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The Economic History of the Fur Trade: 1670 to 1870

Ann M. Carlos, University of Colorado
Frank D. Lewis, Queen’s University

Introduction

A commercial fur trade in North America grew out of the early contact between Indians and European fisherman who were netting cod on the Grand Banks off Newfoundland and on the Bay of Gaspé near Quebec. Indians would trade the pelts of small animals, such as mink, for knives and other iron-based products, or for textiles. Exchange at first was haphazard and it was only in the late sixteenth century, when the wearing of beaver hats became fashionable, that firms were established who dealt exclusively in furs. High quality pelts are available only where winters are severe, so the trade took place predominantly in the regions we now know as Canada, although some activity took place further south along the Mississippi River and in the Rocky Mountains. There was also a market in deer skins that predominated in the Appalachians.

The first firms to participate in the fur trade were French, and under French rule the trade spread along the St. Lawrence and Ottawa Rivers, and down the Mississippi. In the seventeenth century, following the Dutch, the English developed a trade through Albany. Then in 1670, a charter was granted by the British crown to the Hudson’s Bay Company, which began operating from posts along the coast of Hudson Bay (see Figure 1). For roughly the next hundred years, this northern region saw competition of varying intensity between the French and the English. With the conquest of New France in 1763, the French trade shifted to Scottish merchants operating out of Montreal. After the negotiation of Jay’s Treaty (1794), the northern border was defined and trade along the Mississippi passed to the American Fur Company under John Jacob Astor. In 1821, the northern participants merged under the name of the Hudson’s Bay Company, and for many decades this merged company continued to trade in furs. Finally, in the 1990s, under pressure from animal rights groups, the Hudson’s Bay Company, which in the twentieth century had become a large Canadian retailer, ended the fur component of its operation.

Figure 1
Hudson’s Bay Company Hinterlands
 Hudson's Bay Company Hinterlands (map)

Source: Ray (1987, plate 60)

The fur trade was based on pelts destined either for the luxury clothing market or for the felting industries, of which hatting was the most important. This was a transatlantic trade. The animals were trapped and exchanged for goods in North America, and the pelts were transported to Europe for processing and final sale. As a result, forces operating on the demand side of the market in Europe and on the supply side in North America determined prices and volumes; while intermediaries, who linked the two geographically separated areas, determined how the trade was conducted.

The Demand for Fur: Hats, Pelts and Prices

However much hats may be considered an accessory today, they were for centuries a mandatory part of everyday dress, for both men and women. Of course styles changed, and, in response to the vagaries of fashion and politics, hats took on various forms and shapes, from the high-crowned, broad-brimmed hat of the first two Stuarts to the conically-shaped, plainer hat of the Puritans. The Restoration of Charles II of England in 1660 and the Glorious Revolution in 1689 brought their own changes in style (Clarke, 1982, chapter 1). What remained a constant was the material from which hats were made – wool felt. The wool came from various animals, but towards the end of the fifteenth century beaver wool began to be predominate. Over time, beaver hats became increasingly popular eventually dominating the market. Only in the nineteenth century did silk replace beaver in high-fashion men’s hats.

Wool Felt

Furs have long been classified as either fancy or staple. Fancy furs are those demanded for the beauty and luster of their pelt. These furs – mink, fox, otter – are fashioned by furriers into garments or robes. Staple furs are sought for their wool. All staple furs have a double coating of hair with long, stiff, smooth hairs called guard hairs which protect the shorter, softer hair, called wool, that grows next to the animal skin. Only the wool can be felted. Each of the shorter hairs is barbed and once the barbs at the ends of the hair are open, the wool can be compressed into a solid piece of material called felt. The prime staple fur has been beaver, although muskrat and rabbit have also been used.

Wool felt was used for over two centuries to make high-fashion hats. Felt is stronger than a woven material. It will not tear or unravel in a straight line; it is more resistant to water, and it will hold its shape even if it gets wet. These characteristics made felt the prime material for hatters especially when fashion called for hats with large brims. The highest quality hats would be made fully from beaver wool, whereas lower quality hats included inferior wool, such as rabbit.

Felt Making

The transformation of beaver skins into felt and then hats was a highly skilled activity. The process required first that the beaver wool be separated from the guard hairs and the skin, and that some of the wool have open barbs, since felt required some open-barbed wool in the mixture. Felt dates back to the nomads of Central Asia, who are said to have invented the process of felting and made their tents from this light but durable material. Although the art of felting disappeared from much of western Europe during the first millennium, felt-making survived in Russia, Sweden, and Asia Minor. As a result of the Medieval Crusades, felting was reintroduced through the Mediterranean into France (Crean, 1962).

In Russia, the felting industry was based on the European beaver (castor fiber). Given their long tradition of working with beaver pelts, the Russians had perfected the art of combing out the short barbed hairs from among the longer guard hairs, a technology that they safeguarded. As a consequence, the early felting trades in England and France had to rely on beaver wool imported from Russia, although they also used domestic supplies of wool from other animals, such rabbit, sheep and goat. But by the end of the seventeenth century, Russian supplies were drying up, reflecting the serious depletion of the European beaver population.

Coincident with the decline in European beaver stocks was the emergence of a North American trade. North American beaver (castor canadensis) was imported through agents in the English, French and Dutch colonies. Although many of the pelts were shipped to Russia for initial processing, the growth of the beaver market in England and France led to the development of local technologies, and more knowledge of the art of combing. Separating the beaver wool from the felt was only the first step in the felting process. It was also necessary that some of the barbs on the short hairs be raised or open. On the animal these hairs were naturally covered with keratin to prevent the barbs from opening, thus to make felt, the keratin had to be stripped from at least some of the hairs. The process was difficult to refine and entailed considerable experimentation by felt-makers. For instance, one felt maker “bundled [the skins] in a sack of linen and boiled [them] for twelve hours in water containing several fatty substances and nitric acid” (Crean, 1962, p. 381). Although such processes removed the keratin, they did so at the price of a lower quality wool.

The opening of the North American trade not only increased the supply of skins for the felting industry, it also provided a subset of skins whose guard hairs had already been removed and the keratin broken down. Beaver pelts imported from North America were classified as either parchment beaver (castor sec – dry beaver), or coat beaver (castor gras – greasy beaver). Parchment beaver were from freshly caught animals, whose skins were simply dried before being presented for trade. Coat beaver were skins that had been worn by the Indians for a year or more. With wear, the guard hairs fell out and the pelt became oily and more pliable. In addition, the keratin covering the shorter hairs broke down. By the middle of the seventeenth century, hatters and felt-makers came to learn that parchment and coat beaver could be combined to produce a strong, smooth, pliable, top-quality waterproof material.

Until the 1720s, beaver felt was produced with relatively fixed proportions of coat and parchment skins, which led to periodic shortages of one or the other type of pelt. The constraint was relaxed when carotting was developed, a chemical process by which parchment skins were transformed into a type of coat beaver. The original carrotting formula consisted of salts of mercury diluted in nitric acid, which was brushed on the pelts. The use of mercury was a big advance, but it also had serious health consequences for hatters and felters, who were forced to breathe the mercury vapor for extended periods. The expression “mad as a hatter” dates from this period, as the vapor attacked the nervous systems of these workers.

The Prices of Parchment and Coat Beaver

Drawn from the accounts of the Hudson’s Bay Company, Table 1 presents some eighteenth century prices of parchment and coat beaver pelts. From 1713 to 1726, before the carotting process had become established, coat beaver generally fetched a higher price than parchment beaver, averaging 6.6 shillings per pelt as compared to 5.5 shillings. Once carotting was widely used, however, the prices were reversed, and from 1730 to 1770 parchment exceeded coat in almost every year. The same general pattern is seen in the Paris data, although there the reversal was delayed, suggesting slower diffusion in France of the carotting technology. As Crean (1962, p. 382) notes, Nollet’s L’Art de faire des chapeaux included the exact formula, but it was not published until 1765.

A weighted average of parchment and coat prices in London reveals three episodes. From 1713 to 1722 prices were quite stable, fluctuating within the narrow band of 5.0 and 5.5 shillings per pelt. During the period, 1723 to 1745, prices moved sharply higher and remained in the range of 7 to 9 shillings. The years 1746 to 1763 saw another big increase to over 12 shillings per pelt. There are far fewer prices available for Paris, but we do know that in the period 1739 to 1753 the trend was also sharply higher with prices more than doubling.

Table 1
Price of Beaver Pelts in Britain: 1713-1763
(shillings per skin)

Year Parchment Coat Averagea Year Parchment Coat Averagea
1713 5.21 4.62 5.03 1739 8.51 7.11 8.05
1714 5.24 7.86 5.66 1740 8.44 6.66 7.88
1715 4.88 5.49 1741 8.30 6.83 7.84
1716 4.68 8.81 5.16 1742 7.72 6.41 7.36
1717 5.29 8.37 5.65 1743 8.98 6.74 8.27
1718 4.77 7.81 5.22 1744 9.18 6.61 8.52
1719 5.30 6.86 5.51 1745 9.76 6.08 8.76
1720 5.31 6.05 5.38 1746 12.73 7.18 10.88
1721 5.27 5.79 5.29 1747 10.68 6.99 9.50
1722 4.55 4.97 4.55 1748 9.27 6.22 8.44
1723 8.54 5.56 7.84 1749 11.27 6.49 9.77
1724 7.47 5.97 7.17 1750 17.11 8.42 14.00
1725 5.82 6.62 5.88 1751 14.31 10.42 12.90
1726 5.41 7.49 5.83 1752 12.94 10.18 11.84
1727 7.22 1753 10.71 11.97 10.87
1728 8.13 1754 12.19 12.68 12.08
1729 9.56 1755 12.05 12.04 11.99
1730 8.71 1756 13.46 12.02 12.84
1731 6.27 1757 12.59 11.60 12.17
1732 7.12 1758 13.07 11.32 12.49
1733 8.07 1759 15.99 14.68
1734 7.39 1760 13.37 13.06 13.22
1735 8.33 1761 10.94 13.03 11.36
1736 8.72 7.07 8.38 1762 13.17 16.33 13.83
1737 7.94 6.46 7.50 1763 16.33 17.56 16.34
1738 8.95 6.47 8.32

a A weighted average of the prices of parchment, coat and half parchment beaver pelts. Weights are based on the trade in these types of furs at Fort Albany. Prices of the individual types of pelts are not available for the years, 1727 to 1735.

Source: Carlos and Lewis, 1999.

The Demand for Beaver Hats

The main cause of the rising beaver pelt prices in England and France was the increasing demand for beaver hats, which included hats made exclusively with beaver wool and referred to as “beaver hats,” and those hats containing a combination of beaver and a lower cost wool, such as rabbit. These were called “felt hats.” Unfortunately, aggregate consumption series for the eighteenth century Europe are not available. We do, however, have Gregory King’s contemporary work for England which provides a good starting point. In a table entitled “Annual Consumption of Apparell, anno 1688,” King calculated that consumption of all types of hats was about 3.3 million, or nearly one hat per person. King also included a second category, caps of all sorts, for which he estimated consumption at 1.6 million (Harte, 1991, p. 293). This means that as early as 1700, the potential market for hats in England alone was nearly 5 million per year. Over the next century, the rising demand for beaver pelts was a result of a number factors including population growth, a greater export market, a shift toward beaver hats from hats made of other materials, and a shift from caps to hats.

The British export data indicate that demand for beaver hats was growing not just in England, but in Europe as well. In 1700 a modest 69,500 beaver hats were exported from England and almost the same number of felt hats; but by 1760, slightly over 500,000 beaver hats and 370,000 felt halts were shipped from English ports (Lawson, 1943, app. I). In total, over the seventy years to 1770, 21 million beaver and felt hats were exported from England. In addition to the final product, England exported the raw material, beaver pelts. In 1760, £15,000 in beaver pelts were exported along with a range of other furs. The hats and the pelts tended to go to different parts of Europe. Raw pelts were shipped mainly to northern Europe, including Germany, Flanders, Holland and Russia; whereas hats went to the southern European markets of Spain and Portugal. In 1750, Germany imported 16,500 beaver hats, while Spain imported 110,000 and Portugal 175,000 (Lawson, 1943, appendices F & G). Over the first six decades of the eighteenth century, these markets grew dramatically, such that the value of beaver hat sales to Portugal alone was £89,000 in 1756-1760, representing about 300,000 hats or two-thirds of the entire export trade.

European Intermediaries in the Fur Trade

By the eighteenth century, the demand for furs in Europe was being met mainly by exports from North America with intermediaries playing an essential role. The American trade, which moved along the main water systems, was organized largely through chartered companies. At the far north, operating out of Hudson Bay, was the Hudson’s Bay Company, chartered in 1670. The Compagnie d’Occident, founded in 1718, was the most successful of a series of monopoly French companies. It operated through the St. Lawrence River and in the region of the eastern Great Lakes. There was also an English trade through Albany and New York, and a French trade down the Mississippi.

The Hudson’s Bay Company and the Compagnie d’Occident, although similar in title, had very different internal structures. The English trade was organized along hierarchical lines with salaried managers, whereas the French monopoly issued licenses (congés) or leased out the use of its posts. The structure of the English company allowed for more control from the London head office, but required systems that could monitor the managers of the trading posts (Carlos and Nicholas, 1990). The leasing and licensing arrangements of the French made monitoring unnecessary, but led to a system where the center had little influence over the conduct of the trade.

The French and English were distinguished as well by how they interacted with the Natives. The Hudson’s Bay Company established posts around the Bay and waited for the Indians, often middlemen, to come to them. The French, by contrast, moved into the interior, directly trading with the Indians who harvested the furs. The French arrangement was more conducive to expansion, and by the end of the seventeenth century, they had moved beyond the St. Lawrence and Ottawa rivers into the western Great Lakes region (see Figure 1). Later they established posts in the heart of the Hudson Bay hinterland. In addition, the French explored the river systems to the south, setting up a post at the mouth of the Mississippi. As noted earlier, after Jay’s Treaty was signed, the French were replaced in the Mississippi region by U.S. interests which later formed the American Fur Company (Haeger, 1991).

The English takeover of New France at the end of the French and Indian Wars in 1763 did not, at first, fundamentally change the structure of the trade. Rather, French management was replaced by Scottish and English merchants operating in Montreal. But, within a decade, the Montreal trade was reorganized into partnerships between merchants in Montreal and traders who wintered in the interior. The most important of these arrangements led to the formation of the Northwest Company, which for the first two decades of the nineteenth century, competed with the Hudson’s Bay Company (Carlos and Hoffman, 1986). By the early decades of the nineteenth century, the Hudson’s Bay Company, the Northwest Company, and the American Fur Company had, combined, a system of trading posts across North America, including posts in Oregon and British Columbia and on the Mackenzie River. In 1821, the Northwest Company and the Hudson’s Bay Company merged under the name of the Hudson’s Bay Company. The Hudson’s Bay Company then ran the trade as a monopsony until the late 1840s when it began facing serious competition from trappers to the south. The Company’s role in the northwest changed again with the Canadian Confederation in 1867. Over the next decades treaties were signed with many of the northern tribes forever changing the old fur trade order in Canada.

