Robert W. Fogel, Railroads and American Economic Growth: Essays in Econometric History. Baltimore: Johns Hopkins Press, 1964. xv + 296 pp.

Review Essay by Lance Davis, Division of Humanities and Social Sciences, California Institute of Technology. led@hss.caltech.edu

For those of us who lived through the exciting days of the “cliometric revolution,” the publication of Robert Fogel’s Railroads and American Economic Growth represented a very major milestone – it was as if we now had proof that we had left the bumpy and unpaved dirt road of the first few years and could see ahead a straight and well-paved highway into the future. (See note 1.) The roots of “clio” clearly lay in the 1956 publication of Cary Brown’s “Fiscal Policy in the Thirties: A Reappraisal” and, a few months later, in Alfred Conrad and John Meyer’s initial presentation of “The Economics of Slavery in the Ante-Bellum South.” Brown showed that, unlike the findings of the then-current historiography, government economic policy during the 1930’s was not an example of President Roosevelt’s imaginative application of the modern tools of Keynesian fiscal policy; and Conrad and Meyer demonstrated that, despite nearly a century of traditional historiography, ante-bellum slavery was profitable and, at least by implication, that, if the goal was to eliminate slavery before the 1940’s, the Civil War was not an extremely costly and totally unnecessary enterprise. However, these findings – findings that have been well substantiated by later research – while convincing to the small cadre of “converted,” were still not generally accepted by the historical profession. Thus, cliometrics did not really begin to flower until the publication of Robert Fogel’s study of the impact of railroads on American growth in the nineteenth century. Not only did it generate a spate of parallel studies (of Russia, Mexico, Brazil, England, and Scotland, to cite only five), but much more importantly, it provided a methodological foundation for the systematic study of economic history and long-term economic growth.

Despite the attention that had been paid to the construction of the Erie Canal, given the role of the national market in underwriting this country’s rise to become, economically at least, the richest nation in the world, and, given the speed with which rails came to dominate the transport network that provided the basis for that national market, it is not surprising that historians had concluded that railroads were the indispensable and driving force behind American growth in the nineteenth century. To the best of my knowledge, before the first annual Cliometric Conference (a conference held at Purdue University in 1960), few economic historians, neither those traditionally nor those cliometrically inclined doubted this fundamental tenant of American development. (See note 2.) Moreover, although some cliometricians may have been aware of the concept of social savings – a concept that was closely related to the economic literature on cost/benefit analysis – none had attempted to measure the savings attached to any specific legal or technical innovation. (Fogel had touched on a similar concept in The Union Pacific Railroad (1960), but his first published paper dealing specifically with social savings was still almost two years in the future – “A Quantitative Approach to the Study of Railroads in American Economic Growth” (1962).)

With its publication, Railroads proved once and for all that economic history, while still depending on the product of scholars “slugging it out in the archives,” could benefit mightily from the careful application of economic theory and econometrics. On the one hand, although the work immediately generated substantial controversy, and even today one might quibble about a few days or a few months, in the long run, there has been little question about the book’s major conclusion – that the level of per capita income achieved by January 1, 1890 would have been reached by March 31, 1890, if railroads had never been invented. Moreover, Fogel’s work also indicated that there was no other industry that was likely to have been more important than the railroads; and, thus, if not railroads, no other industry could have played the role that historiography attributed to the rails. On the other hand, the evidence is overwhelming that, since the publication and subsequent debate over Railroads, almost all economic history has been written by scholars who have either been trained in economics or who have found it necessary to acquire (either formally or informally) those basic economic and econometric skills. What, then, in addition to the central importance of the subject, made this such a path-breaking work? As the title suggests, the book is actually a collection of four interrelated, but really distinct, substantive essays: “The Interregional Distribution of Agricultural Products,” “The Intraregional Distribution of Agricultural Products,” “Railroads and the ‘Take-off’ Thesis: The American Case” and “The Position of Rails in the Market for American Iron, 1840-1860: A Reconstruction.” Any attempt at evaluating the contribution of the book rests on the evaluation of the methods and findings of the four.

If Fogel had limited his work to the last two essays – the two that in many ways were the most central to the then intense discussions of the “Axiom of Indispensability,” the work would have been important; but it would never have had anywhere near the impact that it actually did. In the third essay, “The Takeoff,” Fogel, although not addressing the question of whether or not there was in fact a “takeoff” between 1843 and 1860, in order to operationalize his argument, chooses the first of W.W. Rostow’s criteria for a “leading industry”: in this case, what impact did the railroads have on the “change in the percentage distribution of output among the various industries?” Then, drawing on the best available data – data reported by Robert Gallman in his seminal (1960) study of commodity output – Fogel finds that the impact of the railroads on that percentage distribution was minimal. In the case of iron, railroads, except at the end of the period, accounted for only a minor fraction of the output change (overall, including the later period, it was still only 17 percent); for coal, it was less than 5 percent; for lumber, barely 5 percent; in the case of transport equipment only 25 percent (only half of the change accounted for by vehicles drawn by animals); and for machinery it was less than 1 percent. Thus, for all manufacturing, the railroads accounted for less than 3 percent of the change – hardly a ringing endorsement for what was purported to be a “leading industry.”

In his more detailed examination of the impact of railroads on the development of the iron industry (an attempt to assess the importance of railroads to industrialization because of their alleged “backward linkages”), Fogel found it necessary to produce a new series on pig iron output between 1840 and 1860 and to revise the estimates of the consumption of railroads to account for imports and recycled rails as well as changes in the weight of rails. These new estimates represented a major contribution to our understanding of the industrial history of the period. Fogel’s primary interest, however, was not on the production of the new series, but on estimating the importance of the railroads in the development of the iron industry. His results, again, indicate that railroads did not dominate the development of the iron industry in the two decades before the Civil War. In fact, his conclusions strongly support Douglass North’s conclusion that, from the point of view of backward linkages, it would be as sensible to talk about an iron stove theory of the development of the iron industry as a railroad theory.

In these two essays Fogel demonstrates a command of what had heretofore been the best of traditional economic history, but in neither chapter are there any major methodological breakthroughs – merely a carefully constructed series of new estimates and the demonstration of an ability to bring those estimates to bear on important issues. In the first and second of the four substantive chapters – the estimate of the social savings from the interregional and from the intraregional distribution of agricultural products – Fogel’s methodological innovations do, however, play a central role. First, in both essays, he attempts to explicate and to provide estimates of the appropriate counterfactual – what the world would have been like had there been no railroads. Although historians have long employed counterfactual arguments – sometimes it seems without realizing it – to most historians the idea of an explicit counterfactual was still a very foreign notion in the early 1960s. Second, in both chapters Fogel employs the concept of social savings (the difference in social costs between the real and the counterfactual worlds) to provide a measure of the value of the introduction of the railroad. The concept of social savings is itself an important research tool; but, from a methodological point of view, it is equally important that the measure was defined operationally, so that Fogel’s calculations could be tested against alternative estimates and against possible alternative definitions. As an aside, however, it is interesting to note that, although the two studies are very very important from the view point of methodological innovation, from the point of view of traditional economic history, they are not as strong as the third and fourth substantive essays. In the second substantive essay – the social savings arising from the intraregional distribution of agricultural commodities – Fogel begins by noting that the substitution of rail for water was more rapid in the intraregional than in the interregional distribution of agricultural commodities, and, that, since the distances to be shipped in the intraregional case were only a third as great for rail as for water transport, one would expect that the social savings from the innovation would be greater. To estimate those savings he proposes two measures: alpha (a direct measure of the cost differences with and without the railroads) and beta (an indirect measure based on the difference in the value of the land that would have been economically productive with railroads and the lesser number of acres and, thus, the lesser value of land that would have been economically productive in the absence of those railroads).

Fogel then estimates alpha for a sample of counties in the North Atlantic region and concludes that the direct costs (alpha) would amount to a loss of 2.5% of GNP, and that adjustment for excluded indirect costs (alpha-2) would have increased that figure to 2.8% of GNP. Neither estimate, however, includes the potential savings that would have resulted from the construction of additional canals and better roads. He admits that the North Atlantic region may not provide an adequate representation of the entire country, but he argues that it would be too expensive and difficult to extend this direct measure of savings to the rest of the country.

