marked reduction in child labor, as children spent more of their time in school, particularly at older ages in high school.   This was also the period leading up, as Claudia Goldin has told us, to the “Quiet Revolution” in the labor force participation of married women, which was to increase substantially after World War II. Credit and insurance, private and social, is the topic of Chapter 9.  The ability to better smooth consumption and also insure against calamity are certainly improvements in living standards that are not captured by standard GNP price deflators.  Initially the shift of households from rural to urban areas arguably coincided with a decrease in consumer credit but by the 1920s credit was on the rise due to several innovations previously documented by economic historians such as Martha Olney.   Households were also better able to obtain insurance of various types (e.g. life, fire, automobile); in particular, loans against life insurance were frequently used as a source for a down payment on a house or car.  Government contributed by expanding social insurance and other programs that helped reduced systemic risks.

Chapter 10 begins the second part of the book, which focuses on the period from 1940 to the present.  As noted, the topic order of Part Two is the same as Part One, so Chapter 10 focuses on food, clothing, and shelter.  Gordon considers the changes in quality in these dimensions of the standard of living to be less monumental than as occurred before World War II.  For example, frozen food became a ubiquitous option after World War II but this change is far less important than the pre-1940 improvement in the milk supply.  Quantitatively, perhaps the most important change was a reduction in relative food prices which, predictably, led to increase in the quantity demanded.  Calories jumped, and so did obesity and many related health problems.  For clothing, the chief difference is in the diversity of styles and, as with food, a sharp reduction in relative price holding quality constant.  In Chapter 11 Gordon notes that automobiles continued to improve in quality after World War II, mostly in terms of amenities and gas mileage; and their usefulness as transportation improved with the building of the interstate highway system.  Gordon is less sanguine about air transportation, arguing that quality of the travel experience deteriorated after deregulation which was not offset by reductions in relative prices.  For housing, the major changes was suburbanization and a concomitant increase in square footage.  The early postwar period witnessed some sharp improvements in the quality of basic household appliances, and somewhat later, the widespread diffusion of air conditioning and microwaves.

Chapter 12 focuses on media and entertainment post-1940.  Certain older forms of entertainment gave way to television, the initial benefits of which were followed by steady improvements in the quality of transmission and reception.  Similarly, there were sharp improvements in the various platforms for listening to music, with substantial advances in recording technology and delivery — the 78 gave way to the LP to the CD to music streaming and YouTube.  The technology to deliver entertainment also delivered the news in ever greater quantity (quality is in the eye of the beholder, I suppose).  Americans today are connected almost immediately to every part of the world, a level of communications unthinkable a century ago.  A surprisingly brief Chapter 13, recounts the history of the modern computer.  There is no way to tell this history without emphasizing just how unprecedented the improvements have been, from the very first post-war computers to today’s laptops and supercomputers.  Moore’s Law, understandably, takes center stage, followed by the Internet and e-commerce.   Gordon has a few negative things to say about the worldwide web, but the main act — why haven’t computers led a revolution in productivity — is saved for later in the book.

Chapter 14 continues the story of health improvements to the present day.  As everyone knows, the U.S. health care system changed markedly after World War II, in terms of delivery of services, organization, and payment schemes.  Great advances were made in cardiovascular care and treatment of infectious disease through the use of antibiotics.   There were also advances in cancer treatment, mostly achieved by the 1970s; the subsequent “war” on cancer has not been as successful.  Most of the benefits were achieved through diffusion of public health and expansion of health knowledge in the general public (e.g. the harmful effects of smoking).  Since 1970 the health care system has shifted to more expensive, capital intensive treatments primarily provided in hospitals that have led to an inexorable growth in medical care’s share of GNP, increases that most scholars agree exceed any improvements in health outcomes.  The chapter concludes with a mixed assessment of Obamacare.  Chapter 15, on the labor force, is also rather short for its subject matter.  Gordon recounts the major changes in the structure and composition of work since World War II.  Again, it is a familiar tale — improved working conditions due to the shift towards the service sector and “indoor” jobs; rising labor force participation for married women; rising educational attainment, at least until recently; and the retirement revolution.  Your faithful reviewer gets a shout-out in a brief discussion of the “Great Compression” of the 1940s; my collaborator in that work, Claudia Goldin (and her collaborator, Lawrence Katz) gets much more attention for her scholarly contributions on the subject matter of Chapter 15, understandably so.

Part Three addresses explanations for the time series pattern in the standard of living.  Chapter 16 focuses on the first half of the twentieth century, which experienced a marked jump in total factor productivity (TFP) growth and the standard of living.  Gordon considers several explanations, dismissing two prominent ones — education and urbanization — right out of the gate.   In paeans to Paul David and Alex Field, he argues that the speed-up in TFP growth can be attributed to the eventual diffusion of key inventions of the “Second” industrial revolution, such as electricity; to the New Deal; and, finally, to World War II.  Chapters 17 and 18 tackle the disappointing performance of TFP growth and the standard of living in the last several decades of U.S. economic history.  Despite remarkable accomplishments in science and technology the impact on average living standards has been small, compared with the 1920-70 period.  Rising inequality since 1970, which can be tied in part to skill-biased technical change, has made matters worse, as did the Great Recession.  While Gordon is not all doom and gloom, he definitely falls on the pessimist side of the optimist-pessimist spectrum — his prediction for labor productivity growth over the 2015-40 period is 1.2 percent per year, a full third lower than the observed rate of growth from 1970 to 2014.

I think it is next to impossible to write a blockbuster economics book without it being a mixed bag in some way or other.  Gordon’s is no exception.  On the plus side, the book is well written, and one can only be in awe of Gordon’s mastery of the factual history of the American standard of living.  We all know macroeconomists who dabble in the past.  Gordon is no dabbler.  One can find interesting ideas for future (professional-level) research in every chapter — graduate students in search of topics for second year or job market papers, take note.  Many previous reviewers have chided Gordon for his pessimistic assessment of future prospects.  Of course, no one knows the future, and that includes Gordon.  It is certainly possible that he will be wrong about productivity growth over the next quarter-century — but I for one will be surprised if his prediction is off by, say, an order of magnitude.

I am less sanguine about the mixed qualitative-quantitative method of the book.  I gave up reading the history-of-technology-as-written-by-historians-of-technology a long time ago because it was just one-damn-invention-after-another.  At the end of a typical article recounting the history of improvements in, say, food processing, I was supposed to conclude that no amount of money would get me to travel back in the past before said improvements took place — except I never did reach this conclusion, knowing it to be fundamentally wrong.  Despite references to hedonic estimation, TFP, and the like, in the end Gordon’s book reads very much like conventional history of technology.  More than a half century ago Robert Fogel showed how one could quantify the social savings of a particular invention, thereby truly advancing scholarly knowledge of the treatment effects. Yet Railroads and American Economic Growth is not even cited in Gordon’s bibliography, let alone discussed in the text.  If one’s focus is the aggregate, I suppose a Fogelian approach is impossible — there are too many inventions, and (presumably) an adding-up problem to boot.  What exactly, though, do we learn from going back and forth between quantitative TFP and qualitative one-damn-invention-after-another? I’m not sure.  There’s the rub, or rather, the tradeoff.

Criticisms aside, if you are into economics blockbusters, The Rise and Fall of American Growth belongs on your bookshelf, next to Piketty and the like.  Just be sure it is a heavy-duty bookshelf.

Robert A. Margo’s Economic History Association presidential address, “Obama, Katrina, and the Persistence of Racial Inequality,” was published in the Journal of Economic History in June 2016.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Development, Growth, and Aggregate Productivity
History of Technology, including Technological Change
Household, Family and Consumer History
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Handbook of Cliometrics

Editor(s):Diebolt, Claude
Haupert, Michael
Reviewer(s):Mitch, David

Published by EH.Net (July 2016)

Claude Diebolt and Michael Haupert, editors, Handbook of Cliometrics. Berlin and Heidelberg: Springer, 2016. xxii + 590 pp.  $149 (hardcover), ISBN: 978-3-642-40405-4.