The Supply of Furs: The Harvesting of Beaver and Depletion

During the eighteenth century, the changing technology of felt production and the growing demand for felt hats were met by attempts to increase the supply of furs, especially the supply of beaver pelts. Any permanent increase, however, was ultimately dependent on the animal resource base. How that base changed over time must be a matter of speculation since no animal counts exist from that period; nevertheless, the evidence we do have points to a scenario in which over-harvesting, at least in some years, gave rise to serious depletion of the beaver and possibly other animals such as marten that were also being traded. Why the beaver were over-harvested was closely related to the prices Natives were receiving, but important as well was the nature of Native property rights to the resource.

Harvests in the Fort Albany and York Factory Regions

That beaver populations along the Eastern seaboard regions of North America were depleted as the fur trade advanced is widely accepted. In fact the search for new sources of supply further west, including the region of Hudson Bay, has been attributed in part to dwindling beaver stocks in areas where the fur trade had been long established. Although there has been little discussion of the impact that the Hudson’s Bay Company and the French, who traded in the region of Hudson Bay, were having on the beaver stock, the remarkably complete records of the Hudson’s Bay Company provide the basis for reasonable inferences about depletion. From 1700 there is an uninterrupted annual series of fur returns at Fort Albany; the fur returns from York Factory begin in 1716 (see Figure 1).

The beaver returns at Fort Albany and York Factory for the period 1700 to 1770 are described in Figure 2. At Fort Albany the number of beaver skins over the period 1700 to 1720 averaged roughly 19,000, with wide year-to-year fluctuations; the range was about 15,000 to 30,000. After 1720 and until the late 1740s average returns declined by about 5,000 skins, and remained within the somewhat narrower range of roughly 10,000 to 20,000 skins. The period of relative stability was broken in the final years of the 1740s. In 1748 and 1749, returns increased to an average of nearly 23,000. Following these unusually strong years, the trade fell precipitously so that in 1756 fewer than 6,000 beaver pelts were received. There was a brief recovery in the early 1760s but by the end decade trade had fallen below even the mid-1750s levels. In 1770, Fort Albany took in just 3,600 beaver pelts. This pattern – unusually large returns in the late 1740s and low returns thereafter – indicates that the beaver in the Fort Albany region were being seriously depleted.

Figure 2
Beaver Traded at Fort Albany and York Factory 1700 – 1770

Source: Carlos and Lewis, 1993.

The beaver returns at York Factory from 1716 to 1770, also described in Figure 2, have some of the key features of the Fort Albany data. After some low returns early on (from 1716 to 1720), the number of beaver pelts increased to an average of 35,000. There were extraordinary returns in 1730 and 1731, when the average was 55,600 skins, but beaver receipts then stabilized at about 31,000 over the remainder of the decade. The first break in the pattern came in the early 1740s shortly after the French established several trading posts in the area. Surprisingly perhaps, given the increased competition, trade in beaver pelts at the Hudson’s Bay Company post increased to an average of 34,300, this over the period 1740 to 1743. Indeed, the 1742 return of 38,791 skins was the largest since the French had established any posts in the region. The returns in 1745 were also strong, but after that year the trade in beaver pelts began a decline that continued through to 1770. Average returns over the rest of the decade were 25,000; the average during the 1750s was 18,000, and just 15,500 in the 1760s. The pattern of beaver returns at York Factory – high returns in the early 1740s followed by a large decline – strongly suggests that, as in the Fort Albany hinterland, the beaver population had been greatly reduced.

The overall carrying capacity of any region, or the size of the animal stock, depends on the nature of the terrain and the underlying biological determinants such as birth and death rates. A standard relationship between the annual harvest and the animal population is the Lotka-Volterra logistic, commonly used in natural resource models to relate the natural growth of a population to the size of that population:
F(X) = aX – bX2, a, b > 0 (1)

where X is the population, F(X) is the natural growth in the population, a is the maximum proportional growth rate of the population, and b = a/X, where X is the upper limit to population size. The population dynamics of the species exploited depends on the harvest each period:

DX = aX – bX2– H (2)

where DX is the annual change in the population and H is the harvest. The choice of parameter a and maximum population X is central to the population estimates and have been based largely on estimates from the beaver ecology literature and Ontario provincial field reports of beaver densities (Carlos and Lewis, 1993).

Simulations based on equation 2 suggest that, until the 1730s, beaver populations remained at levels roughly consistent with maximum sustained yield management, sometimes referred to as the biological optimum. But after the 1730s there was a decline in beaver stocks to about half the maximum sustained yield levels. The cause of the depletion was closely related to what was happening in Europe. There, buoyant demand for felt hats and dwindling local fur supplies resulted in much higher prices for beaver pelts. These higher prices, in conjunction with the resulting competition from the French in the Hudson Bay region, led the Hudson’s Bay Company to offer much better terms to Natives who came to their trading posts (Carlos and Lewis, 1999).

Figure 3 reports a price index for furs at Fort Albany and at York Factory. The index represents a measure of what Natives received in European goods for their furs. At Fort Albany, fur prices were close to 70 from 1713 to 1731, but in 1732, in response to higher European fur prices and the entry of la Vérendrye, an important French trader, the price jumped to 81. After that year, prices continued to rise. The pattern at York Factory was similar. Although prices were high in the early years when the post was being established, beginning in 1724 the price settled down to about 70. At York Factory, the jump in price came in 1738, which was the year la Vérendrye set up a trading post in the York Factory hinterland. Prices then continued to increase. It was these higher fur prices that led to over-harvesting and, ultimately, a decline in beaver stocks.

Figure 3
Price Index for Furs: Fort Albany and York Factory, 1713 – 1770

Source: Carlos and Lewis, 2001.

Property Rights Regimes

An increase in price paid to Native hunters did not have to lead to a decline in the animal stocks, because Indians could have chosen to limit their harvesting. Why they did not was closely related their system of property rights. One can classify property rights along a spectrum with, at one end, open access, where anyone can hunt or fish, and at the other, complete private property, where a sole owner has full control over the resource. Between, there are a range of property rights regimes with access controlled by a community or a government, and where individual members of the group do not necessarily have private property rights. Open access creates a situation where there is less incentive to conserve, because animals not harvested by a particular hunter will be available to other hunters in the future. Thus the closer is a system to open access the more likely it is that the resource will be depleted.

Across aboriginal societies in North America, one finds a range of property rights regimes. Native Americans did have a concept of trespass and of property, but individual and family rights to resources were not absolute. Sometimes referred to as the Good Samaritan principle (McManus, 1972), outsiders were not permitted to harvest furs on another’s territory for trade, but they were allowed to hunt game and even beaver for food. Combined with this limitation to private property was an Ethic of Generosity that included liberal gift-giving where any visitor to one’s encampment was to be supplied with food and shelter.

Why a social norm such as gift-giving or the related Good Samaritan principle emerged was due to the nature of the aboriginal environment. The primary objective of aboriginal societies was survival. Hunting was risky, and so rules were put in place that would reduce the risk of starvation. As Berkes et al.(1989, p. 153) notes, for such societies: “all resources are subject to the overriding principle that no one can prevent a person from obtaining what he needs for his family’s survival.” Such actions were reciprocal and especially in the sub-arctic world were an insurance mechanism. These norms, however, also reduced the incentive to conserve the beaver and other animals that were part of the fur trade. The combination of these norms and the increasing price paid to Native traders led to the large harvests in the 1740s and ultimately depletion of the animal stock.

The Trade in European Goods

Indians were the primary agents in the North American commercial fur trade. It was they who hunted the animals, and transported and traded the pelts or skins to European intermediaries. The exchange was a voluntary. In return for their furs, Indians obtained both access to an iron technology to improve production and access to a wide range of new consumer goods. It is important to recognize, however, that although the European goods were new to aboriginals, the concept of exchange was not. The archaeological evidence indicates an extensive trade between Native tribes in the north and south of North America prior to European contact.

The extraordinary records of the Hudson’s Bay Company allow us to form a clear picture of what Indians were buying. Table 2 lists the goods received by Natives at York Factory, which was by far the largest of the Hudson’s Bay Company trading posts. As is evident from the table, the commercial trade was more than in beads and baubles or even guns and alcohol; rather Native traders were receiving a wide range of products that improved their ability to meet their subsistence requirements and allowed them to raise their living standards. The items have been grouped by use. The producer goods category was dominated by firearms, including guns, shot and powder, but also includes knives, awls and twine. The Natives traded for guns of different lengths. The 3-foot gun was used mainly for waterfowl and in heavily forested areas where game could be shot at close range. The 4-foot gun was more accurate and suitable for open spaces. In addition, the 4-foot gun could play a role in warfare. Maintaining guns in the harsh sub-arctic environment was a serious problem, and ultimately, the Hudson’s Bay Company was forced to send gunsmiths to its trading posts to assess quality and help with repairs. Kettles and blankets were the main items in the “household goods” category. These goods probably became necessities to the Natives who adopted them. Then there were the luxury goods, which have been divided into two broad categories: “tobacco and alcohol,” and “other luxuries,” dominated by cloth of various kinds (Carlos and Lewis, 2001; 2002).

Table 2
Value of Goods Received at York Factory in 1740 (made beaver)

We have much less information about the French trade. The French are reported to have exchanged similar items, although given their higher transport costs, both the furs received and the goods traded tended to be higher in value relative to weight. The Europeans, it might be noted, supplied no food to the trade in the eighteenth century. In fact, Indians helped provision the posts with fish and fowl. This role of food purveyor grew in the nineteenth century as groups known as the “home guard Cree” came to live around the posts; as well, pemmican, supplied by Natives, became an important source of nourishment for Europeans involved in the buffalo hunts.

The value of the goods listed in Table 2 is expressed in terms of the unit of account, the made beaver, which the Hudson’s Bay Company used to record its transactions and determine the rate of exchange between furs and European goods. The price of a prime beaver pelt was 1 made beaver, and every other type of fur and good was assigned a price based on that unit. For example, a marten (a type of mink) was a made beaver, a blanket was 7 made beaver, a gallon of brandy, 4 made beaver, and a yard of cloth, 3? made beaver. These were the official prices at York Factory. Thus Indians, who traded at these prices, received, for example, a gallon of brandy for four prime beaver pelts, two yards of cloth for seven beaver pelts, and a blanket for 21 marten pelts. This was barter trade in that no currency was used; and although the official prices implied certain rates of exchange between furs and goods, Hudson’s Bay Company factors were encouraged to trade at rates more favorable to the Company. The actual rates, however, depended on market conditions in Europe and, most importantly, the extent of French competition in Canada. Figure 3 illustrates the rise in the price of furs at York Factory and Fort Albany in response to higher beaver prices in London and Paris, as well as to a greater French presence in the region (Carlos and Lewis, 1999). The increase in price also reflects the bargaining ability of Native traders during periods of direct competition between the English and French and later the Hudson’s Bay Company and the Northwest Company. At such times, the Native traders would play both parties off against each other (Ray and Freeman, 1978).

The records of the Hudson’s Bay Company provide us with a unique window to the trading process, including the bargaining ability of Native traders, which is evident in the range of commodities received. Natives only bought goods they wanted. Clear from the Company records is that it was the Natives who largely determined the nature and quality of those goods. As well the records tell us how income from the trade was being allocated. The breakdown differed by post and varied over time; but, for example, in 1740 at York Factory, the distribution was: producer goods – 44 percent; household goods – 9 percent; alcohol and tobacco – 24 percent; and other luxuries – 23 percent. An important implication of the trade data is that, like many Europeans and most American colonists, Native Americans were taking part in the consumer revolution of the eighteenth century (de Vries, 1993; Shammas, 1993). In addition to necessities, they were consuming a remarkable variety of luxury products. Cloth, including baize, duffel, flannel, and gartering, was by far the largest class, but they also purchased beads, combs, looking glasses, rings, shirts, and vermillion among a much longer list. Because these items were heterogeneous in nature, the Hudson’s Bay Company’s head office went to great lengths to satisfy the specific tastes of Native consumers. Attempts were also made, not always successfully, to introduce new products (Carlos and Lewis, 2002).

Perhaps surprising, given the emphasis that has been placed on it in the historical literature, was the comparatively small role of alcohol in the trade. At York Factory, Native traders received in 1740 a total of 494 gallons of brandy and “strong water,” which had a value of 1,976 made beaver. More than twice this amount was spent on tobacco in that year, nearly five times was spent on firearms, twice was spent on cloth, and more was spent on blankets and kettles than on alcohol. Thus, brandy, although a significant item of trade, was by no means a dominant one. In addition, alcohol could hardly have created serious social problems during this period. The amount received would have allowed for no more than ten two-ounce drinks per year for the adult Native population living in the region.

The Labor Supply of Natives

Another important question can be addressed using the trade data. Were Natives “lazy and improvident” as they have been described by some contemporaries, or were they “industrious” like the American colonists and many Europeans? Central to answering this question is how Native groups responded to the price of furs, which began rising in the 1730s. Much of the literature argues that Indian trappers reduced their effort in response to higher fur prices; that is, they had backward-bending supply curves of labor. The view is that Natives had a fixed demand for European goods that, at higher fur prices, could be met with fewer furs, and hence less effort. Although widely cited, this argument does not stand up. Not only were higher fur prices accompanied by larger total harvests of furs in the region, but the pattern of Native expenditure also points to a scenario of greater effort. From the late 1730s to the 1760s, as the price of furs rose, the share of expenditure on luxury goods increased dramatically (see Figure 4). Thus Natives were not content simply to accept their good fortune by working less; rather they seized the opportunity provided to them by the strong fur market by increasing their effort in the commercial sector, thereby dramatically augmenting the purchases of those goods, namely the luxuries, that could raise their living standards.

Figure 4
Native Expenditure Shares at York Factory 1716 – 1770

Source: Carlos and Lewis, 2001.

