|Affiliate:||LUISS (Roma) & Duke University (emeritus)|
|University:||LUISS Guido Carli|
|Street:||Viale Romania 31|
|Phone:||+39 348 0591523|
|Areas of Interest|
| Primary Interest|
|Subject:||Economic Development, Growth, and Aggregate Productivity|
|Time Period:||20th Century: WWII and post-WWII|
Additional Interest 1
|Subject:||Economic Development, Growth, and Aggregate Productivity|
|Time Period:||19th Century|
Additional Interest 2
|Subject:||Financial Markets, Financial Institution, and Monetary History|
|Time Period:||20th Century: WWII and post-WWII|
Deirdre McCloskey, Richard Sylla and Gianni Toniolo contributed information and personal recollections to this In Memoriam. Christopher Hanes wrote it and bears responsibility for errors. McCloskey’s own obituary of Fenoaltea has been published in the PSL Quarterly Review (2020). Journal articles and books by Stefano Fenoaltea are listed at the end and referred to in the text by number in the list. References to publications by other people are given in the ordinary way.
Stefano Fenoaltea died unexpectedly in Rome on September 14, 2020 of a previously undiagnosed cardiac condition, at the age of 77. He stood out for his brilliance and cheerful pugnacity in a generation of economic historians who did great work and were not averse to scholarly dispute.
Fenoaltea was born in Italy and educated in European schools. He was graduated at Georgetown University (first in his class) in 1963 and received a PhD in Economics from Harvard in 1968. In the first two decades of his career he wrote several papers on the related topics of medieval manors and servile labor. In 1975 he published “The Rise and Fall of a Theoretical Model: The Manorial System” (4), a response to a paper by North and Thomas (1971) titled “The Rise and Fall of the Manorial System: A Theoretical Model.” North and Thomas had argued that serfs provided their labor to lords in an implicit contractual exchange for “the public good of protection and justice” (North and Thomas 1971, p. 778). Fenoaltea examined their argument and concluded that it was “empirically untenable…Their account of later developments is equally unsatisfactory, since it draws on a dubious interpretation of demographic and political history, and appeals to institutional constraints to an extent that is both empirically unjustified and analytically alarming” (pp 408-409). A few months later Fenoaltea published “Authority, Efficiency, and Agricultural Organization in Medieval England and Beyond: A Hypothesis” (5), which presented his own argument about the manorial system: “the advantages of demesne agriculture were attached specifically to the exercise of authority over the labor force” to “increase output by imposing the use of a superior technique” and reenforce “social roles and hierarchy” (p. 695). In 1976 came “Risk, Transaction Costs, and the Organization of Medieval Agriculture” (7). Here Fenoaltea attacked the argument of McCloskey (1975) that medieval peasants farmed scattered small plots in open fields in order to diversify plot-specific risk. McCloskey published a reply (1977); Fenoaltea replied to the reply (10). Both scholars appeared to enjoy themselves, and McCloskey “was driven to write” (in McCloskey’s words) an article that provided further evidence for his original proposition (McCloskey 1984). In “The Slavery Debate: A Note from the Sidelines,” published in 1981, Fenoaltea ran through the no-man’s land in the battle between Fogel and Engerman (1974) and their critics (David et. al., 1976), taking well-aimed shots at both sides.
In 1984 Fenoaltea published “Slavery and Supervision in Comparative Perspective: A Model” (15), perhaps his best-known work among English-speaking economic historians, which won the Cole Prize for the best article in the Journal of Economic History that year, and also the Economic History Association’s Fritz Redlich Prize for the best article in economic history worldwide in the past two years. In it, Fenoaltea hypothesizes that the “pain incentives” applied to slaves by the master’s threats of physical punishment could elicit great effort but not carefulness, giving slave labor a competitive advantage in “extremely land- and effort-intensive activities (for example, moving stones from here to there)” (p. 639). He shows how his hypothesis and related ideas can account for many otherwise-puzzling features of slavery from ancient times through the nineteenth century.
Even better, in my opinion, is “Europe in the African Mirror: The Slave Trade and the Rise of Feudalism” (24) written in 1988 but not published until 1999. Fenoaltea begins by developing a model to explain a puzzle about the transatlantic trade in African slaves. The puzzle is that the trade transported, at great cost, labor to a region with a high land-labor ratio and concomitantly high physical product of labor (the Americas) from another region with a high, perhaps higher land-labor ratio and physical product of labor (Africa). “The challenge is thus to develop a model capable of producing an efficient trade even though the population density is lower and the physical marginal product of labor higher at the source” (p. 124). The explanation proposed by Fenoaltea is that African elites had a demand for European-produced goods, while extremely high transportation costs within Africa prevented African elites from buying European goods with raw materials produced by slaves exploited at home in Africa. Thus, “Even if the backward area is relatively underpopulated,…it may export people to pay for the advanced products its elite wishes to consume but cannot obtain from domestic sources.” Meanwhile, “the profitability of slave exports means that the source area will tend to lapse into endemic petty warfare and lose the benefits of comparatively peaceful exploitation through taxes or tribute” (p. 124). After developing the model for Africa, Fenoaltea applies it to slave trades in Europe from classical times through the medieval era, and speculates that in “the early Middle Ages, when Christian Europe was itself backward relative to the Byzantine and Islamic worlds…. Europeans may thus have tended to export human beings to pay for advanced manufactures: the anarchy that plagued the West may have been due in primis to raids undertaken for the sake of obtaining captives” (p. 125).
Fenoaltea’s papers in these areas are exemplars of a style once common, now rare in economic history, in which the author takes generally-accepted historical facts, presenting little if any further empirical evidence, and presents a model to explain the facts in words – no math – as the result of transactions costs and other fundamental economic forces along the lines of University of Chicago “Price Theory.” A paper in this style lives or dies on the author’s rhetorical skill and the originality and strength of his argument. If the paper succeeds, it is fun for the reader as well as the author.
But these papers made up the smaller portion of Fenoaltea’s scholarship. Most of his career was devoted to a different kind of work. Starting with his PhD dissertation (1), Fenoaltea studied Italy’s economic development in the era between the formation of the Italian state in the 1860s and the First World War. For this he needed historical statistics on Italian output. At the time Fenoaltea started out reliable statistics of this type had already been constructed for the United States (Frickey , Gallman [1960, 1966]). But the ones available for Italy were not as good, due partly to a dearth of the historical source material for Italy that was available for the U.S. In order to study Italy’s economy, therefore, Fenoaltea constructed his own series on Italian output: first, indexes of industrial production; eventually, measures of GDP components. Fenoaltea continued this work through the rest of his life in cooperation with excellent scholars in the Bank of Italy as well as Italian academic institutions. He was still constructing new series and improving old ones when he died.
The reader may wonder how well this work suited the author of “Slavery and Supervision in Comparative Perspective.” For most economic historians the construction of statistical series is not fun – perhaps not as bad as moving stones from here to there, but requiring an unpleasant combination of effort and care. Why did Fenoaltea keep at it?
Certainly, it gave him opportunities for satisfying, not to say epic scraps, with some of the other scholars working on Italian statistics. It provided foundations for papers challenging existing views of Italian development which Fenoaltea published in prominent English- and Italian-language economic history journals (see list below) and several books (71, 72, 73, 74, 75). In “International Resource Flows and Construction Movements in the Atlantic Economy: The Kuznets Cycle in Italy, 1861-1913” (20, 1988), Fenoaltea used series he had constructed on construction in Italy to test an important hypothesis about the nineteenth-century development of America, Argentina and other new countries. It had been observed that construction, immigration and international capital inflows in new countries were correlated with each other, and negatively correlated with construction in Britain, in “long swings” or “Kuznets cycles.” It had been hypothesized that the ultimate causal factor in these patterns was the migration flows: capital followed labor across the Atlantic. Italy was a natural experiment to test this. It was a capital-importer like the new countries but a country of emigration. It lost more population at times when new-country immigration was high. Fenoaltea showed that in Italy emigration was positively correlated with construction; construction was “tied to changes in the supply of foreign capital, and thus to British foreign investment – themselves attributable, it would appear, less to variations in domestic British investment opportunities than to changes in investors’ perception of the relative safety of investment in Britain and abroad” (20, p.607). “The Italian experience is thus not merely an exception to, and therefore destructive of, the unified interpretation of the Atlantic economy which attributes construction to migration and capital flows to construction. It suggests an alternative and equally unified interpretation, in which capital flows caused construction, and construction..caused migration” (p. 634). This paper has frequently been cited by economic historians interested in American development and international flows of labor and capital.
It is clear, however, that for Fenoaltea the construction of statistical series was not a dull task. It was an intellectual exercise that drew on all his knowledge of economic theory and of history – economic, political and technological. According to Gianni Toniolo, Fenoaltea believed:
quantitative reconstruction of the past is practically an unbounded task, even when limited in time and space. To him, the task was particularly challenging given the relative paucity of the original statistics. As a result of his work, Italy’s historical statistics for the years 1861-1913 are undoubtedly the most refined and complete of those for any country I know something about. The level of disaggregation by sector and area is extremely fine, the information about production technologies impressive.
Fenoaltea’s last book begins with a disquisition on the construction of historical economic statistics which “should be compulsory reading for all graduate students in economic history (even more so in economics!)” (Toniolo). In it Fenoaltea lays out his method:
Invent the series you seek to construct, your initial best guess; but don’t stop there, the starting point matters little only if you move beyond it. Draw out the implications of your series as an applied economist would, recognizing technical relationships, the impact of trade, the substitution effects that can be inferred from the typically abundant evidence on relative prices, the income effects, where appropriate, that influence consumption; and set those implications next to the corpus of surviving “data,” as best you can master it, as an historian would. You will soon enough find that your initial estimates violate “data” constraints, constraints that may be distant but are effective constraints all the same. Revise, rinse, and repeat; at the end of the process you will have a production series, for the “undocumented” industry at hand, that is reasonably tightly constrained by (the application of economic logic to) the historical evidence.
So much for Fenoaltea’s work. What was the man like?
Stefano was admirably slender and always appropriately dressed, una bella figura, often in a somewhat country-gentleman mode. It is impossible to imagine him fat and sloppy. He was mischievous. He could not resist needling officious, smug or easy-to-offend people. He did not like to follow rules. He did not respect authority. In fact, he could barely tolerate it. He was entertaining in conversation, an excellent companion for dinner or a walk. He relished wit: like most academics he liked to hear himself talk; unlike many academics he liked to hear other people talk too. He was given to epigrams and prepared jokes, which could be forgiven because they were almost always good, and to amateur sociology (what economic historian isn’t?). A favorite topic was national characteristics, especially differences between Italians on the one hand and Americans, Canadians or Britons on the other. A hint of his conversational style can be found in his articles and books:
Italy’s provinces are the rough equivalent of France’s departements; but where the latter are named after natural features, more barbarico, the former bear the proud names of their principal cities (59, p. 58).
The heirs of the Ancona group continue however to this day to analyse the cyclical fluctuations of the original Vitali series, either out of filial piety or – in the absence of comprehensive alternative estimates – a Nelsonian talent for exploiting a blind eye; see most recently Delli Gatti et al. (2005) (36, fn. 6).
In estimating times series, as in love and war, the most important thing is luck (29, p. 726).
Another [problem] is that the sources are opaque…that their hidden defects surface, rather like those of our former spouses, only with extended cohabitation” (75, p. 13)
Amateur sociologists will want to trace Stefano’s character to his family background and upbringing. He was the son of Sergio Fenoaltea, an opponent of Italian fascism who spent time in Mussolini’s prisons and, after Mussolini’s fall, was a member of an important committee (Italy’s National Liberation Committee) that coordinated resistance to the Germans and cooperation with the allies. After the war Sergio Fenoaltea entered the Italian diplomatic service and eventually served in its top job, ambassador to the United States, from 1961 to 1967, during which Stefano was in college at Georgetown and graduate school at Harvard. Stefano always spoke of his father with great respect and affection. Sergio Fenoaltea remained resolutely pro-American even in the late 1960s when the Vietnam War was raging. Stefano was just as pro-American. You could get him to criticize our clothing, manners and food but not our morals or institutions.
While his father moved through the diplomatic service, Stefano was educated in French-language schools on the French national curriculum, which is strictly standardized, allowing easy transfers from school to school, and is highly regarded outside English-speaking countries. McCloskey says that Stefano “told me once that his high culture – novels, poetry, and so forth – was French.” Certainly, Stefano shared the French attitude that culture and education were virtues to be displayed rather than (as they are to Americans) sources of embarrassment. He was as fluent in Latin, French and of course Italian as he was in English, which may account for the frequency in his English-language publications of phrases in the other languages. However baffling, even annoying to the monoglot American reader, to Stefano these were simply le mot juste.
Stefano’s lack of respect for authority was perhaps a form of instinctive anti-fascism, hence an act of filial piety, but his friends agree that whatever its source it was a hindrance to his career. At Harvard, his PhD advisor was not the famous Alexander Gerschenkron though Stefano’s dissertation was directly related to Gerschenkron’s research. According to Fenoaltea’s fellow graduate student Richard Sylla this was because “Stefano had a falling out with Gerschenkron. I never quite understood it, but apparently it had something to do with Stefano challenging some of Gerschenkron’s interpretations of Italian industrialization in the late 19th century, which led Gerschenkron to suggest/demand that he find another dissertation advisor.” According to Deirdre McCloskey, another Harvard student at the time, Gerschenkron “refused to work with him when Stefano questioned The Master’s views on the rate and sources of Italian industrialization. Doubtless Stefano was less than diplomatic about the disagreement.” This incident is a worse reflection on Gerschenkron than on Stefano, of course. Stefano appeared to hold no grudge. When Stefano had himself become a senior scholar he was (in my experience) interested and helpful, rather than defensive, when challenged by a youngster.
However, it is an unfortunate fact that in academic life it is sometimes necessary to suck up. Stefano could not do that any more than he could turn his head around 360 degrees. Getting tenure was a problem. Stefano’s scholarship won him try-outs in many excellent American economics departments (including among others Penn and Duke) and a stint at the Institute for Advanced Study in Princeton. But as of the mid-1990s “Stefano was the greatest economic historian of our cohort who had never gotten tenure” (Sylla).
Then things took a happy turn. “In 1996, Stefano moved permanently to Italy, to chairs first at the University of Cassino, then at Brescia and finally, in 2003, at the University of Roma Tor Vergata…. He retired in 2013 and took up a visiting professorship at the prestigious Collegio Carlo Alberto (University of Torino)” (Toniolo). About the time Stefano moved to Italy he inherited a house his father had built on a hill outside Marino above the Alban Lake. He lived there for many years with his wife Maria Angela Pieche and their three children. His last book was dedicated to his recently-born grand-daughter.
Journal articles published by Stefano Fenoaltea
1. “Public Policy and Italian Industrial Development, 1861-1913,” Journal of Economic History XXIX, no. 1 (March 1969), pp. 176-179.
2. “Railroads and Italian Industrial Growth, 1861-1913,” Explorations in Economic History IX, no. 4 (Summer 1972), pp. 325-352.
3. “The Discipline and They: Notes on Counterfactual Methodology and the ‘New Economic History’,” Journal of European Economic History II, no. 3 (Winter 1973), pp. 724-746.
4. “The Rise and Fall of a Theoretical Model: The Manorial System,” Journal of Economic History XXXV, no. 2 (June 1975), pp. 386-409.
5. “Authority, Efficiency, and Agricultural Organization in Medieval England and Beyond: A Hypothesis,” Journal of Economic History XXXV, no. 4 (December 1975), pp. 693-718.
6. “Real Value Added and the Measurement of Industrial Production,” Annals of Economic and Social Measurement V, no. 1 (Winter 1976), pp. 111-137.
7. “Risk, Transaction Costs, and the Organization of Medieval Agriculture,” Explorations in Economic History XIII, no. 2 (April 1976), pp. 129-151
8. “On a Marxian Model of Enclosures,” Journal of Development Economics III, no. 2 (June 1976), pp. 195-198.
9. “Real Value Added Once Again,” Annals of Economic and Social Measurement VI, no. 1 (Winter 1977), pp. 133-134.
10. “Fenoaltea on Open Fields: A Reply,” Explorations in Economic History XIV, no. 4 (October 1977), pp. 405-410.
11. “The Slavery Debate: A Note from the Sidelines,” Explorations in Economic History XVIII, no. 3 (July 1981), pp. 304-308.
12. “The Growth of the Utilities Industries in Italy, 1861-1913,” Journal of Economic History XLII, no. 3 (September 1982), pp. 601-627.
13. “The Organization of Serfdom in Eastern Europe: A Comment,” Journal of Economic History XLIII, no. 3 (September 1983), pp. 705-708.