Reviewed for EH.Net by David Mitch, Department of Economics, University of Maryland – Baltimore County.

There is by now a long tradition of handbooks in economics. And they have varied over the decades in their intended audience and aims. J.M. Keynes in his 1922 introduction to the Cambridge Economic Handbook series described it as “intended to convey to the ordinary reader and to the uninitiated student some conception of the general principles of thought which economists apply to economic problems.”  Kenneth Arrow and Michael Intrilligator in their introduction to the North-Holland Handbooks in Economics series describe them as “a definitive source, reference and teaching supplement for use by professional researchers and advanced graduate students. Each Handbook contains self-contained surveys of the current state of a branch of economics in the form of chapters prepared by leading specialists on various aspects of this branch of economics.”

Claude Diebolt (University of Strasbourg) and Michael Haupert (University of Wisconsin-La Crosse), the editors of Springer’s Handbook of Cliometrics have not clearly identified the audience at which the volume is aimed. They do indicate in their introduction (p. xi) that the contributions “stress the usefulness of cliometrics for economists, historians, and social scientists in general.” Their preface and introduction describe the handbook as one that “contains digested knowledge in an easily accessible format,” (p. xv) while also asserting the aim “to foster world-class research” (p. xv).  They have followed the lead of North-Holland’s handbook series of choosing leading specialists in various branches of cliometrics to write its chapters but appear to have given them quite free reign regarding intended audience, scope, and methodology employed.   Indeed one message the volume as a whole conveys is the diversity of formats that can be associated with cliometric history ranging from exercises in applied econometrics to purely verbal narrative expositions.

The volume comes in at just under 600 pages. It is divided into 22 chapters subsumed under some 7 headings.  This implies an average allotment of 27 pages per chapter with the actual chapters varying from 15 to 35 pages in length.  By way of comparison, the North-Holland Handbook of Economic Growth, Vols. 1A and 1B (to choose just one immediately available volume from the many in the series) runs to a total  of 1800 pages in some 28 chapters for an average length of 64 pages per chapter.  The considerable relative restriction in length for the Springer Handbook implies tradeoffs between the scope and level of the audience for a given contribution.  Some contributions in this volume provide an overview of the forest, taking up general concepts such as labor markets or human capital or landmark episodes such as the Great Depression and accomplish this by aiming at primarily an undergraduate audience albeit with elegance and incisiveness.  Other contributions focus on specific trees, considering a few key issues, key studies or key methodologies which they cover in a depth more suitable for advanced graduate students and researchers.

What choice of topics and organization is appropriate for a handbook of cliometrics?  Insofar as cliometrics is a method rather than substantive economic history, organization according to chronological or geographical coverage would not seem in order. If cliometrics is defined as the application of economic theory and quantitative methods to the study of history, then what is to be covered in such a handbook over and above the theoretical and quantitative tools to be applied? Are there either general principles or specific techniques that can be articulated for the application of economic theory and methods to the study of history? Forums on the future of economic history (such as that from the 2015 Economic History Association annual meeting published in the December, 2015 Journal of Economic History) suggest no shortage of methodological advances to consider including Geographical Information Systems, big data and computational power, and use of quasi-experimental methods — to name just some.

The editors acknowledge the difficulty of deciding what to include and that some important and historically significant topics were excluded (p. xi) and point to the goals of achieving “variety over time, topic, and geography” and “a sampling of topics cliometrics has helped to transform over the past half-century” as principles of selection.

The seven section headings chosen for the volume seem more Fogelian than Northian in conception.  Four of the categories, Human Capital, Finance, Innovation, and Government have clear parallels with headings in The Reinterpretation of American Economic History, the important 1972 compilation by Fogel and Engerman of cliometric work. The three other categories that round off the work include a section on the history of cliometrics, a section on growth, and a section on statistics and cycles.  While Douglass North and new institutional approaches certainly get mention throughout this handbook, none of the chapters give extended coverage to institutions or a Northian framework, an understandable decision given space constraints.

The opening section on history contains both Michael Haupert’s history of cliometrics and Peter Temin’s effort to link economic history and economic development via his own illustrious career experiences.  Almost half of Haupert’s history of cliometrics is actually devoted to the history of pre-cliometric economic history; which limits the detail he provides to either old or new economic history.  Such important episodes as the controversy over the cliometrics of slavery are notably missing from his account, though it does provide a quite useful entrée to the topic. Peter Temin’s contribution fills in this gap with his insightful romp through selected cliometrics highlights over the past fifty years pointing to parallels and synergies between the study of economic history and economic development.  He offers the perspective of a pioneering practitioner of cliometrics on work by more recent generations of cliometricians. His is one of the few contributions in the volume to give explicit consideration to the quasi-experimental methods that have become widespread in the work of younger cliometricians. He also considers tensions and opportunities in publication strategies aiming at alternatively economic history or mainstream economics journals as outlets.

The second section on human capital has five contributions which differ widely in scope and detail.  Claudia Goldin and Robert Margo provide quite general, albeit cogent, overviews of respectively cliometric work on human capital and labor markets. Given their own scholarly work they both not surprisingly focus on the U.S. case, though Goldin sets this in the global context of unified growth theory with Malthusian, transition, and human capital phases.  Her treatment of education and schooling centers on her landmark 2008 book with Lawrence Katz rather than a detailed overview of recent research. She also treats health as a form of human capital in considering long run trends in mortality and life expectancy.  She does not provide any assessment or even mention of recent age-heaping approaches to estimating human capital historically.  Robert Margo’s treatment of labor markets centers around estimates of long term trends in some basic magnitudes including that of the labor force as a whole, occupational structure, wage structure, and racial differences.  He provides concise but insightful interpretations of these trends utilizing a simple demand and supply framework. Margo does refer to work exploring underlying sources and data limitations but given his space limitations does not do so in any depth.  A major and innovative area of cliometric research since the late 1970s has been in examining the relationship between nutrition, heights, and biological living standards, and disease environments as evidenced in trends in human heights, the field of anthropometrics.  Lee Craig overviews this research and his particular emphasis on nineteenth century U.S. developments allows him some focus in depth, though he does draw extensively on more global evidence.  He considers in more depth than the Goldin chapter the role of improvements in nutrition and in public health measures in improving the biological standard of living.  Franziska Tollen and Joerg Baten’s contribution provides an in-depth survey of the use of age-heaping indicators to estimate human capital.  They go in detail into the methodology of how age-heaping indicators are constructed and survey a wide range of findings stemming from use of the age-heaping approach.  Unlike other contributions in this section the level of detail is more suited to advanced researchers.  Jacob Weisdorf surveys the use of parish registers by cliometricians and economic and demographic historians more generally. He provides a useful description of the registries themselves. And he makes note of their use not only for the English and other Western European cases but also for Africa and potentially for other regions as well. Weisdorf embeds his survey in a discussion of the Malthusian population framework and the unified growth approach of Oded Galor and collaborators through the evidence parish registers can provide on trends in births, deaths, and marriages. He connects with the human capital theme by taking up the important information registries can provide on occupational trends.  He gives coverage to historically integrated occupational coding schemes that have been developed to categorize the occupations sometimes recorded on parish registries as in the work of Marco van Leeuwen, Andrew Miles and others (2004, 2005), but only passing mention to the major Cambridge Group project of using occupational information on parish registers to extend back in time knowledge about trends in English occupational structure (Shaw-Taylor and Wrigley 2014).