As an alternative, Fogel suggests that, since water transport was available for about 76% of the land value in the U.S., since, in the absence of railroads, 75% of the loss of land value would be in the four states of Illinois, Iowa, Nebraska, and Kansas, and since all of the lost land could be brought into production with only a small extension of the canal network, a measure based on the difference in the value of arable land provides an equally good measure of social savings. He concludes that the cost of the direct loss of arable land from the absence of railroads (beta) would amount to 1.8% of GNP, and that the total loss – the sum of direct and indirect costs (beta-2) – would amount to 2.1% of GNP. Again, however, beta-2 does include the potential savings that would result from additional canals and better roads. Making further adjustments for the unbuilt canals and better roads, Fogel provides two estimates for the social savings from intraregional trade: alpha-3 equal to 1.2% of GNP and beta-3 equal to 1.0% It was, however, Fogel’s estimates of the social savings generated by railroads in interregional shipping (the first substantive essay), that really touched off the methodological revolution. As in the second essay, the use of explicit counterfactuals and the innovation of the concept (as well as his estimates) of the social savings broke new ground. In this case, however, there were also other very important methodological innovations.

Fogel begins with an operational definition of interregional distribution: “the process of shipping commodities from the primary markets of the Midwest to the secondary markets of the East and South.” While there were good estimates of agricultural production and agricultural exports, there were no data on the method and routes of shipment that were used to move agricultural commodities from producing areas to the points of domestic and foreign consumption; and it is here that Fogel introduces his single most significant innovation. He focuses of four commodities (wheat, corn, beef, and pork) – commodities that together represented 42 percent of agricultural income. He, first, estimates the export surplus at ten primary markets in the west and the consumption in the almost 200 deficit trading areas in the East and South (exports are attributed to the port from which they were shipped). The potential rail and water shipping routes from West to East were easily identified, and the costs of rail and water shipment were well known. To simplify the problem, Fogel focuses on a sample of 30 of the 825 potential routes between pairs of cities in the West and the East. Since the actual choice of routes is unknown, he very imaginatively suggests a linear programming model to estimate the routes – with and without railroads – that would have been selected had the shippers been guided by cost minimization. He then estimates the costs of the inferred shipments, costs estimated both with and without rails. Since there were also additional costs of water transport (lost cargoes, transshipment expenses, extra wagon haulage, time lost because of slower speed and because the canals and rivers froze, and the capital costs of the canals that were not included in the water rates), Fogel adjusts his original cost differentials to account for these additional expenses. His result is an estimate of the social savings in interregional shipment resulting from the innovation of railroads of six-tenths of one percent of GNP, a figure that would have increased to only 1.3%, had he assumed that rail rates were zero.

In this chapter Fogel made four important innovations that were to have a major impact of the nature of research in economic history: (1) the operational definition of social savings; (2) the use of an explicit counterfactual; (3) the use of a formal economic model to estimate what costs would have been had the decisions been made by economic man; and (4) his choice, when it was necessary to make assumptions about the actual world, of assumptions that were biased against his central findings. (See note 3.) Even more than his estimates of interregional social savings, the work in this essay completely changed the way economic historians would do business in the future. There is, however, one blemish in the story. Professor Fogel never actually solved the linear programming problem; his choice of routes was based on what he assumed the solution would have been.

Notes:

1. To give you some feeling about that first decade, one might note that the term “cliometrics” was coined by my then colleague at Purdue, Stanley Reiter – he had been toying around with questions raised by a new discipline that he called “theometrics” (for example, “how many angels can dance on the head of a pin?); and, in his joking way, he suggested that the work in quantitative history seemed to be drawn from similar academic stream.

2. Bob Fogel and, perhaps, Douglass North and Al Fishlow, were the major exceptions. Fogel, himself, has said that he began his investigation fully believing that it would confirm the importance of the railroads. Fishlow (1965) reached conclusions for the antebellum period very similar to those Fogel reached about the latter part of the nineteenth century. Not long before this, North (1961, p. 164) wrote, “While the value added of rails was approximately $6.5 million in 1860 and roughly equals to the value added of bar iron, it was dwarfed by the value added of the polyglot classification of iron castings, which was $21 million in 1860. Indeed, the value added in stove making alone was equal to that of iron rails.”

3. For example, Fogel made no adjustment for changes in non-rail transport that might have been made had there been no railroads: he holds both origins and destinations fixed despite the fact that there would almost certainly have been some such adjustments in the absence of railroads; and he assumes that, in the absence of railroads, water rates would be constant rather than declining as might have been the case had canal builders exploited potential economies of scale.

References:

E. Cary Brown. 1956. “Fiscal Policy in the Thirties: A Reappraisal,” American Economic Review, 46 (December).

Alfred Conrad and John Meyer. 1958. “The Economics of Slavery in the Ante-Bellum South” Journal of Political Economy, 66 (April). This paper was first presented at the meeting of the Economic History Association in 1956.

Albert Fishlow. 1965. American Railroads and the Transformation of the American Economy. Cambridge, MA: Harvard University Press.

Robert Fogel. 1960. The Union Pacific Railroad: A Case Study of Premature Enterprise. Baltimore: Johns Hopkins Press.

Robert Fogel. 1962. “A Quantitative Approach to the Study of Railroads in American Economic Growth: A Report of Some Preliminary Findings,” Journal of Economic History, 22 (June).

Robert E. Gallman. 1960. “Commodity Output in the United States,” in Conference on Income and Wealth, Trends in the American Economy in the Nineteenth Century, 24, Studies in Income and Wealth. Princeton: Princeton University Press.

Douglass North. 1961. The Economic Growth of the United States 1790 to 1860 Englewood Cliffs, NJ: Prentice-Hall.

Published by EH.Net (August 2022).

Scott Reynolds Nelson. Oceans of Grain: How American Wheat Remade the World. New York: Basic Books, 2022. 368 pp. $32 (hardback), ISBN 978-1541646469.

Reviewed for EH.Net by Paul Sharp, University of Southern Denmark, CAGE, CEPR

The title of this book is somewhat misleading. When I received it for review, I expected another US-centric account of how America made the world what it is today. I was therefore somewhat surprised to begin reading, and found that a large part concerns Russia, Turkey, and Ukraine. In fact, reading this book while at the same time witnessing the horrors coming out of Ukraine made an impression, as I will come back to at the end of this review. The author, Scott Reynolds Nelson, is the UGA Athletics Association Professor of the Humanities at the University of Georgia. He has won both academic and literary awards for his writing. It is therefore no surprise that this book is an excellent read. Nelson has the historian’s enviable skill (which many of us from the more economics side of economic history could surely learn from) of making serious analysis come to life through vivid descriptions of people and places. You will most likely come out of reading this book far more knowledgeable than when you started, whether or not you believe the central hypothesis.

Nelson presents a bold theory of what made the modern world. Where Jared Diamond saw “Guns, Germs, and Steel”, Nelson sees the perhaps somewhat less sexy trinity of mold, futures contracts, and dynamite. The potato blight, phytophthora infestans, of the 1840s forced open European markets for grain. The American Civil War led to financial innovations in how grain was traded; and dynamite, invented in Germany in 1867, transformed geography as new deep-water ports were created, and canals and railroads connected continents. In other words, policy, finance, and technology created the globalized world. This is not really news to the economic historian, but Nelson puts it within a framework inspired by the Russian Marxist, activist, and grain trader, Alexander Lvovich Parvus (born Israel Lazarevich Gelfand or Helphand). He postulated the role that “invisible lines,” the “Black Paths” of grain trading routes, have played for the making and breaking of empires, which he argued exist to control and extract rents from them. Rosa Luxembourg was to take his “invisible lines” to create a new way of understanding trade which we now call world systems theory. But Parvus’ influence went far beyond theory. He was able to convince Lenin of the power of these lines and that revolution in Russia was possible.