14. “Railway Construction in Italy, 1861-1913,” Rivista di storia economica I, International issue (1984), pp. 27-58, and “Le costruzioni ferroviarie in Italia, 1861-1913,” Rivista di storia economica I, no. 1 (giugno 1984), pp. 61-94.
15. “Slavery and Supervision in Comparative Perspective: A Model,” Journal of Economic History XLIV, no. 3 (September 1984), pp. 635-668.
16. “Public Works Construction in Italy, 1861-1913,” Rivista di storia economica III, International issue (1986), pp. 1-33, and “Le opere pubbliche in Italia, 1861-1913,” Rivista di storia economica II, no. 3 (ottobre 1985), pp. 335-369.
17. “Construction in Italy, 1861-1913,” Rivista di storia economica IV, International issue (1987), pp. 21-53, and “Le costruzioni in Italia, 1861-1913,” Rivista di storia economica IV, no. 1 (febbraio 1987), pp. 1-34.
18. “The Extractive Industries in Italy, 1861-1913: General Methods and Specific Estimates,” Journal of European Economic History XVII, no. 1 (Spring 1988), pp. 117-125.
19. “Transaction Costs, Whig History, and the Common Fields,” Politics & Society XVI, no. 2-3 (June-September 1988), pp. 171-240.
20. “International Resource Flows and Construction Movements in the Atlantic Economy: The Kuznets Cycle in Italy, 1861-1913,” Journal of Economic History XLVIII, no. 3 (September 1988), pp. 605-638.
21. “The Growth of Italy’s Silk Industry, 1861-1913: A Statistical Reconstruction,” Rivista di storia economica V, no. 3 (ottobre 1988), pp. 275-318.
22. “Servi e schiavi,” Rivista di storia economica IX, no. 1-2 (giugno 1992), pp. 45-48.
23. “Politica doganale, sviluppo industriale, emigrazione: verso una riconsiderazione del dazio sul grano,” Rivista di storia economica X, no. 1 (febbraio 1993), pp. 65-77.
24. “Europe in the African Mirror: The Slave Trade and the Rise of Feudalism,” Rivista di storia economica XV, no. 2 (agosto 1999), pp. 123-165.
25. “The Growth of Italy’s Wool Industry, 1861-1913: A Statistical Reconstruction,” Rivista di storia economica XVI, no. 2 (agosto 2000), pp. 119-145.
26. “The Growth of Italy’s Cotton Industry, 1861-1913: A Statistical Reconstruction,” Rivista di storia economica XVII, no. 2 (agosto 2001), pp. 139-171.
27. “Textile Production in Italy, 1861-1913,” Rivista di storia economica XVIII, no. 1 (aprile 2002), pp. 3-40.
28. “Production and Consumption in Post-Unification Italy: New Evidence, New Conjectures,” Rivista di storia economica XVIII, no. 3 (dicembre 2002), pp. 251-298.
29. “Notes on the Rate of Industrial Growth in Italy, 1861-1913,” Journal of Economic History LXIII, no. 3 (September 2003), pp. 695-735.
30. “Peeking Backward: Regional Aspects of Industrial Growth in Post-Unification Italy,” Journal of Economic History LXIII, no. 4 (December 2003), pp. 1059-1102.
31. “La formazione dell’Italia industriale: consensi, dissensi, ipotesi,” Rivista di storia economica XIX, no. 3 (dicembre 2003), pp. 341-356.
32. “Contro tre pregiudizi,” Rivista di storia economica XX, no. 1 (aprile 2004), pp. 87-106.
33. “Textile Production in Italy’s Regions, 1861-1913,” Rivista di storia economica XX, no. 2 (agosto 2004), pp. 145-174.
34. “Einaudi commentatore e protagonista della politica economica: aspetti dell’età giolittiana,” Rivista di storia economica XX, no. 3 (dicembre 2004), pp. 301-308.
35. “La crescita economica dell’Italia postunitaria: le nuove serie storiche,” Rivista di storia economica XXI, no. 2 (agosto 2005), pp. 91-121.
36. “The Growth of the Italian Economy, 1861-1913: Preliminary Second-Generation Estimates,” European Review of Economic History IX, no. 3 (December 2005), pp. 273-312.
37. “Economic Decline in Historical Perspective: Some Theoretical Considerations,” Rivista di storia economica XXII, no. 1 (aprile 2006), pp. 3-39.
38. “Mining Production in Italy, 1861-1913: National and Regional Time Series” (with Carlo Ciccarelli), Rivista di storia economica XXII, no. 2 (agosto 2006), pp. 141-208.
39. “The Chemical, Coal and Petroleum Products, and Rubber Industries in Italy, 1861-1913: A Statistical Reconstruction,” Rivista di storia economica XXIII, no. 1 (aprile 2007), pp. 33-80.
40. “Business Fluctuations in Italy, 1861-1913: The New Evidence” (with Carlo Ciccarelli), Explorations in Economic History XLIV, no. 3 (July 2007), pp. 432-451.
41. “I due fallimenti della storia economica: il periodo post-unitario,” Rivista di politica economica XCVII, no. 3-4 (marzo-aprile 2007), pp. 341-358.
42. “The Chemical, Coal and Petroleum Products, and Rubber Industries in Italy’s Regions, 1861-1913: Time Series Estimates” (with Carlo Ciccarelli), Rivista di storia economica XXIV, no. 1 (aprile 2008), pp. 3-59.
43. “A proposito del PIL, “ Italianieuropei, 2008, no. 1, pp. 165-169.
44. “The Growth of the Utilities Industries in Italy’s Regions, 1861-1913” (with Carlo Ciccarelli), Rivista di storia economica XXIV, no. 2 (agosto 2008), pp. 175-205.
45. “Social-Overhead Construction in Italy’s Regions, 1861-1913” (with Carlo Ciccarelli), Research in Economic History XXVI (2008), pp. 1-80.
46. “Construction in Italy’s Regions, 1861-1913” (with Carlo Ciccarelli), Rivista di storia economica XXIV, no. 3 (dicembre 2008), pp. 303-340.
47. “Shipbuilding in Italy, 1861-1913: The Burden of the Evidence” (with Carlo Ciccarelli), Historical Social Research XXXIV (2009), no. 2, pp. 333-373.
48. “Luigi Einaudi storico economico dell’età liberale,” Rivista di storia economica XXV, no. 3 (dicembre 2009), pp. 321-330
49. “Metalmaking in Italy, 1861-1913: National and Regional Time Series” (with Carlo Ciccarelli), Rivista di storia economica XXVI (2010), no. 1, pp. 121-153.
50. “The Reconstruction of Historical National Accounts: The Case of Italy,” PSL Quarterly Review LXIII (2010), no. 252, pp. 77-96.
51. “The Effects of Unification: Markets, Policy, and Cyclical Convergence in Italy, 1861-1913” (with Carlo Ciccarelli and Tommaso Proietti), Cliometrica IV (2010), no. 3, pp. 269-292.
52. “On the Structure of the Italian Economy, 1861-1913,” Rivista di storia economica XXVII (2011), no. 1, pp. 61-72.
53. “L’industria e l’economia nelle province dell’Italia liberale: tra storia e geografia” (with Carlo Ciccarelli), Semestrale di Studi e Ricerche di Geografia XXIII (2011), no. 2, pp. 31-46.
54 “Lo sviluppo economico italiano dal Risorgimento alla Grande Guerra,” Annali della Fondazione Giuseppe di Vittorio, 2011, pp. 213-227.
55. “The Rail-guided Vehicles Industry in Italy, 1861-1913: The Burden of the Evidence” (with Carlo Ciccarelli), Research in Economic History XXVIII (2012), pp. 43-115.
56. “The Growth of the Italian Economy, 1861-1913: The Expenditure Side Re- (and De-) constructed,” Rivista di storia economica XXVIII (2012), no. 2, pp. 285-318.
57 “La cliometria e l’unificazione italiana: bollettino dal fronte” (with Carlo Ciccarelli), Meridiana. Rivista di storia e scienze sociali, no. 73-74 (2012), pp. 258-266.
58 “La cantieristica in Italia, 1861-1913: una ricostruzione quantitativa” (with Carlo Ciccarelli), Bollettino dell’Associazione Italiana Documentazione Marittima e Navale, no. 26 (2012), pp. 129-154.
59. “Through the Magnifying Glass: Provincial Aspects of Industrial Growth in Post- Unification Italy” (with Carlo Ciccarelli), Economic History Review LXVI (2013), no. 1, pp. 57-85.
60. “The Non-metallic Mineral Products Industries in Italy, 1861-1913: National and Regional Time Series” (with Carlo Ciccarelli), Rivista di storia economica XXIX (2013), no. 3, pp. 267-317.
61. “The Measurement of Production Movements: Lessons from the General Engineering Industry in Italy, 1861-1913,” Explorations in Economic History 57 (2015), pp. 19-37.
62. “Industrial Employment in Italy, 1911: The Burden of the Census Data,” Rivista di storia economica XXXI (2015), no. 2, pp. 225-246.
63. “The Measurement of Production: Lessons from the Engineering Industry in Italy, 1911,” Research in Economic History XXXII (2016), pp. 73-145.
64. “Fenoaltea on Industrial Employment in 1911: A Rejoinder,” Rivista di storia economica XXXI I (2016), no. 1, pp. 113-117.
65. “Understanding the Ancient Near Eastern Economy: A Note from the Sidelines,” Rivista di storia economica XXXII (2016), no. 3, pp. 403-415.
66. “The Engineering Industry in Italy’s Regions, 1861-1913: A Statistical Reconstruction”, Rivista di storia economica XXXIII (2017), no. 2, pp. 159-246.
67. “The Growth of Italy’s Apparel Industry, 1861-1913: A Statistical Reconstruction,” Rivista di storia economica XXXIII (2017), no. 3, pp. 315-350.
68. “The Backlash to Globalization: Some Further Thoughts,” Annals of the Fondazione Luigi Einaudi LII (2018), no. 1, pp. 15-20.
69. “Italy in the Market for Seagoing Vessels, 1861-1913: Domestic production, Imports, and Exports,” Rivista di storia economica (in press).
70. “Spleen: The Failures of the Cliometric School,” Annals of the Fondazione Luigi Einaudi (forthcoming).
Books published by Stefano Fenoaltea
71. L’economia italiana dall’Unità alla Grande Guerra, pp. viii, 339 (Rome-Bari: Laterza, 2006; ISBN: 88-420-7925-1).
72. La produzione industriale delle regioni d’Italia, 1861-1913: una ricostruzione quantitativa. 1. Le industrie non manifatturiere (with Carlo Ciccarelli), pp. xlviii, 499 (Rome: Banca d’Italia, 2009).
73. The Reinterpretation of Italian Economic History: from Unification to the Great War, pp. xxi, 296 (New York: Cambridge University Press, 2011; ISBN: 978-0-521-19238-5).
74. La produzione industriale delle regioni d’Italia, 1861-1913: una ricostruzione quantitativa. 2. Le industrie estrattivo-manifatturiere (with Carlo Ciccarelli), pp. vi, 677 (Rome: Banca d’Italia, 2014).
75. Reconstructing the Past: Revised Estimates of Italy’s Product, 1861-1913. (Turin: Fondazione Luigi Einaudi, 2020.
David, Paul A. , Herbert G. Gutman, Richard Sutch, Peter Temin and Gavin Wright. Reckoning with Slavery. New York: Oxford University Press, 1976.
Fogel, Robert William and Engerman, Stanley L. Time on the Cross: the Economics of American Negro Slavery. Boston: Little, Brown 1974.
Frickey, Edwin. Production in the United States, 1860-1914. Cambridge, MA: Harvard University Press, 1947.
Gallman, Robert E. “Commodity Output, 1839-1899.” In William N. Parker, ed. Trends in the American Economy in the Nineteenth century. Studies in Income and Wealth, Volume 24. Princeton: Princeton Univesity Press for NBER, 1960.
— “Gross National Product in the United States, 1834-1909.” In Conference on Research in Income and Wealth, Output, Employment and Productivity in the United States after 1800. New York: Columbia University Press for NBER, 1966.
Gerschenkron, Alexander. ‘Notes on the Rate of Industrial Growth in Italy, 1881-1913.” Journal of Economic History, December 1955, 15 (4): 360-375.
McCloskey, D.N. “The Persistence of English Common Fields.” In William N. Parker and E.L. Jones, Eds., European Peasants and Their Markets. Princeton: Princeton University Press, 1975.
— “Fenoaltea on Open Fields: A Comment.” Explorations in Economic History, 1977, 14 (4): 402-404.
— and John Nash.”Corn at Interest: The Extent and Cost of Grain Storage in Medieval England.”
American Economic Review, March 1984, 74(1): 174-187
— “Stefano Fenoaltea (1943-2020).” PSL Quarterly Review, December 2020, 73(5).
Morgenstern, Oskar. On the Accuracy of Economic Observations. Princeton: Princeton University Press, 1963.
North, Douglass and Robert Thomas. “The Rise and Fall of the Manorial System: A Theoretical Model.” Journal of Economic History, December 1971, 31 (4): 777-803.
 In a footnote to the 1999 publication Fenoaltea explains that the article is the same as the 1988 paper and “unforeseen commitments have delayed both the publication of the volume developing the analysis of the African slave trade and, perhaps sine die, the intended further research on early medieval Europe” (p. 123). According to Gianni Toniolo, editor of the journal in which the paper was eventually published (Rivista di Storia Economica), Stefano had signed a contract for the book with Cambridge University Press but “had hardly even begun to write” it.
 Fenoaltea describes the development of Italian historical production and GDP statistics in 73 (chapter 1) and 75 (chapter 3). Late-nineteenth century America was full of institutions that gathered economic information, such as active state and local governments, trade associations and business-oriented newspapers, not to mention the U.S. Bureau of the Census. Britain resembled the U.S. to some degree in this respect. Italy, along with most other continental countries, did not.
It was required reading in graduate economic history classes taught by Peter Lindert and Jeffrey Williamson, at least.
I agree with Toniolo. In my fantasies, it and Morgenstern (1963) are readings in a half-semester graduate economics core course called “Data.”
Think of a cheetah. Try to imagine a fat, sloppy cheetah. You can’t. That is what I mean.
 A rough quote on the subject of litter in parks: “In America, public property is everyone’s property; in Italy, public property is no one’s property.” Claiming to speak from personal experience, Stefano said that Italian high-school soccer players took showy shots whether or not they had a realistic chance of scoring, while British/American/ Canadian kids passed the ball to guys in good positions.
 Here is the place for an excellent story about Stefano told by Richard Sylla, who was in graduate school with Stefano. “I invited him to have dinner one weekend with my wife and me at our apartment….He said “I’m not sure about my plans for the weekend. I haven’t decided yet whether I should stay in Cambridge and socialize with my intellectual equals, or go to Washington and intellectualize with my social equals.”
 Soon after I first met Stefano he showed me, with pride, his library of classic economics books from the 1880s-1930s (think Edgeworth, Marshall, Pigou, Keynes). Stefano said it had been collected by his father “who had a degree in economics.” That was all he told me about his father at the time but I got the impression that from Stefano’s point of view the connection between his father and economics conferred dignity on economics.
 According to Sergio Fenoaltea’s New York Times obituary, he resigned as ambassador to America in 1967 at a time when he “seemed to disagree with his Government, particularly with what he felt was Foreign Minister Amintore Fanfani’s lukewar commitment to the North American Treaty Organization.”
Presumably, one of the reasons Gerschenkron refused to oversee Fenoaltea’s dissertation was that Fenoaltea was constructing an index of Italian industrial production for 1861-1913. Gerschenkron had already constructed such an index. Fenoaltea’s index pointed to different conclusions about Italian development. According to Toniolo, “Gerschenkron did not take it lightly and Stefano had to find himself new dissertation supervisors.” Gerschenkron’s index had been published it in 1955 in an article titled “Notes on the Rate of Industrial Growth in Italy,1881-1913′ (Gerschenkron 1955). In 2005 Stefano published an article with exactly the same title in the same journal (29). In it he wrote “The title of this piece is of course a recent copy of an Old Master…. Alexander Gerschenkron’s classic article,” and counted the years that “have passed since the present writer began unwarily to tread in his teacher’s footsteps…. As my contemporaries will recall, the footsteps I stepped in had not quite been vacated by Gerschenkron’s own feet.”
 When I was an assistant professor, about 1990, one of the first papers I wrote presented a hypothesis to explain the distribution of slave labor across occupations and economic sectors. It was different from, and could have been seen as opposed to, Stefano’s argument in “Slavery and Supervision in Comparative Perspective” (15). Despite my appalling ignorance on the subject Stefano talked to me about it for many days, apparently with pleasure. Without him the paper would have been much worse.
|Author(s):||Fenoaltea, Stefano |
|Reviewer(s):||Incerpi, Andrea |
Published by EH.Net (February 2021)
Stefano Fenoaltea, Reconstructing the Past: Revised Estimates of Italy’s Product, 1861-1913. Torino: Fondazione Luigi Einaudi onlus, 2020. xvi + 329 pp. (online open-access), ISBN: 978-88-32139-02-0.