Section Three on Economic Growth contains a further five chapters that are quite varied in character and coverage.  Claude Diebolt and Faustine Perrin nominally give coverage to a range of growth theories, although they use the unified growth approach of Oded Galor and David Weil to provide a narrative of growth over the past millennium while offering an extension by incorporating implications of female economic and social empowerment into their discussion.   Gregory Clark offers a cliometric perspective on the British Industrial Revolution centering on the sources of productivity advance and identifying it as driven by an “upturn in the rate of technological innovation” (p. 207).  Although he does not provide an in-depth survey of cliometric work on the Industrial Revolution, Clark does consider some of the leading underlying explanations that have been offered including institutional and intellectual approaches and those grounded in human capital; he argues that none can provide convincing explanations. He thus concludes that the “Industrial Revolution remains one of history’s great mysteries” (p. 232). James Foreman-Peck takes up economic-demographic interactions by using a simple linear specification of the Malthusian model as his starting point and quite effectively uses it as a unifying framework for his review both of empirical evidence and causal estimation strategies. While I would have been interested in seeing further discussion of the implications of relaxing the assumptions of linearity, Foreman-Peck’s contribution should prove an effective teaching tool in showing how some simple micro-specifications can have far-reaching applications.  Emanuele Felice provides a quite detailed discussion of issues involved in constructing GDP estimates that are comparable across countries and over time and even for sub-national regions, as well as turning to the evidence and approaches in using such estimates to examine tendencies to growth convergence and factors influencing these tendencies.  Markus Lampe and Paul Sharp take up the topic of trade, turning first to the importance of trade, then to how to measure the extent of trade and market integration, then to the role of institutions, technology, and policy in determining trade and finally to the measurement and determinants of trade policy. Their coverage is very well informed, but with only a sentence or two to devote to each study they consider, the emphasis is on breadth rather than depth.

Section Four on Finance, has more unity and coherence between its four chapters than other sections of this volume.  Larry Neal’s opening contribution on the cliometrics of finance focuses specifically on surveying the market for sovereign debt from early modern times through the early twentieth century and the market for short-term commercial credit with particular emphasis on exchange rates, including extensive comments for both topics on available data sources. Neal concludes, however, with extended general reflections on both the accomplishments and limitations of the now quite extensive body of cliometric work on finance.  For his contribution, the late John James defines “Payment Systems” as “the complex of financial instruments and relationships that transfer value between buyers and sellers to complete their transactions” (pp. 353-54).  James provides a wide ranging narrative account — suitable for non-specialists that can be viewed as informed by a cliometric framework or spirit rather than directly cliometric — of the evolution of payment systems so defined from the demonetization accompanying the collapse of the Roman Empire through the early twenty-first century U.S.  In contrast to Neal and James, Matthew Jaremski organizes his survey of cliometric work on financial crises methodologically.  He first considers studies that employ survival and hazard models to examine determinants of banking crises, then turns to the use of data envelopment analysis for a production function/efficiency perspective on deposit insurance and then in the last part of the survey considers approaches to deal with simultaneity in the interaction between financial crises and more general economic activity; these include vector auto-regression, instrumental variables approaches and difference-in-difference models.  Jaremski’s exposition is lucid despite the amount of technical detail presented, though it seems aimed at specialists and researchers in the field.  Caroline Fohlin concludes the Finance section with a wide-ranging international comparative perspective on financial systems.  She starts with some basic typologies on financial systems, distinguishing first between functional and institutional perspectives and then to standard distinctions between a) bank-based versus market-based systems, b) universal versus specialized systems and c) relationship versus arms-length systems.  She then turns to the extent to which the actual historical evolution of financial systems adds complexity to these distinctions. She proceeds to consider determinants of choices between the various types of systems she distinguishes and to evidence on the nexus between finance and economic growth.  Throughout her detailed survey of a large number of studies and countries, Fohlin warns against rigid classification by over-arching categories or mono-causal explanations, leaving her with the final conclusion (p. 427) that “history matters.”

The remaining three sections of the volume each contain pairs of contribution.  The two essays in the fifth section on Innovation provides a quite interesting contrast.  Stanley Engerman and the late Nathan Rosenberg comment on “innovation in historical perspective” by arguing that uncertainty associated with the innovation process implies that the richness of historical accounts of the innovation process can capture important aspects that would be missed in an ahistorical theoretical framework. Engerman and Rosenberg were both early contributors to cliometrics; their chapter, as with that of John James described above, can perhaps be seen as more informed by a cliometric framework than involving direct application of either the theoretical or empirical methods associated with Cliometrics.  In contrast, Jochen Streb directly embraces “the Cliometric Study of Innovations,” surveying both theoretical and empirical cliometric studies of the history of innovation with a particular, though not exclusive, focus on patents as measures of innovation.

The sixth section is on “Statistics and Cycles.”  The contribution by Thomas Rahlf in this section on “Statistical Inference” is actually a history of thought of statistical inference during the twentieth century.  He attempts to link this with cliometrics in the last part of his essay by suggesting that Alfred Conrad, John Meyer and others formulating cliometric methodology were informed by a Bayesian approach and that the history of Bayesian statistics is thus relevant for understanding the methodology of cliometrics.  He also suggests that cliometric inference could benefit from further attention to the criticisms of econometric methodology offered by Rudolf Kalman of Kalman filter fame. However, neither of these suggestions is articulated in any detail. The other contribution is by Terence Mills on “Trends, Cycles, and Structural Breaks in Cliometrics,” which offers a helpful primer on developments over the past quarter century in time-series statistics and econometrics pertinent to this topic and provides a number of illustrations based on cliometric work.

In the final section on government Price Fishback contributes an essay focused on a particular historical episode in which the role of government loomed large and on which he has considerable expertise, that of the 1930s Great Depression in the United States. And Jari Eloranta brings his specialist knowledge to surveying a recurring situation in which governments have been prominent, that of war.  Given the large literatures they each consider, Fishback and Eloranta make the quite sensible choice of providing non-technical narrative overviews suitable for undergraduates and general readers.

Given the varying audiences at which the contributions appear to aim, as well as the range of formats and styles of the contributions, it may be more apt to label this volume a companion to cliometrics or a cliometric sampler than a handbook with the comprehensiveness the latter title might imply. Indeed, as already mentioned above, the editors are more circumspect than Springer’s blurb on its website about the comprehensiveness of coverage.  One can readily come up with a list of topics in which cliometrics has made important contributions that are omitted, including coverage of work on the major economic sectors, income and wealth inequality, and (as noted above) extended treatment of institutional approaches. And as suggested above, I would also have welcomed discussion of quasi-experimental approaches — both opportunities and reservations, in light of how prevalent this has become in recent research.  Nevertheless, given the apparent constraints on length presumably set by the publisher, the choice of topics is quite appropriate.  The editors are to be commended for taking on such a challenging yet important assignment and for recruiting such a strong set of contributors.  The resultant volume contains worthwhile contributions that readers from a range of disciplines and varying degrees of commitment to cliometrics will want to consult.   As more and more historians and sociologists, as well as economists, seem to be venturing into financial history, economic history, and the history of capitalism, it would be interesting to know more about how persuaded they will be about the usefulness of cliometrics by the essays in this volume.

References:

Philippe Aghion and Steven N. Durlauf, eds. 2005. Handbook of Economic Growth Vols. 1A and 1B, Amsterdam: North-Holland Elsevier.

William Collins, Kris Mitchener, Ran Abramitzky, and Naomi Lamoreaux. 2015. “Essays: The Future of Economic History,” Journal of Economic History, 75, 4: 1228-1257.

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

Oded Galor and David N. Weil. 2000. “Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond,” American Economic Review, 90, 4: 806-828.

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

J.M. Keynes. 1922. “Introduction to H.D. Henderson, Supply and Demand,” Cambridge Economic Handbooks – 1, New York: Harcourt and Brace, pp. v-vi.