The introduction provides a great summary of Nelson’s hypothesis. His 2012 book A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters (Knopf) explained that financial panics had much to do with drastic changes in commodity prices. Accordingly, the story here starts in Odesa, Ukraine, which he visited in 2011 to research international financial crises. Nelson sees connections between booms and busts in the wheat market for everything from the French Revolution to the Arab Spring. He notes parallels between different settings based on connections to wheat. For example, Ukraine has some of the richest soil in the world, and it was captured by Russia in 1768 under Catherine II. At the same time, he notes, similar expansionism was going on in the Americas. Then, the French Revolution (over the price of bread, of course, as Nelson notes), and the French and Napoleonic Wars led to Odesa becoming a grain-exporting boomtown. European landlords in turn faced Ricardo’s paradox, as rents dropped as food became cheap. The initial response was protectionist barriers to trade, but then a water mold caused the potato harvest to fail, and European trade opened following 1846.

This, Nelson explains, led to century-long contest between Russia and America to feed Europe’s working class. In the 1860s both empires ended serfdom and slavery respectively. America then gained the upper hand, when the Union Army during the Civil War created futures contracts that allowed grain to be bought and sold without the costly and time intensive process of pricing based on samples. This, combined with the transatlantic telegraph, steam shipping, and the new opportunities brought by dynamite, led to what Kevin H. O’Rourke has termed the “Grain Invasion.” European prices fell, and the ships which brought grain returned with migrants to the New World. As European workers in cities became better off, Odesa, and other grain exporting regions, faced ruin, and the combination of the agrarian crisis and the bursting of estate bubbles ushered in what was known as the Great Depression until the 1930s. The powerful agricultural Austro-Hungarian and Ottoman Empires declined. Russia, for its part, responded in 1884 with state-supported railroads and a plan to plant grain in Siberia and Central Asia. This brought in capital from largely French investors, but Russia’s expansionary plans were checked when it lost in war to the Japanese Empire in 1905. Then, in 1914 Russia’s anxiety that Turkey might halt Russian grain shipments on the Black Seas helped start World War I: “a war over nothing less than foreign bread.” Thus, as Parvus, who grew up in Odesa during the 1873 crisis and coined the term “Agrarian Crisis” in 1895, claimed, the paths of grain made and destroyed empires.

Chapter 1 covers an impressive span of time, 10,000-800 BC and explains the origin of the “black paths” that so fascinated Parvus. Ancient oxen trails connected the Ukrainian plains with the Black Sea ports. Geographers and historians have claimed that these paths, and the trading cities known as emporia (themselves the source of the word “empire”) were created by empires, which in turn were defined by their control of trade lines. Folklore, backed up by new archaeological evidence suggests a far more ancient origin. The first wheat “farmers” might have been travelers or traders, who after decades of migration remained at way stations which formed the first settled communities. Empires then emerged based on establishing protection rackets along the pathways, and in a few generations imposed formal imperial rule. Thus, empires imposed a tax on the black paths, but so too did disease, and the rise and fall of both determined the volume of trade. Nelson explains that historically bread was extremely expensive, involving three stages: 1) planting and harvesting; 2) storing and shipping to the bread eaters, in the emporium; and 3) producing flour, mixing with yeast and water, and baking, which took place in the cities. For at least fifty centuries considerable human labor was devoted to the second stage, and empires emerged to engross and centralize it.

Chapter 2 covers 800 BC-AD 1758. Nelson explains how Byzantium enforced a monopoly control of the Bosporus Strait and the Dardanelles. Constantinople rose and fell as the black paths expanded and contracted, but grain emporia were nodes for infection, and the Plague of Justinian in 541 ended the ancient world. With depopulation, important knowledge about the storage of grain was lost, and its rediscovery centuries later was to play an important part for making long distance trade possible. Constantinople became increasingly dependent on Slavic peoples, and as the grain flowed in, Byzantian culture and the Orthodox religion flowed back. In medieval western Europe, which was often cut off from trade with the East after 542, serfdom arose to compensate for the loss of trade, and control of mill and bakery meant control of people. Nelson is brilliant at finding anecdotes to illustrate the centrality of grain for understanding the world. Thus, the word lord comes from an old word meaning loaf-ward, and the word lady from loaf-kneader, although one wonders if similar etymologies exist for the same words in different languages.

The years 541-1100 were the age of robber barons, for example the Hanseatic League. Absolutist states emerged to break their monopoly, and in 1453 the Byzantine Empire, increasingly starved of grain, collapsed and the Turks took over. A long struggle then emerged with Russia, which wanted to take Constantinople to monopolize the Bosporus themselves. Thus “… at its deepest level an empire may be a monopolizer of food along ancient grain pathways that it never fully understands. Empires survive only as long as they control the sources of food needed to feed soldiers and citizens; they fund themselves by taxing those who sell it.” This is further explored in Chapter 3, covering 1760-1844, where it is explained how Catherine II, inspired by the physiocrats, believed that grain exports properly managed could be the source of an empire’s wealth. To this end she transformed serfdom into something more akin to New World slavery, and enacted extensive military and fiscal reforms. She then set about seizing land where wheat could grow, although she never managed to capture Constantinople. But as the Ottoman Empire shrank, in part due to a less sophisticated grain-tax system, European princes tore grain-producing Poland to pieces to appease Catherine. Moreover, as with US expansion, thousands of native peoples were persuaded to ally with Russia in order to dispossess others. Having taken Ukraine, Catherine founded Odessa (renamed in Ukrainian as Odesa) as a free port, and invited in foreigners to farm land as she aimed to feed Europe and thus make Russia rich. Meanwhile the United States, before the Civil War, offered no real competition. The American port cities were not “visionary physiocratic cities” but “simple adjuncts to plantation slave regimes” where landowners blocked foreign imports. However, the French rediscovered Roman techniques of grain storage, allowing for silos and American “elevators”, thus making long-distance trade increasingly feasible. Trade remained protected, however, and to an extreme degree following the Napoleonic Wars.

Chapter 4 provides the first of Nelson’s trinity of explanations. Barriers to trade crumbled with the failure of the potato crop in the 1840s. As trade expanded, bread replaced potatoes and living standards surged, although health often suffered as Europeans preferred highly processed white bread. Thus emerged what Parvus described as the European consumption-accumulation city. Labor and capital accumulated where food was cheapest and the cities with the deepest docks thrived. Prosperity allowed workers to save, freeing up capital for industrialization. Nelson explains, “European industrialization and urbanization had little in the way of European roots. It was fueled by foreign food.” Chapter 5 demonstrates how the conflict between the Russian and Ottoman Empires came to a head with the Crimean War 1853-56 which saw Russia fail to capture Constantinople, in part because France and Britain feared a Russian monopoly on the Black Sea. This was a humiliating defeat, but also left the Ottoman Empire in heavy debt to Britain and France. Serfdom was abolished in Russia in order to expand grain production, leaving former serfs heavily indebted, but with land, and new political structures, the mir and the zemstvo, were implemented to govern these areas.

A different story played out in the United States, where slavery was abolished around the same time, but land was not redistributed, part of the origins of inequality in the US today. At the same time, the US expanded grain production into the interior using Black Sea varieties of wheat, and the Republican Party campaigned against slavery based on a belief in physiocratic expansion, and a desire for incentives to put family laborers onto wheat farms. Migrants purchased land along new railroads whose monopoly power they came to hate. Then in Chapter 6 Nelson gives the second part of his explanation. The Civil War created a necessity for breaking the power of merchants to supply food for the army, and this was done with a novel financial innovation. Bills of exchange were divided into hundreds of enforceable contracts, which would be called futures contracts, obviating the necessity for buying and selling based on a sample. Although in 1863 only the US Army was using this, with the introduction of the Transatlantic telegraph trade became completely reorganized. Ships could take the place of storage facilitates, redirected at port to wherever the grain was needed. America could now compete with Russia.