Reviewed for EH.Net by Andrea Incerpi, Department of Economics, Università degli Studi dell’Insubria
One year ago, Stefano Fenoaltea was refining his last remarkable work, Reconstructing the Past: Revised Estimates of Italy’s Product, 1861-1913. His untimely passing interrupted the heated debate started a year before with “Spleen” (Fenoaltea, 2019) and concluded on the pages of the Annals while the editing of the book was coming to a close. The debate was centered on the essence of “Cliometrics” and its methodological foundations: economic theory, data, facts. These are the three tools used to file the oxymoron of a “scientific history,” the poorly-cultured definition hidden by the reputation of Econometrica. Their recovery is crucial to avoid the failure of the econometric school: as economists, as historians, as economic historians (Fenoaltea, 2019). The steps of this path, which lead to a Copernican approach to economic history, are the core of Fenoaltea’s book. Indeed, it is not a work of mere reconstruction of data but a Summa Theologiae of a fifty years of training for the author as an historian. Namely, an economic historian.
The first part of the book, which could be taken as a precious handbook for doctoral students, details the “art” of reconstructing historical data by renewing the failures marked in “Spleen” (Fenoaltea, 2019). Since economics is based on measurement, the good economic historian needs a method to measure in order to be a competent economist. Something that is generally snubbed by economists themselves in favor of the quality of data-processing. This method is a set of rules that Fenoaltea calls le regole dell’arte, with regard to the strict rules imposed by the medieval crafts guilds. Firstly, vet the data. This means verify the credibility of the data and “deconstruct it” investigating the “data-generating process” of the sources (p. 15). The second rule should be a natural impulse to a historian, as such without an objective limit: disaggregation. The assumptions behind each aggregate must be discussed both by vertical and horizontal disaggregation. It means, referring to the topic of the book, across “stage of production” (different time paths) and across “production sequences” (different goods and processes) respectively. The third rule concerns indexation and the general use of “known” series as proxies for the unknown ones. Here the strict rules recalled by the craft guilds leave room for an informal reminder, “a sad comment” (p. 29): thinking. Before indexing, while indexing, after indexing. Clearly, Fenoaltea’s belief in human logic does not match the belief in the intellectual profession of cliometricians. The fourth rule goes back to formal methodology. It concerns the use of a deflator to avoid the distortions of current prices. The deflator must be general and not activity-specific (p. 29). Given the impossibility to identify a standard for the real value of a good or a basket of goods, the general hint applies in a case-by-case basis that must be properly justified. Finally, the fifth rule is a warning about the standard constructs for the economy’s aggregate. Each of them has its proper genesis by circumstances and by the economic agenda. The adoption of GDP is the example of how a practical problem, the need for timely evidence on the economy to stabilize business cycles, can be solved by adopting a conventional measure. Thus, the artisan cliometrician must know what the standard measures quantify and what he wants to measure (p. 36). This is the only secular way to avoid the edicts of clergy economists and the misleading label of their standards of measure.
A focus on the way to treat maintenance activity in the production framework and a brief history of the evolution of Italy’s national accounts lead the way to the following second part of the book. As the title suggests, this part introduces the second generation estimates of Italy’s product related to the production side. This naming concerns the enforcement each generation of estimates has with the previous regole dell’arte. Within an idyllic world made of four generations of estimates, the last one is a pipe dream and the third one is still an ongoing work for the author. Thus, the second generation of estimates, which respects the first three rules, replaces the first generation, which comply with none of them. The production side, as admitted by Fenoaltea (p. 69), is not a deep complaint of Baffigi’s reconstruction (Baffigi, 2015). The agriculture estimates here include evidence of yearly harvest fluctuations and an allowance for on-farm improvements. The industry series update estimates for some industrial sectors: chemical, utilities, engineering, and leather. Revisions in services refer to differences in extrapolation obtained by Zamagni and Battilani (2000) and other minor refinements, such as per capita wages and the rental value of the premises.
The third part of the book refers to the estimates for the expenditure side. These series include several refinements following a basic guiding principle: estimating investments and consumptions by allocating to these the production-side estimates of value added (p. 93). The refinements include a revision of exports and imports and the calculation of an inventory-investments series that rejects the trend-cycle decomposition of aggregate investments proposed by the sesquicentennial corpus of revised national accounts (Toniolo, 2013). Thus, the expenditure side estimates point out two new factors compared to previous reconstructions: a revised downturn of private consumption and the reaffirmation of a long swing Kuznets-cycle for investments.
Finally, the last part of the book concerns the composition of fixed investments. Fenoaltea aims to better distinguish infrastructure investments from business investments. This is possible by disaggregating the data by destination. First of all, distinguishing investments in agriculture from investments in industry. By doing so, the partial disaggregation obtained identifies investments in structures and investments in machinery. Unfortunately, a more ambitious disaggregation of investments, by type (housing, public works, machinery and vehicles) and by destination (housing, services, public infrastructure) relies on weak first generation estimates only, which don’t make this step very satisfactory. The results of the decomposition confirm what Fenoaltea already argued in his previous works (Fenoaltea 1988, 2011): that is the long swing in infrastructure was due to the exogenous changes in the international capital market. Moreover, the investment in tools was similarly developed by the availability of finance (p. 107), mainly the retained earnings of the artisans themselves.
Fenoaltea’s book is the culmination of lifelong research spent reconstructing the past by sources and data. It started early in 1967 at the time of his PhD under the supervision of Alexander Gerschenkron, his mentor and target of endless criticism (note 25, p. 35). This methodological controversy narrowed the research of Fenoaltea to the Italian Liberal Age (1861-1913) for a meticulous, and possibly never-ending, improvement of product estimates, as confirmed by his intent to go further in the study. This admirable effort shows probably a “diminishing return” (Baffigi, 2019) for each attempt of refinements. The differences between each stage of reconstruction grow thinner while the interpretation of the Italian Liberal economy is always rooted to the theoretical approach of Fenoaltea as a neoclassical economist.
The reference to Atropos is a sad coincidence, considering the passing of the author, which interrupted his long journey in search of the most accurate interpretations of Italian economic history. If economists are the clergy of a questionable religion, nevertheless Fenoaltea is a leading scholar for cliometricians. And his book is a secular Bible for the methodology of the discipline. A Bible to discuss and to reinterpret. It would not be the first time in history.
1. See Annals of the Fondazione Luigi Einaudi, 53 (2).
2. On the relationship with Gerschenkron see D. McCloskey (2020).
3. Fenoaltea masterfully contributed even to other topics such as the English open fields or slavery, mainly in the first part of his career as scholar.
Baffigi, A. (2015). Il PIL per la storia d’Italia. Istruzioni per l’uso. Collana storica della Banca d’Italia. Serie statistiche, vol. V (Venice: Marsilio).
Fenoaltea, S. (1988). International Resource Flows and Construction Movements in the Atlantic Economy: The Kuznets Cycle in Italy, 1861–1913. Journal of Economic History 48, 605–638.
Fenoaltea, S. (2011). The Reinterpretation of Italian Economic History: From Unification to the Great War (New York: Cambridge University Press).
Fenoaltea, S. (2019). Spleen: The Failures of the Cliometric School. Annals of the Fondazione Luigi Einaudi 53/2, 5−23.
McCloskey, D. (2020), “Stefano Fenoaltea (1943-2020), PSL Quarterly Review, 73 (295): 393-394.
Rey, G. M., ed. (2000). I conti economici dell’Italia. 3°°. Il valore aggiunto per gli anni 1891, 1938, 1951. Collana storica della Banca d’Italia. Serie statistiche, vol. I (Rome-Bari: Laterza).
Toniolo, G., ed. (2013). The Oxford Handbook of the Italian Economy since Unification (New York: Oxford University Press).
Andrea Incerpi is research fellow in Economic History at Università degli Studi dell’Insubria. Recent publications include “Finance and Development in Italy, 1870-1913” (with Barbara Pistoresi and Alberto Rinaldi), International Journal of Economics and Finance (2020) and “Balancing the Current Account: Remittances and Tourism in Italy, 1861-1914,” Rivista di Storia Economica (2019).
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 (firstname.lastname@example.org). Published by EH.Net (February 2021). All EH.Net reviews are archived at http://www.eh.net/BookReview.
|Subject(s):||Economic Development, Growth, and Aggregate Productivity|
|Time Period(s):||19th Century|
20th Century: Pre WWII
|Editor(s):||Bordo, Michael D. |
Qvigstad, Jan F.
|Reviewer(s):||Richardson, Gary |
Published by EH.Net (July 2018)
Michael D. Bordo, Øyvind Eitrheim, Marc Flandreau and Jan F. Qvigstad, editors, Central Banks at a Crossroads: What Can We Learn from History? New York: Cambridge University Press, 2016. xix + 697 pages. $155 (hardback), ISBN: 978-1-107-14966-3.
Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California – Irvine.
This volume presents the results of a multi-team, multi-disciplinary research project that was inspired by the bicentennial of the Norges Bank, the Norwegian Central Bank. In the summer of 2012, the editors commissioned a broad range of research from fourteen teams of coauthors. The researchers included renowned international academics as well as policymaking experts. Representatives of all teams presented initial drafts of their research at a conference in Geneva in April 2013 at the Graduate Institute of International and Development Studies. After receiving comments and revising, the authors presented again in June 2014 at a Norges Bank conference titled Of the Uses of Central Banks: Lessons from History. The authors revised their papers once again, to accommodate comments by discussants and editors, and submitted final drafts for publication the following March.
The volume (and the research program which it encapsulates) asks broad questions about the past, present, and future of central banks. Why did the evolve? Will they continue to evolve in the future? What functions do they serve today? How are they structured as institutions? Why are central banks in developing nations so similar? In what ways do they differ? How are they structured as institutions? What are their roles in the international monetary system and among domestic political institutions? What lessons does history have for current and future practitioners of central banking and what does current practice reveal about central banks’ history and evolution?
The book divides the chapters into four groups. The first group provides historical perspectives on the central bank as an institution. This group includes five chapters.
• Chapter 2. “The Descent of Central Banks (1400-1815)” by William Roberds and François R. Velde.
• Chapter 3. “Central Bank Credibility: An Historical and Quantitative Exploration” by Michael D. Bordo and Pierre L. Siklos.
• Chapter 4. “The Coevolution of Money Markets and Monetary Policy, 1815-2008” by Clemens Jobst and Stefano Ugolini.
• Chapter 5. “Central Bank Independence in Small Open Economies” by Forrest Capie, Geoffrey Wood, and Juan Castañeda.
• Chapter 6. “Fighting the Last War: Economists on the Lender of Last Resort” by Richard S. Grossman and Hugh Rockoff.
The second group examines central banks as part of the international monetary system. This group includes four chapters.
• Chapter 7. “A Century and a Half of Central Banks, International Reserves and International Currencies” by Barry Eichengreen and Marc Flandreau.
• Chapter 8. “Central Banks and the Stability of the International Monetary Regime” by Catherine Schenk and Tobias Straumann.
• Chapter 9. “The International Monetary and Financial System: A Capital Account Historical Perspective” by Claudio Borio, Harold James and Hyun Song Shin.
• Chapter 10. “Central Banking: Perspectives from Emerging Economies” by Menzie D. Chinn.
The third group examines central banks as part of a system of regulatory, monetary, and fiscal institutions within a nation. A focus is delineating central banks from other institutions and describing central banks’ powers and limitations. This group contains three chapters.
• Chapter 11. “The Evolution of the Financial Stability Mandate from its Origins to the Present Day” by Gianni Toniolo and Eugene N. White.
• Chapter 12. “Bubbles and Central Banks: Historical Perspectives” by Markus K. Brunnermeier and Isabel Schnabel.
• Chapter 13. “Central Banks and Payment Systems: The Evolving Trade-off between Cost and Risk” by Charles Kahn, Stephen Quinn and Will Roberds.
The fourth group describes central banks from a practical perspective. It contains two papers that describe what central banks do well, what they do poorly, and how their successes and failures lead to gradual changes in central banks’ structure and mission.
• Chapter 14. “Central Bank Evolution: Lessons Learnt from the Sub-prime Crisis” by C. A. E. Goodhart.
• Chapter 15. “The Evolution of Central Banks: A Practitioner’s Perspective” by Andrew G. Haldane and Jan F. Qvigstad.
The introductory chapter provides a clear and comprehensive summary of the chapters. You can read the introduction for free on the Cambridge University Press web site, so I will not summarize that material here. But, I will encourage you to read it. The introduction does a great job of discussing the big questions that still need to be answered about central banks. It explains that the basic story of central banks is to worry about monetary stability in normal times and about financial stability during crises. It also describes their evolution over the long term, hundreds of years, and explains that central banks’ structure and functions have co-evolved along with the structure of the economy.
The quality of the remaining chapters is uniformly high. Researchers interested in the history of central banks may be interested in the entire book. Specialists may want to focus on individual chapters. In my undergraduate course on the history of the Federal Reserve, I now assign portions of Chapters 2 and 4, which examine the evolution of central banking around the world from the fifteenth through the nineteenth centuries; Chapter 7, which discusses the structure of the international financial system and international currencies; Chapter 11, which discusses central banks’ role as a financial supervisor; and Chapter 13, which discusses central banks and payment systems. I have incorporated ideas and visuals from those chapters and several others into my courses’ power point presentations. An example comes from Chapter 15, which does a good job of discussing the dual long-run objectives of central banks, monetary and financial stability. The chapter highlights the interaction between the two, the value of policy independence in pursuing both, and the challenges that arise as the economy evolves and policy-makers struggle to find the right long-run balance and tradeoffs between their multiple objectives. Chapter 15 illustrates these issues with the history of the Bank of England and the Norges Bank. I teach a course on the history of the Federal Reserve, so I have taken ideas from this chapter and use them to frame material about the Fed which I present in my class.
I expect this volume will have lasting value because of the quality of its chapters. The chapters cover a broad range of topics, time, and geography, but return to consistent themes. The chapters are well written and suitable for a broad audience including researchers at universities and central banks but also policymakers and undergraduates who are interested in the topic.
Gary Richardson is the author of “Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve
District Border, 1929-1933,” Journal of Political Economy (2009). He was the editor for the Federal Reserve’s historical website, which can be found at www.federalreservehistory.org.
Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (email@example.com). Published by EH.Net (July 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.
|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
|Geographic Area(s):||General, International, or Comparative|
|Time Period(s):||19th Century|
20th Century: Pre WWII
20th Century: WWII and post-WWII
|Author(s):||Vecchi, Giovanni |
|Reviewer(s):||Focacci, Chiara Natalie|
Pala, Giovanni Maria
Published by EH.Net (July 2017)
Giovanni Vecchi, Measuring Wellbeing: A History of Italian Living Standards. New York: Oxford University Press, 2017. xvii + 645 pp., $99 (hardback), ISBN: 978-0-19-994459-0.
Reviewed for EH.Net by Chiara Natalie Focacci, Andrea Incerpi, Marco Molteni, Giovanni Maria Pala, and Andrea Ramazzotti.
Measuring Wellbeing offers a multidimensional, quantitative analysis of Italian living standards from the country’s unification in 1861 to the present day. In doing so, it goes beyond the misleading identification of living standards with strictly monetary indexes, broadening the focus to include measures of physical wellbeing and social indicators. Giovanni Vecchi collaborates with eighteen scholars from a range of universities and research institutions to take stock of the latest research in their areas. Each chapter deals with a different dimension of wellbeing and is co-authored by Vecchi and other economic historians. All chapters include an appendix on sources and methodology. The book presents new as well as pre-existing estimates of welfare indicators at the national and regional level, and — when possible — puts these in international perspective. Many of the estimates are drawn from Vecchi’s previous book, In Ricchezza e in Povertà (2011). Measuring Wellbeing expands on and brings to the international audience the work done for the Italian edition.
As stated in the introduction, the book is not intended as a definitive work. It is instead a landmark which organizes for the reader the research conducted so far. It is a meticulous attempt to provide scholars with a sound, heterogeneous picture of the latest knowledge on the evolution of Italian living standards. Nonetheless, the book refrains from dealing with the “deep” causes underlying the measures it surveys. In this sense, it is conceived as a methodological work and a platform for future research.
The book has two souls. It will interest the Italianist as both an accessible introduction and an authoritative reference on living standards in Italy from a quantitative perspective. Equally though it should appeal to scholars interested in Italy as a case study for the analysis of wellbeing. It deals with the issues in a clear (at times pedagogical) way, making this book an ideal starting point even for students outside the boundaries of economics eager to approach the issue of living standards rigorously.