A Note on the Non-commercial Sector

As important as the fur trade was to Native Americans in the sub-arctic regions of Canada, commerce with the Europeans comprised just one, relatively small, part of their overall economy. Exact figures are not available, but the traditional sectors; hunting, gathering, food preparation and, to some extent, agriculture must have accounted for at least 75 to 80 percent of Native labor during these decades. Nevertheless, despite the limited time spent in commercial activity, the fur trade had a profound effect on the nature of the Native economy and Native society. The introduction of European producer goods, such as guns, and household goods, mainly kettles and blankets, changed the way Native Americans achieved subsistence; and the European luxury goods expanded the range of products that allowed them to move beyond subsistence. Most importantly, the fur trade connected Natives to Europeans in ways that affected how and how much they chose to work, where they chose to live, and how they exploited the resources on which the trade and their survival was based.

References

Berkes, Fikret, David Feeny, Bonnie J. McCay, and James M. Acheson. “The Benefits of the Commons.” Nature 340 (July 13, 1989): 91-93.

Braund, Kathryn E. Holland.Deerskins and Duffels: The Creek Indian Trade with Anglo-America, 1685-1815. Lincoln: University of Nebraska Press, 1993.

Carlos, Ann M., and Elizabeth Hoffman. “The North American Fur Trade: Bargaining to a Joint Profit Maximum under Incomplete Information, 1804-1821.” Journal of Economic History 46, no. 4 (1986): 967-86.

Carlos, Ann M., and Frank D. Lewis. “Indians, the Beaver and the Bay: The Economics of Depletion in the Lands of the Hudson’s Bay Company, 1700-1763.” Journal of Economic History 53, no. 3 (1993): 465-94.

Carlos, Ann M., and Frank D. Lewis. “Property Rights, Competition and Depletion in the Eighteenth-Century Canadian Fur Trade: The Role of the European Market.” Canadian Journal of Economics 32, no. 3 (1999): 705-28.

Carlos, Ann M., and Frank D. Lewis. “Property Rights and Competition in the Depletion of the Beaver: Native Americans and the Hudson’s Bay Company.” In The Other Side of the Frontier: Economic Explorations in Native American History, edited by Linda Barrington, 131-149. Boulder, CO: Westview Press, 1999.

Carlos, Ann M., and Frank D. Lewis. “Trade, Consumption, and the Native Economy: Lessons from York Factory, Hudson Bay.” Journal of Economic History61, no. 4 (2001): 465-94.

Carlos, Ann M., and Frank D. Lewis. “Marketing in the Land of Hudson Bay: Indian Consumers and the Hudson’s Bay Company, 1670-1770.” Enterprise and Society 2 (2002): 285-317.

Carlos, Ann and Nicholas, Stephen. “Agency Problems in Early Chartered Companies: The Case of the Hudson’s Bay Company.” Journal of Economic History 50, no. 4 (1990): 853-75.

Clarke, Fiona. Hats. London: Batsford, 1982.

Crean, J. F. “Hats and the Fur Trade.” Canadian Journal of Economics and Political Science 28, no. 3 (1962): 373-386.

Corner, David. “The Tyranny of Fashion: The Case of the Felt-Hatting Trade in the Late Seventeenth and Eighteenth Centuries.” Textile History 22, no.2 (1991): 153-178.

de Vries, Jan. “Between Purchasing Power and the World of Goods: Understanding the Household Economy in Early Modern Europe.” In Consumption and the World of Goods, edited by John Brewer and Roy Porter, 85-132. London: Routledge, 1993.

Ginsburg Madeleine. The Hat: Trends and Traditions. London: Studio Editions, 1990.

Haeger, John D. John Jacob Astor: Business and Finance in the Early Republic. Detroit: Wayne State University Press, 1991.

Harte, N.B. “The Economics of Clothing in the Late Seventeenth Century.” Textile History 22, no. 2 (1991): 277-296.

Heidenreich, Conrad E., and Arthur J. Ray. The Early Fur Trade: A Study in Cultural Interaction. Toronto: McClelland and Stewart, 1976.

Helm, Jane, ed. Handbook of North American Indians 6, Subarctic. Washington: Smithsonian, 1981.

Innis, Harold. The Fur Trade in Canada (revised edition). Toronto: University of Toronto Press, 1956.

Krech III, Shepard. The Ecological Indian: Myth and History. New York: Norton, 1999.

Lawson, Murray G. Fur: A Study in English Mercantilism. Toronto: University of Toronto Press, 1943.

McManus, John. “An Economic Analysis of Indian Behavior in the North American Fur Trade.” Journal of Economic History 32, no.1 (1972): 36-53.

Ray, Arthur J. Indians in the Fur Trade: Their Role as Hunters, Trappers and Middlemen in the Lands Southwest of Hudson Bay, 1660-1870. Toronto: University of Toronto Press, 1974.

Ray, Arthur J. and Donald Freeman. “Give Us Good Measure”: An Economic Analysis of Relations between the Indians and the Hudson’s Bay Company before 1763. Toronto: University of Toronto Press, 1978.

Ray, Arthur J. “Bayside Trade, 1720-1780.” In Historical Atlas of Canada 1, edited by R. Cole Harris, plate 60. Toronto: University of Toronto Press, 1987.

Rich, E. E. Hudson’s Bay Company, 1670 – 1870. 2 vols. Toronto: McClelland and Stewart, 1960.

Rich, E.E. “Trade Habits and Economic Motivation among the Indians of North America.” Canadian Journal of Economics and Political Science 26, no. 1 (1960): 35-53.

Shammas, Carole. “Changes in English and Anglo-American Consumption from 1550-1800.” In Consumption and the World of Goods, edited by John Brewer and Roy Porter, 177-205. London: Routledge, 1993.

Wien, Thomas. “Selling Beaver Skins in North America and Europe, 1720-1760: The Uses of Fur-Trade Imperialism.” Journal of the Canadian Historical Association, New Series 1 (1990): 293-317.

Citation: Carlos, Ann and Frank Lewis. “Fur Trade (1670-1870)”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-the-fur-trade-1670-to-1870/

From Old Regime to Industrial State: A History of German Industrialization from the Eighteenth Century to World War I

Author(s):Tilly, Richard H.
Kopsidis, Michael
Reviewer(s):Wegge, Simone A.

Published by EH.Net (September 2022).

Richard H. Tilly and Michael Kopsidis. From Old Regime to Industrial State: A History of German Industrialization from the Eighteenth Century to World War I. Chicago: University of Chicago Press, 2020. 327 pp. $75 (cloth), ISBN 978-0226725437.

Reviewed for EH.Net by Simone A. Wegge, Department of Economics, College of Staten Island and the Graduate Center, City University of New York.

 

Richard H. Tilly and Michael Kopsidis have produced an interesting new book and effectively present an updated history of German industrialization. They cover a wide range of topics including agricultural innovation, demographic change, labor markets, entrepreneurial activity, patent activity, regulation, banking developments and more and provide a roadmap for most of the main events in the history of German industrialization in the two centuries leading up to the First World War. While doing so they draw on their own research as well as much new scholarship in Germany economic history. The reference section, at almost 40 pages, emphasizes the authors’ extensive and deep reading and serves as an excellent source for works in both English and German on the topics of German industrialization and economic growth.

The monograph is broken up into four parts, the first part describing Germany in the eighteenth century, the second part early industrialization, the third part the growth of industrial capitalism up to the 1870s, and the fourth and concluding section Germany’s takeoff as an industrial power from unification in 1871 to the year 1914.

One of the more interesting sections of Part I is Chapter 2, which provides an intensive account of industrialization in three important economic regions in Germany, Saxony, the Ruhr/Rhine region and Württemberg. All three had vibrant proto-industrial textile sectors in the eighteenth century, and this feature seemed to be important for rapid industrialization in both Saxony and the Ruhr/Rhine region but not in Württemberg. One thus cannot conclude that an active proto-industry necessarily led “directly to industrialization” (p. 57). Interestingly, Württemberg is one of the most industrialized parts of the German economy today. Chapter 4 is the other highlight of Part I and explains reforms in agrarian property rights and citizens’ rights, the adoption of compulsory schooling, the decline in the power of guilds accompanied by the rise of manufacturers, and the ascendancy of the bureaucratic Prussian state. This chapter is crucial, as it helps one to understand the overwhelming influence of Prussian customs and institutions on the rest of Germany. Note that “unification of Germany in 1871” is considered by some to be an oxymoron for a “Prussian takeover.”

A valuable section of Part II is the material (Chapter 5) on the Zollverein, the common market that evolved between various German states in the decades leading up to 1871. Incorporating research from Dumke (1981, 1984) and more recent work from Keller & Shuie (2014), Tilly and Kopsidis argue that the main effects of the Zollverein were not tariff protection, as Friedrich List had claimed in 1841, but were instead to eliminate internal trade barriers and to expand and integrate markets. The authors also cite intriguing work from Ploeckl (2009) to show that the development of the Zollverein was a complicated sequential game that Prussia devised in the interest of bringing all its neighboring states into the fold.

The authors round off Part II with a discussion of the financial and agricultural crises that culminated in a hunger crisis in the mid-1840s and eventually the 1848 Revolution; they argue that a significant result was that the bourgeoisie gained political power but that not much else changed for the vast majority of people in German regions, most of whom were farmers, laborers and artisans. The authors are very much focused on Prussia, where in 1807 with the Prussian Edict (p. 70), many farmers were able to pay off obligations and benefit from a more modern semblance of land ownership (Bauernbefreiung or “farmer emancipation”) and thus a more market-oriented rural economy. In various parts of Germany, however, this transformation took place in later decades: for example, in Bavaria farmers were first given the option in 1848 of paying off obligations in 1848; in the Electorate of Hesse-Cassel legislation to this effect was passed in 1832 and finalized in 1848. The authors may be underestimating the positive effects of the 1848 Revolution for a sizable number of German farmers outside of Prussia (p. 118). In general, the topic of Bauerbefreiung in understudied, and there are other possible connections that economic historians will find interesting: many farmers used loans to achieve these economic freedoms, which may have in turn spurred on the founding of more local credit institutions in the 1830s and 1840s.

The third part of the book delves into the actual industrialization of Germany up to 1870. Leading sectors like railroads, iron and steel, and coal mining expanded in the 1850s up to the crisis period of 1857 and again, after a downturn, in the late 1860s. The authors describe the development as a “cyclical phenomenon,” something they attribute to the work of Spree (1977), who emphasizes the linkages between sectors, both forward and backward ones, with railroads being the “initiator” and the chief consumer of German finished iron production. Since it was expensive to move coal, the location of coal deposits played a determinative role in the location of industries, which Gutberlet (2014) expands on. The takeoff of German industry was helped by two regulatory developments: first, Prussia paved the way for limited liability corporations in 1843; secondly, this option was available to most of the rest of Germany (“German-wide”) with the 1861 ADHGB (Allgemeine Deutsches Handelsgesetzbuch) legislation on business laws (p. 122).

Other sections of Part III handle the changes to labor and capital markets as well the increase in agricultural outputs in the takeoff period. A final chapter addresses changes in the banking sector, where the authors highlight first, the emergence of universal banks as arising at their inception as a way to finance railroads and secondly, the growth of German savings banks and credit cooperatives, which made a difference in encouraging savings and financing local economic activities.

The fourth and final section of the book, Part IV, covers the period from 1871 to 1914. Chapters 12 and 13 are especially interesting, as they get into the weeds of German industrialization and describe the takeoff period. It is a remarkable story, such that by 1907 Germany was ahead of the United Kingdom in various heavy industries, including the chemical, engineering, metals, and iron and steel industries. GDP per capita was still higher in the U.K. in 1914 though, given that the British were more productive in other sectors, such as in mining, clothing, textile, and food & beverage.

A particular important event was the passage of the German Patent Law, which established the German Imperial Patent Office in 1871. The authors use the recent research of Streb et al. (2006) on “valuable patents” to describe four waves of innovations involving steam and railroads in the first wave, chemical and dyestuffs in the second wave, pharmaceuticals and fertilizers in the third wave and electricity in the fourth. Besides emphasizing patents, economic historians have debated as to whether entrepreneurial skills or scale economies were more relevant, and the author come down on the side of the latter, stressing the rise of cartels. Advanced industrialization also required skilled and knowledgeable workers, and the story of how German industry, in cooperation with German vocational schools and technical universities, invested in human capital, is also told here. By 1900, on an annual basis Germany was producing eight times more new engineers than Britain. Industrialists increasingly turned to the corporation as a form of legal organization for their firms, with 80% of large firms in the latter years of the nineteenth century organized as such (p. 186). After 1892, many small firms took advantage of the new legal form of the GMbH (Gesellschaft mit beschränkter Haftung), designed for a private limited liability companies or partnerships (Guinnane, 2021).

Chapter 13 continues with this story of takeoff and describes in more detail financial developments. The introduction in 1873 of a national currency, the German mark, and the establishment in 1876 of a central bank, the Reichsbank, are two notable events. By the 1880s, and especially with the Company Law of 1884, which paved the way for a greater role for banks that supplied capital, banks were very much involved in monitoring the firms they financed: the markets, for instance, viewed firms more favorably when their bankers served on their corporate boards, something that is still practiced today. These big banks evolved into large universal banks and held a lot of capital.

Tilly and Kopsidis claim that this setup and universal banks’ “diversified branching network and close ties to the Reichsbank” were effective in bringing more stability to the banking sector of Germany, a stark contrast to the U.S. banking system prior to 1913 before the creation of the Federal Reserve Bank (p. 200). The literature on Germany’s universal banks and their involvement in German industrialization is extensive, and Tilly and Kopsidis cite many recent scholarly works on this topic (e.g., Burhop 2006; Fohlin, 2007).

There is much to learn in this book. If I have quibbles, it is that the authors ignore significant parts of Germany. The book focuses heavily on Prussia and the regions that developed faster, Westphalia and Saxony. Less attention though is paid to areas like Bavaria and Baden, or to Württemberg in the takeoff period. Regions like Hessen, Schleswig-Holstein, Mecklenburg, and Thuringia are missing in the index. To discuss a less developed area of Germany, Tilly and Kopsidis repeatedly draw on the example of the East Elbian parts of Prussia, some of which is today Poland and quite removed from the rest of Germany. There were however other “backwaters,” the authors’ term that they could have drawn on. Of course, no single book can be everything to everybody. For a discussion in English of relative economic development and backwardness across all German regions, readers should refer to Oliver Grant’s 2005 monograph.

Over this almost 50-year period several notable political changes at the federal level occurred. German reunification (or “Prussian takeover”) took place in 1871 under Chancellor Otto Bismarck, who served in this role until 1890. Alongside the chancellor was the German monarch, consisting of a series of German emperors who stemmed from the House of Hohenzollern and who had ruled Prussia before 1871. The monarchy lasted from 1871 to 1918, at which point the political organization of German was switched to a republic. Did any of this matter? Tilly and Kopsidis do not say too much, although they briefly discuss the rise of tensions with other nations as Germany’s economic interests grew beyond its borders. It bears mentioning, however obvious, that Germany did not fight in any great war between 1872 and 1913, and this all helped provide stability that enabled entrepreneurs to innovate and businesses to grow.