Marco H.D. van Leeuwen, Ineke Maas and Andrew Miles. 2004. “Creating a Historical International Standard Classification of Occupations: An Exercise in Multinational, Interdisciplinary Cooperation,” Historical Methods, 37, 4: 186-197.

Bart Van de Putte and Andrew Miles. 2005. “A Social Classification Scheme for Historical Occupational Data,” Historical Methods, 38, 2: 61-94.

Leigh Shaw-Taylor and E.A. Wrigley. 2014. “Occupational Structure and Population Change” in Roderick Floud, Jane Humphries, and Paul Johnson, editors, The Cambridge Economic History of Modern Britain, New Edition, Vol.1, Cambridge: Cambridge University Press, 53-88.

David Mitch is Professor of Economics at the University of Maryland, Baltimore County. He is the author of “Schooling for All by Financing by Some,” Paedagogica Historica, 52: 4 (August, 2016): 325-348.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Economic Development, Growth, and Aggregate Productivity
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Historical Demography, including Migration
History of Economic Thought; Methodology
History of Technology, including Technological Change
Military and War
Industry: Manufacturing and Construction
International and Domestic Trade and Relations
Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Money Changes Everything: How Finance Made Civilization Possible

Author(s):Goetzmann, William N.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2016)

William N. Goetzmann, Money Changes Everything: How Finance Made Civilization Possible.  Princeton: Princeton University Press, 2016. x + 584 pp. $35 (cloth), ISBN: 978-0-691-14378-1.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois.

Long awaited by other financial historians, myself included, William N. Goetzmann’s book has finally appeared! This, after years of research and teaching during which Goetzmann allowed anyone interested in financial history to view his chapters in progress on-line at: http://viking.som.yale.edu. (The website is well worth visiting in any case for the wide selection of primary source materials he has made readily available there for the rest of us.)  The printed product covers defining episodes in the history of finance from ancient Mesopotamia to the sub-prime crisis of 2008.  The introduction explains the themes that underlie the chest-thumping title despite his modest initial disclaimer that, “This book is a somewhat personal narrative about the people, places, and things that, in my view, shaped the history of finance as a technology of civilization” (p. 3). To motivate the structure of the book chapters that follow Goetzmann summarizes the key elements of finance as:
1. Reallocating economic value through time
2. Reallocating risk
3. Reallocating capital
4. Expanding the access to, and the complexity of, these reallocations

After explaining and extolling the virtues of each financial element, however, he broadens and deepens the implications of financial innovations that have occurred through history under each element.  The first element, the re-allocation of economic value through time, he sees as the fundamental feature that allowed civilizations to arise in the first place, wherever and whenever they occurred. Drawing on earlier work by his father, the late historian William H. Goetzmann, he distinguishes cultures as “structures of interrelated institutions, language, ideas, values, myths and symbols.  They tend to be exclusive, even tribal.  Civilizations, on the other hand, are open to new customs and ideas. They are syncretistic, chaotic, and often confusing societal information systems.  They continue to grow in the richness, variety and complexity of societal experience” (p. 9).

Goetzmann concludes with the optimistic view that: “financial technology allowed for more complex political institutions, enhanced social mobility, and greater economic growth – in short, all the major indicators of complex society we call civilization” (p. 14). Following this upbeat overview, there are four major sections, each with a separate introduction to explain the motivation.  Part 1, “From Cuneiform to Classical Civilization,” starts with Babylon and ends with Roman finance making a transition from informal securities markets in the Republic to central control of the money supply and its uses under the Empire.  Part II, “The Financial Legacy of China,” is a thoughtful diversion about the different routes that financial engineers can take, depending on the nature of political controls and contract enforcement.  Part III, the bulk of the book in two hundred pages, describes in loving detail “The European Crucible,” beginning with sovereign debt in Venice and concluding with American substitutes for sovereign debt, often underwritten by Dutch financiers.   Part IV, “The Emergence of Global Markets,” takes the reader into the maelstrom of the late nineteenth, twentieth, and early twenty-first centuries as global finance made its way among competing political visions in the world, all the while becoming increasingly complex — and disruptive.

Part I, “From Cuneiform to Classical Civilization,” focuses on lasting contributions to the rise of civilizations in the West, starting with writing, then cities, and culminates with a “financial architecture” based on record keeping, contract enforcement, a numerical system that permitted compound interest calculations, and astronomical observations based on a calendar year of 360 days (to make interest calculations easier).  This financial architecture held congeries of cities together in mutually beneficial trade networks, but then also allowed the rise of empires and their disruptive consequences.  Especially poignant is the interpretation of the Muraŝu archive discovered in the ruins of ancient Nippur, which must have been one of the financial centers of the Persian Empire.  Three generations of the Muraŝu family maintained their clay tablets recording outstanding claims on property and business ventures, concluding with their aid to a usurper who overthrew the reigning emperor, Sogdianus.  The Muraŝu family organized the financing of the army of his half-brother, Ochus, who became Darius II.  After which, however, the archive testifies to continuing indebtedness and foreclosures of the various financiers.  Goetzmann concludes, “finance could rapidly and powerfully focus economic assets in one time and place for political gain” (p. 68).

The historical record of finance in the ensuring centuries remains largely to be decoded from the millions of clay tablets now dispersed in museums throughout the world, but the Mesopotamian innovations persisted into Grecian times.  The famed orator, Demosthenes, was often hired to express eloquently and convincingly the case of his client, whether an aggrieved creditor or debtor, before a mass jury of Athenian citizens.  His various speeches demonstrate the sophistication and complexity of Athenian private finance. Goetzmann concludes, “The Athenian state was able to induce investors into the equally risky venture of prospecting and mining through mechanisms for dispute resolution and the means by which the state fairly and transparently allotted property rights” (p. 91).

Roman finance, he argues, laid the basis for later development of corporate enterprises and secondary markets in mortgages as the Roman Republic expanded at the expense of Grecian (and Phoenician) city-states, while adopting their most successful and proven financial techniques, including the use of standardized coins to facilitate impersonal exchanges throughout the unified empire.  Why some forms of private finance, annuities based on rental properties, disappear from the historical record after the rise of the Empire remains a mystery.  The later travails of the Roman Empire with increasingly desperate measures for war finance, moreover, elicit a comparison with the contemporaneous Han Empire in China.

Part II, “The Financial Legacy of China,” basically resolves the so-called “Needham Paradox,” the failure of the technology advances of the Song Dynasty to generate an industrial revolution or further scientific advances that occurred much later in Europe, to the financial divergence between China and Europe. The key factor was the failure of China to develop sovereign debt, whether for its magnificent cities or for the central government.  Only with the opening of China’s treaty ports in the nineteenth century did the Chinese government finally resort to state debt, and even then the first Chinese government bonds were floated on international debt markets rather than in China itself.  But when China did enter global markets of the late nineteenth century, it did so with a vengeance. Shanghai rapidly became one of the great banking centers of the world in the 1920s, but only by discarding the imperial legacy of centuries before.  Goetzmann notes, “There was great debate in the Han over the role of private enterprise versus state ownership [especially regarding salt, iron, and maritime trade] and state ownership won” (p. 174).  Thereafter, the state provided credit to merchants and warlords when it needed to mobilize resources, eventually creating fiat paper money in the Song Dynasty.  Goetzmann concludes, “It is impossible to create fiat money without complete fiat.  Thus, the value of the currency rose and ultimately collapsed with the state” (p. 202).

Part III, “The European Crucible,” develops the logic that led small, competing, and warring city-states scattered across Western Europe to create viable forms of finance that led, with many well-known missteps but also with a few underappreciated financial successes, to modern, global finance.  Goetzmann sees the stages of financial development in Europe as: “first, the emergence of financial institutions; second the development of securities markets; third, the emergence of companies; fourth, the sudden explosion of stock markets; fifth, the quantification of risk; and finally, the spillover of this system to the rest of the world” (p. 203). The next twelve chapters explore both the missteps and the occasional successes that lay the foundations for modern finance.