Perhaps Vecchi’s most significant contribution regards the innovative method of exploiting historical household budgets as a micro-data source to study poverty and inequality. Historical application of this approach was pioneered in Rossi, Vecchi and Toniolo (2001); a more recent assessment can be found in A’Hearn, Amendola and Vecchi (2016). The chapter on “Household Budgets” (chapter 13, whose coauthor is Stefano Chianese) presents a collection of almost 20,000 Italian household budgets from 1861 to present. This collection is part of the larger Historical Household Budgets Project (HHB: http://hhbproject.com/the-project).
The Italian Household Budgets Database (IHBD) includes both the typical statistics and surveys produced by institutions such as ISTAT (Italian Statistical Office) or the Bank of Italy, and documents from family archives, trade unions, cultural institutions, and personnel records of public and private employers. In the database, proper historical household budgets are also combined, controversially but interestingly, with so-called “synthetic,” hypothetical households. In addition to earnings and expenses, these sources provide micro-evidence also on other socio-demographic characteristics. The problem of such an ad hoc collection not being a representative sample is addressed using post-stratification techniques and census data to weigh observations appropriately.
IHBD is then employed as a basis for estimating monetary indicators of the distribution of wellbeing, such as inequality (chapter 8; with Nicola Amendola) and poverty (chapter 9; with Amendola and Fernando Salsano). Historical household budgets are also used in developing a novel indicator of vulnerability (chapter 11; with Mariacristina Rossi and Lucia Latino), assessing “how the living conditions of the Italians have been – and are still – conditioned by the presence of risk and uncertainty” (p. 416), i.e. the risk of falling into poverty.
Among other monetary indicators, the authors reconstruct national and regional estimates of income (chapter 7; with Alessandro Brunetti and Emanuele Felice), and wealth (chapter 10; with Luigi Cannari and Giovanni D’Alessio). A chapter on the cost of living (chapter 14; with Amendola) problematizes the issue of temporal as well as spatial price differences in a historical perspective, emphasizing how good price indexes are essential to getting accurate monetary indicators — especially in countries like Italy where regional disparities are substantial.
Producing original estimates or linking existing but scattered series, the authors address physical wellbeing by analyzing nutrition (chapter 1; with Marina Sorrentino), height (chapter 2; with Brian A’Hearn), and health (chapter 3, with Vincenzo Atella and Silvia Francisci). To further investigate non-monetary dimensions, the authors consider education (chapter 5; with A’Hearn), migration (chapter 6; with Matteo Gomellini and Cormac Ó Grada) and the human development index (chapter 12; with Amendola and Giacomo Gabbuti). An original exploration of child labor is provided in Chapter 4 (with Francesco Cinnirella and Gianni Toniolo).
Remarkably, the fourteen chapters are preceded by an introduction but not followed by a conclusion summarizing the main findings and trends. The work is indeed a kaleidoscope, from which no mosaic emerges: the tiles are given, but their arrangement is left to the interpretation and judgment of the reader. A reason for this choice can be discerned in the chapter on the Human Development Index. In this “non-conclusive conclusion,” a one-dimensional synthesis of wellbeing is strongly rejected by the authors, who regard a reductive summary of the complex picture of Italian living standards in the long run as both impractical and undesirable. This approach is at the same time the strongest and weakest point of the book.
One of the factors that makes it hard to give a summary overview of Italian living standards in historical perspective is the issue of regional disparities. Monetary indicators all reflect the long-lasting divide between the North and the South of the country. The chapter on income assesses the prevalence of the North-South divide relative to region-specific determinants of geographic variation since the 1930s, and identifies a short-lived period of convergence starting in the 1950s and driven by publicly funded development projects. Regional polarization looms large over inequality, poverty risk, the distribution of wealth, and the dynamics of vulnerability. At first glance, lagging regions appear to have fared better on non-monetary dimensions of wellbeing, as convergence was stronger for key indicators such as life expectancy and infant mortality. Closer scrutiny reveals that convergence, though real, was slow and subject to setbacks and reversals. The chapter on height provides a particularly close examination of the persistence of regional divides in a context of general progress. The analysis delivers a nuanced picture, where local economic conditions prevail over the efforts of national policymaking.
The book also casts light on the understudied effects of industrialization on the living standards of the Italians. Although they maintain a certain reticence, the authors argue that Italian industrialization was relatively benign. Such conclusion is sustained by findings presented throughout the book. For instance, after discussing alternative strategies, Vecchi, Amendola and Salsano settle on an Orshansky-type poverty line, which is absolute, but adapts to a changing economic and social context. On this basis they estimate a remarkable series of absolute poverty incidence for the whole post-unification period, finding that poverty fell almost continuously, except for short-lived spells that do not coincide with the decades of stronger industrialization. Moreover, the authors estimate that the growth effect almost always favored “a reduction in poverty,” while “the variations in income redistribution have always had an adverse effect on absolute poverty” (p. 368): the “growth effect” has largely offset this “inequality effect.”. A “benign” industrialization also appears in the anthropometric data, as the average stature of the Italian population “never experience[d] any falls” (p. 58), which might be expected in “industrializing areas undergoing rapid urbanization” (p. 59). As a final example, child labor — whose incidence was extremely high in 1881 – “dropped quite sharply during the first stages of industrialisation (1881-1911)” (p. 154) and again during the “economic miracle” (from the 1950s to the mid 1960s), a pattern which contrasts with recent findings on other European countries.
Another general conclusion that seems to emerge is that the achievements of the past should not be taken for granted. On a number of indicators documented in the book (e.g. child labor, income, inequality) recent years have witnessed a partial reversal of the remarkable leaps forward of the post-war “Golden Age.” However, as the authors claim in the closing of the chapter on income: “caution is the watchword, here, since we lack a suitable temporal perspective in order to judge whether the malaise is temporary (albeit prolonged), reversible, or irreparable” (p. 289).
Vecchi’s Measuring Wellbeing is a brave study attempting to fill the gap within the Italian economic history literature on quantifying living standards. The concept of wellbeing is presented as multifaceted and the book also explores non-orthodox dimensions. Unfortunately, it is difficult for the reader to reach an all-embracing conclusion (especially without background knowledge of Italian history), but this is not the authors’ final aim, and this shortcoming is compensated by the relevant methodological contributions that this book presents. This is an innovative and important work and ought to interest both economists and historians — not necessarily just “Italianists.” With regards to Italy, it will soon become the standard reference on the topic of wellbeing, providing scholars with a springboard for their present and future research.
As defined by the authors, “The first is interpreted as the variation in poverty that would be observed if there were no variation in income distribution during the period concerned; the second effect is interpreted as the variation in poverty that would be observed if average income did not vary during the period” (p. 368).
Brian A’Hearn, Nicola Amendola, and Giovanni Vecchi. 2016. “On Historical Household Budgets,” Rivista di Storia Economica, issue 2: 137-76.
Nicola Rossi, Gianni Toniolo, and Giovanni Vecchi. 2001. “Is the Kuznets Curve Still Alive? Evidence from Italian Household Budgets, 1881-1961,” Journal of Economic History, 61 (4): 904-25.
Giovanni Vecchi. 2011. In Ricchezza e in povertà: il benessere degli italiani dall’Unità a oggi. Bologna, Italy: Il Mulino.
The authors of this review are students in the graduate program in Economic and Social History at the University of Oxford.
Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (firstname.lastname@example.org). Published by EH.Net (July 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.
|Subject(s):||Education and Human Resource Development|
Historical Demography, including Migration
Household, Family and Consumer History
Income and Wealth
Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
|Time Period(s):||19th Century|
20th Century: Pre WWII
20th Century: WWII and post-WWII
|Editor(s):||Toniolo, Gianni |
|Reviewer(s):||Prados de la Escosura, Leandro |
Published by EH.Net (October 2015)
Gianni Toniolo, editor, The Oxford Handbook of the Italian Economy since Unification. New York: Oxford University Press, 2013. xiv + 785 pp. $170 (cloth), ISBN: 978-0-19-993669-4.
Reviewed for EH.Net by Leandro Prados de la Escosura, Department of Social Sciences, Universidad Carlos III.
In addition to being a leading scholar of the economic history of modern Italy, Gianni Toniolo has been throughout his career an outstanding citizen. He has had a leading role in debates on Italy’s economic performance since the 1970s — initially as an active member of the new generation of distinguished economic historians that challenged and renovated the conventional narrative. More recently, he has led a new generation of young economists and economic historians in a major revision of Italian economic history that focuses on standards of living and income distribution.
The Oxford Handbook, a most ambitious re-interpretative project in modern European economic history, is the latest proof of Toniolo’s good citizenship. The purpose of this collective effort is assessing Italian long run economic performance within an international perspective. A common element in the contributions to the volume is addressing historical issues from a present day’s perspective and emphasizing its policy dimensions. This feature differentiates the volume from conventional economic history texts. The wide variety of issues considered does not harm the volume’s unity. In addition, the book is well written and accessible to the non-technical reader.
The volume is divided into five parts: aggregate growth and policy; sources of growth and welfare; international competitiveness; firms, banks, and the state; and the regional divide. For each topic within each of the five sections, the editor has chosen two or three specialists, usually an international scholar in the field and an Italian economist or economic historian. Such a bold idea proves to be a success. An excellent quantitative appendix, that includes a new set of GDP estimates from the output and expenditure sides, together with new series of labor quantity, capital stock and total factor productivity, completes the volume.
Part I on aggregate growth and policy represents, perhaps, the most ambitious interpretative section of the volume. It starts with a thoughtful introduction by the editor that constitutes a good guide for the rest of the volume. In contrast to the relative decline during the Early Modern era, Italy experienced sustained growth and catching up to the leading economies for most of the twentieth century, separating two phases (pre-1896 and post-1992) of sluggish performance and falling behind. The process of international convergence was accompanied by internal divergence between north and south. The introduction is followed by Harold James and Kevin O’Rourke’s assessment of Italy’s performance during the first globalization and its subsequent backlash, in which they stress pre-World War II capital scarcity and highlight the specificity of interwar industrial policy under the lead of state-owned industrial conglomerate IRI. Then, Andrea Boltho compares Italy to Germany and Japan, countries defeated in World War II and great successes in the postwar, which slowed down significantly at the turn of the century. Lack of major reforms during the reconstruction years, administrative inefficiencies, permanent conflict in industrial relations, and the gap between North and South are pointed out as Italy’s distinctive elements. Nicholas Crafts and Marco Magnani carry out a path-breaking interpretation of Italy’s catching up during the Golden Age and lagging behind since 1992. Their main argument is that institutions and policy choices that allow success in a far-from-frontier economy differ from those required for a close-to-frontier economy. Thus, Italy successfully performed as a far-from-frontier economy in the so-called age of Fordist manufacturing within a stable context of growing export demand, diffusion of U.S. technology, and high investment opportunities, with regulation, industrial policy, government intervention, and undervalued exchange rates as the main policy instruments. As Italy got closer to the technological frontier, factor and product markets’ flexibility and human and intangible capital accumulation became central to growth opportunities and Italy fell short of achieving them, as the delayed diffusion of information and communications technologies confirms. In the closing paper, Marcello de Cecco provides an original insight on how major issues in Italian economic performance were addressed by foreign scholars in which dualism receives particular attention.
Part II on sources of growth and welfare represents the most empirical section of the volume and provides a quantitative background for the rest of the volume’s contributions. It opens with a major contribution by Alberto Baffigi (that represents a collective endeavor) to produce a new set of historical national accounts with homogeneous GDP series from the supply and demand sides, at current and constant prices, over one hundred and fifty years. In the next chapter, Stephen Broadberry, Claire Giordano and Francesco Zollino compute new series of capital and labor and combine them with Baffigi’s new GDP series to draw trends in labor and total factor productivity (TFP) that place Italy in comparative perspective. Their analysis of the sources of growth reveals that during 1913-1993, TFP drove labor productivity growth (in which structural change played a relevant part) especially during growth accelerations. However, up to 1913 and, then, since 1993, factor accumulation dominated long-run growth. Italy appears to have come full circle. Andrea Brandolini and Giovanni Vecchi address standards of living in a comprehensive way to conclude that modern economic growth in Italy was compatible with substantial achievements in human development and the eradication of extreme poverty. The evolution of Italy’s educational system is addressed in Giuseppe Bertola and Paolo Sestito’s essay. They find that insufficient education levels (in both quantity and quality) represent a much more relevant obstacle for growth and catching up in today’s advanced Italian economy than during the Golden Age. In their assessment of emigration, Matteo Gomelli and Cormac Ó Gráda stress the positive self-selection of migrants and the favorable impact of migration on living standards and growth, as well as on reducing regional discrepancies. Lastly, Luigi Guiso and Paolo Pinotti use the enfranchisement of 1912 to investigate whether civic capital had an effect on democratization. After enfranchisement, electoral turnout declined but more in the South than in the North, which was more civic-capital intense. From this finding they conclude that formal democratization had a lower impact in the South as lower civic capital reduced political participation and, hence, did not contribute to closing the North-South gap.
Part III focuses on the international competitiveness of the Italian economy. It starts with a complete survey of the evolution of comparative advantage by Giovanni Federico and Nikolaus Wolf who emphasize the association between economic growth and export performance. They stress the dynamic role of manufacturing exports from World War I to 1980, when low-tech exports dominated and competitiveness declined, especially during the last two decades. Virginia di Nino, Barry Eichengreen, and Massimo Sbracia show that Italy’s currency was mostly undervalued between unification and the 1990s, after which it became overvalued. Undervaluation stimulated growth through export expansion and a more efficient resource allocation. Federico Barbiellini Amidei, John Catwell, and Anna Spadavecchia, who investigate technological innovation, highlight the major role played by international transfers of technology. Italy creatively adopted foreign technology, as industries’ innovation was driven more by engineering and design than by R&D. Since the 1990s, imports of foreign disembodied technology slowed down while R&D expenditure lagged behind advanced countries deepening the gap. A most informative chapter on the emergence and expansion of Italian multinationals by Fabrizio Onida, Giuseppe Berta, and Mario Perugini closes Part III.
The theme of Part IV is how firms and industries evolved and what the role played in it by banks and public policies. Franco Amatori, Matteo Bugamelli, and Andrea Colli assess how firms reacted to different technological paradigms in a global economy. During the first three-fourths of the twentieth century, industry, especially small and medium-size firms, performed satisfactorily. However, in the latest phase of globalization, small-size firms were unable to take full advantage of the information and communication technology, while suffered increasing competition from emerging countries. Inability to manage social conflict and to create a modern institutional framework seems to underlie Italy’s disappointing performance during the last two decades. The impact of credit allocation on growth and efficiency since World War II is at the core of Stefano Battilossi, Alfredo Gigliobianco, and Giuseppe Marinelli’s essay. They find a contribution of Italian banks to economic growth up to 1970, while overregulation and financial repression — a result of policies socially motivated and serving vested political interests — had a negative impact between the 1970s and mid-1990s. Liberalization had a positive effect on the banking system that responded to growth opportunities and directed credit towards promising industries. Banks, thus, should not be blamed for Italy’s current structural problems. In their chapter, Fabrizio Balassone, Maura Francese, and Angelo Pace find support for the hypothesis of a negative association between public debt and growth over the long run through a reduction in capital accumulation. Nonetheless, unlike the experience of the late nineteenth and early twentieth century, reducing public debt from 1995 to 2007 did not have a positive effect on growth. Delayed fiscal consolidation and the size of public expenditure and deficits appear as the explanation. In this section’s closing paper, Magda Bianco and Giulio Napolitano address the impact of public administration on the efficiency of the Italian economy.
In Part V, dedicated to the regional divide, Giovanni Iuzzolino, Guido Pellegrini, and Gianfranco Viesti focus on the changes in regional convergence of GDP per head since unification and find a declining North-South gap between the late nineteenth and mid-twentieth century that gave way to its increase during the Golden Age, to be followed by a reduction that has stabilized since the 1980s. In human development terms, however, the divergence partially closed over time. Brian A’Hearn and Anthony Venables investigate, in turn, the role of internal geography and foreign trade patterns in regional disparities showing that location of natural advantage and access to domestic and international markets favored the North over time, rejecting the hypothesis of an inverted-U pattern of regional inequality. Water abundance permitted intensive agriculture after unification; largely inward-looking industrialization in the early twentieth century also gave advantage to the North with its larger and more sophisticated markets. In the post-World War II era agglomeration in the North facilitated its access to European Community markets.
I cannot refrain from adding some succinct remarks after reading such a fascinating volume. As regards the quantitative part, it needs to be said that Baffigi’s chapter would by itself justify the volume. However, the way the new series are presented is a bit disappointing. One misses the presentation of long-run trends in GDP and GDP per head and the contribution due to supply and demand components.