The authors of From Old Regime to Industrial State cover much ground and discuss the many angles of economic growth, including patents, technological change, infrastructure development, education and occupational training, customs unions, evolving market structures, financial development and the rise of universal banks, agricultural productivity, and more. There is much here to absorb – the story of German economic development from many angles. That this monograph is written in English and not in German is a plus as it makes it accessible to a much larger audience. The authors’ engagement in many debates about the history of German economic growth, as well as the extensive references to so many different scholarly works, especially recent ones, makes this work further valuable.

For historians of the industrial revolution, contemplating Germany’s rise to an efficient, innovative and productive industrial economy is a must. Tilly and Kopsidis provide a fresh perspective on German economic history by considering many previous explanations and using the most recent scholarship, their own work as well as their deep reading into the subject matter. In sum, this work is a very important addition to the fields of historical economic growth and industrialization.

References

Burhop, C. 2006. “Did Banks Cause the German Industrialization?” Explorations in Economic History 43: 39-63.

Dumke, R. 1981. “Die wirtschaftlichen Folgen des Zollvereins.“ In W. Abelshauser & D. Petzina, eds., Deutsche Wirtschaftsgeschichte im Industriezeitalter. Düsseldorf: Athenäum-Verlag, pp. 241-73.

Dumke, R. 1984. “Der Deutsche Zollverein als Modell ökonomischer Integration.“ In H. Berding, ed., Wirtschaftliche und politische Integration in Europa im 19. und 20. Jahrhundert. Göttingen, Germany: Vandenhoeck & Ruprecht, pp 71-101.

Fohlin, C. 2007. Finance Capitalism and Germany’s Rise to Industrial Power. Cambridge: Cambridge University Press.

Grant, O. 2005. Migration and Inequality in Germany, 1870 – 1913. Oxford: Oxford University Press.

Guinnane, T. 2021. Creating a New Legal Form: The GmBH.” Business History Review 95 (1): 3-32.

Gutberlet, T. 2013. “Mechanization, Transportation and the Location of Industry in Germany 1846- 1907.” Ph.D. Diss., University of Arizona.

Keller, W., and C. Shiue. 2014. “Endogenous Formation of Free Trade Agreements: Evidence from the Zollverein’s Impact on Market Integration.” Journal of Economic History 74, 1168-204

List, F. 1841. Das nationale System der Politischen Ökonomie.Stuttgart: Cotta.

Ploeckl, F. 2009. “The Zollverein and the Sequence of a Customs Union. Australian Economic History Review 33: 277-300.

Spree, R. 1977. Die Wachstumzyklen der deutschen Wirtschaft von 1840 bis 1880. Berlin: Dunker & Humboldt.

Spree, R. 2011. Die Industrialisierung Deutchslands im 19. Jahrhundert. Online publication. www.rspress.wordpress.com.

Streb, J., J. Baten, and S. Yin. 2006. “Technological and Geographical Spillover.” Economic History Review 59: 347-73.

 

Simone A. Wegge is Professor and Chairperson at the Department of Economics at the College of Staten Island and a member of the doctoral faculty at the Graduate Center, both of the City University of New York. Her recent publications include “Inheritance Institutions and Landholding Inequality in Nineteenth-Century Germany: Village-Level Evidence from Hesse-Cassel” (Journal of Economic History, 2021), and, with Tyler Anbinder and Cormac Ó Gráda, “Networks and Opportunities: A Digital History of Ireland’s Great Famine Refugees in New York” (American Historical Review, 2019).

Copyright (c) 2022 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 2022). All EH.Net reviews are archived at https://www.eh.net/book-reviews.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century
20th Century: Pre WWII

Central America’s Forgotten History: Revolution, Violence, and the Roots of Migration

Author(s):Chomsky, Aviva
Reviewer(s):Hübner, Jamin Andreas

Published by EH.Net (August 2022).

Aviva Chomsky. Central America’s Forgotten History: Revolution, Violence, and the Roots of Migration. Boston: Beacon Press, 2021. 294 pp. $25.95 (paperback), ISBN: 978-0807056486.

Reviewed by Jamin Andreas Hübner, LCC International University and University of the People.

 

It is often disturbing how uncritically economic history tends to treat imperialism and colonialism. (I recently described some of these problems in my review of The Economic History of Colonialism; see Capital & Class 46:1). There are, however, new works of social, political, and economic history that don’t make the repeated errors of eurocentrism and instead use primary sources that give voice to the unheard and suppressed. Historian Aviva Chomsky’s Central America’s Forgotten History is one of these books. It explores the true human costs of interventions that are often justified in the name of “economic development.”

The book basically explains why so many people have been and are immigrating to North America from Central America and how American economic interests led to the invasion, occupation, conquering, and violent suppression of peoples and societies in Central America. Importantly, it restores and re-centers the memories of witnesses of these events.

The first section discusses how memory suppression favors certain economic and political goals, and outlines the major markets (coffee, bananas, etc.) and the central role of anti-communist Cold War rhetoric in these American interventions. The second section looks at each place and episode of crisis and economic imperialism (from roughly the late 1800s to 1990s): Guatemala (ch. 4), Nicaragua (ch. 5), El Salvador (ch. 6), and Honduras (ch. 7). Chapter 8 looks at Central American solidarity in the United States. The last section looks at what happened in Central America the last forty years in light of American foreign policy, from the neoliberal program of Ronald Reagan’s administration to the immigration restrictions of Donald Trump’s.

Chomsky highlights the “Good Neighbor Policy” in Guatemala during the 1930s and its connections with the New Deal. “Too much democracy had allowed workers, peasants, and the government to challenge” US corporations; “United Fruit discovered that it was much more profit to do business with a dictator than with a democratic president” (p. 46). Furthermore, with the rise of Soviet communism, “Cold War counterrevolution targeted not only communism but virtually any movement for social change” (p. 46). The military dictator Jorge Ubico “subjected Indians to forced labor,” “provided tax exemption for the United Fruit Company and [invited] the United States to establish its first military base in the country” (p. 48). By the 1950s, most of the country’s exports went to the U.S. When the country elected a reformist (who proposed to outlaw forced labor, redistribute land, and grant rights to peasants), the America CIA orchestrated a violent overthrow of the government in 1953-54, and purged the land of “communists” (anyone who resisted, unionized, or refused to work for private capital). Investors wrote the economic laws; American oil companies wrote laws for drilling, the Bank of America revised the bank code and opened branches in the country and government loans were granted to buy products from General Motors. “For US businesses …the coup brought magnificent windfalls” (p. 76).

Then came big economic shifts. “First came the cotton boom…For peasant farmers, cotton meant eviction…forced recruitment through debt and low wages…child labor,” etc. (p. 54). Then came the “beef boom,” which created few jobs but absorbed massive amounts of land—all while the population exploded in growth. While multinational companies profited, these changes caused mass malnutrition for Guatemalans and economic servitude; “by the early 1980s, all five Central American companies held debts significantly larger than their annual earnings” (pp. 56-57). The people resisted by forming economic cooperatives and latched on to Liberation Theology amidst their Catholic tradition and offered an alternative society. “They established hospitals, health clinics,” training programs, and other essential services that the “free” market failed to produce (p. 83). The U.S. tried to train Guatemalans to invade Cuba on their behalf, but this effort failed miserably. Meanwhile, factories continued to be built for textiles, canned foods, soda pop, shoes, where workers were “surrounded by barbed wire, guarded by armed men and police dogs, and patrolled inside by armed supervisors” (p. 85). When the people rose up in revolt in the late 1970s to 1983, the government enacted scorched-earth violence, massacres, executions, displacement, and genocide of indigenes (pp. 90-94)—and then facilitated a civil war. Although military aid from the US officially ended in 1977, the country has not recovered from such trauma.

In Nicaragua, the US occupied the country for most of the first third of the twentieth century, to ensure that no other country built canals for competing economic trade. In the late 1970s a revolution led by the Sandinistas rose up against the Somoza family dictatorship and gained control (p. 99). Chomsky writes that the Sandinista government, despite armed opposition, got off to an impressive start:

“The gains of the first years of the revolution were close to astonishing. Land reforms transformed the agricultural structure and increase productivity, both in basic grains like corn, beans, and rice, and in exports like sugar and coffee. The population was eating more—significantly more—and imports of basic grains dropped close to zero. Public health campaigns reduced or eradicated malaria, polio, measles, and tetanus, and the infant mortality rate dropped by a third. Hundreds of new schools were built… [the revolution had] extraordinary mobilization, voluntarism, flexibility and optimism.” (p. 105).

Conservatives in the U.S. sought to take Nicaragua back and get its people, institutions, and land working for American capital. Chomsky carefully explains how Reagan fought hard during his Presidency—on behalf of investors, and against Congress and public opinion—to cover up his administration’s illegal war against Nicaragua.

In El Salvador the coffee industry had long exploited workers, much as it had in Nicaragua. American companies moved in during the 1960s. “When the country implemented the first rural minimum wage in 1965, coffee planters responded by simply expelling peasants from their plantations. The cotton, sugar, and cattle revolutions after WWII concentrated more fertile land in the hands of the oligarchy and further squeezed El Salvador’s peasants…” (p. 125). The country suffered decades of civil war, regime change, and constant U.S. intervention.

Honduras was arguably the training ground for these economic programs, and in the 1980s it was literally the training ground for the U.S.-financed contra rebels attempting to overthrow the Sandinistas in Nicaragua. (Thus the nickname “The USS Honduras.”) In addition to special economic zones, neoliberal land reform in the 1990s privatized the real estate market and essentially removed collective and cooperative lands from the people so that private companies could monetize the palm oil market (pp. 156-57). In familiar fashion, a leftist, socialist-oriented President was elected by the people in 2005 and then deposed in 2009 in a coup that Chomsky describes as western- and U.S.-backed. Thereafter, free-market reforms created mass poverty (66%) and doubling of unemployment (p. 161). Foreign investors, however, profited well—which would seem to have been the point.

By the end of the book, it is all too clear why so many people from Central America are moving North, and why Trump’s “shithole countries” remark about some Central American (as well as African) countries actually points to the legacy of American imperialism. It’s also clear why few in America want to remember this legacy.

Central America’s Forgotten History is similar to Naomi Klein’s Shock Doctrine and Jonathan Katz’s Gangsters of Capitalism, both of which look at the devastating effects of American economic interventionism in Central and Latin America. Chomsky gives more attention to the role of the Catholic Church, social repression, and provides a sweeping, lucid narrative summary of this history. Given the effects and sheer scale of these interventions, they deserve recognition not just from political and social historians, but from economic historians as well.

 

Dr. Jamin Andreas Hübner is a faculty member at the University of the People and LCC International University. He is a scholar of religion and economics, as well as an activist, and organizational leader, and is currently writing a book on cooperative economics.

Copyright (c) 2022 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 2022). All EH.Net reviews are archived at https://www.eh.net/book-reviews.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Economywide Country Studies and Comparative History
Military and War
International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII
21st Century

How the World Became Rich: The Historical Origins of Economic Growth

Author(s):Koyama, Mark
Rubin, Jared
Reviewer(s):Mokyr, Joel

Published by EH.Net (July 2022).

Mark Koyama and Jared Rubin. How the World Became Rich: The Historical Origins of Economic Growth. Cambridge, UK: Polity Press. x + 259 pp. $24.95 (paperback), ISBN 978-1509540235.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

 

Full disclosure: this reviewer’s name appears on the back cover of this book having written an endorsement, known as a blurb. Given that in the 40 words of an endorsement one can say very little, this book merits a more detailed discussion.

Any scholar teaching economic history and wishing for an up-to-date survey of a large and important literature will find it useful to read this book to bone up on the recent research listed in the long and encompassing list of references. Furthermore, they should seriously consider having their students read it for their class. The book is a wide-ranging yet remarkably complete and accessible survey of the Great Enrichment, the emergence of modern and prosperous economies that provide us with a material standard of living that our ancestors could not have dreamed of. How and why modern economic growth occurred when and where it did, and how economists have tried to understand this phenomenon, is the theme of this book. It is written by two of the finest young senior scholars in our field, both with important contributions to the subject matter of this book.

Many of the issues this book raises are highly contentious in our profession, and for good reason: these are hard questions on which learned scholars can disagree and interpret the evidence in different ways. How much did institutions really matter? What was the role of culture in economic growth? Was geography destiny? What was the role of craft guilds in the economic development of early modern Europe? How to think about the role of imperialism and slavery in the Industrial Revolution and the subsequent growth of industrial powers? Were high wages good or bad for technological progress? Was war a positive factor in economic growth? Was the European Marriage Pattern a positive factor in the economic development of the Continent?

The ecumenical and balanced approach the authors take to these questions is much like the Rabbi in a famous Jewish story. According to the legend, a rabbi is holding court in front of a large audience of his pupils. A husband and wife appear before the rabbi, to discuss their troubled domestic life. First the husband gets to lay out his case, and he lists all the sins and vices of his wife. The Rabbi listens carefully and pronounces his verdict: the husband is in the right. Then his pupils appeal to him: you should hear the wife’s case as well. The Rabbi consents and listens to the woman lays out her powerful case against her lazy and violent husband. He then announces his second verdict: the wife is in the right. His best pupil protests: but Rabbi, how can they both be in the right? The Rabbi listens and pronounces: the pupil is right too.

Rubin and Koyama present balanced and fair surveys of made in the literature, but they are reluctant to take strong positions. Such an ecumenical approach sets them apart from Clark’s Farewell to Alms and McCloskey’s Bourgeois Dignity, where the authors take up similar issues but in a much stronger opinionated mode. That thoughtful and measured approach of the survey, its elegant and crystal-clear style, and the authors’ impressive knowledge of a large and complex literature make this book nothing short of ideal for teaching advanced courses on global economic history to economics students.

It is especially refreshing to see a book such as this that pays explicit attention to institutions and culture, two themes that until not so long ago were taboo in our field but now seem to play increasingly central roles. The book contains full chapters on each, and while the discussion is naturally far from exhaustive, the authors do an excellent job summarizing some of the best work in these areas. What remains, of course, unsolved is why different nations develop different institutions and how and why such institutions change over time and how exactly cultural beliefs help determine the institutions that society ends up with.