After 219 pages of fascinating historical episodes, often interleaved with personal accounts of Goetzmann’s encounters with archaeological digs or archival sites, he sums up the lessons of history from the European example.  “Financial technology is redundant, adaptive, and sometimes mercurial.  The institutions we take to be sacrosanct, inevitable, and indispensable are probably not.  Given the random outcome of historical events, another set of institutions might have emerged to solve the same financial problems.  Financial innovation is thus a series of accidents of history — the caprice of time, location, and opportunity” (p. 219).  Consequently, his treatment of the technical advances in probability theory and actuarial science, starting with Fibonacci, Bernoulli and Pascal, contrasts sharply with that of Peter Bernstein’s Against the Gods: The Remarkable Story of Risk (New York: Wiley, 1996).  For Bernstein, the practical application of the Black-Scholes model for pricing options, built on the assumption that past distributions of asset prices could persist over the near future, had created the modern, efficient, global financial market.  For Goetzmann, however, the successes of the early financial markets led to the formalization in mathematical terms of the underlying processes.  He notes with approval the possibilities of non-linearities formalized by his Yale colleague Benoit Mandelbrot and erratic market movements highlighted by another Yale colleague, Robert Shiller.  Both scholars were inspired by observing anomalies in the price discovery processes revealed in the securities markets of the 20th century.

The final success of the European Crucible, according to Goetzmann, however, arose in the American colonies, first with their experiments with land banks (until outlawed by the British Parliament) and then with land companies backed usually by Dutch and British investors.  With all the current fervor surrounding the role played by Alexander Hamilton, thanks to the Broadway musical based on Ronald Chernow’s biography, Goetzmann instead gives Abraham Van Ketwich and a number of other Dutch bankers primary credit for having securitized the early debt of the United States.  True, “Dutch investors made out well when the debt of the United States was reorganized by Alexander Hamilton and the young nation made good on its financial commitments” (p. 386).  So, real credit for America’s success should go to the eighteenth century Dutch investors who developed the financial innovation of closed end mutual funds, which allowed small investors to share the returns from risky assets.

Part IV, “The Emergence of Global Markets,” begins with an interesting discussion of Marx, especially his insights into contemporary finance as demonstrated in his newspaper columns in the New York Daily Tribune in the U.S.  Goetzmann writes, “His prose is terse, witty, and convincing.  When I read these lively columns I can almost forgive him” (p. 411). The Tribune articles by Marx portray a world of “global linkages and geo-political dynamics” and that is what excites Goetzmann about this period of financial history. Especially noteworthy is the amount of information contained in the Investor’s Monthly Manual “quoting thousands of prices for securities from all over the world” (p. 412).  (And it’s available on downloadable pdf files from Goetzmann’s website given above.)  He extols The London Stock Exchange in 1870 as “giant economic lever with the fulcrum planted in the present, balancing past savings and future promises” (p. 413).

There follow fascinating insights into the experiences in pre-revolutionary China (“China’s Financiers”) and pre-World War I and early revolutionary Russia (“The Russian Bear”). Each country attempted to adopt financial innovations and capital from abroad while trying to establish legitimacy for a new government.  Both lapsed into authoritarian regimes espousing Marxian ideology, demonstrating again the historical contingencies under which financial innovations arise or meet their demise.  Chapter 26, “Keynes to the Rescue,” contrasts Keynes’ macro-economic recommendations, familiar to all from his General Theory, with his microeconomic investment strategies in handling the endowments of King’s College at Cambridge University.  At the macro-level, Keynes prescribed governmental spending whenever the animal spirits motivating private investment flagged while at a micro-level he switched from speculating on price movements in equities or foreign exchange (with dismal results) into equity investments in firms with sound management and robust markets.

“The New Financial World” emerged after World War I, not World War II, on Goetzmann’s account.  Highlighting the leadership of the U.S. in finance were skyscraper bonds, which he sees as an application into vertical space of the early American land companies dealing with wide, open horizontal spaces.  Financial architecture mimicked in many ways the new architecture that created a building boom toward the sky.  It is their eventual demise at the end of 1926 that Goetzmann sees as the collapse of a real bubble as “skyscrapers built in Manhattan were … driven by a demand for bonds that backed them rather than by a demand for the amazing new machine to make the land pay” (p. 480). Following the collapse of the urban real estate market in the U.S., returns from applying other new technologies such as radios, autos, and electrical appliances were delayed by a decade of more and equity prices in their companies collapsed, destroying the American public’s craving for investing in the stock markets.

Out of the Great Depression that followed, however, Goetzmann sees the emergence of useful financial innovations, starting with government regulation of the securities markets, implementation of a national Social Security plan, and improvements in mutual fund designs, all leading to post-war developments in financial theories, as well as intense empirical research into the varieties of movements in equity prices.  The challenges of the future, in a global financial system with confidence badly shaken from the 2008 financial crisis, lie in providing assurances to the current working age populations around the world that their future medical expenses and pension benefits can be financed. Attempts to meet these challenges with new financial innovations, whether from private or public initiatives, should be encouraged, as history shows that the consequences of disappointing the public’s expectations have always been disastrous for a civilization.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke (Cambridge University Press, 2015).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

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

Why Did Europe Conquer the World?

Author(s):Hoffman, Philip T.
Reviewer(s):Eloranta, Jari

Published by EH.Net (April 2016)

Philip T. Hoffman, Why Did Europe Conquer the World? Princeton: Princeton University Press, 2015. vii + 272 pp. $30 (cloth), ISBN: 978-0-691-13970-8.

Reviewed for EH.Net by Jari Eloranta, Department of History, Appalachian State University.

Philip Hoffman, Professor of History and Business Economics at California Tech and recent president of the Economic History Association, is a prolific scholar, whose work has primarily focused on early modern Europe, especially French economic history and financial markets. Hoffman’s new book focuses on a pivotal issue in world history, namely how Europe came to rule the world. This is, needless to say, a hugely ambitious book and one that no scholar analyzing transitions in global history can overlook. It is a daunting task to attempt such an endeavor, let alone succeed as Hoffman has. This book will change interpretations of European warfare, the financing of conflicts, transitions in other regions of the world, the causes of the Industrial Revolution, and the Great Divergence — topics that are at the forefront of history, economics, and political science today.

Hoffman takes on big theories of history and development in this book, similar to other grand theorists like Jared Diamond (1999), Charles Tilly (1992), David Landes (1998), Joel Mokyr (1992), and Daron Acemoglu and James Robinson (2005). The pivotal question for all social scientists remains: Why are some so rich and some so poor? Whereas explanations for the different development paths have ranged from biological (Diamond) to geographical and cultural (Landes) and institutional (see e.g. North 1990), Hoffman follows a similar path as Tilly, Larry Neal (2000), and Niall Ferguson (2001), who argue that understanding the costs and impacts of warfare is the key to this puzzle. Tilly (1992) pointed out that capital and coercion are pivotal components in the rise of Europe over the last thousand years and that the constant need to fund warfare led to the creation of public debt and sharing of power between sovereigns and merchants. And, as Ferguson (2001) argues, military spending was the crucial component in this transition, since it led to other financial, fiscal, and institutional innovations. Hoffman is able to go a step beyond these somewhat blunt insights to provide a theoretical and (partially) empirical foundation that fills in many of the gaps and challenges the other “big” historical frameworks.