In the excellent chapter by Broadberry, Giordano and Zollino it seems surprising that human capital is not considered independently. This decision implies that in the estimates any potential contribution of labor quality is included in the residual, rendering TFP estimates an upper bound of its actual magnitude. In turn, using full time equivalent workers (FTE) fails to take into account the decline in hours worked per employed worker that probably results in a downward bias in labor productivity levels and growth.
Some additional questions emerge. Are broad capital accumulation and efficiency gains, complementary or alternative? Does TFP growth follow capital accumulation? Should it be concluded that Italy exhausted its catching-up potential as it got closer the technological frontier? Other national experiences, such as Korea’s, tend to suggest otherwise.
On the contentious issue of inequality, the Italian historical experience appears of great interest. A’Hearn and Venables do not find confirmation for the hypothesis of an inverted-U pattern of regional inequality. Such a finding is consistent with the results for personal income distribution by Brandolini and Vecchi. This coincidence suggests a possible association between them as differences in average incomes between rich and poor regions will be most probably an element in overall inequality and would explain, perhaps, the absence of a Kuznets curve in Italy.
As the reader will realize, the long journey through this lengthy book is worth pursuing. Italian and European economic history is better and more thoughtful after the appearance of The Oxford Handbook of the Italian Economy.
Leandro Prados de la Escosura is the author of “Economic Freedom in the Long Run: Evidence from OECD Countries (1850-2007),” Economic History Review (forthcoming).
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|Subject(s):||Economic Development, Growth, and Aggregate Productivity|
Economic Planning and Policy
Economywide Country Studies and Comparative History
Financial Markets, Financial Institutions, and Monetary History
Industry: Manufacturing and Construction
International and Domestic Trade and Relations
Living Standards, Anthropometric History, Economic Anthropology
Urban and Regional History
|Time Period(s):||19th Century|
20th Century: Pre WWII
20th Century: WWII and post-WWII
Lennart Schön, Lund University
This article presents an overview of Swedish economic growth performance internationally and statistically and an account of major trends in Swedish economic development during the nineteenth and twentieth centuries.1
Modern economic growth in Sweden took off in the middle of the nineteenth century and in international comparative terms Sweden has been rather successful during the past 150 years. This is largely thanks to the transformation of the economy and society from agrarian to industrial. Sweden is a small economy that has been open to foreign influences and highly dependent upon the world economy. Thus, successive structural changes have put their imprint upon modern economic growth.
Swedish Growth in International Perspective
The century-long period from the 1870s to the 1970s comprises the most successful part of Swedish industrialization and growth. On a per capita basis the Japanese economy performed equally well (see Table 1). The neighboring Scandinavian countries also grew rapidly but at a somewhat slower rate than Sweden. Growth in the rest of industrial Europe and in the U.S. was clearly outpaced. Growth in the entire world economy, as measured by Maddison, was even slower.
Table 1 Annual Economic Growth Rates per Capita in Industrial Nations and the World Economy, 1871-2005
|Year||Sweden||Rest of Nordic Countries||Rest of Western Europe||United States||Japan||World Economy|
Note: Rest of Nordic countries = Denmark, Finland and Norway. Rest of Western Europe = Austria, Belgium, Britain, France, Germany, Italy, the Netherlands, and Switzerland.
Source: Maddison (2006); Krantz/Schön (forthcoming 2007); World Bank, World Development Indicator 2000; Groningen Growth and Development Centre, www.ggdc.com.
The Swedish advance in a global perspective is illustrated in Figure 1. In the mid-nineteenth century the Swedish average income level was close to the average global level (as measured by Maddison). In a European perspective Sweden was a rather poor country. By the 1970s, however, the Swedish income level was more than three times higher than the global average and among the highest in Europe.
Note. The annual variation in world production between Maddison’s benchmarks 1870, 1913 and 1950 is estimated from his supply of annual country series.
To some extent this was a catch-up story. Sweden was able to take advantage of technological and organizational advances made in Western Europe and North America. Furthermore, Scandinavian countries with resource bases such as Sweden and Finland had been rather disadvantaged as long as agriculture was the main source of income. The shift to industry expanded the resource base and industrial development – directed both to a growing domestic market but even more to a widening world market – became the main lever of growth from the late nineteenth century.
Catch-up is not the whole story, though. In many industrial areas Swedish companies took a position at the technological frontier from an early point in time. Thus, in certain sectors there was also forging ahead,2 quickening the pace of structural change in the industrializing economy. Furthermore, during a century of fairly rapid growth new conditions have arisen that have required profound adaptation and a renewal of entrepreneurial activity as well as of economic policies.
The slow down in Swedish growth from the 1970s may be considered in this perspective. While in most other countries growth from the 1970s fell only in relation to growth rates in the golden post-war ages, Swedish growth fell clearly below the historical long run growth trend. It also fell to a very low level internationally. The 1970s certainly meant the end to a number of successful growth trajectories in the industrial society. At the same time new growth forces appeared with the electronic revolution, as well as with the advance of a more service based economy. It may be the case that this structural change hit the Swedish economy harder than most other economies, at least of the industrial capitalist economies. Sweden was forced into a transformation of its industrial economy and of its political economy in the 1970s and the 1980s that was more profound than in most other Western economies.
A Statistical Overview, 1800-2000
Swedish economic development since 1800 may be divided into six periods with different growth trends, as well as different composition of growth forces.
Table 2 Annual Growth Rates in per Capita Production, Total Investments, Foreign Trade and Population in Sweden, 1800-2000
|Period||Per capita GDP||Investments||Foreign Trade||Population|
Source: Krantz/Schön (forthcoming 2007).
In the first decades of the nineteenth century the agricultural sector dominated and growth was slow in all aspects but in population. Still there was per capita growth, but to some extent this was a recovery from the low levels during the Napoleonic Wars. The acceleration during the next period around the mid-nineteenth century is marked in all aspects. Investments and foreign trade became very dynamic ingredients with the onset of industrialization. They were to remain so during the following periods as well. Up to the 1970s per capita growth rates increased for each successive period. In an international perspective it is most notable that per capita growth rates increased also in the interwar period, despite the slow down in foreign trade. The interwar period is crucial for the long run relative success of Swedish economic growth. The decisive culmination in the post-war period with high growth rates in investments and in foreign trade stands out as well, as the deceleration in all aspects in the late twentieth century.
An analysis in a traditional growth accounting framework gives a long term pattern with certain periodic similarities (see Table 3). Thus, total factor productivity growth has increased over time up to the 1970s, only to decrease to its long run level in the last decades. This deceleration in productivity growth may be looked upon either as a failure of the “Swedish Model” to accommodate new growth forces or as another case of the “productivity paradox” in lieu of the information technology revolution.3
Table 3 Total Factor Productivity (TFP) Growth and Relative Contribution of Capital, Labor and TFP to GDP Growth in Sweden, 1840-2000
Source: See Table 2.
In terms of contribution to overall growth, TFP has increased its share for every period. The TFP share was low in the 1840s but there was a very marked increase with the onset of modern industrialization from the 1870s. In relative terms TFP reached its highest level so far from the 1970s, thus indicating an increasing role of human capital, technology and knowledge in economic growth. The role of capital accumulation was markedly more pronounced in early industrialization with the build-up of a modern infrastructure and with urbanization, but still capital did retain much of its importance during the twentieth century. Thus its contribution to growth during the post-war Golden Ages was significant with very high levels of material investments. At the same time TFP growth culminated with positive structural shifts, as well as increased knowledge intensity complementary to the investments. Labor has in quantitative terms progressively reduced its role in economic growth. One should observe, however, the relatively large importance of labor in Swedish economic growth during the interwar period. This was largely due to demographic factors and to the employment situation that will be further commented upon.
In the first decades of the nineteenth century, growth was still led by the primary production of agriculture, accompanied by services and transport. Secondary production in manufacturing and building was, on the contrary, very stagnant. From the 1840s the industrial sector accelerated, increasingly supported by transport and communications, as well as by private services. The sectoral shift from agriculture to industry became more pronounced at the turn of the twentieth century when industry and transportation boomed, while agricultural growth decelerated into subsequent stagnation. In the post-war period the volume of services, both private and public, increased strongly, although still not outpacing industry. From the 1970s the focus shifted to private services and to transport and communications, indicating fundamental new prerequisites of growth.
Table 4 Growth Rates of Industrial Sectors, 1800-2000
|Period||Agriculture||Industrial and Hand||Transport and Communic.||Building||Private Services||Public Services||GDP|
Source: See Table 2.
Note: Private services are exclusive of dwelling services.
Growth and Transformation in the Agricultural Society of the Early Nineteenth Century
During the first half of the nineteenth century the agricultural sector and the rural society dominated the Swedish economy. Thus, more than three-quarters of the population were occupied in agriculture while roughly 90 percent lived in the countryside. Many non-agrarian activities such as the iron industry, the saw mill industry and many crafts as well as domestic, religious and military services were performed in rural areas. Although growth was slow, a number of structural and institutional changes occurred that paved the way for future modernization.
Most important was the transformation of agriculture. From the late eighteenth century commercialization of the primary sector intensified. Particularly during the Napoleonic Wars, the domestic market for food stuffs widened. The population increase in combination with the temporary decrease in imports stimulated enclosures and reclamation of land, the introduction of new crops and new methods and above all it stimulated a greater degree of market orientation. In the decades after the war the traditional Swedish trade deficit in grain even shifted to a trade surplus with an increasing exportation of oats, primarily to Britain.
Concomitant with the agricultural transformation were a number of infrastructural and institutional changes. Domestic transportation costs were reduced through investments in canals and roads. Trade of agricultural goods was liberalized, reducing transaction costs and integrating the domestic market even further. Trading companies became more effective in attracting agricultural surpluses for more distant markets. In support of the agricultural sector new means of information were introduced by, for example, agricultural societies that published periodicals on innovative methods and on market trends. Mortgage societies were established to supply agriculture with long term capital for investments that in turn intensified the commercialization of production.
All these elements meant a profound institutional change in the sense that the price mechanism became much more effective in directing human behavior. Furthermore, a greater interest in information and in the main instrument of information, namely literacy, was infused. Traditionally, popular literacy had been upheld by the church, mainly devoted to knowledge of the primary Lutheran texts. In the new economic environment, literacy was secularized and transformed into a more functional literacy marked by the advent of schools for public education in the 1840s.
The Breakthrough of Modern Economic Growth in the Mid-nineteenth Century
In the decades around the middle of the nineteenth century new dynamic forces appeared that accelerated growth. Most notably foreign trade expanded by leaps and bounds in the 1850s and 1860s. With new export sectors, industrial investments increased. Furthermore, railways became the most prominent component of a new infrastructure and with this construction a new component in Swedish growth was introduced, heavy capital imports.
The upswing in industrial growth in Western Europe during the 1850s, in combination with demand induced through the Crimean War, led to a particularly strong expansion in Swedish exports with sharp price increases for three staple goods – bar iron, wood and oats. The charcoal-based Swedish bar iron had been the traditional export good and had completely dominated Swedish exports until mid-nineteenth century. Bar iron met, however, increasingly strong competition from British and continental iron and steel industries and Swedish exports had stagnated in the first half of the nineteenth century. The upswing in international demand, following the diffusion of industrialization and railway construction, gave an impetus to the modernization of Swedish steel production in the following decades.
The saw mill industry was a really new export industry that grew dramatically in the 1850s and 1860s. Up until this time, the vast forests in Sweden had been regarded mainly as a fuel resource for the iron industry and for household heating and local residential construction. With sharp price increases on the Western European market from the 1840s and 1850s, the resources of the sparsely populated northern part of Sweden suddenly became valuable. A formidable explosion of saw mill construction at the mouths of the rivers along the northern coastline followed. Within a few decades Swedish merchants, as well as Norwegian, German, British and Dutch merchants, became saw mill owners running large-scale capitalist enterprises at the fringe of the European civilization.
Less dramatic but equally important was the sudden expansion of Swedish oat exports. The market for oats appeared mainly in Britain, where short-distance transportation in rapidly growing urban centers increased the fleet of horses. Swedish oats became an important energy resource during the decades around the mid-nineteenth century. In Sweden this had a special significance since oats could be cultivated on rather barren and marginal soils and Sweden was richly endowed with such soils. Thus, the market for oats with strongly increasing prices stimulated further the commercialization of agriculture and the diffusion of new methods. It was furthermore so since oats for the market were a substitute for local flax production – also thriving on barren soils – while domestic linen was increasingly supplanted by factory-produced cotton goods.
The Swedish economy was able to respond to the impetus from Western Europe during these decades, to diffuse the new influences in the economy and to integrate them in its development very successfully. The barriers to change seem to have been weak. This is partly explained by the prior transformation of agriculture and the evolution of market institutions in the rural economy. People reacted to the price mechanism. New social classes of commercial peasants, capitalists and wage laborers had emerged in an era of domestic market expansion, with increased regional specialization, and population increase.
The composition of export goods also contributed to the diffusion of participation and to the diffusion of export income. Iron, wood and oats meant both a regional and a social distribution. The value of prior marginal resources such as soils in the south and forests in the north was inflated. The technology was simple and labor intensive in industry, forestry, agriculture and transportation. The demand for unskilled labor increased strongly that was to put an imprint upon Swedish wage development in the second half of the nineteenth century. Commercial houses and industrial companies made profits but export income was distributed to many segments of the population.
The integration of the Swedish economy was further enforced through initiatives taken by the State. The parliament decision in the 1850s to construct the railway trunk lines meant, first, a more direct involvement by the State in the development of a modern infrastructure and, second, new principles of finance since the State had to rely upon capital imports. At the same time markets for goods, labor and capital were liberalized and integration both within Sweden and with the world market deepened. The Swedish adoption of the Gold Standard in 1873 put a final stamp on this institutional development.
A Second Industrial Revolution around 1900
In the late nineteenth century, particularly in the 1880s, international competition became fiercer for agriculture and early industrial branches. The integration of world markets led to falling prices and stagnation in the demand for Swedish staple goods such as iron, sawn wood and oats. Profits were squeezed and expansion thwarted. On the other hand there arose new markets. Increasing wages intensified mechanization both in agriculture and in industry. The demand increased for more sophisticated machinery equipment. At the same time consumer demand shifted towards better foodstuff – such as milk, butter and meat – and towards more fabricated industrial goods.
The decades around the turn of the twentieth century meant a profound structural change in the composition of Swedish industrial expansion that was crucial for long term growth. New and more sophisticated enterprises were founded and expanded particularly from the 1890s, in the upswing after the Baring Crisis.
The new enterprises were closely related to the so called Second Industrial Revolution in which scientific knowledge and more complex engineering skills were main components. The electrical motor became especially important in Sweden. A new development block was created around this innovation that combined engineering skills in companies such as ASEA (later ABB) with a large demand in energy-intensive processes and with the large supply of hydropower in Sweden.4 Financing the rapid development of this large block engaged commercial banks, knitting closer ties between financial capital and industry. The State, once again, engaged itself in infrastructural development in support of electrification, still resorting to heavy capital imports.
A number of innovative industries were founded in this period – all related to increased demand for mechanization and engineering skills. Companies such as AGA, ASEA, Ericsson, Separator (AlfaLaval) and SKF have been labeled “enterprises of genius” and all are represented with renowned inventors and innovators. This was, of course, not an entirely Swedish phenomenon. These branches developed simultaneously on the Continent, particularly in nearby Germany and in the U.S. Knowledge and innovative stimulus was diffused among these economies. The question is rather why this new development became so strong in Sweden so that new industries within a relatively short period of time were able to supplant old resource-based industries as main driving forces of industrialization.
Traditions of engineering skills were certainly important, developed in old heavy industrial branches such as iron and steel industries and stimulated further by State initiatives such as railway construction or, more directly, the founding of the Royal Institute of Technology. But apart from that the economic development in the second half of the nineteenth century fundamentally changed relative factor prices and the profitability of allocation of resources in different lines of production.
The relative increase in the wages of unskilled labor had been stimulated by the composition of early exports in Sweden. This was much reinforced by two components in the further development – emigration and capital imports.
Within approximately the same period, 1850-1910, the Swedish economy received a huge amount of capital mainly from Germany and France, while delivering an equally huge amount of labor to primarily the U.S. Thus, Swedish relative factor prices changed dramatically. Swedish interest rates remained at rather high levels compared to leading European countries until 1910, due to a continuous large demand for capital in Sweden, but relative wages rose persistently (see Table 5). As in the rest of Scandinavia, wage increases were much stronger than GDP growth in Sweden indicating a shift in income distribution in favor of labor, particularly in favor of unskilled labor, during this period of increased world market integration.