The final part of Nelson’s trinity is presented in Chapter 7, appropriately entitled “Boom.” Trade costs were again slashed with the invention of dynamite, which allowed railroads to run through mountains, canals, such as the Suez Canal, to link continents, and for the creation of new deep ports. The increased trade came with additional innovations such as grading, specialized insurance, and Hungarian milling techniques. As the price of food plummeted, workers found more time to educate and organize themselves, as Chapter 8 explains. New economic theories, including Marx’s, emerged to calculate the causes and limits of the new agricultural plenty. Much of the remainder of the book explains Parvus’ contribution to socialist theory and his direct influence on the course of events during his life, including the emergence of the Young Turks and the revolutions in Russia. He argued that although cheap grain benefited everyone, the main threat to the world was the alliance between capitalists and empire which would lead to imperialism, and pointless and costly wars. Agricultural empires such as the Ottoman and Austro-Hungarian empires suffered, while other empires gorged on cheap grain and became great powers. The US share of the grain trade declined as increasing shares of its production went to feed its own large cities. New conflicts emerged as others sought to capitalize on the demand from elsewhere, as Turkey again became a key battleground. World War I itself was “a World War over bread” with for example the closing of the Bosporus and Dardanelles Straits a key event. As Russia starved, revolutions eventually toppled the old Tsarist regime, and the Soviet Union, by quickly incorporating grain producing areas in Ukraine for example, took its place.

One is left with the feeling that we should be surprised about the importance of wheat for world history, which the layperson might indeed be. But from the perspective of an economic historian, one cannot really argue that wheat has been underappreciated. My own PhD thesis, from 2009, was entitled “Wheat, Globalization and Economic History,” and my career as a researcher began with reading the great works by Fairlie, Harley, Williamson, O’Rourke, Jacks, Brunt, and of course my own former supervisor, K.G. Persson (some references are given below). Certainly, there are many more I have forgotten to mention. One could argue that Russia’s role in this story is underexplored, with a few notable exceptions such as Goodwin and Grennes (1998), but more and more scholars are working on Russian economic history these days, so this will improve. Other large countries such as China and India take up relatively little space in Nelson’s account, while references to Parvus alone take up half a page in the index. One can of course argue against the somewhat physiocratic idea of the world where everything starts with the soil. In history this might have been truer, but Engel’s Law and technological progress have changed that, present concerns about food supplies notwithstanding. Regarding the first globalization, Nelson explains that economists and contemporaries have emphasized the importance of the elimination of tariffs, the introduction of the gold standard, and steamships. But, he believes, they have missed the ecological and political background: how the potato famine opened trade, dynamite opened ports, and futures markets increased liquidity. This is a powerful and convincing argument, but this is not a quantitative study. The only graph is of imports of wheat and flour into UK, but this only goes back to 1820. Before this, he explains in an appendix, there was a lot of smuggling and the data is underreported, meaning that historians have overstated the role of cotton and understate wheat.

Given my geographical location and research interests I am looking for Scandinavian connections everywhere, and I apologize for that! But it might be mentioned that, although Nelson dedicates the book to his maternal grandmother and explains that his grandparents left Sweden in 1887, the book somewhat neglects Europe outside Russia and Turkey (and indeed the world beyond), despite the obvious point that dynamite was invented in Germany by a Swede. Copenhagen’s role as a major Baltic trading hub is mentioned in passing, but the somewhat famous Danish exception during the backlash against the American grain invasion before the First World War deserves at least a sentence. Sticking to free trade, Denmark imported cheap grain, which helped feed a booming Danish industry in butter, bacon, and eggs, allowing this small country to feed the large industrializing cities of northern England. Danish exports were to play a crucial role in establishing industrialized dairying around the world, including the United States and Russia. Food is after all not only grain, particularly not as countries become richer. On a more trivial note, at one point the Danish ruler of England, King Canute, is described as a “legendary fool,” but as a historical figure he arguably was neither legendary (although the famous story about him might be) nor foolish for trying to demonstrate the limits of his power and in the process getting his feet wet.

Nelson is not afraid of using dramatic language to demonstrate the relevance of his work for the present, for example in chapter 14: “Now, just as ten thousand years ago, producers and consumers are bound together in a common world ecology that viruses, empires, and states have only ridden upon, bits of foam on a vast, invisible deep.” But sometimes he over-eggs the pudding, such as in the conclusion: “Whether to regard empires as symbiotes or parasites depends on one’s perspective. I tend to see empires as parasites, but one could make the argument that imperially sponsored universities… try to prevent starvation… in ways that promote ‘growth’ inside the empire. Physics, biology, chemistry, economics, and history are all, in their way, data-processing systems for empires hoping to keep their subjects – us – alive so that they can rule another day.” I like to believe that knowledge creation has value beyond allowing our present rulers to survive.

In sum, I would certainly recommend reading this book. I learned a great deal, and his thesis is fascinating and provocative. Moreover, it is a highly engaging read. But be prepared to feel somewhat unsettled as well. Nelson chillingly concludes that “modern Russia’s relative weakness as a great power now (in 2021) may still ultimately depend on its separation from Ukraine… Ukraine has always been the greatest prize, as Catherine the Great well knew.” Economists and economic historians are always being asked to provide policy implications of their work these days. Here is one that President Putin seems to have taken to heart.

References

Brunt, L. (2004). Nature or Nurture? Explaining English Wheat Yields in the Industrial Revolution, c. 1770. Journal of Economic History, 64(1), 193-225.

Fairlie, S. (1969). “The Corn Laws and British Wheat Production, 1829-76.” Economic History Review, 22(1), 88-116.

Goodwin, B. K., & Grennes, T. J. (1998). “Tsarist Russia and the World Wheat Market.” Explorations in Economic History, 35(4), 405-430.

Harley, C. K. (1978). “Western Settlement and the Price of Wheat, 1872–1913.” Journal of Economic History, 38(4), 865-878.

O’Rourke, K. H. (1997). The European Grain Invasion, 1870–1913.” Journal of Economic History, 57(4), 775-801.

O’Rourke, K. H., and Williamson, J. G. (2001). Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press.

Olmstead, A. L., & Rhode, P. W. (2002). “The Red Queen and the Hard Reds: Productivity Growth in American Wheat, 1800–1940.” Journal of Economic History, 62(4), 929-966.

Persson, K. G. (1999). Grain Markets in Europe, 1500–1900: Integration and Deregulation. Cambridge, UK: Cambridge University Press.

Paul Sharp is professor of economics at the University of Southern Denmark, where he heads the Historical Economics and Development Group (HEDG). He is the author, with Karl Gunnar Persson, of An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present (Cambridge University Press, 2015) and, with Markus Lampe, of A Land of Milk and Butter: How Elites Created the Modern Danish Dairy Industry (University of Chicago Press, 2018).

Copyright (c) 2022 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2022). All EH.Net reviews are archived at https://www.eh.net/book-reviews.

Published by EH.Net (June 2019)

Francisco Vidal Luna and Herbert S. Klein, An Economic and Demographic History of São Paulo, 1850–1950. Stanford, CA: Stanford University Press, 2018. xxv + 448 pp. $75 (cloth), ISBN: 978-1-5036-0200-7.

Reviewed for EH.Net by Ian Read, International Studies, Soka University.

 
Of the twenty-two provinces that composed the enormous Brazilian Empire in 1850, São Paulo was not particularly unusual. It was thinly populated, with settlers and slaves near the coast and “barbarous” indigenous communities in the interior, all mostly subsistence farming, hunting, and gathering. The province had few wagon roads, no railroads, and no regular transoceanic ship line to its main port at Santos. Nevertheless, a potent vision of uniqueness, built on the heroics of its colonial frontiersmen and slave catchers (bandeirantes) and the promise of its fertile highlands, had already emerged among Paulistas. Temperate highlands, separated from a narrow strip of tropical coast by a steep escarpment, were recognized as perfect for European farmers as early as the sixteenth century. When the province’s president, Dr. Vicente Pires da Motta remarked in 1849 that São Paulo’s was “favored by Heaven” he shared a regional opinion that was reaffirmed when the highlands were mostly spared from cholera, smallpox and yellow fever. The president might have again called upon heaven if he had seen São Paulo one century later when it was the most populated, wealthy, and powerful state in Brazil. São Paulo’s transformation into the “locomotive” that pulled Brazil’s economy has captured international attention since the province (and Republican state after 1889) filled with coffee trees, slaves, and immigrants during the second half of the nineteenth century. With an economy larger than Argentina or the Netherlands today, scholars continue to wonder why.