Hoffman poses a question for a potential time traveler similar to the one asked by Landes: How did Europe go from a patchwork of small and seemingly powerless communities one thousand years ago to a position of military and political dominance by the end of the millennium? Why did the world not become dominated by the Chinese or some of the other worthy contender? He answers the question by turning to a model of tournaments — the “tournament” for domination in Europe in conjunction with other cultural and historical developments explains Europe’s global success. Ultimately, the key to Hoffman’s explanation is warfare. As he correctly points out, Europeans have been almost constantly at war. Historically, most of their sovereigns’ spending went toward military purposes, and even lavish palaces like Versailles represented only a minuscule part of the state budget. His model links the high probability that European rulers would go to war to the high value of the victor’s prize, and similarity of resources, military technology, and ability to mobilize those resources (absence of a hegemon is crucial). Moreover, the political cost of attempting to win the prize must have been fairly low, and rulers were willing and able to learn from these conflicts. Thus, Hoffman’s four conditions for Europeans’ path toward global dominance include frequent war, high (and consistent) military spending, adoption and advancement of gunpowder technology, and relative lack of obstacles to military innovations. Europeans enjoyed low fixed costs for going to war, distances were small, variable costs for mobilization were low, and there was a merchant base that helped with the financing of conflicts.

One of the key elements in Hoffman’s explanatory framework is the ability of rulers to extract revenue from the society. His comparative data — which are by necessity a bit sporadic for China and other states around the globe — prove that European rulers collected, in per capita terms, much higher revenues and invested them into warfare. He also shows, based on his research into early modern European revenue systems and military producers, that the high military spending in Europe also translated into sustained productivity growth in the military sector. He even goes further to suggest that this was linked to the eventual Industrial Revolution, which is a bit harder to verify. Positive technological externalities may arise from military technologies, but significant crowding out effects cannot be ignored.

This book is particularly interesting when Hoffman engages in comparative research to examine various empires and regimes around the world in this period. While specialists in the histories of these polities may find details that they disagree with, the overall argument about China’s stagnation from the fifteenth century onward (or later, depending on whether one ascribes to the views of Pomeranz (2000) or Broadberry and Gupta (2006)) is quite convincing. Eschewing some of the more traditional explanations, for example China’s turn inwards in the fifteenth century, Hoffman makes a case for the tournament model here as well. He shows that Chinese tax collection rates were low, and that the focus on defending against nomads meant lower military spending on navies. Also, the investment in gunpowder technology was not consistently high, and thus the Chinese eventually fell behind the Europeans, which was displayed amply in the Opium Wars of the nineteenth century. Similar arguments can be made as to why Japan and India also stagnated, although some of the reasons differed. Interestingly enough, Hoffman also assigns a large role in Europe’s bellicosity to Christianity; rather than pulling European nations together, Christianity became a source of almost constant conflict, starting with the Crusades, divisions within the Catholic Church, and then the wars of religion in the sixteenth and seventeenth centuries.

In general, Hoffman’s model and the empirical support presented in the book are impressive and persuasive. One could, of course, offer some counterarguments. For example, Hoffman’s model is probably not as all-encompassing as he suggests; in many ways his framework complements the broader models about the role played by geography, nature, climate, and human interactions. Moreover, he inordinately downplays the role played by the modes of financing wars — why it may make a difference whether tax revenue or loans were used to extend conflicts. Ultimately the European (or originally Dutch/British) model of financing wars with the support of domestic merchants and markets with low interest rate loans was a huge advantage when Europe entered the age of total wars at the end of the eighteenth century. Finally, it is hard to discount the role raw materials and other natural resources played in assigning winners and losers in these tournaments. The classic argument by Pomeranz (2000) about the lack of coal near developing urban centers in China as a major hindrance to its industrialization is a good example of this line of thinking. Regardless of these small reservations, this book is a classic of economic history, which should be required reading by scholars everywhere, and will be a starting point for many debates about the role conflicts and military spending have played in historical processes.

References:

Acemoglu, D. and J.A. Robinson (2005) Economic Origins of Dictatorship and Democracy, Cambridge University Press.

Broadberry, S. and B. Gupta (2006) “The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500–1800,” Economic History Review, 59(1), 2-31.

Diamond, J. (1999) Guns, Germs, and Steel: The Fates of Human Societies, W.W. Norton.

Ferguson, N. (2001) The Cash Nexus: Money and Power in the Modern World, 1700-2000, Basic Books.

Landes, D. (1998) The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor, W.W. Norton.

Mokyr, J. (1992) The Lever of Riches: Technological Creativity and Economic Progress, Oxford University Press.

Neal, L. (2000) “How It All Began: The Monetary and Financial Architecture of Europe during the First Global Capital Markets, 1648–1815,” Financial History Review, 7(2), 117-140.

North, D. C. (1990) Institutions, Institutional Change and Economic Performance, Cambridge University Press.

Pomeranz, K. (2000) The Great Divergence: China, Europe, and the Making of the Modern World Economy, Princeton University Press.

Tilly, C. (1992) Coercion, Capital, and European States, AD 990-1992, Blackwell.

Jari Eloranta (elorantaj@appstate.edu) is a Professor of Comparative Economic and Business History at Appalachian State University and author of several articles on military and government spending, including (with Andreev Svetlozar and Pavel Osinsky) “Democratization and Central Government Spending, 1870–1938: Emergence of the Leviathan?” Research in Economic History (2014).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (April 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economywide Country Studies and Comparative History
Financial Markets, Financial Institutions, and Monetary History
Military and War
Industry: Manufacturing and Construction
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Emile and Isaac Pereire: Bankers, Socialists and Sephardic Jews in Nineteenth-century France

Author(s):Davies, Helen M.
Reviewer(s):Redmount, Esther

Published by EH.Net (January 2016)

Helen M. Davies, Emile and Isaac Pereire: Bankers, Socialists and Sephardic Jews in Nineteenth-century France. Manchester: Manchester University Press, 2015.  x + 260 pp., $100 (hardback), ISBN: 978-0-7190-8923-7.

Reviewed for EH.Net by Esther Redmount, Department of Economics, Colorado College.

While Emile and Isaac Pereire: Bankers, Socialists and Sephardic Jews in Nineteenth-century France was not written for economic historians, the topics it covers cannot help but be of interest to those who study economic and financial development, the Industrial Revolution, entrepreneurship and the history of economic thought.

The brothers Emile and Isaac Pereire rose from extreme deprivation in the Jewish community of Bordeaux to the pinnacle of the grande bourgeoisie in Paris during the Second Empire as founders and directors of the Crédit Mobilier.  Their meteoric rise and the roles they played in nineteenth-century economic development in Europe are not unlike those of other only recently emancipated (though still largely unenfranchised) Jewish financiers of the period including the Rothschilds, the Bleichröders and the Ephrussi.  Helen Davies’ monograph is the first biography of the brothers Pereire in English and it makes extensive use of archival sources, relying, in particular, on the Archives de la Famille Pereire, in Paris.  This gives Davies access to letters and other communications that shed new light on the network of relationships among the Pereires, the Saint-Simonians, the Rothschilds, Napoleon III and others influential in the political and economic development of France.  Her book serves as an interesting complement to more standard economic histories of nineteenth-century France.

Several themes play out in the lives of Emile and Isaac Pereire.  Both men grew up poor, but closely attached to a network of cousins and in-laws who helped them on their way.  As young men, both were effectively apprenticed as bookkeepers in the banking and maritime establishments of Bordeaux. When they subsequently relocated to Paris, those same networks provided housing and social support as well.  Most importantly, their connection to Olinde Rodrigues brought them into contact with Claude Henri de Rouvray, comte de Saint-Simon, whose writings on the possibilities for economic and moral enhancement attendant on the careful and deliberate direction of economic activity became their guiding light in the decades to come.

It is easy now to underestimate how influential Saint-Simon’s utopian socialism was during this period.  Davies reminds us of how many politicians, social theorists and economic analysts were influenced by the writings of de Rouvray and those who surrounded him, including Napoleon III.  She can do little more than remind us, since that topic is well beyond the scope of the present book and would require at least another whole treatise to address.