Table 5 Annual Increase in Real Wages of Unskilled Labor and Annual GDP Growth per Capita, 1870-1910
|Country||Annual real wage increase, 1870-1910||Annual GDP growth per capita, 1870-1910|
|Denmark and Norway||2.6||1.3|
|France, Germany and Great Britain||1.1||1.2|
Sources: Wages from Williamson (1995); GDP growth see Table 1.
Relative profitability fell in traditional industries, which exploited rich natural resources and cheap labor, while more sophisticated industries were favored. But the causality runs both ways. Had this structural shift with the growth of new and more profitable industries not occurred, the Swedish economy would not have been able to sustain the wage increase.5
Accelerated Growth in the War-stricken Period, 1910-1950
The most notable feature of long term Swedish growth is the acceleration in growth rates during the period 1910-1950, which in Europe at large was full of problems and catastrophes.6 Thus, Swedish per capita production grew at 2.2 percent annually while growth in the rest of Scandinavia was somewhat below 2 percent and in the rest of Europe hovered at 1 percent. The Swedish acceleration was based mainly on three pillars.
First, the structure created at the end of the nineteenth century was very viable, with considerable long term growth potential. It consisted of new industries and new infrastructures that involved industrialists and financial capitalists, as well as public sector support. It also involved industries meeting a relatively strong demand in war times, as well as in the interwar period, both domestically and abroad.
Second, the First World War meant an immense financial bonus to the Swedish market. A huge export surplus at inflated prices during the war led to the domestication of the Swedish national debt. This in turn further capitalized the Swedish financial market, lowering interest rates and ameliorating sequential innovative activity in industry. A domestic money market arose that provided the State with new instruments for economic policy that were to become important for the implementation of the new social democratic “Keynesian” policies of the 1930s.
Third, demographic development favored the Swedish economy in this period. The share of the economically active age group 15-64 grew substantially. This was due partly to the fact that prior emigration had sized down cohorts that now would have become old age pensioners. Comparatively low mortality of young people during the 1910s, as well as an end to mass emigration further enhanced the share of the active population. Both the labor market and domestic demand was stimulated in particular during the 1930s when the household forming age group of 25-30 years increased.
The augmented labor supply would have increased unemployment had it not been combined with the richer supply of capital and innovative industrial development that met elastic demand both domestically and in Europe.
Thus, a richer supply of both capital and labor stimulated the domestic market in a period when international market integration deteriorated. Above all it stimulated the development of mass production of consumption goods based upon the innovations of the Second Industrial Revolution. Significant new enterprises that emanated from the interwar period were very much related to the new logic of the industrial society, such as Volvo, SAAB, Electrolux, Tetra Pak and IKEA.
The Golden Age of Growth, 1950-1975
The Swedish economy was clearly part of the European Golden Age of growth, although Swedish acceleration from the 1950s was less pronounced than in the rest of Western Europe, which to a much larger extent had been plagued by wars and crises.7 The Swedish post-war period was characterized primarily by two phenomena – the full fruition of development blocks based upon the great innovations of the late nineteenth century (the electrical motor and the combustion engine) and the cementation of the “Swedish Model” for the welfare state. These two phenomena were highly complementary.
The Swedish Model had basically two components. One was a greater public responsibility for social security and for the creation and preservation of human capital. This led to a rapid increase in the supply of public services in the realms of education, health and children’s day care as well as to increases in social security programs and in public savings for transfers to pensioners program. The consequence was high taxation. The other component was a regulation of labor and capital markets. This was the most ingenious part of the model, constructed to sustain growth in the industrial society and to increase equality in combination with the social security program and taxation.
The labor market program was the result of negotiations between trade unions and the employers’ organization. It was labeled “solidaristic wage policy” with two elements. One was to achieve equal wages for equal work, regardless of individual companies’ ability to pay. The other element was to raise the wage level in low paid areas and thus to compress the wage distribution. The aim of the program was actually to increase the speed in the structural rationalization of industries and to eliminate less productive companies and branches. Labor should be transferred to the most productive export-oriented sectors. At the same time income should be distributed more equally. A drawback of the solidaristic wage policy from an egalitarian point of view was that profits soared in the productive sectors since wage increases were held back. However, capital market regulations hindered the ability of high profits to be converted into very high incomes for shareholders. Profits were taxed very low if they were converted into further investments within the company (the timing in the use of the funds was controlled by the State in its stabilization policy) but taxed heavily if distributed to share holders. The result was that investments within existing profitable companies were supported and actually subsidized while the mobility of capital dwindled and the activity at the stock market fell.
As long as the export sectors grew, the program worked well.8 Companies founded in the late nineteenth century and in the interwar period developed into successful multinationals in engineering with machinery, auto industries and shipbuilding, as well as in resource-based industries of steel and paper. The expansion of the export sector was the main force behind the high growth rates and the productivity increases but the sector was strongly supported by public investments or publicly subsidized investments in infrastructure and residential construction.
Hence, during the Golden Age of growth the development blocks around electrification and motorization matured in a broad modernization of the society, where mass consumption and mass production was supported by social programs, by investment programs and by labor market policy.
Crisis and Restructuring from the 1970s
In the 1970s and early 1980s a number of industries – such as steel works, pulp and paper, shipbuilding, and mechanical engineering – ran into crisis. New global competition, changing consumer behavior and profound innovative renewal, especially in microelectronics, made some of the industrial pillars of the Swedish Model crumble. At the same time the disadvantages of the old model became more apparent. It put obstacles to flexibility and to entrepreneurial initiatives and it reduced individual incentives for mobility. Thus, while the Swedish Model did foster rationalization of existing industries well adapted to the post-war period, it did not support more profound transformation of the economy.
One should not exaggerate the obstacles to transformation, though. The Swedish economy was still very open in the market for goods and many services, and the pressure to transform increased rapidly. During the 1980s a far-reaching structural change within industry as well as in economic policy took place, engaging both private and public actors. Shipbuilding was almost completely discontinued, pulp industries were integrated into modernized paper works, the steel industry was concentrated and specialized, and the mechanical engineering was digitalized. New and more knowledge-intensive growth industries appeared in the 1980s, such as IT-based telecommunication, pharmaceutical industries, and biotechnology, as well as new service industries.
During the 1980s some of the constituent components of the Swedish model were weakened or eliminated. Centralized negotiations and solidaristic wage policy disappeared. Regulations in the capital market were dismantled under the pressure of increasing international capital flows simultaneously with a forceful revival of the stock market. The expansion of public sector services came to an end and the taxation system was reformed with a reduction of marginal tax rates. Thus, Swedish economic policy and welfare system became more adapted to the main European level that facilitated the Swedish application of membership and final entrance into the European Union in 1995.
It is also clear that the period from the 1970s to the early twenty-first century comprise two growth trends, before and after 1990 respectively. During the 1970s and 1980s, growth in Sweden was very slow and marked by the great structural problems that the Swedish economy had to cope with. The slow growth prior to 1990 does not signify stagnation in a real sense, but rather the transformation of industrial structures and the reformulation of economic policy, which did not immediately result in a speed up of growth but rather in imbalances and bottle necks that took years to eliminate. From the 1990s up to 2005 Swedish growth accelerated quite forcefully in comparison with most Western economies.9 Thus, the 1980s may be considered as a Swedish case of “the productivity paradox,” with innovative renewal but with a delayed acceleration of productivity and growth from the 1990s – although a delayed productivity effect of more profound transformation and radical innovative behavior is not paradoxical.
Table 6 Annual Growth Rates per Capita, 1971-2005
|Period||Sweden||Rest of Nordic Countries||Rest of Western Europe||United States||World Economy|
Sources: See Table 1.
The recent acceleration in growth may also indicate that some of the basic traits from early industrialization still pertain to the Swedish economy – an international attitude in a small open economy fosters transformation and adaptation of human skills to new circumstances as a major force behind long term growth.
Abramovitz, Moses. “Catching Up, Forging Ahead and Falling Behind.” Journal of Economic History 46, no. 2 (1986): 385-406.
Dahmén, Erik. “Development Blocks in Industrial Economics.” Scandinavian Economic History Review 36 (1988): 3-14.
David, Paul A. “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox.” American Economic Review 80, no. 2 (1980): 355-61.
Eichengreen, Barry. “Institutions and Economic Growth: Europe after World War II.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo. New York: Cambridge University Press, 1996.
Krantz, Olle and Lennart Schön. Swedish Historical National Accounts, 1800-2000. Lund: Almqvist and Wiksell International (forthcoming, 2007).
Maddison, Angus. The World Economy, Volumes 1 and 2. Paris: OECD (2006).
Schön, Lennart. “Development Blocks and Transformation Pressure in a Macro-Economic Perspective: A Model of Long-Cyclical Change.” Skandinaviska Enskilda Banken Quarterly Review 20, no. 3-4 (1991): 67-76.
Schön, Lennart. “External and Internal Factors in Swedish Industrialization.” Scandinavian Economic History Review 45, no. 3 (1997): 209-223.
Schön, Lennart. En modern svensk ekonomisk historia: Tillväxt och omvandling under två sekel (A Modern Swedish Economic History: Growth and Transformation in Two Centuries). Stockholm: SNS (2000).
Schön, Lennart. “Total Factor Productivity in Swedish Manufacturing in the Period 1870-2000.” In Exploring Economic Growth: Essays in Measurement and Analysis: A Festschrift for Riitta Hjerppe on Her Sixtieth Birthday, edited by S. Heikkinen and J.L. van Zanden. Amsterdam: Aksant, 2004.
Schön, Lennart. “Swedish Industrialization 1870-1930 and the Heckscher-Ohlin Theory.” In Eli Heckscher, International Trade, and Economic History, edited by Ronald Findlay et al. Cambridge, MA: MIT Press (2006).
Temin, Peter. “The Golden Age of European Growth Reconsidered.” European Review of Economic History 6, no. 1 (2002): 3-22.
Williamson, Jeffrey G. “The Evolution of Global Labor Markets since 1830: Background Evidence and Hypotheses.” Explorations in Economic History 32, no. 2 (1995): 141-96.
Citation: Schön, Lennart. “Sweden – Economic Growth and Structural Change, 1800-2000”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/sweden-economic-growth-and-structural-change-1800-2000/
Albrecht Ritschl, Humboldt Universitaet – Berlin
Between 1948 and 1951, the United States poured financial aiding totaling $13 billion (about $100 billion at 2003 prices) into the economies of Western Europe. Officially termed the European Recovery Program (ERP), the Marshall Plan was approved by Congress in the Economic Cooperation Act of April 1948. After a transitory 90-Days Recovery Program, the Marshall Plan spanned three ERP years from July 1948 to June 1951. Congress appropriated payments to European countries in annual installments. Most of U.S. assistance under the ERP took the form of grants; the loan component had deliberately been kept low to avoid transfer problems. Distribution of the ERP funds among the recipient countries and their allocation to key sectors were placed in the hands of a U.S. board operating in Europe, the Economic Cooperation Agency (ECA). Countries would present requests for deliveries of goods to the ECA, which evaluated and decided them according to a set scheme of priorities. Dollar payments by the ECA for any deliveries were complemented by a system of national matching funds in the recipient countries, called counterpart funds. Countries would pay for ERP deliveries, not in U.S. dollars but in their own national currencies. These payments were credited to their respective counterpart funds. With a view to the German transfer problem of the inter-war period, no attempt was made to transfer these payments into U.S. dollars. Instead, the ECA employed these counterpart funds to channel investment into bottleneck sectors of the respective national economies. Repayment to the U.S. of the ERP’s loan component was effected in the mid-1950s.
The Marshall Plan was by no means the first U.S. aid program for post-war Europe. Already during 1945-1947, the U.S. paid out substantial financial assistance to Europe under various different schemes. In total annual amount, these payments were actually larger than the Marshall Plan itself. One key element of the Marshall Plan was to bundle existing, rival programs in a package and to identify and iron out inconsistencies. The origin of the Marshall Plan lay precisely in a crisis of the previous aid schemes. Extreme weather conditions in Europe in 1946/47 had disrupted an already shaky system of food rationing, exacerbated a coal and power shortage, and threatened to slow down the pace of recovery in Western Europe. Faced with increasing doubts in Congress about the efficiency of existing programs, the Truman administration felt the need to come up with a unifying concept. The Marshall Plan differed from previous programs mainly in the centralized administration of aid allotments and the strengthened link with America’s political agenda. Researchers currently agree that any effects of the Marshall Plan must have operated through its political conditionality, far less so through its size.
The Marshall Plan also did not bring about the immediate integration of Europe into international markets. Large external debts presented a serious obstacle to liberalization of Europe’s foreign exchange markets. A British attempt in 1947 to lift capital controls triggered a run on Britain’s foreign exchange reserves, and was abandoned after six weeks. As a result, markets would not easily provide the large capital imports needed for European reconstruction. The prospect of having to finance Europe’s so-called dollar gap out of U.S. aid indefinitely was instrumental in shaping the Marshall Plan. During the three years of the Plan’s operation, U.S. policy temporarily turned away from the goal of implementing the Bretton Woods system. Instead, it focused on the more modest goal of liberalizing trade and payments within Europe. To this end, the European Payments Union (EPU) was established in 1950. It lifted most capital controls within Europe, and combined a European fixed exchange rate system with a first round of trade liberalization among its members (Kaplan and Schleiminger (1989)). Although itself independent of the Marshall Plan, the EPU’s system of overdrafts and drawing rights was backed by ECA funds. The EPU was designed to smooth Europe’s transition to full convertibility with the Bretton Woods system, and had largely achieved this goal when it was dissolved formally in 1958 (Eichengreen (1993)).
Competing Interpretations of the Effects of the Marshall Plan
The Marshall Plan is still renowned as a showcase of successful U.S. intervention abroad. It was hailed by contemporaries as the decisive kick that pushed Western Europe beyond the threshold of sustained recovery (e.g., Ellis (1950), Wallich (1982 ). Later observers sympathetic to the Marshall Plan pointed to its high political payoff and its allegedly strong multiplier effects (e.g., Arkes (1972), van der Wee (1986)). Still today, economic folklore credits the Marshall Plan with everything that improved in Europe after the war: the restoration of decent food supplies, the opening of supply bottlenecks in industry, and most importantly, the reconstruction of capital equipment and housing stocks in the devastated economies of Western Europe.
Later analyses of the Marshall Plan have disagreed fundamentally with this favorable interpretation, and have offered more skeptical views. An older literature interpreted the Marshall Plan largely as an American export program, inspired by Keynesian fears about stagnation in the U.S. post-war economy. At times enriched with a good dose of political Anti-Americanism, this interpretation was quick to assume that Marshall Aid primarily served the interests of U.S. big business.
A revision to this doctrine highlighted the small relative magnitude of the Marshall Plan. U.S. assistance hardly exceeded 2.5% of GNP of the recipient countries, and accounted for less than 20% of capital formation in that period. The allocation of aid often seemed to follow political, not economic needs: nearly half the resources never arrived in the disaster areas on the former European battlefields but served to buy political support in England and France, and to fend off communist threats in various countries. Also, the overall political outcome hardly seemed to fit with U.S. plans. Post-war Europe emerged from the Marshall Plan as a largely protectionist bloc of countries under French leadership. Rather than integrating smoothly into the Bretton Woods system as envisaged by the U.S., Europe seemed to work towards its own economic and financial integration. Epitomized by the work of Milward (1984), this line of research sees France as the main winner over the U.S. in a contest over political dominance in post-war Europe. In this perspective, Marshall Aid appears as a frustrated, economically less-than-significant attempt to influence the course of events in Europe.
This interpretation has seen its own revision. In spite of its small contribution to aggregate output growth, the Marshall Plan may have played a critical role in opening strategic bottlenecks in key industries. Borchardt and Buchheim (1991) argued that raw material imports under the Marshall Plan accelerated the recovery of West German manufacturing. De Long and Eichengreen (1993) argued for Marshall Plan conditionality as a key element in breaking up structural rigidities and bringing about readjustment in the recipient economies. This perspective is a classical story about backward and forward linkages: according to it, the Marshall Plan relaxed binding constraints in a complex input-output framework. Consequently, a purely macroeconomic perspective would be misleading. However, as Eichengreen and Uzan (1992) pointed out, most of these effects were probably temporary, and even their magnitude is questionable. Conditionality and the investment of counterpart funds into strategic sectors may have accelerated the speed of Europe’s convergence back to its steady state. However, to affect the conditional steady state itself, the Marshall Plan would have had to accomplish more than that, and solve a cooperation problem that free markets could not easily handle.