An Economic and Demographic History of São Paulo is the second volume of what Francisco Vida Luna and Herbert S. Klein rightly call “the first full-scale survey of the economy and society of the state of São Paulo” (p. xvii). The authors summarize the book’s ten chapters with characteristic concision. “Chapters 1 and 2 describe the evolution of the agricultural economy and the construction of the provincial government under the empire. Chapters 3 and 4 deal with the same themes under the republic. Chapter 5 treats the crisis of coffee overproduction and how the state responded and discusses the Vargas revolution (in 1930) and the government that the Paulista elite had created. In Chapter 6 [they] examine the progressive integration of the state and its principal port of Santos into the world economy. Chapter 7 examines the growth of an industrial complex within the state, and the state’s evolving infrastructure and urbanization in discussed in Chapter 8. The changing population is described in Chapter 9” (p. xxiv), and the book ends with a brief concluding summary. A longtime collaboration between a Brazilian (Luna) and American (Klein) author has resulted in several broadly synthesizing monographs on Brazilian history. One of the book’s most original contributions uses primary historical sources to astutely analyze public finances. They offer convincing evidence that São Paulo experienced its railroad age and attracted so many immigrants after a new Republic regime created a more effective tax structure. Nevertheless, the state government usually spent more than it took in, and its obligations to foreign lenders could create a crisis. The book’s text is supported by an impressive apparatus: 99 tables, 49 graphs, and 11 maps. These figures are beautifully crafted and provide an encyclopedic amount of data for future research.

Luna and Klein provide an expert — if not a bit triumphant — overview of São Paulo’s economic and demographic growth. “Seen from a long-term perspective, as we adopt in this volume, the evolution of São Paulo from 1850 to 1950 is a story of extraordinary change comparable with only a few other areas of recent settlement in the world” (p. xviii). Therefore, “backward” (e.g., agriculture, industry, education, society) transformed into “modern” (e.g., docks, highways, electrical grids, capital goods sector) by men’s acumen, foreign laborers, and export revenue. But as Luna and Klein explained in another recent book, Brazil “remains a traditional capitalist society and one that grew out of slavery.” “Thus, class and race still define inequalities in access to the resources that society offers.”[1] One ends up with a sense that there could have been a deeper discussion of the relation of inequality to growth, especially because São Paulo provides a fascinating case study. The Paulista elite were famously insular and far more European and white than the people they ruled, and São Paulo shows that exclusion and inequality, buttressed by discrimination, need not come at the expense of growth.

Luna and Klein end their study in 1950 because they believe the groundwork for the transitions in commodity exports, industrialization, and urbanization had been achieved. Still, those acquainted with the official 1950 census of São Paulo, realize that the transition of the state of São Paulo had many shortcomings in terms of social progress. In 1950, fewer than three percent of employers were black (including mixed race pardos) but Afro-Brazilians composed more than eleven percent of the population. More than half of white people were literate, but less than one-third of blacks could read or write.[2] A UNESCO study, also approved in 1950, is not too different from the assessment of Brazilian society that Luna and Klein give elsewhere: “a slave regime” was too slow to become “a class regime” in São Paulo, even in the absence of Jim Crow legal segregation.[3] Considering the entanglements of race and class, economists have recently debated whether Brazil or São Paulo has experienced any decline in its rates of wealth inequality since 1850, and some new evidence suggests that it increased during this period.[4] Luna and Klein briefly mention enormous inequality in landholding (pp. 103-104, 113) at the beginning of their period and extreme divisions in industrial holdings toward the end (pp. 217-220), but the words “inequality” and “race” are not discussed at length and are absent from the book’s index. Since we have plenty of evidence that São Paulo grew and changed intensely, but always with the same winners and losers, we should learn more about the institutions and tax structures that permitted the barest level of redistribution into infrastructure, sanitation, and public education to maintain profits and the status quo of sometimes violent patrimonial relationships. In considering human development, historians of Brazil may need to bridge the gulf that separates two branches of literature. On the one hand, Barbara Weinstein’s The Color of Modernity: São Paulo and the Making of Race and Nation in Brazil (Durham, NC: Duke University Press, 2015) and Celia Maria Marinho de Azevedo’s classic Onda negra, medo branco: o negro no imaginário das elites – século XIX (Rio de Janeiro, RJ: Paz e Terra, 1987) make disturbingly vivid the normative arrangements that elite families used for their preservation. On the other hand, John Williamson and Thomas Piketty’s research has found the inherent exclusion of inequality is not the unbreakable inheritance of a colonial Latin American past, but of socioeconomic machinations that continue to spin and grind.

Notes:
1. Francisco Vidal Luna and Herbert S. Klein, The Economic and Social History of Brazil since 1889. New York: Cambridge University Press, 2014, p. 311.
2. Conselho Nacional de Estatística, Estado de São Paulo, Censo Demografico. 1954, pgs.5, 20, 30.
3. Roger Bastide and Florestan Fernandes, Relações raciais entre negros e brancos em São Paulo: ensaio sociológico sôbre as origens, as manifestações e os efeitos do preconceito de côr no município de São Paulo, São Paulo: Ed. Anhembi, 1955, p. 59.
4. Luis Bértola, Cecilia Castelnovo, Javier Rodríguez, and Henry Willebald. 2009. “Income Distribution in the Latin American Southern Cone during the First Globalization Boom and Beyond,” International Journal of Comparative Sociology, 50, no. 5-6: 5-6.

Ian Read is the author of “Do Diseases Talk? Writing the Cultural and Epidemiological History of Disease in Latin America,” Latin American Perspectives and The Hierarchies of Slavery in Santos, Brazil, 1822-1888, Stanford: Stanford University Press, 2012.

Copyright (c) 2019 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2019). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Published by EH.Net (April 2017)

Noam Maggor, Brahmin Capitalism: Frontiers of Wealth and Populism in America’s First Gilded Age.  Cambridge, MA: Harvard University Press, 2017. xii + 284 pp. $40 (cloth), ISBN: 978-0-674-97146-2.

Reviewed for EH.Net by David O. Whitten, Professor of Economics, Auburn University.

Noam Maggor, Postdoctoral Associate in the Department of History at Cornell University and formerly a Fellow in the Charles Warren Center for Studies in American History at Harvard University, opens Brahmin Capitalism: Frontiers of Wealth and Populism in America’s First Gilded Age with the pre-Civil War history of Boston wealth and its employment in the construction and expansion of the cotton textile industry in the Boston area.  The return on investments in mills and machine shops attracted capital to the point of over-development that left investors with declining stock values and reduced returns that might well have spelled the end of Boston as a capital-rich city.  What Boston financiers did to reinvent themselves has a commanding role in Maggor’s study.

The first thrust into investments outside of Boston’s textile industry was a failure.  Bostonians — with more ambition than understanding of human behavior and Mother Nature — undertook to prove to the investment world that cotton culture could be as remunerative under free labor conditions as it was under slavery.  Cultivating cotton on a sea island off the coast of South Carolina proved more challenging than the young Bostonians anticipated.  The heat, high humidity, lack of infrastructure, and hurricanes combined with a recalcitrant newly-freed labor force to overwhelm the young men from the North who returned to Boston in defeat.  They might have benefited from knowledge of the experience of ship builders in the early National period who struggled to harvest live-oak trees for construction of the nation’s renowned frigates.  The live oaks thrive in the swampy Atlantic coastal regions of the Southern states.  The parts essential for the best ship construction were acquired but only at heavy expense of human effort and treasure.

The spectacular growth of the American heartland in the post-Civil War era is well documented.  What Maggor adds to that body of literature is a microscopic analysis of the role of Boston investors in that explosive expansion.  Railroad construction required financing as did exploitation of the mines and forests of the United States.  Maggor documents the Boston investors’ contribution to that underwriting.  The Mexican Central Railway, a 1,225 mile road that ran from El Paso to Mexico City, for example, was incorporated under Massachusetts law and controlled by the Boston investment group that owned the Atchison, Topeka and Santa Fe and was directed from Boston where nine of its thirteen directors resided.  The Mexican Central connected with the Atchinson, Topeka, and Santa Fe and feeder lines constructed to regions where remunerative freight could be found.