The brothers spent considerable time and energy writing and lecturing on the major economic tenets of Saint-Simonianism before the movement dissolved.  Davies argues convincingly that the work they did actually laid the foundation for their own forays into industrial capitalism. From articles they had written, the Pereires foresaw what a system of railways could do for France and how urban renewal might transform what was still primarily a medieval city into the new Paris.  In 1832, Emile Pereire developed a proposal to build a passenger railway between Paris and St. Germain and the family became small investors in the project that included James de Rothschild among others.  At this stage, relations between the two were cordial, though they would not remain so.

When the Paris-St. Germain concession was granted, Emile Pereire became a director and four bankers comprised the board.  With the inauguration of the line, the Pereires achieved political as well as economic influence, but having seen the power bankers could wield, they strove to be the chief brokers of their own dreams.  Davies deftly shows how they managed this through the creation of a financial institution that bought shares or invested directly in the acquisition and building of infrastructure.  That bank, the Crédit Mobilier, was to be the great work of their lives.

The lives of the Pereires and their enterprises intersect the great political upheavals in France mid-century.  Davies walks us through how the Revolution of 1848 and its aftermath opened opportunities for the Pereires to work with Louis-Napoleon.  Indeed in 1852, the man who was to become Emperor formally established the Crédit Mobilier.  Davies describes this bank as “a powerful instrument in the expansion of French capitalism, the lynch-pin which facilitated a revolution in banking and heavy industry.”  Because her book is not an economic history, per se, she does not attempt to assess the strengths and weakness of this institution.  Rather she gives readers a view of this financial institution as it evolved and was discussed in the correspondence of its principals.  Historians such as Rondo Cameron, Alexander Gerschenkron and Niall Ferguson have all weighed in on the impact of the Crédit Mobilier and those interested in the broader ramifications of this form of state-sponsored development might begin a study of the larger question with their works.

The Crédit Mobilier collapsed in December of 1867.  Its capital was raised primarily by issuing bonds. The funds from those issues were then used to buy shares in the industrial enterprises in which it was interested or to establish and then run and manage those enterprises directly.  When those enterprises were profitable or when share values were high, the bank was highly liquid and profitable.  In downturns or in the face of increasing competition, the bank became insolvent. By the time of its most serious distress in 1867, as the correspondence among family members and business associates makes clear, the Rothschilds were no longer allies and the willingness or ability of the Emperor to come to the Pereires’ aid was waning. The bank was unable to find funds to pay its creditors.  Charges of malfeasance were levied, but Davies finds support for mismanagement rather than fraud.

Even if the Crédit Mobilier was no longer financially sound, it had, in addition to railroads, created or reorganized public utilities (gas and omnibus services within Paris).  It owned industrial laundries, housing developments and significant tracts of land, grand hotels and opera houses.  What remained Davies notes, even after the financial institution was swept away, established France as a modern, industrial and commercial powerhouse, second only to Great Britain in the period.

This book is not a substitute for a standard history of French economic development.  Nor is it a substitute for a thorough treatment of utopian socialism as outlined by Saint-Simon and his followers.  It is, however, a well-written and useful addition to the literature on economic development because it makes clear how macroeconomic outcomes arise from the actions of individual agents, how theory and ideas can be influential, and how entrepreneurship crops up in unlikely places to transform the society from which it arises.  Were this book to go to a second edition, I would welcome a time-line of French political history and a map of railway lines developed by the Pereires and their enterprises in France at this time.

References:
Rondo Cameron (1953), “The Crédit Mobilier and the Economic Development of Europe,” Journal of Political Economy, 61:6, 461-488.

Niall Ferguson (1999), The House of Rothschild: The World’s Banker, 1849-1999, New York: Viking.

Alexander Gerschenkron (1962), Economic Backwardness in Historical Perspective: A Book of Essays, Cambridge, MA: Harvard University Press.

Fritz Stern, (1979), Gold and Iron: Bismarck, Bleichröder and the Building of the German Empire, New York: Vintage.

Esther Redmount is the editor of The Economics of the Family: How the Household Affects Markets and Economic Growth (Praeger, 2014) and “The Effect of Wage Payment Reform on Workers’ Labor Supply, Wages, and Welfare,” Journal of Economic History, 2012 (with Arthur Snow and Ronald S. Warren Jr.).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (January 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):19th Century

Political Order and Inequality: Their Foundations and Their Consequences for Human Welfare

Author(s):Boix, Carles
Reviewer(s):Clay, Karen

Published by EH.Net (November 2015)

Carles Boix, Political Order and Inequality: Their Foundations and Their Consequences for Human Welfare. New York: Cambridge University Press, 2015. xii + 311 pp. $65 (hardcover), ISBN: 978-1-107-08943-3.

Reviewed for EH.Net by Karen Clay, Department of Economics, Carnegie Mellon University.

Anyone who has read Acemoglu and Robinson’s Why Nations Fail: The Origins of Power, Prosperity, and Poverty or North, Wallis and Weingast’s Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History or Hoffman’s Why Did Europe Conquer the World? or Pomeranz’s The Great Divergence: China, Europe, and the Making of the Modern World Economy or Mokyr’s The Lever of Riches: Technological Creativity and Economic Progress or similar books will want to consider buying Political Order and Inequality: Their Foundations and Their Consequences for Human Welfare.  The book, written by Carles Boix (the Robert Garrett Professor of Politics and Public Affairs at Princeton University), is very much in the spirit of these books.  It tackles a huge and very important question, provides a theoretical framework, and offers selected empirical evidence to support the argument.

One important way in which this book differs from the economics literature, particularly the work on institutions, involves the direction of causality.   Boix argues that technological change and economic growth preceded the formation of the state.  Political order, growth, and inequality were shaped by economic and military factors.  While institutions play a role in this framework, it is a much more limited role than in the work of some other authors.  Boix links his framework loosely to Marx and to endogenous growth models in the sense that economic change takes place through an endogenous process. This allows Boix to offer a theory that can accommodate political and institutional change.

The framework can be thought of as beginning in an initial hunter-gather world. Individuals led relatively equal lives in small cooperative bands that focused on providing enough food for the group.  The price of growth is then inequality.  And inequality brings about, in turn, the breakdown of cooperation that exists in the “state of nature.”  One example of a technological change that caused inequality and change was plant domestication.  A limited number places were suited to initial domestication, and in those places, greater productivity led to inequality and political change.  Out of this emerged one of two types of states.  The majority of early institutions were monarchical, but some were republican or mixed.  The type that emerged depended on military technology.  Monarchies tended to arise when technologies such as horses gave advantages to looters.  Republics tended to arise when technologies such as navies gave advantages to producers. Inequality is then jointly determined by factor endowments and political institutions and is higher under monarchies than republics. Both types of political institutions tended to stifle innovation in order to maintain the status quo.

Boix attributes the rise of the West to a combination of factors. One was endogenous technical change driven by population growth. Urbanization brought together the elements necessary for innovation and endogenous growth. A second was the political fragmentation of Europe.  In a number of areas of Western European, producers were able to fend off looters or the landed elites intermarried and invested in the industrial elites.  A third was a military revolution that allowed some urban centers to defend themselves and continue the process of growth. War-related technologies allowed some groups of producers to prevent military conquest and eradication of their gains.  These war-related technologies included pikes, gunpowder, and navies. These three factors eventually led to the Industrial Revolution. Other regions had some of the same elements, notably China, but in the end growth was stifled.