One such cooperation problem was a hold-up problem in labor markets, a theme recurrent also in Eichengreen (1996). Agents in Europe’s highly cartelized labor markets had the choice between reverting to an uncooperative equilibrium with high wage demands and low investment, or a new equilibrium with temporary wage restraint and high investment rates. To the extent that the ECA successfully linked Marshall Plan deliveries to wage restraint in collective bargaining, it implemented a low-wage, high-investment equilibrium. Again, however, from a neoclassical perspective this may have affected the speed of convergence more than the steady state itself.
There was also a bigger, international cooperation problem in whose solution the Marshall Plan was instrumental. Germany’s financial war machinery had left behind large amounts of debts owed to the formerly occupied countries. To this were added reparation demands that potentially dwarfed those of World War I. Any scheme for economic recovery and cooperation in Western Europe would have to deal with these unsettled financial consequences of World War II. At the same time, it had to address the security concerns of America’s allies, which perceived any reconstruction of Germany beyond the necessary minimum as a future threat. All of this implied defining a role for postwar Germany, a delicate task that had initially been left open.
The Monnet Plan for French postwar reconstruction envisioned shifting the center of European heavy industry from Germany’s Ruhr valley to France. U.S. postwar policies were initially built on similar principles: under the Morgenthau Plan, Germany’s heavy industry would be cut back and the German economy would be restructured to be based on light industry and agriculture. The price of these policies consisted of continued U.S. assistance to Europe. Coal and steel as well as machinery were shipped to Europe across the Atlantic, while German heavy industry, a traditional exporter of such items, was operating far below capacity. Among other things, the Marshall Plan was also a reaction to this problem of deficient German deliveries to Europe.
Diplomatic historians have long argued that German reconstruction under U.S. political aegis was the core of the Marshall Plan (see particularly Gimbel (1976) and Hogan (1987)). Given continued U.S. military presence in Europe, self-sustained recovery and economic cooperation could be implemented, such that U.S. deliveries to Western Europe were substituted with German exports. Berger and Ritschl (1995) document the diplomatic arm-twisting especially of France by the U.S., and interpret the Marshall Plan as a set of institutions, designed to serve as a commitment device for economic cooperation within Europe. To implement a cooperative equilibrium, U.S. policies linked Marshall Aid to free trade within Europe, to an agreement over the economic reconstruction of West Germany, and to a standstill regarding reparations and war debts as long as Germany was divided. Viewed from this perspective, Marshall Aid and its conditionality were merely the outer shell of a program whose core was a far wider political agenda for economic cooperation in Western Europe.
Arkes, Hadley. Bureaucracy, the Marshall Plan, and the National Interest. Princeton: Princeton University Press, 1972.
Berger, Helge and Albrecht Ritschl. “Germany and the Political Economy of the Marshall Plan, 1947-1952: A Re-Revisionist View.” In Europe’s Postwar Recovery, edited by Barry Eichengreen, 199-245. Cambridge: Cambridge University Press, 1995
Borchardt, Knut and Christoph Buchheim. “The Marshall Plan and Key Economic Sectors: A Microeconomic Perspective.” In The Marshall Plan and Germany, edited by Charles S. Maier and Gunter Bischof, 410-451. Oxford: Berg, 1991
De Long, J. Bradford and Barry Eichengreen. “The Marshall Plan: History’s Most Successful Structural Adjustment Program.” In Postwar Economic Reconstruction and Lessons for the East Today, edited by Rudiger Dornbusch et al, 189-230. Cambridge: MIT Press, 1993
Eichengreen, Barry. Reconstructing Europe’s Trade and Payments: The European Payments System. Manchester: Manchester University Press, 1993.
Eichengreen, Barry. “Institutions and Economic Growth: Europe after World War II.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo, 38-70. Cambridge: Cambridge University Press, 1996
Eichengreen, Barry and Marc Uzan. “The Marshall Plan: Economic Effects and Implications for Eastern Europe and the USSR.” Economic Policy 14 (1992): 14-75.
Ellis, Howard. The Economics of Freedom: The Progress and Future of Aid to Europe. New York: Harper & Row, 1950
Gimbel, John. The Origins of the Marshall Plan. Stanford: Stanford University Press, 1976
Hogan, Michael J. The Marshall Plan, Britain, and the Reconstruction of Western Europe, 1947-1952. Cambridge: Cambridge University Press, 1987.
Kaplan, Jacob and Gunter Schleiminger. The European Payments Union: Financial Diplomacy in the 1950s. Oxford: Oxford University Press, 1989.
Milward, Alan S. The Reconstruction of Western Europe, 1945-1951. London: Methuen, 1984.
van der Wee, Herman. Prosperity and Upheaval: The World Economy, 1945-1980. Berkeley: University of California Press, 1986.
Wallich, Henry. Mainsprings of the German Revival. New Haven: Yale University Press, 1982 (1955).
Citation: Ritschl, Albrecht. “The Marshall Plan, 1948-1951”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/the-marshall-plan-1948-1951/
Ingrid Henriksen, University of Copenhagen
Denmark is located in Northern Europe between the North Sea and the Baltic. Today Denmark consists of the Jutland Peninsula bordering Germany and the Danish Isles and covers 43,069 square kilometers (16,629 square miles). 1 The present nation is the result of several cessions of territory throughout history. The last of the former Danish territories in southern Sweden were lost to Sweden in 1658, following one of the numerous wars between the two nations, which especially marred the sixteenth and seventeenth centuries. Following defeat in the Napoleonic Wars, Norway was separated from Denmark in 1814. After the last major war, the Second Schleswig War in 1864, Danish territory was further reduced by a third when Schleswig and Holstein were ceded to Germany. After a regional referendum in 1920 only North-Schleswig returned to Denmark. Finally, Iceland, withdrew from the union with Denmark in 1944. The following will deal with the geographical unit of today’s Denmark.
Prerequisites of Growth
Throughout history a number of advantageous factors have shaped the Danish economy. From this perspective it may not be surprising to find today’s Denmark among the richest societies in the world. According to the OECD, it ranked seventh in 2004, with income of $29.231 per capita (PPP). Although we can identify a number of turning points and breaks, for the time period over which we have quantitative evidence this long-run position has changed little. Thus Maddison (2001) in his estimate of GDP per capita around 1600 places Denmark as number six. One interpretation could be that favorable circumstances, rather than ingenious institutions or policies, have determined Danish economic development. Nevertheless, this article also deals with time periods in which the Danish economy was either diverging from or converging towards the leading economies.
Average Annual GDP Growth (at factor costs)
Sources: Johansen (1985) and Statistics Denmark ‘Statistikbanken’ online.
Denmark’s geographical location in close proximity of the most dynamic nations of sixteenth-century Europe, the Netherlands and the United Kingdom, no doubt exerted a positive influence on the Danish economy and Danish institutions. The North German area influenced Denmark both through long-term economic links and through the Lutheran Protestant Reformation which the Danes embraced in 1536.
The Danish economy traditionally specialized in agriculture like most other small and medium-sized European countries. It is, however, rather unique to find a rich European country in the late-nineteenth and mid-twentieth century which retained such a strong agrarian bias. Only in the late 1950s did the workforce of manufacturing industry overtake that of agriculture. Thus an economic history of Denmark must take its point of departure in agricultural development for quite a long stretch of time.
Looking at resource endowments, Denmark enjoyed a relatively high agricultural land-to-labor ratio compared to other European countries, with the exception of the UK. This was significant for several reasons since it, in this case, was accompanied by a comparatively wealthy peasantry.
Denmark had no mineral resources to speak of until the exploitation of oil and gas in the North Sea began in 1972 and 1984, respectively. From 1991 on Denmark has been a net exporter of energy although on a very modest scale compared to neighboring Norway and Britain. The small deposits are currently projected to be depleted by the end of the second decade of the twenty-first century.
Source: Johansen (1985) and Statistics Denmark ’Nationalregnskaber’
Good logistic can be regarded as a resource in pre-industrial economies. The Danish coast line of 7,314 km and the fact that no point is more than 50 km from the sea were advantages in an age in which transport by sea was more economical than land transport.
Decline and Transformation, 1500-1750
The year of the Lutheran Reformation (1536) conventionally marks the end of the Middle Ages in Danish historiography. Only around 1500 did population growth begin to pick up after the devastating effect of the Black Death. Growth thereafter was modest and at times probably stagnant with large fluctuations in mortality following major wars, particularly during the seventeenth century, and years of bad harvests. About 80-85 percent of the population lived from subsistence agriculture in small rural communities and this did not change. Exports are estimated to have been about 5 percent of GDP between 1550 and 1650. The main export products were oxen and grain. The period after 1650 was characterized by a long lasting slump with a marked decline in exports to the neighboring countries, the Netherlands in particular.
The institutional development after the Black Death showed a return to more archaic forms. Unlike other parts of northwestern Europe, the peasantry on the Danish Isles afterwards became a victim of a process of re-feudalization during the last decades of the fifteenth century. A likely explanation is the low population density that encouraged large landowners to hold on to their labor by all means. Freehold tenure among peasants effectively disappeared during the seventeenth century. Institutions like bonded labor that forced peasants to stay on the estate where they were born, and labor services on the demesne as part of the land rent bring to mind similar arrangements in Europe east of the Elbe River. One exception to the East European model was crucial, however. The demesne land, that is the land worked directly under the estate, never made up more than nine percent of total land by the mid eighteenth century. Although some estate owners saw an interest in encroaching on peasant land, the state protected the latter as production units and, more importantly, as a tax base. Bonded labor was codified in the all-encompassing Danish Law of Christian V in 1683. It was further intensified by being extended, though under another label, to all Denmark during 1733-88, as a means for the state to tide the large landlords over an agrarian crisis. One explanation for the long life of such an authoritarian institution could be that the tenants were relatively well off, with 25-50 acres of land on average. Another reason could be that reality differed from the formal rigor of the institutions.
Following the Protestant Reformation in 1536, the Crown took over all church land, thereby making it the owner of 50 percent of all land. The costs of warfare during most of the sixteenth century could still be covered by the revenue of these substantial possessions. Around 1600 the income from taxation and customs, mostly Sound Toll collected from ships that passed the narrow strait between Denmark and today’s Sweden, on the one hand and Crown land revenues on the other were equally large. About 50 years later, after a major fiscal crisis had led to the sale of about half of all Crown lands, the revenue from royal demesnes declined relatively to about one third, and after 1660 the full transition from domain state to tax state was completed.
The bulk of the former Crown land had been sold to nobles and a few common owners of estates. Consequently, although the Danish constitution of 1665 was the most stringent version of absolutism found anywhere in Europe at the time, the Crown depended heavily on estate owners to perform a number of important local tasks. Thus, conscription of troops for warfare, collection of land taxes and maintenance of law and order enhanced the landlords’ power over their tenants.
Reform and International Market Integration, 1750-1870
The driving force of Danish economic growth, which took off during the late eighteenth century was population growth at home and abroad – which triggered technological and institutional innovation. Whereas the Danish population during the previous hundred years grew by about 0.4 percent per annum, growth climbed to about 0.6 percent, accelerating after 1775 and especially from the second decade of the nineteenth century (Johansen 2002). Like elsewhere in Northern Europe, accelerating growth can be ascribed to a decline in mortality, mainly child mortality. Probably this development was initiated by fewer spells of epidemic diseases due to fewer wars and to greater inherited immunity against contagious diseases. Vaccination against smallpox and formal education of midwives from the early nineteenth century might have played a role (Banggård 2004). Land reforms that entailed some scattering of the farm population may also have had a positive influence. Prices rose from the late eighteenth century in response to the increase in populations in Northern Europe, but also following a number of international conflicts. This again caused a boom in Danish transit shipping and in grain exports.
Population growth rendered the old institutional set up obsolete. Landlords no longer needed to bind labor to their estate, as a new class of landless laborers or cottagers with little land emerged. The work of these day-laborers was to replace the labor services of tenant farmers on the demesnes. The old system of labor services obviously presented an incentive problem all the more since it was often carried by the live-in servants of the tenant farmers. Thus, the labor days on the demesnes represented a loss to both landlords and tenants (Henriksen 2003). Part of the land rent was originally paid in grain. Some of it had been converted to money which meant that real rents declined during the inflation. The solution to these problems was massive land sales both from the remaining crown lands and from private landlords to their tenants. As a result two-thirds of all Danish farmers became owner-occupiers compared to only ten percent in the mid-eighteenth century. This development was halted during the next two and a half decades but resumed as the business cycle picked up during the 1840s and 1850s. It was to become of vital importance to the modernization of Danish agriculture towards the end of the nineteenth century that 75 percent of all agricultural land was farmed by owners of middle-sized farms of about 50 acres. Population growth may also have put a pressure on common lands in the villages. At any rate enclosure begun in the 1760s, accelerated in the 1790s supported by legislation and was almost complete in the third decade of the nineteenth century.
The initiative for the sweeping land reforms from the 1780s is thought to have come from below – that is from the landlords and in some instances also from the peasantry. The absolute monarch and his counselors were, however, strongly supportive of these measures. The desire for peasant land as a tax base weighed heavily and the reforms were believed to enhance the efficiency of peasant farming. Besides, the central government was by now more powerful than in the preceding centuries and less dependent on landlords for local administrative tasks.
Production per capita rose modestly before the 1830s and more pronouncedly thereafter when a better allocation of labor and land followed the reforms and when some new crops like clover and potatoes were introduced at a larger scale. Most importantly, the Danes no longer lived at the margin of hunger. No longer do we find a correlation between demographic variables, deaths and births, and bad harvest years (Johansen 2002).
A liberalization of import tariffs in 1797 marked the end of a short spell of late mercantilism. Further liberalizations during the nineteenth and the beginning of the twentieth century established the Danish liberal tradition in international trade that was only to be broken by the protectionism of the 1930s.
Following the loss of the secured Norwegian market for grain in 1814, Danish exports began to target the British market. The great rush forward came as the British Corn Law was repealed in 1846. The export share of the production value in agriculture rose from roughly 10 to around 30 percent between 1800 and 1870.
In 1849 absolute monarchy was peacefully replaced by a free constitution. The long-term benefits of fundamental principles such as the inviolability of private property rights, the freedom of contracting and the freedom of association were probably essential to future growth though hard to quantify.
Modernization and Convergence, 1870-1914
During this period Danish economic growth outperformed that of most other European countries. A convergence in real wages towards the richest countries, Britain and the U.S., as shown by O’Rourke and Williamsson (1999), can only in part be explained by open economy forces. Denmark became a net importer of foreign capital from the 1890s and foreign debt was well above 40 percent of GDP on the eve of WWI. Overseas emigration reduced the potential workforce but as mortality declined population growth stayed around one percent per annum. The increase in foreign trade was substantial, as in many other economies during the heyday of the gold standard. Thus the export share of Danish agriculture surged to a 60 percent.
The background for the latter development has featured prominently in many international comparative analyses. Part of the explanation for the success, as in other Protestant parts of Northern Europe, was a high rate of literacy that allowed a fast spread of new ideas and new technology.
The driving force of growth was that of a small open economy, which responded effectively to a change in international product prices, in this instance caused by the invasion of cheap grain to Western Europe from North America and Eastern Europe. Like Britain, the Netherlands and Belgium, Denmark did not impose a tariff on grain, in spite of the strong agrarian dominance in society and politics.
Proposals to impose tariffs on grain, and later on cattle and butter, were turned down by Danish farmers. The majority seems to have realized the advantages accruing from the free imports of cheap animal feed during the ongoing process of transition from vegetable to animal production, at a time when the prices of animal products did not decline as much as grain prices. The dominant middle-sized farm was inefficient for wheat but had its comparative advantage in intensive animal farming with the given technology. O’Rourke (1997) found that the grain invasion only lowered Danish rents by 4-5 percent, while real wages rose (according to expectation) but more than in any other agrarian economy and more than in industrialized Britain.
The move from grain exports to exports of animal products, mainly butter and bacon, was to a great extent facilitated by the spread of agricultural cooperatives. This organization allowed the middle-sized and small farms that dominated Danish agriculture to benefit from the economy of scale in processing and marketing. The newly invented steam-driven continuous cream separator skimmed more cream from a kilo of milk than conventional methods and had the further advantage of allowing transported milk brought together from a number of suppliers to be skimmed. From the 1880s the majority of these creameries in Denmark were established as cooperatives and about 20 years later, in 1903, the owners of 81 percent of all milk cows supplied to a cooperative (Henriksen 1999). The Danish dairy industry captured over a third of the rapidly expanding British butter-import market, establishing a reputation for consistent quality that was reflected in high prices. Furthermore, the cooperatives played an active role in persuading the dairy farmers to expand production from summer to year-round dairying. The costs of intensive feeding during the wintertime were more than made up for by a winter price premium (Henriksen and O’Rourke 2005). Year-round dairying resulted in a higher rate of utilization of agrarian capital – that is of farm animals and of the modern cooperative creameries. Not least did this intensive production mean a higher utilization of hitherto underemployed labor. From the late 1890’s, in particular, labor productivity in agriculture rose at an unanticipated speed at par with productivity increase in the urban trades.