The one issue on which the book takes a relatively strong position is on the issue of European imperialism and the importance of slavery and the slave trade to the Industrial Revolution and the origins of Western technological leadership (chapter 6). In recent years the “new history of capitalism,” in its zeal to blame the West and Capitalism for all the ills of the world, has argued that the West grew rich largely at the expense of the Africans and Asians whom Europeans mercilessly enslaved, sold, and exploited. As more sophisticated and economically literate scholarship has shown, the famous thesis by Eric Williams and recent proponents (e.g., Berg and Hudson, 2021) that somehow the Industrial Revolution depended on European imperialism and the Atlantic slave trade cannot be seriously defended. While Atlantic ports have been shown to have been crucial for subsequent economic development (Acemoglu, Johnson and Robinson, 2005), the exact causal chains are still unclear, and Koyama and Rubin stress sensibly that without institutional support for technological progress, without a rule of law and constraints on the executive, and without a comparatively inclusive society, no amount of colonialism and oppression of non-Europeans would have triggered modern economic growth.

The insight that economists have brought to this literature is that economic growth is fundamentally a positive-sum game: on a global level, the economic success of the West did not — on average — impoverish the Rest. In the long haul it made the entire world much richer than before — just not quite as rich as Europe and its offshoots (with some major exceptions such as Japan and Singapore). The causality is more complex. Whatever it was that made Europe learn to control energy and materials as well as run their economic systems better, also allowed them to manipulate and exploit Asians and Africans. But if anything was causal here, it was not that Imperialism caused the Industrial Revolution but the reverse: as Daniel Headrick in his classic work on the topic (1981) showed decades ago, what made western Imperialism possible above all was better technology (see also Hoffman, 2015).

Moreover, it is striking how poorly the historical fit between Imperialism of any kind and economic growth really is. The Roman Empire was the mother of all predatory empires, yet it did not industrialize and experienced only limited technological change. Eighteenth century China and Russia both added enormous stretches of land to their realms, with no noticeable effects on economic growth. The British Industrial Revolution coincided with the loss of the North American thirteen colonies. While Britain was a successful commercial and maritime nation, the Smithian gains from trade with its Empire — as Deirdre McCloskey (2010) has persuasively argued — were by themselves never enough to trigger the Industrial Revolution, much less create the Great Enrichment. In per capita terms, one of the largest colonial empires was the Dutch one in the East Indies, yet it did not help the Dutch industrialize until late in the nineteenth century. Belgium initiated its lamentable adventure in the Congo only after it had industrialized. Perhaps most strikingly, the European imperial venture collapsed after World War II, yet those were exactly the years during which economic growth in Europe was most rapid — with the exception of Russia (which maintained its colonial empire until 1991). In short, Koyama and Rubin conclude that colonialism and the slave trade “played a large role in the making of modern world” (a suitably vague statement) but that evidence is “mixed” on whether it was responsible for the world becoming rich (a polite pronouncement of a Scottish verdict: not proven).

Where the book truly shines is pointing out why the Great Enrichment was relatively late in coming and why the pre-1750 world — with a few exceptions — remained poor. The authors admirably survey the consensus that has emerged on the subject. Three major factors held the economies back. First, as neo-Malthusians such as Galor and Clark have maintained, before 1750 population growth in many cases wiped out the fruits of productivity growth, such as they were. Second, predators of various kinds and extractive institutions (North-Wallis-Weingast’s “natural state”) not only pillaged and plundered the riches of the few places that had been economically successful, they extinguished incentives to invest and innovate. Finally, until institutions had been established to govern and control the accumulation and dissemination of useful knowledge, the opportunities for sustained technological progress remained too limited. As the authors point out in admirable detail, the Industrial Revolution meant that these three brakes on economic progress slowly dissolved to create the Great Enrichment, first in a few economies in the West, then in more and more places around the world.

At the end of the day, as the authors sum up in chapter 11, in 2022 “the world is rich.” Almost anywhere one lives in this world, material life is in all likelihood better that it was a century, let alone a millennium, ago. A rising tide lifted most ships on the planet, but rather unequally, and while global poverty and famine are a fraction of what they were in 1800, they are still with us — mostly because of incompetent or tyrannical governance. What is perhaps worth noting, however, is that while technology keeps advancing, with novel breakthroughs opening new horizons in material sciences, molecular genetics, energy physics, and much more, there seems to be little if any long-term progress in the institutions that underlay the economic miracles of the past two centuries. Not only do countries with weak institutions such as Russia seem to lack the capability to adopt more inclusive and open governance, but even in nations long committed to the Enlightenment visions of freedom, human rights, and democracy, the institutions that helped make us rich seem ever more fragile. The conflict between ever-more powerful technology and the brittle polities that deploy it may be the greatest challenge to our future.

References

Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2005. “The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth.” The American Economic Review 95 (2005), pp. 546-579.

Berg, Maxine, and Pat Hudson. 2021. “Slavery, Atlantic Trade and Skills: a Response to Mokyr’s ‘Holy Land of Industrialism’” Journal of the British Academy, Vol. 9, pp. 259–281.

Clark, Gregory. 2007. A Farewell to Alms. Princeton, NJ: Princeton University Press.

Galor, Oded. 2011. Unified Growth Theory. Princeton, NJ: Princeton University Press.

Headrick, Daniel R. 1981. The Tools of Empire. New York: Oxford University Press.

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

McCloskey, Deirdre. 2010. Bourgeois Dignity: Why Economics Can’t Explain the Modern World. Chicago: University of Chicago Press.

North, Douglass C., John Joseph Wallis, and Barry Weingast. 2009. Violence and Social Orders. Cambridge: Cambridge University Press.

 

Joel Mokyr is the Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and History at Northwestern University, and Sackler Professor, (by special appointment) at the Eitan Berglas School of Economics, Tel Aviv University. His most recent book is A Culture of Growth (Princeton University Press, 2017).

Copyright (c) 2022 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 2022). All EH.Net reviews are archived at https://www.eh.net/book-reviews.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Servitude and Slavery
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

New Perspectives on Welsh Industrial History

Editor(s):Miskell, Louise
Reviewer(s):Evans, Shaun

Published by EH.Net (March 2022).

Louise Miskell, ed. New Perspectives on Welsh Industrial History. Cardiff: University of Wales Press, 2020. xiv + 268 pp. £24.99 (paperback), ISBN 978-1-78683-500-0.

Reviewed for EH.Net by Shaun Evans, School of History, Law and Social Sciences, Bangor University.

 

In April 2016 the National Assembly for Wales was recalled to consider interventions which would alleviate the urgent situation facing the Welsh steel industry. In his statement on the issue the then First Minister, Carwyn Jones, concluded with an assertion that:

Steel production is not just about statistics and the economy, vital though they are: it’s a fundamental part of who we are as a country. So, the clear message that needs to go from this National Assembly today to all our steel communities … is that we stand beside you, shoulder to shoulder. [Applause.]

(Statement on Tata Steel, Welsh Assembly, 4 April 2016)

The speech encapsulates the prominence of heavy industry as part of the national fabric and consciousness of Wales: ‘a fundamental part of who we are as a country.’ It also evinces how industry tends to be viewed from a Welsh perspective – with an emphasis on community, livelihood and identity over statistics and the economy. Such a viewpoint is fundamental to the original and varied collection of essays brought together in New Perspectives on Welsh Industrial History; one of its prime objectives is to put statistics, quantitative analysis, and the economy back into the study of the modern Welsh past.

In a valuable and wide-ranging introduction, Louise Miskell teases out the nature and status of economic history studies in Wales since the beginning of the twentieth century, reflecting on the key trends, developments, projects, and approaches. She argues that economic history has never taken root in Welsh academia in the same way it has done in England, partly because of a perception that the historical industrialisation of Wales was a non-Welsh process (reliant on outside capital and instigating anglicisation of Welsh communities) and in part because of the challenge of identifying and defining a distinctive ‘Welsh economy’ not wholly bound up in wider British economic activity. More fundamental still is the fact that it was themes and questions of society, culture, nation, and identity which tended to shape the study of Welsh history across the twentieth century; including the emergence of a thriving brand of labour history as the dominant framework for analyses of industrial communities in Wales. Working-class experience, social life, characteristics of industrial communities, workplace relations, protest, and industrial disputes on issues of wages and working conditions have tended to predominate over economic analyses in the labour history tradition in Wales. Miskell notes a general reluctance amongst historians of Wales to engage with statistical analysis; an ‘anti-numerical’ tradition which has hindered the development of economic assessments of Wales’ past.

The collection of essays, from Miskell and seven other scholars, in New Perspectives is designed to rebalance these scholarly deficits and biases; reassess and transcend traditional stereotypes; articulate a more diverse picture of the Welsh industrial past; and outline new directions, themes, and questions to be pursued across the next generation of Welsh industrial and economic history. In these respects, the volume is a resounding success, pooling original case studies and interpretations to enrich established knowledge and understanding of industrial activity in Wales across the nineteenth and twentieth centuries, towards the dawn of Welsh Devolution in 1997. The presence of meticulously researched essays emanating from recent doctoral projects and in-depth archival analysis is particularly encouraging. The most important new directions or perspectives can be grouped into four core themes:

(1) Interrogation of the global interconnectedness of Welsh industry runs as a thread across many of the essays, ranging from the role of Welsh copper in British colonial activity and transatlantic slavery; to the coal trade between Wales and France across the long-nineteenth century; to the post-1945 iron-ore mining ventures of the Steel Company of Wales in Mauritania, west Africa. These outward-facing assessments of the intricacies of supply chains, imports, products, exports, and markets contribute to a more complex and comprehensive understanding of Wales’ place in the world and involvements in British economic, foreign, and colonial affairs across the modern period.

(2) The essays address the issue that the perspectives of employers, owners and companies have often been absent or marginalised in previous studies of Welsh industrial history. The rallying call here is to unlock the research potentials of the archives and records produced by businesses, industrial owners, and managers. In the volume this materialises with a fascinating study of the approach of industrial owners and managers towards employee welfare circa 1840-1939. The implication is that that relations in industrial communities were often far more nuanced than the simplistic exploitative employer/exploited worker binary exhibited in parts of the labour history tradition. This theme is further illuminated through an intricate analysis of worker relations during the industrial disputes at the Port Talbot Steelworks, 1945-79.

(3) The collection includes studies which examine the role of the State in the economic development of Welsh communities from the second half of the twentieth century. This includes an assessment of government-supported manufacturing ventures (e.g., Dunlop factory, British Nylon Spinners factory) and a wide-ranging study of the policy objectives and achievements of the Welsh Development Agency (1976-2006) in promoting Wales as a location for industrial investment.

(4) Another achievement of the collection is its widening of the lens of study beyond the core pillars of Welsh industrial history: coal and iron. This encouragement of a broader assessment of economic and industrial activity will serve to enrich the overarching historiography of Wales, disrupting stereotypes and articulating a more inclusive, complex, and diverse picture of society, culture, and landscape. In this respect, the inclusion of a meticulously researched essay on domestic service is especially refreshing. It not only underlines the essential and commonplace contributions of women to economic activity, but it provides part of a framework for connecting the study of industrial and urban Wales with the study of rural Wales and its deeply rooted farming-based economy. As signposted by this volume, a more complete understanding of Wales’ economic history will require historians to move beyond traditional methodological approaches, conceptual boundaries, and disciplinary limits.

It is inevitable that an edited collection of essays deriving from workshop proceedings will exhibit gaps; the editor admits that there are important sections of the Welsh economy not represented in these New Perspectives. Any criticism of a volume which contributes so much should be rightly viewed as pedantic on the part of this reviewer. At the heart of the 2016 Steel Crisis, when so much political and media attention was understandably fixed on the future of Port Talbot, the cries from Flintshire were: ‘yes, but don’t forget about Shotton.’ To put it too bluntly, this volume unintentionally projects a misconception that industrial and economic activity in Wales’ past was confined to southeast Wales, which has implications for how other areas of Wales are perceived. There are of course exceptions to this generalisation within the essays. Nevertheless, the important New Perspectives and areas for future analyses outlined in this volume should be applied to a broader geographical conception of Welsh industrial and economic history. The slate landscapes of Gwynedd have recently been awarded UNESCO World Heritage Status: an economic history of the local quarrying and global industry attached to these landscapes is desperately required. The lead mining and woollen industries of mid-Wales, north Wales coalfield, Parys copper mine in Anglesey, Bersham ironworks and Brymbo steelworks, Greenfield Valley and manufacturing industries of Deeside, together with the array of industries and businesses operating from rural, coastal, and high-street arenas, are amongst the spheres of economic activity which should be embraced by the new economic and industrial history of Wales. New Perspectives provides essential parts of the roadmap for this historiographical endeavour.

 

Shaun Evans is Lecturer in Early Modern and Welsh History in the School of History, Law and Social Sciences at Bangor University and Director of the Institute for the Study of Welsh Estates (http://iswe.bangor.ac.uk). His research focuses on society, culture, and landscape in Wales circa 1500-1900, and he is co-editor of Land Reform in the British and Irish Isles since 1800 (Edinburgh, 2022).

Copyright (c) 2022 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 (March 2022). All EH.Net reviews are archived at https://www.eh.net/book-reviews.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Economywide Country Studies and Comparative History
Industry: Manufacturing and Construction
Labor and Employment History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Between Empire and Globalization: An Economic History of Modern Spain

Author(s):Carreras, Albert
Tafunell, Xavier
Reviewer(s):Prados de la Escosura, Leandro

Published by EH.Net (November 2021).

Albert Carreras and Xavier Tafunell. Between Empire and Globalization: An Economic History of Modern Spain. Palgrave Studies in Economic History. London: Palgrave Macmillan, 2021. x + 350 pp. $140 (hardcover), ISBN 978-3-030-60503-2.

Reviewed for EH.Net by Leandro Prados de la Escosura, Emeritus Professor of Economic History, Universidad Carlos III.

 

This is a long overdue English-language textbook on modern Spanish economic history. Earlier ones appeared twenty and forty years ago (Harrison, 1978; Tortella, 2000) and were far less comprehensive. In fact, the reader has to go back half a century to find a more ambitious project (Vicens Vives, 1969), which encompassed from the Neolithic to the 1950s. Although the book is rightly timed, it appears paradoxically at a time when courses on Spanish economic history are rarely taught to economics undergraduates in Spanish universities.

The book offers an overview of Spain’s economic performance during the last two centuries in which Spain’s integration into the international economy and the role of government occupy a central position. Assessing how Spain reacted to globalisation and modern economic growth in advanced countries is the main goal of the volume. Five dimensions: institutional change, broad capital (physical and human) formation, structural change, internationalization, and government intervention are highlighted by the authors. Geographic constraints (physical relief, lack of navigable rivers, dry and extreme weather, and location) complete the picture, adding a negative background. The stress on adverse geography continues a venerable tradition of which Gabriel Tortella’s textbook is an exponent. A major conclusion of the volume is that “the best times for the Spanish economy are always linked to increases in the degree of openness” since “trade closure has tended to be a factor in curbing growth, while openness has promoted it” (pp. 284, 299).