The empirical evidence is of necessity selected, because an exhaustive discussion of the evidence would take decades to write and many volumes to publish.  Boix also aims to tell a causal story, which is very much in line with analysis by economists.  What sorts of evidence does Boix provide?  Chapter 1 draws on evidence from the Ethnographic Atlas on social structures, inequality, and political life. Chapter 3 returns to the Ethnographic Atlas with a focus on economic activity.  Here Boix provides some evidence that economic activity drives social and institutional outcomes.  In particular he presents graphs showing the relationship between early transition to agriculture and early state formation.  Chapter 4 draws on data on parliamentary meetings, real wages and population densities in Europe. Chapter 5 investigates economic and political inequality using height data.  Whether one finds this useful will depend on one’s view of height data and the nature of the comparisons across groups. Chapter 6 examines evidence on urbanization, politics, income and wealth.

Political Order and Inequality: Their Foundations and Their Consequences for Human Welfare is an important book.  It is by no means the last word regarding the big historical questions such as why some nations are rich and others poor and why the Industrial Revolution happened in Europe.  It does, however, require economists to carefully consider the causal structure of their arguments and the importance of political institutions.  Perspectives may differ on whether Boix has the story right.  But anyone writing in this area needs to read Boix, along with books listed in the first sentence of this review, and offer an interpretation that fits all of the empirical evidence advanced thus far.

Karen Clay’s publications include “Adapting to Climate Change: Evidence from Long-Run Changes in the Temperature-Mortality Relationship in the 20th Century United States”  (with Barreca, Deschenes, Greenstone, and Shapiro – forthcoming in the Journal of Political Economy) and The Evolution of a Nation: How Geography and Law Shaped the American States (with Daniel Berkowitz).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2015). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The First Knowledge Economy: Human Capital and the European Economy, 1750-1850

Author(s):Jacob, Margaret C.
Reviewer(s):Hornung, Erik

Published by EH.Net (September 2015)

Margaret C. Jacob, The First Knowledge Economy: Human Capital and the European Economy, 1750-1850. Cambridge: Cambridge University Press, 2014. ix + 257 pp. $30 (paperback), ISBN: 978-1-107-61983-8.

Reviewed for EH.Net by Erik Hornung, Max Planck Institute for Tax Law and Public Finance.

Many factors have been identified as causes of the transition to sustained economic growth during the eighteenth and nineteenth centuries. Human capital may be one of the most controversial additions to the long list of causes, not least because the English are not known to have been well educated at the eve of the Industrial Revolution. In The First Knowledge Economy, Margaret C Jacob argues that English knowledge elites were at the heart of the transition. She especially focusses on the marriage between theoretical sciences and applied mechanical knowledge which helped creating many technological innovations during the Industrial Revolution. She, thus, aims at rectifying the prevalent hypothesis that technological progress resulted from tinkering of skilled but science-ignorant engineers. An impressive set of new archival sources supports her argument that English engineers were, indeed, well aware of and heavily influenced by recent advances in natural sciences.

Each of the first four chapter focuses on outstanding entrepreneurs and engineers whose records and transcripts have survived. Available information on technical and scientific knowledge is extracted from correspondence with fellow engineers and businessmen, calculations, lecture notes, thoughts about scientific readings, and involvement in scientific societies. In this manner, the reader learns how scientific content affected mindsets and decisions of famous entrepreneurs and eventually entered the production process. Understanding that their decisions were based on the latest advances in science helps to sort out the misconception that entrepreneurs were uninformed tinkerers who accidentally became successful. When tinkering, they did so with mechanical precision and regard for the known natural laws.

After a rather unstructured introduction, Chapter 1 depicts James Watt and Matthew Boulton, the inventor/entrepreneur duo famed for developing the steam engine. Analyzing a wealth of notebook entries and correspondence, Jacob depicts the views and attitudes towards religion, politics, education and science of the two businessmen and their family members. Although never formal scholars of science at any institute of higher learning, science infused the life and work of both Watt and Boulton.

The second chapter is mainly concerned with the argument that England was first because labor was expensive and coal was cheap, which made the invention of steam engines necessary. Jacob argues that technical knowledge was crucial for technological progress in mining. This claim is substantiated by transcripts which exemplify the technical knowledge of engineers, colliers, and so-called viewers working with steam engines. Clearly the majority of the technical staff in English mining must have been highly literate and capable of doing sophisticated calculations. They needed to estimate the size of engine cylinders, water-pumping potential, and the size and costs of a steam engine to advise mine owners on which steam engines to buy. Their knowledge eventually translated to a wide knowledge base which diffused through publications and public lectures.

Chapters 3 and 4 expand the established concepts to the Manchester cotton spinning industry and the Leeds textile industry. Using the correspondence of cotton barons John Kennedy and James M’Connel, Jacob describes how science and technical knowledge increased in importance during the mechanization of cotton spinning. Cloth manufacturing was arguably less prone to mechanization than spinning. Yet, the notebooks of textile manufacturers John Marshall and Benjamin Gott confirm the established pattern of adoption of scientific knowledge. The chapters conclude that a common language was needed to allow for the interaction between manufacturers and engineers. Once established entrepreneurs were able to mechanize, their businesses and machines became more sophisticated and complex.

Chapters 5 and 6 constitute a geographical change and a methodological break in the book. The center of attention is shifted to France and the “puzzle” why the French lagged behind in industrial development. Although highly interested in the practical uses of the new science, the Ancien Régime failed to create an optimal environment for industrial purposes. Jacob argues that scientific education was almost completely directed toward the aristocracy who entered into military positions. Consequently, technical knowledge was primarily used in military engineering and not for commercial activity. The French Revolution democratized education and increased the scientific content of the curricula, but, this was only a brief episode before the Restoration re-reformed education to replace scientific with religious content subject to harsh supervision by the clergy and police authorities.

Chapter 7 shifts the focus to the Low Countries, comparing Belgium and the Netherlands regarding how French occupying forces managed to instill scientific knowledge in the curricula of secondary schools and universities. Jacob argues that Belgium with its centralized system of education embraced and retained the French reforms towards industrial educational after 1795, which helped them industrialize quickly. Unlike Belgium, the Netherlands with its localized system of education did not embrace French educational reforms and industrialization evolved more slowly.

Jacob argues that we do not know enough about the curriculum in England, since schooling was organized locally. Thus, to understand whether industry benefited from sciences, we have to rely on the scientific knowledge of entrepreneurs and engineers without knowing where it was acquired. Due to the fact that France was more centralized, it can be convincingly established that the French institutional setting did not leave enough room for scientific content in public education. However, it remains unclear whether this argument suffices in contributing to solve the puzzle of continental backwardness. Instead of applying the established concept of relying on biographical information and the personal scientific knowledge of successful entrepreneurs to France (and the Low Countries), Jacob decides to provide a summary of the political economy of schooling and the curriculum during the pre- and post-Revolution. For a suitable comparison we would need to learn more about the adoption of scientific knowledge by continental entrepreneurs and engineers. We might end up finding similar patterns here.  A recent article by Squicciarini and Voigtlaender (2015) focusses on French knowledge elites (subscribers to Diderot’s Encyclopédie), who seem to have been relevant for industrial development during the period from 1750 to 1850.

This book makes an important contribution by showing that English technological development did not occur detached from scientific advances. Jacob carefully avoids drawing strong conclusions and generalizations. She asserts a central role to human capital without making causal claims. A little more structure and clearer statements might have been helpful. If cheap energy and expensive labor made inventing labor-saving technologies profitable, acquisition of scientific knowledge might be considered a proximate factor rather than the ultimate cause.

Reference:

Mara P. Squicciarini and Nico Voigtländer (2015). “Human Capital and Industrialization: Evidence from the Age of Enlightenment.” Quarterly Journal of Economics (forthcoming)

Erik Hornung (erik.hornung@tax.mpg.de) is Senior Research Fellow at the Max Planck Institute for Tax Law and Public Finance. He is author of the paper “Immigration and the Diffusion of Technology: The Huguenot Diaspora in Prussia,” American Economic Review 104-1 (2014): 84-122.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2015). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Development, Growth, and Aggregate Productivity
Education and Human Resource Development
History of Technology, including Technological Change
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century