The moneyed interests in Boston did not invest in a pig-in-a-poke but relied on their men-on-the-ground to advise them on the potential of attractive enterprises — men who devoted themselves to careful study and analysis of the projects they reviewed for their employers in Boston.  Those employers were family and friends of the advance-agents, who saw themselves as missionaries to the great unwashed of the American heartland and who were often surprised at the intellect, cunning and energy of the lower class men they studied.  It was not unusual for the surveyors to assume responsibility for the undertakings they recommended for investment.

Maggor juxtaposes his exposition of the flow of Boston capital into the heartland with discussions of changes in Boston itself.  At the same time that Boston financiers were gaining national influence with their monetary assets they were losing control of their city.  In the heyday of cotton manufacturing and the import/export trade, the city of Boston belonged to the elite.  The controlling offices were held by those with money and ownership of the factories.  With the decline of cotton manufacturing and import/export, Boston became home to small manufacturing and commercial firms whose owners and employees made up in numbers (read votes) for what they lacked in wealth.  Moreover, the lower and middle classes expanded their political power by expanding the city itself, incorporating what had been outlying towns into the city proper over the protests of the moneyed class that considered itself to be the soul of Boston, the people who mattered.  As the nineteenth century advanced, Boston’s elite were increasingly isolated in pockets they were able to defend against the urban juggernaut.  Beacon Hill and later Back Bay became enclaves of the rich and powerful — powerful nationally but increasingly impotent locally.

Maggor showcases the hometown conflict facing the moneyed interests of Boston with a chapter dedicated to the fierce battle over use of the Common.  Using direct quotations from the debaters, Maggor paints a vivid portrait of the positions taken by the combatants or in the case of the moneyed class, their paid spokespersons.  These positions reflected the philosophies of the two sides and their opposing views of their city and their place in it. The rhetorical storm grew out of a request of mechanics in Boston for use of a small part of the Common for an exposition featuring the mechanical advancements of which they were proud.  Similar expositions were common in the decades after the successful Crystal Palace Exposition in London in 1851.  The Common was a barrier between Back Bay, home to a large portion of the moneyed class who saw any intrusion into the sanctuary they portrayed as an urban retreat for the lower classes, as a threat to their privacy and security.

Following the battle for the Common, Maggor investigates the conflict between East Coast investors and the constitutional conventions at work in the states being carved out of the western territories.  Boston investors, like the others in the East, were concerned that state constitutions might infringe on their freedom to harvest the resources of the territories and to regulate the railroads owned by Eastern moneyed interests.  Delegates to the conventions were not of the elite of society but residents of the new states who had vested interests in the operation of their government.  These delegates sought protection from the rich men back east who sought to take off the resources of the state at minimum or no cost and to run rampant over organized labor and any resistance to railroad rate setting.  Representatives of the East Coast moneyed interests played hard ball with the constitutional conventions threatening the loss of investment funds essential to the development of the state.  Neither side won complete victories but the moneyed interests probably gained the most from the negotiations.

Meanwhile, back in Boston the elites built political coalitions that propelled them back into control of their city government.  Once back in power the elected elites strove to undo what the populist administrations had constructed and reduce the support of lower classes that came at the expense of those better off.  The conflict between those dependent upon a strong and well financed city government and those who wanted to reduce that government parallels the national political conflict of the second decade of the twenty-first century.  As Maggor assures us, the development of the United States as an industrial power and leader of the world did not come about smoothly but in fits and starts with uneven results.  Brahmin Capitalism is a guide to the background of that development as it progressed in Boston, a premier leader in investment at home and beyond.

Maggor’s work lacks a bibliography but extensive citations largely make up for that failure.  The writing is like silk, so smooth that it often moves the reader along at such a pace that the underlying meaning of the narrative is missed and demands a second and even third reading.  This is not an easy book to digest.  It demands concentration but makes the effort worthwhile.  Students of business history will benefit from a reading of this work.

David O. Whitten (Professor of Economics, emeritus, Auburn University) is author (with Bess E. Whitten), of Birth of Big Business in the United States: Giant Commercial, Extractive, and Industrial Enterprise, 1860–1914 (Praeger, 2006) and (with Douglas Steeples) Democracy in Desperation:  The Depression of 1893 (Greenwood Press, 1998) and editor of Business Library Review, International (aka Wall Street Review of Books founded by Robert Sobel) from 1976 to 2002.

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

Published by EH.Net (December 2016)

Stephen S. Cohen and J. Bradford DeLong, Concrete Economics: The Hamiltonian Approach to Economic Growth and Policy. Boston: Harvard Business Review Press, 2016. xi + 223 pp. $28 (cloth), ISBN: 978-1-422-18981-8.

Reviewed for EH.Net by Richard M. Salsman, Program in Philosophy, Politics and Economics, Duke University.

When the U.S. has prospered most has it been due mainly to a limited state that ensures equal legal treatment and relatively free markets, or has it been due to an active, intervening state that regiments activity and protects or subsidizes favored products, firms and sectors, at the expense of others? The latter, say the authors of this brief but rather interesting volume. Take note, any remaining fans of Adam Smith, true believers in “invisible hands,” or diehard devotees of “laissez faire.”

DeLong, a professor of economics at the University of California, Berkeley and Cohen, professor emeritus and co-director of the Berkeley Roundtable in the International Economy (BRIE), deserve credit for reminding us that no economic policy is truly “hands off.” As a discipline, political economy properly recognizes and studies the unavoidable interaction of politics and markets; the latter can’t even function without some basic provision of public goods (e.g., law and order, security of private property, legal sanctity of contract). They deserve kudos also for at least stipulating that prosperity (“the wealth of nations”) is a worthy goal (as it was for Smith), for that’s surely not a key premise of today’s environmentalists, social-justice warriors, or the Pope.

But is more needed, for prosperity, than the provision of basic, rights-protecting public goods? Yes, say these authors — substantially more. In their view the state is an economy’s designer, the one institution which can (must!) identify and clear out “spaces” where entrepreneurs can then confidently operate. They believe the U.S. has suffered economic crises and stagnation since 1980 because economic policy has been too pro-business — i.e., excessively-low tax rates, free trade, deregulation, entrepreneurialism, and promotion of “zero-sum” financial activity at the expense of value-added manufacturing. They tout five prior episodes in U.S. history when “real” prosperity occurred, due (they claim) to their preferred policy mix of high income tax (and tariff) rates, heavy regulation (especially of finance), infrastructure spending, and protectionism: the 1790s and early 1800s (via “Hamiltonian” principles), the post-Civil War Gilded Age (via Lincolnian prescriptions), the progressive era (via Teddy Roosevelt’s policies), the New Deal of the 1930s (via FDR’s New Deal), and the post-WWII decades of infrastructure/aerospace buildout (a by-product of the “military industrial complex” which Eisenhower both encouraged and distrusted).

By intention, the methodology here isn’t very rigorous. No new historical database is cited or analyzed. The authors eschew careful, disciplined treatments of history, empirics, and models. They offer, unapologetically, a selective historical narrative designed mainly to corroborate their theme. They believe policy formation (and analysis) goes awry if ever animated by “ideology,” especially in free-market form. Declaring themselves “non-ideological,” they focus on what they call the “concretes,” instead of abstractions; they endorse only what “works” (“pragmatically”), not what should work (“theoretically”). But can anyone specify what “works” without reference to some criterion? The authors implicitly deny that scientific methods require hypothesizing and testing — that some theory is necessary even to know where to look in a vast empirical record.

DeLong and Cohen’s methodology — more accurately, their anti-methodology posture — is worth mentioning, because in truth they cleverly apply a specific theory in choosing their anecdotes and structuring their narrative, one which economists have variously characterized as “economic nationalism” or “industrial policy.” In this model, popularized in the 1970s and early 1980s by Robert Reich and Lester Thurow, public officials and planners are presumed to be sufficiently wise and prescient to distinguish future economic “winners and losers” and thus able to generate sustainable prosperity by fostering the former and discouraging the latter, while (somehow) also avoiding the corporatist and labor union rent-seeking such policy targeting typically invites. A more recent example of the approach is Mazzucato’s The Entrepreneurial State (2013).