The structure of the book is chronological with two overviews, one that presents long run trends in economic performance, followed by an overall assessment. Different phases are distinguished: three in the “long” nineteenth century: 1789-1840, 1840-90, and 1890-1914; and seven in the next hundred years: 1914-36, 1936-51, 1951-59, 1959-73, 1973-85, 1986-98, and 1999-2017. The post- World War I periodisation corresponds to an institutional perspective, rather than to differences in economic performance, which might have led the authors to single out the fast-growing 1920s and a phase of growth (1986-2007) and another of crisis and recovery (from 2008 onwards) after Spain’s accession to the European Union.

Although the authors claim that they “have avoided debates and have sought to build on wide interpretative consensus” (p. 104), their comprehensive assessment of modern Spain’s economic performance is two books in one: an analytical description, as corresponds to a good conventional textbook, and an interpretation. However, the interpretation is mainly restricted to the “long” nineteenth century. The chronological limits of the interpretation are attributable to the comparative absence of historical debate on the post-1914 period, which suggests, in turn, a lack of research (Prados de la Escosura and Sánchez-Alonso, 2020). The “long” nineteenth century debate is presided over by a dilemma that, according to the authors, economic agents faced: either imitate Britain and industrialise, or give up and become its suppliers. The dilemma is not far from that one presented by W. Arthur Lewis (1978) for world regions between 1870 and 1913. The second option, they argue, suited ‘Spanish economic lobbies” but not Catalan and Basque entrepreneurs, and eventually prevailed.

What are the strengths and weaknesses of the volume? A major strength is its impressive and ambitious picture of modern Spain, covering every angle of the international debate on industrialisation and globalisation and providing a new, accurate, and up-to-date description of Spanish economic progress during the last 60 years.  It can be easily argued that the present book represents a landmark not only in Spanish economic history but in international economic history, as few countries, including those of Western Europe and its offshoots, have a comprehensive, well-written, and appealing textbook like this one.

On the downside, the main weakness of the book is that it follows the historical literature too closely for each period, often rendering a fragmented picture. More importantly, the overall macroeconomic view provided in the first and the last chapters is often neglected and even contradicted by the sectoral and piecemeal evidence discussed in the rest of the volume. The book, originally published in Spanish in 2004, has gone through successive updates and this perhaps explains the unsolved tension between the historical literature views and the macroeconomic context. Had the authors presented each chapter within the framework of chapters 1 and 12, the contributions of sectoral developments and economic policies would have been highlighted and the narrative would have been more consistent.

Examples of this mismatch are the contrast between the authors’ pessimistic assessment of the half-century between 1840 and 1890, which they label a “double failure.” For this they draw on old debates on protectionism vs. free trade, as well as the railways’ construction as a speculative bubble and a missed opportunity for domestic industry’s expansion, despite the evidence of fast aggregate growth based on capital accumulation and efficiency gains, in which the railways played a far from negligible part. Similarly, the authors place stress on “weak” domestic demand for cotton and iron and steel goods and poor incentives for industrial development from international markets, even though aggregate industrial output and productivity thrived.

Another shortcoming is the neglect of well-known contributions, such as Pedro Fraile Balbín’s (1991) work on the political economy of protectionism, which would have added a missing dimension to the volume’s narrative, as well as important insights. Occasionally, important additions to the literature are neglected or referred to the further reading section of each chapter, with the unintended consequence of missing views that may have provided new paradigms. Let us consider the case of the first globalisation, which, as shown by Kevin O’Rourke and Jeffrey Williamson (1999), represented a pervasive phenomenon including a dramatic reduction in transport and communication costs and a change in attitudes toward trade. In their analytical framework, protectionist policies appear only as a way to mitigate globalisation effects and temporarily delay the unavoidable. Consequently, the old protection-free trade view, in which trade was halted when a phase of liberalisation, as presented in this book, was replaced by one of high tariffs, needs to be revised. Moreover, the distributional effects of raising tariffs are largely neglected in the historical literature of Spain that the authors follow so closely. Protectionism would plausibly have led to a pro-landowner income distribution, a hypothesis supported by the increase in aggregate income inequality. Lastly, the neglect of recent literature is also evident in assertions such as “protectionist measures had an undeniable impact on emigration, reducing it” (p. 95). This was proved wrong by Blanca Sánchez-Alonso (2000), who showed that protection would have pushed workers to emigrate, as one would expect in a simple Heckscher-Ohlin model, in which trade provides an alternative to factor mobility. The authors seem to ignore that it was the depreciation of Spanish currency that prevented migration, by reducing potential emigrants’ purchasing power.

These critical aspects, which can be certainly addressed in next editions, do not detract from the relevance of the book under review. This volume represents a tour de force survey of modern Spanish economic history in the context of international debates on growth and development. I do, therefore, strongly encourage any reader interested in the performance of a middle-income country during the age of globalisation to read this book, as it provides not just a narrative about Spain’s economic history but useful insights that may be the seed of further research.

References:

Fraile Balbín, Pedro. 1991. Industrialización y grupos de presión. La economía política de la protección en España, 1900-1950. Madrid: Alianza.

Harrison, Joseph. 1978. An Economic History of Modern Spain. Manchester: Manchester University Press.

Lewis, W. Arthur. 1978. Growth and Fluctuations, 1870-1913. London: George Allen & Unwin.

O’Rourke, Kevin H., and Jeffrey G. Williamson. 1999. Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press.

Prados de la Escosura, Leandro, and Blanca Sánchez-Alonso. 2020. “Economic Development in Spain, 1815–2017.” Oxford Research Encyclopedia of Economics and Finance. Oxford: Oxford University Press.

Sánchez-Alonso, Blanca. 2000. “European Emigration in the Late Nineteenth Century: The Paradoxical Case of Spain.” Economic History Review 53, 2: 309-330.

Tortella, Gabriel. 2000. The Development of Modern Spain: An Economic History of the Nineteenth and Twentieth Centuries. Cambridge, MA: Harvard University Press.

Vicens Vives, Jaime. 1969. An Economic History of Spain. Princeton: Princeton University Press.

 

Leandro Prados de la Escosura is Emeritus Professor of Economic History, Universidad Carlos III and a CEPR Research Fellow. His research into growth, inequality, and development includes Spanish Economic Growth, 1850–2015 (Palgrave Studies in Economic History, 2017).

 

Copyright (c) 2021 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 2021). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

New Perspectives on Political Economy and Its History

Editor(s):Marcuzzo, Maria Cristina
Deleplace, Ghislain
Paesani, Paolo
Reviewer(s):Kates, Steven

Published by EH.Net (March 2021)

Maria Cristina Marcuzzo, Ghislain Deleplace and Paolo Paesani, editors, New Perspectives on Political Economy and Its History. Cham, Switzerland: Palgrave, 2020. xviii + 406 pp. $149 (hardcover), ISBN: 978-3-030-42924-9.

Reviewed for EH.Net by Steven Kates, School of Economics, Finance and Marketing, RMIT University (Melbourne, Australia).

 

There was a time that one might have said that economic theory was comprised of a series of concepts that help explain the way communities provision themselves and became more prosperous over time. Economic theory as it developed came in the wake of the pamphleteers of more ancient days who saw the world around them and thought there had to be a better way of getting things done. They therefore wrote polemical accounts aimed at addressing various problems as they saw them, to try to persuade others to take up the approaches they were attempting to advocate.

Meanwhile, almost from out of nowhere came the Industrial Revolution. It was not a consequence of Adam Smith having written his Wealth of Nations. The two just appeared on the scene at roughly the same time, and some — observing the world they were living in, while also reading Smith’s account of how economies worked — came to the conclusion that there was some actual theoretical knowledge that might assist in the improvement of the way in which economies grew and prospered. That is how we came to have the classical school first, and then the major critiques of the socialist writers, with Marx and Sismondi among the most significant.

The classical economists observed the world, saw the tremendous growth in output and living standards and, correctly in my view, came to the conclusion that it was the role of private entrepreneurs that had made the difference. Within the community, if it were designed in a way that allowed individuals to pursue their own best interests as they saw them, there would be a rearrangement of productive forces in response to where the greatest return on investments would occur. Output rose, innovations occurred, and as a direct result living-standards rose. It may appear to many of us looking back on those times that the social costs were immense, but many of those who were living at the time were content that England should exchange its “green and pleasant land” for a highly productive economic structure that allowed many individuals to move forward in what they could earn and in the range and quantity of the goods and services they could buy.

But the costs were high, and memories were short. Henry Mayhew’s London Labour and the London Poor, which he began in 1849 as an investigative journalist and which was finally published in 1861-62, brought the tremendous social costs into the limelight (Mayhew 1985). He was hardly the first to do so, but Mayhew’s work stands out as a depiction of the burdens that had befallen the newly formed proletariats of the industrial age. It was the appearance not just of poverty, which had till then been universal, that mattered, but the agglomeration of entire industrial suburbs that focused attention on the world as it had become. Dark satanic mills had become the way of the world.

What also was new in the world at the time was the business cycle, the periodic ebb and flow of economic activity which came at such a tremendous cost to the working classes. It was one thing to be mired in poverty. It was another thing entirely to find that the low wages upon which individuals depended would suddenly disappear, and for reasons utterly beyond the control of the workers themselves, indeed beyond the control of anyone. And while there was no denying the spectacular growth not just in the volume of output but in the assortment of goods and services that came into existence, there was also disquiet at the disruptions and harm that could be visited on individuals and their families because of the disruptions in their working lives.

And while this overview of the years of the Industrial Revolution is part of the background knowledge of every economist, the need for a means to account for how the industrial world operated was required as well as some means to control the forces that had been let loose upon the world. There was the positive side that came in terms of production. But there was the negative side that came in relation to the polluted cities that had sprung up and the uncertainties that had become embedded within the lives of so many individuals. And this is where the history of economic thought comes into the story.

Economists are the inheritors of the latest manifestations of the theory of the economy that more or less satisfies most of the profession. There are now theories of such astonishing abstraction that it is almost impossible any longer to look into what economists believe they know and truly understand how the economic world is structured or what can and should be changed to improve the operation of the productive aspects of our economies. Which brings us to the book under review, New Perspectives on Political Economy and Its History, a collection of readings edited by Maria Cristina Marcuzzo, Ghislain Deleplace and Paolo Paesani. This is how they describe what they are attempting to do in their Introduction.

In contrast to the reorientation of political economy implemented by Keynes with his General Theory less than seven years after the 1929 Wall Street crash, no substantial change in the mainstream approach to economics can be detected twelve years after the collapse of Lehman Brothers. The same Dynamic Stochastic General Equilibrium (DSGE) model which had been unable to anticipate the crisis still rules research, teaching and economic policy, only marginally modified to take account of the most obvious flaws of the economic system. In this intellectual environment, going back to past authors may be of some help, not to fuel nostalgia for times gone by but to explore modern economic issues along new perspectives — in short to build theory and understand facts. This is the task of the history of economic thought, when it is not understood as a graveyard for respected albeit no longer read authors but as a living corpus of debates on the same old issues shrunk and distorted by the present mainstream. (pp. 1-2)

I particularly agree with them on the role of the history of economics which I will repeat: the role of the history of economics is “to explore modern economic issues along new perspectives.” It may seem somewhat odd that one would delve into the past to find new perspectives, but given how hollow the understanding of most economists is of the theories that have come before the ones they have studied themselves, there truly is a vast ocean of economic theory unknown to virtually all economists that do have many perspectives that really might with great benefit be brought into the debates among economists today.

But here we come to the first obstacle. There is an enormous amount of learning that every economist must come to terms with in even being able to deal with the mainstream theories they are taught. Retreating to historic accounts does not provide an obvious wormhole through which new insights can be introduced among the wide array of perspectives that already exist within the profession. If one thinks of theory in relation to General Equilibrium, which is highly mathematical in its orientation, it seems like a major ask to suggest that economists abandon their present approach and return to completely foreign forms of analysis that existed at some point deep in the past. Suppose this is how one goes about thinking about things, which is an equation picked more or less at random:

ct + xt + G0exp(G˜ t) = yt

The meaning of the equation is of no significance so far as the point I am trying to make goes. It is only presented to compare and contrast a passage from a quite sensible argument presented by Sheila Dow in her chapter on “The Methodological Role of the History of Economic Thought.”

The history of economic ideas is important, not just for understanding theory itself, but also for understanding the subject matter of theory and how it has absorbed particular economic ideas. Karl Niebyl . . . presented a stage analysis of Classical monetary theory and policy whereby the dominant economic ideas of each stage are both the product of real experience, but also shape real experience, all mediated by power structures …. Prevailing academic ideas about monetary policy, the product of past experience, provide the basis for monetary arrangements and monetary policy, which then enable and constrain future possibilities for monetary policy. Given this temporal sequence and the tendency for past experience to be a poor guide to the future, these developments get out of phase, so that monetary arrangements and monetary policy get out of phase with reality and academic ideas take time to catch up, and so it goes on. (p. 32)

You can easily see the problem. Is it even possible for practitioners of these two ways of approaching economic theory to even begin to communicate with each other? And this is leaving all issues of political economy aside. These are just two methodologies now used to discuss economic theory. The number of economists who can understand both is vanishingly small. Unless a special effort is made to reach out to modern economists, the economics of earlier times will be utterly beyond their reach, assuming they can even be made to feel a wish to go back to these earlier forms of analysis.

Background Knowledge Required

Going further, if the aim is to interest mainstream economists in the history of economics, there needs to be some kind of overlap in these articles and the kinds of knowledge an economist would typically have. I have chosen for my example an issue of interest to myself, which overlaps both the writings of John Stuart Mill and the Wages Fund doctrine. The article is “Classical Roots of the Criticisms of John Stuart Mill’s Wage-Fund Theory” written by Antonella Stirati. The question that might well be asked is why would someone without a prior interest in Mill or the wages fund wish to read such an article? I, for example, do believe there is a good deal to learn about the operation of a modern economy through seeing what Mill and his classical contemporaries believed. Yet this is how the article begins:

The purpose of this contribution is to discuss the analytical contents of the criticisms levelled at J.S. Mill’s theory of the wage fund and accepted by him in his famous recantation of 1869. I will therefore disregard other important aspects of that debate, of a historical-political nature, particularly in relation to the controversy on the role and legitimacy of the trade unions.