Industrialization in Denmark took its modest beginning in the 1870s with a temporary acceleration in the late 1890s. It may be a prime example of an industrialization process governed by domestic demand for industrial goods. Industry’s export never exceeded 10 percent of value added before 1914, compared to agriculture’s export share of 60 percent. The export drive of agriculture towards the end of the nineteenth century was a major force in developing other sectors of the economy not least transport, trade and finance.
Weathering War and Depression, 1914-1950
Denmark, as a neutral nation, escaped the devastating effects of World War I and was even allowed to carry on exports to both sides in the conflict. The ensuing trade surplus resulted in a trebling of the money supply. As the monetary authorities failed to contain the inflationary effects of this development, the value of the Danish currency slumped to about 60 percent of its pre-war value in 1920. The effects of monetary policy failure were aggravated by a decision to return to the gold standard at the 1913 level. When monetary policy was finally tightened in 1924, it resulted in fierce speculation in an appreciation of the Krone. During 1925-26 the currency returned quickly to its pre-war parity. As this was not counterbalanced by an equal decline in prices, the result was a sharp real appreciation and a subsequent deterioration in Denmark’s competitive position (Klovland 1997).
Source: Abildgren (2005)
Note: Trade with Germany is included in the calculation of the real effective exchange rate for the whole period, including 1921-23.
When, in September 1931, Britain decided to leave the gold standard again, Denmark, together with Sweden and Norway, followed only a week later. This move was beneficial as the large real depreciation lead to a long-lasting improvement in Denmark’s competitiveness in the 1930s. It was, no doubt, the single most important policy decision during the depression years. Keynesian demand management, even if it had been fully understood, was barred by a small public sector, only about 13 percent of GDP. As it was, fiscal orthodoxy ruled and policy was slightly procyclical as taxes were raised to cover the deficit created by crisis and unemployment (Topp 1995).
Structural development during the 1920s, surprisingly for a rich nation at this stage, was in favor of agriculture. The total labor force in Danish agriculture grew by 5 percent from 1920 to 1930. The number of employees in agriculture was stagnating whereas the number of self-employed farmers increased by a larger number. The development in relative incomes cannot account for this trend but part of the explanation must be found in a flawed Danish land policy, which actively supported a further parceling out of land into small holdings and restricted the consolidation into larger more viable farms. It took until the early 1960s before this policy began to be unwound.
When the world depression hit Denmark with a minor time lag, agriculture still employed one-third of the total workforce while its contribution to total GDP was a bit less than one-fifth. Perhaps more importantly, agricultural goods still made up 80 percent of total exports.
Denmark’s terms of trade, as a consequence, declined by 24 percent from 1930 to 1932. In 1933 and 1934 bilateral trade agreements were forced upon Denmark by Britain and Germany. In 1932 Denmark had adopted exchange control, a harsh measure even for its time, to stem the net flow of foreign exchange out of the country. By rationing imports exchange control also offered some protection of domestic industry. At the end of the decade manufacture’s GDP had surpassed that of agriculture. In spite of the protectionist policy, unemployment soared to 13-15 percent of the workforce.
The policy mistakes during World War I and its immediate aftermath served as a lesson for policymakers during World War II. The German occupation force (April 9, 1940 until May 5, 1945) drew the funds for its sustenance and for exports to Germany on the Danish central bank whereby the money supply more than doubled. In response the Danish authorities in 1943 launched a policy of absorbing money through open market operations and, for the first time in history, through a surplus on the state budget.
Economic reconstruction after World War II was swift, as again Denmark had been spared the worst consequences of a major war. In 1946 GDP recovered its highest pre-war level. In spite of this, Denmark received relatively generous support through the Marshall Plan of 1948-52, when measured in dollars per capita.
From Riches to Crisis, 1950-1973: Liberalizations and International Integration Once Again
The growth performance during 1950-1957 was markedly lower than the Western European average. The main reason was the high share of agricultural goods in Danish exports, 63 percent in 1950. International trade in agricultural products to a large extent remained regulated. Large deteriorations in the terms of trade caused by the British devaluation 1949, when Denmark followed suit, the outbreak of the Korean War in 1950, and the Suez-crisis of 1956 made matters worse. The ensuing deficits on the balance of payment led the government to contractionary policy measures which restrained growth.
The liberalization of the flow of goods and capital in Western Europe within the framework of the OEEC (the Organization for European Economic Cooperation) during the 1950s probably dealt a blow to some of the Danish manufacturing firms, especially in the textile industry, that had been sheltered through exchange control and wartime. Nevertheless, the export share of industrial production doubled from 10 percent to 20 percent before 1957, at the same time as employment in industry surpassed agricultural employment.
On the question of European economic integration Denmark linked up with its largest trading partner, Britain. After the establishment of the European Common Market in 1958 and when the attempts to create a large European free trade area failed, Denmark entered the European Free Trade Association (EFTA) created under British leadership in 1960. When Britain was finally able to join the European Economic Community (EEC) in 1973, Denmark followed, after a referendum on the issue. Long before admission to the EEC, the advantages to Danish agriculture from the Common Agricultural Policy (CAP) had been emphasized. The higher prices within the EEC were capitalized into higher land prices at the same time that investments were increased based on the expected gains from membership. As a result the most indebted farmers who had borrowed at fixed interests rates were hit hard by two developments from the early 1980s. The EEC started to reduce the producers’ benefits of the CAP because of overproduction and, after 1982, the Danish economy adjusted to a lower level of inflation, and therefore, nominal interest rates. According to Andersen (2001) Danish farmers were left with the highest interest burden of all European Union (EU) farmers in the 1990’s.
Denmark’s relations with the EU, while enthusiastic at the beginning, have since been characterized by a certain amount of reserve. A national referendum in 1992 turned down the treaty on the European Union, the Maastricht Treaty. The Danes, then, opted out of four areas, common citizenship, a common currency, common foreign and defense politics and a common policy on police and legal matters. Once more, in 2000, adoption of the common currency, the Euro, was turned down by the Danish electorate. In the debate leading up to the referendum the possible economic advantages of the Euro in the form of lower transaction costs were considered to be modest, compared to the existent regime of fixed exchange rates vis-à-vis the Euro. All the major political parties, nevertheless, are pro-European, with only the extreme Right and the extreme Left being against. It seems that there is a discrepancy between the general public and the politicians on this particular issue.
As far as domestic economic policy is concerned, the heritage from the 1940s was a new commitment to high employment modified by a balance of payment constraint. The Danish policy differed from that of some other parts of Europe in that the remains of the planned economy from the war and reconstruction period in the form of rationing and price control were dismantled around 1950 and that no nationalizations took place.
Instead of direct regulation, economic policy relied on demand management with fiscal policy as its main instrument. Monetary policy remained a bone of contention between politicians and economists. Coordination of policies was the buzzword but within that framework monetary policy was allotted a passive role. The major political parties for a long time were wary of letting the market rate of interest clear the loan market. Instead, some quantitative measures were carried out with the purpose of dampening the demand for loans.
From Agricultural Society to Service Society: The Growth of the Welfare State
Structural problems in foreign trade extended into the high growth period of 1958-73, as Danish agricultural exports were met with constraints both from the then EEC-member countries and most EFTA countries, as well. During the same decade, the 1960s, as the importance of agriculture was declining the share of employment in the public sector grew rapidly until 1983. Building and construction also took a growing share of the workforce until 1970. These developments left manufacturing industry with a secondary position. Consequently, as pointed out by Pedersen (1995) the sheltered sectors in the economy crowded out the sectors that were exposed to international competition, that is mostly industry and agriculture, by putting a pressure on labor and other costs during the years of strong expansion.
Perhaps the most conspicuous feature of the Danish economy during the Golden Age was the steep increase in welfare-related costs from the mid 1960s and not least the corresponding increases in the number of public employees. Although the seeds of the modern Scandinavian welfare state were sown at a much earlier date, the 1960s was the time when public expenditure as a share of GDP exceeded that of most other countries.
As in other modern welfare states, important elements in the growth of the public sector during the 1960s were the expansion in public health care and education, both free for all citizens. The background for much of the increase in the number of public employees from the late 1960s was the rise in labor participation by married women from the late 1960s until about 1990, partly at least as a consequence. In response, the public day care facilities for young children and old people were expanded. Whereas in 1965 7 percent of 0-6 year olds were in a day nursery or kindergarten, this share rose to 77 per cent in 2000. This again spawned more employment opportunities for women in the public sector. Today the labor participation for women, around 75 percent of 16-66 year olds, is among the highest in the world.
Originally social welfare programs targeted low income earners who were encouraged to take out insurance against sickness (1892), unemployment (1907) and disability (1922). The public subsidized these schemes and initiated a program for the poor among old people (1891). The high unemployment period in the 1930s inspired some temporary relief and some administrative reform, but little fundamental change.
Welfare policy in the first four decades following World War II is commonly believed to have been strongly influenced by the Social Democrat party which held around 30 percent of the votes in general elections and was the party in power for long periods of time. One of the distinctive features of the Danish welfare state has been its focus on the needs of the individual person rather than on the family context. Another important characteristic is the universal nature of a number of benefits starting with a basic old age pension for all in 1956. The compensation rates in a number of schedules are high in international comparison, particularly for low income earners. Public transfers gained a larger share in total public outlays both because standards were raised – that is benefits became higher – and because the number of recipients increased dramatically following the high unemployment regime from the mid 1970s to the mid 1990s. To pay for the high transfers and the large public sector – around 30 percent of the work force – the tax load is also high in international perspective. The share public sector and social expenditure has risen to above 50 percent of GDP, only second to the share in Sweden.
Source: Statistics Denmark ‘50 års-oversigten’ and ADAM’s databank
The Danish labor market model has recently attracted favorable international attention (OECD 2005). It has been declared successful in fighting unemployment – especially compared to the policies of countries like Germany and France. The so-called Flexicurity model rests on three pillars. The first is low employment protection, the second is relatively high compensation rates for the unemployed and the third is the requirement for active participation by the unemployed. Low employment protection has a long tradition in Denmark and there is no change in this factor when comparing the twenty years of high unemployment – 8-12 per cent of the labor force – from the mid 1970s to the mid 1990s, to the past ten years when unemployment has declined to a mere 4.5 percent in 2006. The rules governing compensation to the unemployed were tightened from 1994, limiting the number of years the unemployed could receive benefits from 7 to 4. Most noticeably labor market policy in 1994 turned from ‘passive’ measures – besides unemployment benefits, an early retirement scheme and a temporary paid leave scheme – toward ‘active’ measures that were devoted to getting people back to work by providing training and jobs. It is commonly supposed that the strengthening of economic incentives helped to lower unemployment. However, as Andersen and Svarer (2006) point out, while unemployment has declined substantially a large and growing share of Danes of employable age receives transfers other than unemployment benefit – that is benefits related to sickness or social problems of various kinds, early retirement benefits, etc. This makes it hazardous to compare the Danish labor market model with that of many other countries.
Exchange Rates and Macroeconomic Policy
Denmark has traditionally adhered to a fixed exchange rate regime. The belief is that for a small and open economy, a floating exchange rate could lead to very volatile exchange rates which would harm foreign trade. After having abandoned the gold standard in 1931, the Danish currency (the Krone) was, for a while, pegged to the British pound, only to join the IMF system of fixed but adjustable exchange rates, the so-called Bretton Woods system after World War II. The close link with the British economy still manifested itself when the Danish currency was devaluated along with the pound in 1949 and, half way, in 1967. The devaluation also reflected that after 1960, Denmark’s international competitiveness had gradually been eroded by rising real wages, corresponding to a 30 percent real appreciation of the currency (Pedersen 1996).
When the Bretton Woods system broke down in the early 1970s, Denmark joined the European exchange rate cooperation, the “Snake” arrangement, set up in 1972, an arrangement that was to be continued in the form of the Exchange Rate Mechanism within the European Monetary System from 1979. The Deutschmark was effectively the nominal anchor in European currency cooperation until the launch of the Euro in 1999, a fact that put Danish competitiveness under severe pressure because of markedly higher inflation in Denmark compared to Germany. In the end the Danish government gave way before the pressure and undertook four discrete devaluations from 1979 to 1982. Since compensatory increases in wages were held back, the balance of trade improved perceptibly.
This improvement could, however, not make up for the soaring costs of old loans at a time when the international real rates of interests were high. The Danish devaluation strategy exacerbated this problem. The anticipation of further devaluations was mirrored in a steep increase in the long-term rate of interest. It peaked at 22 percent in nominal terms in 1982, with an interest spread to Germany of 10 percent. Combined with the effects of the second oil crisis on the Danish terms of trade, unemployment rose to 10 percent of the labor force. Given the relatively high compensation ratios for the unemployed, the public deficit increased rapidly and public debt grew to about 70 percent of GDP.
Source: Statistics Denmark Statistical Yearbooks and ADAM’s Databank
In September 1982 the Social Democrat minority government resigned without a general election and was relieved by a Conservative-Liberal minority government. The new government launched a program to improve the competitiveness of the private sector and to rebalance public finances. An important element was a disinflationary economic policy based on fixed exchange rates pegging the Krone to the participants of the EMS and, from 1999, to the Euro. Furthermore, automatic wage indexation that had occurred, with short interruptions since 1920 (with a short lag and high coverage), was abolished. Fiscal policy was tightened, thus bringing an end to the real increases in public expenditure that had lasted since the 1960’s.
The stabilization policy was successful in bringing down inflation and long interest rates. Pedersen (1995) finds that this process, nevertheless, was slower than might have been expected. In view of former Danish exchange rate policy it took some time for the market to believe in the credible commitment to fixed exchange rates. From the late 1990s the interest spread to Germany/ Euroland has been negligible, however.
The initial success of the stabilization policy brought a boom to the Danish economy that, once again, caused overheating in the form of high wage increases (in 1987) and a deterioration of the current account. The solution to this was a number of reforms in 1986-87 aiming at encouraging private savings that had by then fallen to an historical low. Most notable was the reform that reduced tax deductibility of private interest on debts. These measures resulted in a hard landing to the economy caused by the collapse of the housing market.
The period of low growth was further prolonged by the international recession in 1992. In 1993 yet another shift of regime occurred in Danish economic policy. A new Social Democrat government decided to ‘kick start’ the economy by means of a moderate fiscal expansion whereas, in 1994, the same government tightened labor market policies substantially, as we have seen. Mainly as a consequence of these measures the Danish economy from 1994 entered a period of moderate growth with unemployment steadily falling to the level of the 1970s. A new feature that still puzzles Danish economists is that the decline in unemployment over these years has not yet resulted in any increase in wage inflation.
Denmark at the beginning of the twenty-first century in many ways fits the description of a Small Successful European Economy according to Mokyr (2006). Unlike in most of the other small economies, however, Danish exports are broad based and have no “niche” in the world market. Like some other small European countries, Ireland, Finland and Sweden, the short term economic fluctuations as described above have not followed the European business cycle very closely for the past thirty years (Andersen 2001). Domestic demand and domestic economic policy has, after all, played a crucial role even in a very small and very open economy.
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Banggaard, Grethe. Befolkningsfremmende foranstaltninger og faldende børnedødelighed. Danmark, ca. 1750-1850. Odense: Syddansk Universitetsforlag, 2004
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Henriksen, Ingrid. “Avoiding Lock-in: Cooperative Creameries in Denmark, 1882-1903.” European Review of Economic History 3, no. 1 (1999): 57-78
Henriksen, Ingrid. “Freehold Tenure in Late Eighteenth-Century Denmark.” Advances in Agricultural Economic History 2 (2003): 21-40.
Henriksen, Ingrid and Kevin H. O’Rourke. “Incentives, Technology and the Shift to Year-round Dairying in Late Nineteenth-century Denmark.” Economic History Review 58, no. 3 (2005):.520-54.
Johansen, Hans Chr. Danish Population History, 1600-1939. Odense: University Press of Southern Denmark, 2002.
Johansen, Hans Chr. Dansk historisk statistik, 1814-1980. København: Gyldendal, 1985.
Klovland, Jan T. “Monetary Policy and Business Cycles in the Interwar Years: The Scandinavian Experience.” European Review of Economic History 2, no. 3 (1998): 309-44.
Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001
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1 Denmark also includes the Faeroe Islands, with home rule since 1948, and Greenland, with home rule since 1979, both in the North Atlantic. These territories are left out of this account.
Citation: Henriksen, Ingrid. “An Economic History of Denmark”. EH.Net Encyclopedia, edited by Robert Whaples. October 6, 2006. URL http://eh.net/encyclopedia/an-economic-history-of-denmark/
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