When a theory doesn’t explain economic reality very well, its adherents might elect to eschew theory altogether or instead to cherry-pick the historical record, to make the dubious theory “fit.” Hedging their bets, these authors try both. As for the cherry-picking, they cite nearly every major economic innovation in the U.S. since its founding era and attribute it to the encouragement of some government policy. Thanks mainly to Washington, America has had firearms, railroads, radio, aerospace, autos, trucking, assembly lines, nuclear power, electrification, central banking, paper money, infrastructure, computers, semiconductors, the Internet (yes, they credit Al Gore), and even smart phones. If the U.S. government has ever even remotely touched these things, the authors imply, it pretty much made them possible. At the same time, they blame failed products, eroded industries, and recession-depression decades in U.S. history on overly-free markets.

Even if the claim were true, that these products and sectors were made possible by Washington, it’s worth noting that the authors find that they entail primarily spin-offs from the outlays and projects of the U.S. Department of Defense — a state function even classical liberals can heartily endorse. Are prosperity-fostering spinoffs likely to flow also from the explosion of entitlement-transfer outlays in the half-century since the start of “Great Society” schemes? U.S. federal spending on national defense is now just 12% of all outlays, down from 16% in 2000, 23% in 1980, and 50% in 1960. It’s about as likely as the authors’ more liberal sympathizers being pleased to hear what aspect of U.S. spending most boosts the economy. These Berkeley dons are in the odd position of wishing devoutly for the “military-industrial complex” Ike warned against.

A misleading aspect of the book is the authors’ insistence that theirs is “the Hamilton approach to economic growth and policy.” In truth Alexander Hamilton, the first U.S. Treasury secretary (1789-1795) wanted (and implemented) a constitutionally-limited federal government, by no means a state engaged in “industrial planning” of the kind DeLong and Cohen want (let alone “social insurance” or “redistribution”). Hamilton rejected British mercantilism, which stunted American manufacturing; and unlike his Jeffersonian-agrarian opponents (and successors), he wanted low and uniform tariffs. Hamilton also defended and implemented a gold-silver based dollar, sustained reductions in the national debt, and a limited-power, privately-owned national (nationwide) bank (not a “central bank,” as the authors claim). Also unlike DeLong and Cohen, who devote a whole chapter to denouncing what they claim is a cancer-like “hypertrophy of finance” since 1980, Hamilton saw the financial sector as productive (if left free of government influence — as it surely isn’t today), not one that displaces real and healthy economic sinews.

Two periods in U.S. economic history are particularly misrepresented in the book, to fit the author’s theme. The “Gilded Age,” the half-century between the ended of the Civil War and start of World War I — supposedly entailed “vast accumulations of conspicuous wealth” and a “confiscation of the nation’s wealth” due to “the crushing power of trusts” (p. 71). In fact that was a half-century of stupendous invention, entrepreneurship, and wage gains, due to economic freedom, not theft; it was accomplished without a central bank, a federal income tax, centralized industrial planning, or a regulatory state. The other period misrepresented is the 1930s; the authors say FDR’s heavily-interventionist New Deal revived the economy, but in fact it mainly prolonged the stagnation.

It’s reasonable to expect a book authored by fans of “industrial policy” to highlight Japan, as did Reich and Thurow in the 1980s. After all, Japan’s Ministry of International Trade and Industry (“MITI”) was heralded as the model for planning agencies globally and the progenitor of its post-war economic “miracle.” Yes, Japan’s industrial production increased nearly 10% per annum from 1950 to 1991; but since then it has shrunk at a compounded rate of 0.4% per annum. Does this quarter-century contraction reflect free market policies enacted after 1991? Hardly. Somehow “things changed,” the authors report, dead-pan. “Japan had become a solidly rich nation.” “Asset values then crashed and stayed crashed,” and “rapid growth became dishearteningly elusive. Why? We do not claim to know” (p. 133).  Herein lies the futility (and dishonesty) of historical cherry-picking: when the facts don’t fit, plead humility and ignorance; otherwise, proclaim boldly and often that every sustained economic success necessarily has flowed from astute state planning.

DeLong and Cohen deserve thanks for issuing a reminder that the humane state should facilitate prosperity and higher living standards, as that’s become a minority (but much needed) view in recent decades. The book’s more refutable parts include the claim that prosperity is achievable by actively countermanding markets, the belief that today’s burgeoning welfare-transfer state (which they condone) can spawn wealth-producing “spinoffs,” and above all, the presumption that their book has the imprimatur of a truly Hamiltonian (pro-capitalist) political economy.

Richard M. Salsman is the author of The Political Economy of Public Debt: Three Centuries of Theory and Evidence (Edward Elgar, 2017). richard.salsman@duke.edu.

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

Published by EH.Net (September 2016)

Michael Brem Bonner, Confederate Political Economy: Creating and Managing a Southern Corporatist Nation. Baton Rouge: Louisiana State University Press, 2016. x + 260 pp. $48 (hardcover), ISBN: 978-0-8071-6212-5.

Reviewed for EH.Net by Gary M. Pecquet, Department of Economics, Central Michigan University.

Historian Michael Bonner examines how the government, bureaucrats, industrial leaders and ordinary citizens interacted under the pressures of emergency wartime conditions to create a distinct Confederate political economy. The Confederate war economy dispensed with many of the normal features of a market economy just as the United States did in prosecuting the two world wars during the twentieth century.

Although the extent of the Confederate government’s economic control was unprecedented by American standards, Bonner correctly contends that the Confederate political economy was never a top-down command economy, as Louise Hill (1936) and as William Davis (1994) have contended. Bonner correctly dispatches the claim that the Confederacy adopted a “State Socialist” model. According to him, “The State Socialism argument overlooks the capitalists, both the agricultural capitalist slaveholders and the growing class of industrial capitalists, who facilitated the dramatically increased production of war materiel” (p. 222, fn. 44).

Instead, Bonner draws from Nobel-laureate Edmund Phelps’ Mass Flourishing (2013) and finds the Confederate war economy to be neither free market, nor state socialism. Bonner finds that the Confederate war economy compared more closely to the authoritarian “corporatist” economic model (aka “Fascism,” aka “crony capitalism”) adopted throughout Europe during the early-to-mid twentieth century to preserve traditional social values from dynamic capitalistic.  Markets are tolerated, but subject to significant government oversight and regulation.

Confederate leaders did not intentionally set up an authoritarian regime, but the corporate model emerged out of wartime expediency. Special provisions in the new Confederate Constitution conferred additional powers to the executive branch: a six-year Presidential term, a line-item veto and executive control over government expenditures. In addition, The Confederate Supreme Court was never appointed and approved; nor did the Congress even establish federal courts for judicial review. Moreover, although Confederate congressmen and senators continued to stand for elections, wartime pressures for patriotism reduced the role of political parties and prevented gridlock. This gave President Jefferson Davis a free hand to contract with selected private firms to secure war supplies. Initially, the Confederacy lacked a bureaucracy and trained public servants so it often relied upon the assistance from states for enforcement.

The Confederate authorities had to negotiate with private interests in order to ensure reliable supplies of essential military goods. They also developed an ad hoc policy towards railroads. The Confederacy conscripted men into military service and imposed a system of wartime passes upon civilians to prevent espionage.

Bonner describes thorough narratives the corporatist interworking between the Confederate government and private manufacturers. These included the Tredegar Iron Works of Richmond and the Shelby Iron Works of Alabama, near Birmingham. Drawing largely from Charles Dew (1966), Bonner describes the rise of entrepreneur/businessman Joseph Reid Anderson, who built the Tredegar Iron Works ten years before the beginning of the war. Tredegar secured early contracts from the emerging Confederate government in February 1861 and continued to sell to both private railroads as well as the government. Bonner does a good job describing the contractual negotiations between Tredegar and government purchasing agents. Due to the onslaught of rampant inflation, the company faced rising costs and accusations of price gouging by Confederate politicians. These complaints increased and by late 1862, an army ordinance officer accused the company of yielding excessive profits of 30 to 50 percent or even as high as “60-80% in recent months” (p. 80). After 1863 the company asked five more times for price increases and the accusations of profiteering only got worse. But Tredegar was the major supplier of iron to the Confederacy and continued to obtain contracts. We may regard this process of price increases followed by accusations and new contracts as a bi-lateral negotiating process taking place during times of depreciating currency values. (Incidentally, this process was not substantially different from the union-management negotiations under periods of continuous price inflation in certain twentieth-century corporatist nations.)