The reasons for the interest in the analytical issues that emerged in the criticisms of the wage-fund theory lie in the fact that they take up and revive many aspects of Smith’s approach to wage determination. In so doing, they show its inconsistency with the wage-fund theory presented by Mill; that is, they show the existence of a conflict between Smith’s views, representative of the theory of wages proper to the classical political economy (from Petty to Ricardo) and the subsequently established theory of the wage fund. (p. 149)

The background knowledge in the history of economic thought that would be required to see what the author is attempting to argue is phenomenal. Indeed, one would already have to know what Mill’s wages fund theory is, what Mill recanted in 1869, and even have some knowledge and even interest in Adam Smith’s approach to wage determination. How much could anyone be expected to know about the theory of wages, especially from Petty (who?) to Ricardo. Where are such people? Where they are not is among the vast majority of the economics profession. And then after many pages we come to the conclusion:

Mill’s acceptance of the two main arguments advanced by Longe and Thornton in turn shows that the departure from the classical tradition was still flimsy, as a new, general analytical framework alternative to the classical approach was yet to become available. The absence of analytical foundations for a decreasing relationship between real wages and employment other than the simple and arbitrary assumption of a given wage fund led to rejection of the wage-fund theory. (pp. 166-67)

This would not only be incomprehensible to virtually every economist today, but almost all would not even see what the point of the struggle to read the article would be. And as it happens, even I who know what the point is, and where the argument is heading, disagree with this conclusion, not that it matters. What we therefore have is an article that argues that even Mill had not completely disassociated his economic argument from the classical tradition which would only come later on and be undertaken by others. Therefore, there is nothing there to learn since even before someone might have picked up this collection of readings they would have, sight unseen, rejected the wages fund doctrine as a sensible approach to understanding any part of how an economy works. (As a recent and contemporary example of how such an argument might be run even today, see Grieve 2020.)

Engaging Mainstream Economists

All authors have an agenda. There is some point they wish to get across to others. I do think there is an enormous amount of sound economic theory that remains embedded within the classical tradition that has now been lost to the modern world. Moreover, I believe that a modern economist who does not understand Mill, for example, is a much-diminished economist in comparison with an economist who does. I have even written an introductory textbook based on Mill’s Principles (see Kates 2017). I do not say that this is the only point in studying the history of economics, but it is one of the important streams in the role of HET. So let me come back to this passage from the Introduction:

In this intellectual environment, going back to past authors may be of some help, not to fuel nostalgia for times gone by but to explore modern economic issues along new perspectives — in short to build theory and understand facts (emphasis added). This is the task of the history of economic thought, when it is not understood as a graveyard for respected albeit no longer read authors but as a living corpus of debates on the same old issues shrunk and distorted by the present mainstream.

I could not agree more with the book’s ambition, but I am disappointed with the execution. I have written a book on this very issue, Defending the History of Economic Thought (Kates, 2013). And let me tell you that this is a highly controversial issue within HET, with many who argue that studying the history of economics should not be trying to use this part of the economics discipline to revive previous doctrines. Theirs is a kind of Whig history, in which there is only progress so that what we find in our textbooks and journals in the present is the final flowering of everything that came before. The history is merely to tell how we reached the supposed heights we have now scaled.

That is obviously how it must look since those who accept some theory must believe that what they have been taught is the best that has ever been thought and said, since if some previous theoretical approach were better, then surely we would be teaching that instead. Yet the reality is that there is an inertia in how issues are conceived. It is something of a cliché to recall that when Galileo dropped a heavy object and a much lighter object from the Leaning Tower of Pisa (or so the story goes) that this was an experiment that could have been undertaken any time during the past if it had occurred to someone to find out for themselves. It was only that the idea had never occurred to anyone else before. But that is not how it was among economists.

It was not as if John Stuart Mill had never considered utility as a means of estimating value. Mill was, after all, the leading utilitarian philosopher of his time. Jevons and his notion of final (marginal) utility may have struck most of his contemporaries as a step forward but then our own textbooks have almost entirely wiped themselves clean of marginal utility in the same way that DSGE has replaced Keynesian theory as the core concept underpinning economic analysis.

All very well, except that every economic downturn since the 1960s has immediately conjured the need for a stimulus, so that no matter how much we might pretend that Keynesian theory has more or less disappeared with our accumulating understanding of the ways in which an economy works, there Keynes remains, as central today as he was in 1936. No introductory textbook avoids Y=C+I+G. And when it comes to that, Keynes seems to have a quite central importance, certainly in the text under review, as shown by the following entry in the index:

Keynes, J.M., 1, 2, 4, 8, 15–17, 29, 32–34, 50, 56, 58, 225, 234, 281, 294, 303, 311, 314, 325–327, 329–331, 334–340, 344–359, 365–367, 370, 371, 374–379, 384–391, 394–397

In fact, there is little doubt that one of the central aims of the book is to assist in the return of Keynesian economic theory to the mainstream. And while I disagree with the specific aim, I am completely onside with the wish to use the history of economic thought in this way, to speak to other economists about how economies work in the real world based on the perspective of economists who are now long dead. This is directly stated in the final paragraph of the introduction.

In their attempt to provide new perspectives on political economy and its history, the eighteen essays collected in this book try to respond to the wish that economics might embark along a different route, whereby economists take into serious consideration past theories and concepts which have failed to survive in the evolutionary struggle of ideas for no good reason, but simply because they have been ‘submerged and forgotten’ with the shift of paradigms. (p. 17)

I too wish to see economics embark along a different route from the one it has taken. Not the different route that the editors of this volume would like to see taken, but nevertheless a different route. These are essays which are attempting to persuade the reader to adopt these different perspectives. And this is a very good thing and I only wish there were more efforts made to do the same.

Economic theory as it is now taught is near moribund. It is too mathematical, too mechanical and almost completely lacking in a philosophical core. There is no longer much of anything that one might describe as “the soul of economics.” The passions that were once central to economic debate have almost entirely evaporated. It is therefore a pleasure to see something of the old enthusiasms found in this book whose essays are largely by people who are trying to convince you of something about the nature of the world and the kinds of economic theories needed to understand it.

This may seem to clash with my earlier statement, that I could not agree more with the book’s ambition, but I am disappointed with the execution. My problem remains that too little effort was made to engage modern economists in a way that would allow those who have studied economics using modern techniques and mathematical analysis to see the difference between what they are taught and what classical economists taught. There is too much asked of readers who are not scholars in the history of economic thought. That was the challenge the editors had set themselves, to bring elements of the classical school within the reach of economists generally. That is an ambition I completely support. My only wish is that a greater effort had been made to explain the views of these earlier economists in a way that would be comprehensible to an economist who had not previously undertaken their own studies into these theories. Thus, I remain concerned that many of the articles in this volume will be understood only by those already versed in the history of economic thought, even while the aim of this book is one I could not agree with more.

References:

Grieve, Roy H. 2020. “Drop the Dead Donkey: A Response to Steven Kates on the Subject of Mill’s Fourth Proposition on Capital.” History of Economics Review: 20-36.

Kates, Steven. 2013. Defending the History of Economic Thought. Cheltenham UK: Edward Elgar.

Kates, Steven. 2017. Free Market Economics: An Introduction for the General Reader. Third edition. Cheltenham UK: Edward Elgar.

Mayhew, Henry. 1985. London Labour and the London Poor. Selections Made and Introduced by Victor Neuburg. Harmondsworth: Penguin Books.

 

 

Copyright (c) 2021 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 (March 2021). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

Classical Economic Theory and the Modern Economy

Author(s):Kates, Steven
Reviewer(s):Numa, Guy

Published by EH.Net (November 2020)

Steven Kates, Classical Economic Theory and the Modern Economy. Cheltenham: Edward Elgar, 2020. vi + 264 pp. $125 (hardcover), ISBN: 978-1-78643-356-5.

Reviewed for EH.Net by Guy Numa, Department of Economics, Colorado State University.

 

This book is about how little Steven Kates thinks of the “modern economy,” an umbrella term for all variants of Keynesian economics. Bold and pretentious statements abound. “Just about the whole of modern economic theory is perniciously wrong … there is virtually nothing useful one can learn from a modern economics text in how to manage an economy” (p. 1). “Economists know nothing whatsoever about the analytical depth of the classical economists” (p. 16). Kates aims “to explain why classical economics is vastly superior” (p. 17). Kates wants to convince us that he is “almost uniquely placed” to do so, though he acknowledges “how obscure [he is] within the world of economics” and notes that “virtually no one sees things as [he does]” (p. 17). This does not prevent him from boasting about how, as chief economist of Australia’s national employers’ association, he “never made a single wrong call on the economy or the effects of public policy” (p. 20). Unfortunately, the book is filled with errors. Relevant quotes and texts are omitted or distorted for the sole purpose of justifying his anti-Keynesian narrative.

Throughout the book, Kates acts more like a pamphleteer than a convincing analyst. In almost all of the twelve chapters that comprise the book, he rants about Keynesian macro, his long-standing target. He even scolds Austrian economists for being too cozy with Keynes (p. 215). Kates asserts that “the number of jobs is unrelated to the level of demand for goods and services … It is a proposition that is … absolutely correct both in theory and also from the evidence of every attempt to use a stimulus to increase the level of employment” (p. 4). He insinuates that a legal mandate on employers to pay higher wages is tantamount to theft (p. 18)! Kates is more persuasive when he reminds the reader that classical economists considered recessions and government intervention, though the topic is superficially discussed. Overall, Kates’s arguments are quite repetitive.

The centerpiece of Kates’s anti-Keynesian manifesto is his own definition of Say’s Law. His mantra is that “Say’s Law is different in meaning and implications from the nineteenth century’s loi des débouchés … properly attributed to Say” (p. 13). Kates makes three claims: i) Say’s arguments was that “demand is constituted by supply” (pp. 13, 69); ii) “Fred Taylor noted that the principle denying the possibility of overproduction and demand deficiency did not have a name … He supplied that name, calling it ‘Say’s Law’ after J.-B. Say. ‘Say’s Law’ is, however, not Say’s loi des débouchés” (p. 14; see also pp. 67-69). Ironically, the claim contradicts a previous statement, where Kates (1998, p. 151) argued correctly that “Taylor was the first to use the term ‘Say’s Law’ to describe what had previously been referred to as ‘the law of markets’ or the ‘théorie des débouchés’;” iii) “Keynes was not trying to deny that demand is constituted by supply. He was denying that economies never enter recession because of a deficiency of demand” (p. 15).

In fact, all three propositions are erroneous. Kates’s faulty definition of Say’s Law has previously been demonstrated (Jonsson 1999). The problem is that Kates conveniently avoids quoting relevant passages which disprove his manufactured arguments. In some instances, these passages follow immediately Kates’s quotes, but they are conspicuously omitted.

First, apparently Kates is not familiar with Say’s writings. It is no wonder that he never quotes Say. Contrary to Kates’s claims, Say’s loi des débouchés (law of outlets) cannot be reduced to the argument that goods buy goods (pp. 67, 91). Indeed, in the first edition of Say’s Traité the discussion of the law is not limited to the chapter on outlets (Book I, chapter XXII). In Book IV, chapter V, Say ([1803] 2006, p. 688) wrote: “the scope of the total demand for means of production, does not depend upon the scope of consumption. Consumption is not a cause: it is an effect. One must buy in order to consume; yet one can buy only what has been produced. The quantity of products demanded is therefore determined by the quantity of products created? Undoubtedly so” (original emphasis). Thus, Say never declared that “demand is constituted by supply.” Say’s focus was production not supply, an important distinction. For him, products consisted of goods or services produced or traded at cost-covering prices. Kates recognizes that this element “was the core of classical thought” (p. 12), but he fails to apply this crucial reasoning to Say’s thinking. Moreover, Kates maintains that “following the publication of Malthus’s Principles, Say agreed completely with Malthus’s critics and denied the possibility of demand deficiency” (p. 68). This statement, too, is incorrect. Recent studies have demonstrated, with ample evidence, that in several instances Say admitted that a general demand shortfall was possible and could cause economic crises (Béraud and Numa 2018, 2019). Following Say, most classical economists believed that production was the source of demand. That is the essence of what later became known as Say’s Law. However, for Say the law need not imply that supply was necessarily equal to demand, nor that demand deficiency could not cause crises. Because Say and other classical economists carefully distinguished supply from production, Say’s law of outlets differed from Keynes’s interpretation.

Second, it is true that Taylor invented the term “Say’s Law.” However, it is incorrect to claim that Taylor created the term “to describe … the impossibility of demand deficiency as a cause of recession.” Page 73 of the book is the perfect illustration of Kates’s selective quoting and blatant distortions of the historical record and the textual evidence. Kates quotes Taylor twice. The first quote does not contain any reference to the term “Say’s Law.” In reality, Taylor (1925, p. 196) discussed “general demand fallacies;” nowhere in this passage is “Say’s Law” defined as “the impossibility of demand deficiency as a cause of recession,” which is nothing but Kates’s own version of the law. The second quote ends with Taylor’s explicit reference to Say (1803), but Kates omits what follows immediately after, that is, the actual statement of the principle which begins on the same page by the following words. “This principle may be stated as follows: Principle — Say’s Law. The Ultimate Identity of Demand and Product. In the last analysis, the demand for goods produced for the market consists of goods produced for the market, i. e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with one another’s wants, total demand must in the long run coincide with the total product or output of goods produced for the market (Taylor 1925, pp. 201-202; original emphasis). This passage, Taylor’s actual definition of Say’s Law, is never quoted or mentioned in Kates’s book. The irony is that in the past, Kates (1998, p. 150) correctly quoted it. It should be noted that, like Say, Taylor (1925, p. 203) acknowledged that general demand deficiency could cause economic crises. He also admitted that public expenditures could have expansionary effects, a position that Say also supported. Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets; hence the term “Say’s Law.”

Third, the question is whether Keynes’s definition of Say’s Law is the same as Kates’s. Keynes was very clear. He ([1939] 1973, pp. xxxiv-xxxv) criticized “the doctrines associated with the name of J.-B. Say” and explicitly interpreted Say’s Law as the principle “that demand is created by supply.” For Keynes ([1936] 1973, p. 18), the expression means that “in some significant but not clearly defined sense that the whole of the costs of production must necessarily be spent in the aggregate … on purchasing the product” (see also Keynes [1936] 1973, p. 26). He deduced from this principle the idea that, for classical economists, a lack of demand was not the cause of recessions, but Keynes never defined Say’s Law as “recessions are never caused by demand deficiency.” Kates’s “definition” of Say’s Law is just a straw man to justify his anti-Keynesian propaganda.

The book suffers from other flaws. Kates reduces classical economic theory to John Stuart Mill’s Principles. Even though Mill was a prominent classical economist, this is incredibly simplistic. Kates even admits that much, conceding that “Mill’s economics is very different from the economics of Smith and Ricardo” (p. 32). Kates’s reading of Mill is also incomplete. There is no discussion of Mill’s radicalism (Persky 2016), other than the fact that he was a self-proclaimed “socialist” (pp. 5, 32, 73). Furthermore, the secondary literature is rarely considered. On topics such as Say’s Law, classical political economy, and the Keynesian revolution, one would expect a comprehensive discussion of recent and older studies. Instead, Kates’s volume is a true preacher’s monologue .

There may be legitimate reasons to criticize modern economic theories and policies. However, protesting against Keynesian economics should not be done at the expense of the historical record and the textual evidence.

References:

Béraud, Alain, and Guy Numa. 2018. “Beyond Say’s Law. The Significance of J.-B. Say’s Monetary Views.” Journal of the History of Economic Thought 40 (2): 217–241.

Béraud, Alain, and Guy Numa. 2019. “Retrospectives: Lord Keynes and Mr. Say: A Proximity of Ideas.” Journal of Economic Perspectives 33 (3): 228-242.

Jonsson, Petur. 1999. “‘Say’s Law and the Keynesian Revolution: How Macroeconomics Lost Its Way’ by Steven Kates.” Southern Economic Journal 65 (4): 967–970.

Kates, Steven. 1998. Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way. Cheltenham: Edward Elgar.

Keynes, John Maynard. (1936) 1973. The General Theory of Employment, Interest and Money. London: Macmillan. Reprinted in Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Keynes, John Maynard. (1939) 1973. “Preface to the French Edition.” Reprinted in The General Theory, pp. xxxi–xxxv. Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Persky, Joseph. 2016. The Political Economy of Progress: John Stuart Mill and Modern Radicalism. New York: Oxford University Press.

Say, Jean-Baptiste. [1803, 1814, 1817, 1819, 1826, 1841] 2006. Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent et se consomment les richesses. Édition variorum in Œuvres Complètes de Jean-Baptiste Say. Paris: Economica.

Taylor, Fred Manville. 1925. Principles of Economics. Ninth edition. New York: Ronald Press.

Guy Numa is an Assistant Professor of Economics at Colorado State University. Recent publications include “Retrospectives. Lord Keynes and Mr. Say: A Proximity of Ideas” (with Alain Béraud), Journal of Economic Perspectives (2019); “Jean-Baptiste Say on Free Trade” History of Political Economy (2019); “Money as a Store of Value: Jean-Baptiste Say on Hoarding and Idle Balances” History of Political Economy (2020).

Copyright (c) 2020 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 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):History of Economic Thought; Methodology
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700

Author(s):Harris, Ron
Reviewer(s):Artunç, Cihan

Published by EH.Net (September 2020)

Ron Harris, Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700. Princeton: Princeton University Press, 2020. xiii + 465 pp. $40 (hardcover), ISBN: 978-0-691-15077-2.

Reviewed for EH.Net by Cihan Artunç, Department of Economics, Middlebury College.

 

In 670 CE, a merchant in Turfan, Central Asia, disappeared while traveling to trade goods he received on a loan from another, foreign, merchant. The debtor’s demise (and with him, one copy of the contract) called into question whether the terms of the loan could be satisfied. The question was finally settled, remarkably in the creditor’s favor. In 1469, Jakob the Elder, the managing partner of the Fugger family firm — one of the largest commercial enterprises in Europe at the time — passed away. Despite being wildly successful, the business almost collapsed as it convulsed through ad hoc arrangements for 43 years until finally transitioning to Jakob the Rich’s stewardship in 1512.

These are just some of micro case studies Ron Harris elegantly weaves to demonstrate the many different problems firms faced in long-distance Eurasian trade. Some risks were outside of merchants’ control. Pirates, bandits, and storms were real threats. But price fluctuations could be just as ruinous. It was difficult to verify any one associate’s claim. In a world with incomplete information, and where information flowed slowly, monitoring different agents, ships, partners, or branches became vital for any growing business. The risks were immense but so were the rewards. But, even if the firm successfully solved these problems and enjoyed growth, it could simply dissolve after the death of its controlling members, with no heir willing to take the reins and risk the fortune they inherited.

Today, businesses wrestle with many of the same issues. To solve the problems of information, agency, and different sources of risk, firms have to come up with a way to effectively monitor agents, coordinate the actions of different actors in the organization, and assign liability to members appropriately. Harris, a legal and economic historian at Tel Aviv University, takes advantage of his expertise in these literatures that are not always in conversation with one another. His careful study combines insights from contract theory and institutional economics with the rich body of evidence the history literature produced to show the similar and different ways in which societies responded to the organizational challenges involved in Eurasian trade, one of the most capital-intensive and risky economic activities before the 1700s.

Some solutions were simple and addressed related problems; these institutions appeared spontaneously in many places. Single ownership like itinerant traders (“peddlers”) or plain bilateral contracts such as loans or agency were endogenous to many areas and endemic across Eurasia. They became the building blocks of more sophisticated institutional arrangements.

Other solutions, like the commenda or the sea loan, emerged in one place but migrated all across Eurasia, through the expansion of empires or religion, the movement of people, and the merchants involved in Eurasian trade themselves. The sea loan allowed for more flexible assignment of liability. The lender took up the sea risk, the borrower assumed the business risk. It permitted the use of ships or goods as collateral. Originated in Phoenician and Greek practices, it was integrated into Roman law, survived Christian rules against usury, and spread across the Mediterranean and much of Eurasia. It remained an attractive way of organizing maritime trade until the arrival of the commenda. In its simplest version, the commenda resembled other bilateral contracts between an investor and a traveling partner to share profits from a venture. Commenda’s innovation was in separating the invested capital from both parties. Creditors could only make claims on the commenda capital, effectively giving both the investor and the traveling partner limited liability. One traveling partner could pool capital from many different investors by combining different commendas and could even entrust these pooled assets to another traveling partner through a new commenda. The form’s flexibility made it a popular organizational choice across Eurasia. Wherever the form migrated, the form could be adapted easily depending on that region’s institutional setup. The profit-sharing rule varied from place to place, as did what the investor could actually invest. But the broad contours remained the same.

Other institutions were so entrenched in the context where they first emerged, they could not migrate easily. The grand example Harris stresses is the business corporation. The idea of a legal person was developed in Western Europe within the Catholic Church. The Eastern Orthodox Church did not enjoy the same robust separation from a higher secular authority; Islam was too decentralized and non-hierarchical to make the corporate form an attractive option. The corporation migrated from the Catholic Church to European cities, which came to be somewhat autonomous as they became independent from the rural feudal system. Municipalities, universities, and guilds all took advantage of the corporate form. In other parts of the world, cities did not enjoy the same level of independence. But it was only the English and the Dutch who innovated by attaching joint stock to the corporation for a commercial objective. Harris argues that the commitment of the government to not arbitrarily expropriate assets was vital for this development. The corporation’s equity, a large pool of assets drawn from many investors, would be a tempting target for the executive. The firm had to convince its potential subscribers that their investment would be safe from expropriation or unexpected taxation, thus locking in capital for long periods of time. Harris further argues the business corporation, by allowing the English and the Dutch to scale up their operations and set up repeatable voyages from East Asia through the long and expensive Cape route, led to their ascendance in Eurasian trade at the expense of the Portuguese and the local players.

Perhaps the book’s most important contribution is the new typology of indigenous, migratory, and embedded institutions. Previous arguments on why certain institutions emerged or were adopted in some places but not others inevitably focused too much on the supply side. Harris improves on the existing views by comparing the complexity of said institutions and their reliance on other building blocks. It’s not that the Islamic Middle East or the Chinese Empire lacked sophisticated solutions. Far from it, the institutions that these regions developed — the waqf or the family lineage organization — also depended on the Islamic or the Chinese institutional complex to function effectively. These institutions, just like the business corporation, could not migrate alone without other complementary institutions. And because these regions had their own alternatives, they did not necessarily need the corporation until the corporation’s advantage in exploiting scale and scope became clear. The book thus develops a nuanced argument that demonstrates the depth of institutional solutions that different societies created and distances itself from the essentialist, Eurocentric arguments that unfortunately characterize some of this literature.

In explaining the corporation’s embeddedness in English and Dutch institutions, the analysis falls back to the all-too-familiar claims about commitment and checks on the executive. The recent reevaluation of that literature notwithstanding, this raises a question about whether the success of the English and Dutch East India Companies can be truly attributed to their organizational advantage or to some other English or Dutch institution that allowed the corporation to emerge there in the first place. Harris is careful in not pushing this line of argument too far and admits that private-state partnerships might have been functionally similar. Disentangling the state’s role from the organizational efficacy of the corporation will be an important question with which future research will have to grapple. Going the Distance makes an important step in this direction and provides an important analytical framework that will be useful in taking up this question.

 

Cihan Artunç is an Assistant Professor of Economics at Middlebury College. Recent publications include “Partnership as Experimentation” (with Timothy W. Guinnane), Journal of Law, Economics, and Organization (2019).

Copyright (c) 2020 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 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Asia
Europe
Time Period(s):Medieval
16th Century
17th Century

The Economics of the Second World War: Seventy-Five Years On

Editor(s):Broadberry, Stephen
Harrison, Mark
Reviewer(s):Sahari, Aaro

Published by EH.Net (August 2020)

Stephen Broadberry and Mark Harrison, editors, The Economics of the Second World War: Seventy-Five Years On. London: CEPR Press, 2020. vii + 122 pp. free ebook, ISBN: 978-1-912179-31-2.

Reviewed for EH.Net by Aaro Sahari, Department of Philosophy, History and Arts, University of Helsinki.

 

The Economics of the Second World War is a concise overview on the economic history of the Second World War, or the “greatest conflict of an era of mass warfare” as editors Stephen Broadberry (Professor of Economic History, Oxford University) and Mark Harrison (Emeritus Professor, University of Warwick) define it. The book is divided into three sections and consists of sixteen short chapters written by a group of experienced historians of twentieth century economic, military and technology history. First, the origins of the war are discussed from European perspectives. Second, the conduct of war is analyzed. Third, the consequences of the conflict are examined. All chapters summarize earlier research findings. The book is a continuation to a 2019 work on the First World War by the same editors and also available from CEPR Press.

The first part, “Preparations for War,” re-evaluates the struggling German economy, Hitler’s rise to power, the Soviet economy and war preparations, and British economic management during the war. The role of the Great Depression in the NSDAP’s rise to power is a staple of historical literature but concrete economic evidence has been scarce. In the first chapter Hans-Joachim Voth (University of Zurich) presents recent econometric analyses on the linkages between the 1931 German banking crisis, failure of the Danat bank, regional historical antisemitism, and Nazi propaganda. The second chapter by Richard Overy (University of Exeter) continues on to re-evaluate the making of Germany’s war economy. Overy dismisses the myth of a blitzkrieg economy in favor of a transition onto war footing from 1936 onwards. The third chapter, by editor Mark Harrison, focuses on USSR before the war. Stalin’s Soviet Union was a warfare state in the 1930s, and the welfare of the people was sacrificed in favor of military development. Only this singular, brutal focus on external threats prepared USSR for the 1941 invasion. The last article on prewar developments, by editor Stephen Broadberry, analyses the fiscal and financial management of war in the UK. Together these four chapters point out the significance of the Great War in directing national economic policies of these three countries toward the Second World War.

In the second part, “Conduct of the War,” the discussion of war economics opens up to include United States, Japan, and various neutral and occupied countries. Eight articles provide a kaleidoscopic view of the Second World War using individual cases to highlight essential economic phenomena in the conduct of and survival in this global crisis. First, Phillips Payson O’Brien (University of St. Andrews) re-evaluates the vast literature on how the war was won through logistics, material attrition, and costly, novel military technologies in the air and at sea. David Edgerton (King’s College London) then reminds that a national economy isn’t a sufficient unit of study in the age globalization. The UK economy was better integrated to global trade networks than the German one, and thus more capable of shifting to a war-centric model. Price Fishback (University of Arizona) challenges the notion that the war raised the United States, “the arsenal of democracy,” out of depression. Long-term economic analysis provides quantitative proof that centrally directed war spending not only differs significantly from normal economic activities but also fails to explain changes in U.S. domestic economy. Mark Harrison (University of Warwick) uses economist Mancur Olson’s postwar research activities to analyze the impact of strategic bombing in the war to argue that supply-chain disruptions had limited, often indirect effects. Then, Tetsuji Okazaki (University of Tokyo) discusses the essential role of supplier networks in Japan’s wartime production of airplanes and the impact of extending production to new, inexperienced suppliers.

The last three articles in part II delve into the wider economic phenomena of the war. Hein Klemann (Erasmus University) revisits the strain of the German war effort on occupied European countries. He notes that poorer East European countries suffered more from the occupation than West European countries, and that the Nazi policy of “Germany first” led to production inefficiencies in all occupied territories. Eric Golson’s (University of Surrey) article on neutral countries’ economic activities is an essential, if unduly short, part of the overall story. Legal neutrality was typically maintained through economic concessions to offset military weakness. Finally, Alan Bollard (Victoria University) summarizes the essential role of economists to the war effort in key belligerent countries.

In the final part of the book, “Consequences of the War,” big societal phenomena are investigated. Cormac Ó Gráda (University College Dublin) summarizes the many, horrendous famines of the Second World War from a macro perspective. Walter Scheidel (Stanford University) discusses the impact of the war on lowering economic inequality globally and in leading to more equal economic regimes thereafter. Tamás Vonyó (Bocconi University) compares the role of population loss and migration patterns in East Germany, Eastern Europe and USSR to contextualize significant differences in postwar economic recovery. Finally, Pauline Grosjean (University of New South Wales) discusses differences in the societal impact of war – from institutional growth and increased resiliency to conflict traps and persistent public mistrust in institutions. These four articles provide a necessary social framework for the economic analysis of the Second World War.

The Economics of the Second World War provides a quick and convenient introduction into the topic of war and economy in the twentieth century. The book is a well written throughout, if a bit too short. Most of the discussed phenomena would have benefited from a more thorough examination. Fortunately, all authors have provided well curated lists of further reading for the inquisitive reader. A few omissions remain from the overall story. Essential trade networks remain abstract without a description of the logistics of war. Also, an economic foray into the global impact of the Second World War would have contextualized the articles well. Still, as it is The Economics of the Second World War provides a useful primer into the economic history of a complex, global conflict.

 

Aaro Sahari defended his PhD on Finnish industrial technopolitics (1918–1954) in 2018. He is a member of the editorial council for the Finnish Journal for the History of Technology — Tekniikan Waiheita — and the Finnish National Council for the History of Science and Technology. Sahari currently works on technology professionals’ tacit knowledge strategies and generational narratives.

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