Compared to Tredegar, Shelby Iron Works of Alabama was a latecomer. Largely from new primary sources, Bonner uncovers details of crony capitalism between the Shelby Company and government purchasing agents. At Shelby, prospective owners sought to expand operations, but wanted government protection from risks, so with the help of an influential Confederate purchasing agent, they secured a $75,000 loan from the Confederacy. But the private/public partnership created conflicting expectations that undermined the effectiveness of the operation. The company was supposed to repay the loan, but the government expected that the added facilities should be used to fill government orders, not private orders. The government officials feared that Shelby iron might be sold at higher prices to private buyers. The government also aided the Shelby works by exempting key employees from the draft. The major point of contention between Shelby and government was the means of payment (sound money or depreciated Confederate notes and bonds). Eventually, however, Shelby agreed to accept payment in fixed prices, with an eye to renegotiating new terms as prices increased. But in this case, Confederate officials could threaten Shelby’s labor supply by denying draft exemptions, so they may have held an advantage.

The Confederacy did embark upon a major government-run business. At the beginning of the war, the South had only four small local gunpowder mills. The Confederate government decided to create a single, large government-owned gunpowder factory at a secure location to provide its wartime requisitions. This single factory successfully supplied the Confederate armies for most of the war.

Bonner does a good job showing how Woodrow Wilson’s administration adopted the Confederate corporatist model as it mobilized the economy for participation in World War I. Although the Confederacy stumbled into cozy business-government relationships, the Wilson Administration consciously followed the same pattern. The Wilsonian World War I regime was not a top-down command-and-control system, but one that mixed government force and favors with private cooperation. Like the Confederacy, the WWI selective service relied upon the cooperation of local draft boards. Wilson’s government takeover of the railroads worked much the same way as Confederate control over rails. In both cases, the governments had to rely upon the railroad owners’ expertise giving business the upper hand in setting policy.

Bonner’s book provides a helpful addition to the study of early twentieth century Progressive economic policy. His book exploring Confederate mobilization provides a complimentary narrative to Robert Higgs’ (1987) analysis of the growth of government in Crisis and Leviathan. Bonner does not consider the role of intellectual history. Corporatism originated in Europe as the “German Historical School” and adherents taught its doctrines in American universities. Wilson adopted the theories of corporatism from his university professors (Pecquet and Thies, 2010). What Bonner shows us is that the practice of wartime mobilization also flowed out of a preexisting pattern that remained in the memories of contemporary historians.

References:

Davis, William C. 1994. A Government of Our Own: The Making of the Confederacy. New York: Free Press.

Dew, Charles B. 1994. Bond of Iron: Master and Slave at Buffalo Forge. New York: W. W. Norton.

Higgs, Robert J. 1987. Crisis and Leviathan: Critical Episodes in the Growth of American Government. Oxford University Press.

Hill, Louise B. 1936. “State Socialism in the Confederate States of America,” in Southern Sketches, Charlottesville, VA: Historical Publishing.

Pecquet, Gary M. and Clifford F. Thies. 2010. “The Shaping of the Political-Economic Thought of a Future President: Professor Ely and Young Woodrow Wilson at ‘The Hopkins,” The Independent Review, 15 (2) 257-277.

Phelps, Edmund. 2013. Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change. Princeton, NJ: Princeton University Press.

Gary M. Pecquet has published numerous articles on nineteenth and early twentieth century American economic history. The most recent of these works (with Clifford F. Thies) is “Reputation Overrides Record: How Warren G. Harding Mistakenly Became the Worst President of the United States,” The Independent Review (Summer 2016). He can be reached for comment at pecqu1g@cmich.edu.

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

Published by EH.Net (July 2016)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Published by EH.Net (June 2016)

Samuel Bostaph, Andrew Carnegie: An Economic Biography. Lanham, MD: Lexington Books, 2015. xii + 125 pp. $75 (hardcover), ISBN: 978-0-7391-8983-2.

Reviewed for EH.Net by Robert P. Rogers, College of Business and Economics, Ashland University.

This book, a concise biography of Andrew Carnegie, focuses on some important issues concerning his business and philanthropy.

Carnegie’ life was a rags-to-riches Horatio Alger story but with an interesting twist.  While he was born a poor Scot, his family was well-read and knowledgeable about their surroundings.  Carnegie used a succession of seemingly prosaic but strategically placed jobs to become a major executive with the Pennsylvania Railroad.  He employed his connections there to start several businesses supplying the railroad with important inputs such as bridges and rails.  Eventually he built a steel rail firm using the Bessemer process.

His ability to obtain financing and find competent executives and engineers enabled Carnegie to develop a large efficient steel firm.  Among the people he attracted to the firm were Henry Frick and Alexander Holley.  Frick and Holley were pioneers in the development of, respectively, coke ovens and Bessemer furnaces.  Not only did the firm capitalize on the demand for rails, but it also became the leading firm in construction steel.  To do this, the firm employed another new steel furnace, the open hearth.  By the 1890s, Carnegie’s company had become the leading steel firm in the world.

Given its brevity and its focus on the issues of government intervention, firm governance, and property rights, this is the biography that I would recommend to a generalist wanting to understand Carnegie.

On three issues, however, I see problems with the analysis.  They concern tariffs, railroads, and the intertwined issues of property rights and governance.  Ironically, it is on the latter two issues that Bostaph breaks new ground, but there are still questions.

Bostaph overstates the role of tariffs in Carnegie’s success.  Fogel (1964) and Temin (1964) have ascertained that protection had some positive effect on the success of the American steel industry.  Nevertheless, it seems unlikely that absent tariffs a country as well endowed with coal, iron ore, and human capital as the United States would not have developed a large domestic steel industry.  Had a free trade regime existed in the United States, Maine might have had ten Carnegie libraries instead of fifteen.  Carnegie might have been rich anyway but not as rich.

My second quibble with Bostaph is the relationship of railroads to steel.  Many writers have correctly posited that through subsidies the government unnecessarily encouraged railroads.  Yet, it is likely that the United States would have developed a large railroad system without this government help.

I have intimated that Bostaph’s major contribution concerns firm governance and property rights.  The major issues were the Carnegie firm’s relationships between two of its human inputs — factory workers and firm executives.

Most interesting is Bostaph’s analysis of the Homestead strike.  Many workers viewed their jobs as a property right.  This idea was based on the labor theory of value that asserts that the value in an item arises from the work put into making it.  Bostaph rightly argues that this theory is wrong citing the nineteenth century marginalist economist, Karl Menger.  The marginalists posit that the value of an item arises from the utility that it gives to the user who pays for it.  Pieces of iron ore do not have any value until they are metamorphosed into items that can be used such as rails or beams.  Entrepreneurs like Carnegie figured out how to combine capital and labor to produce the items that users will buy.

Given Bostaph’s analysis, still, Carnegie might have developed an efficient job property rights system for factory jobs.  Law and accounting firms are so organized.  Other steel firms have developed with the factory job as a property right.  The above contention, however, cannot be confirmed or refuted.

Nevertheless, Carnegie did give property rights to some of his labor — managers.  By making them partners in the enterprise, he gave them a stake in the enterprise, i.e. a property right.  Until the middle 1890s, the Carnegie firm was a large complicated partnership.   It is not clear how well it worked.  Through much of the firm’s history, however, there existed extensive conflicts between the various manager-partners.  From reading Bostaph’s account of the firm in the 1890s, one has to wonder how steel got made given all the squabbling.

While this system was efficient to a degree, a better system might have been developed.  A piece of evidence is the attitude of W. J. Jones, the illustrious manager of the Homestead works (some time before the strike).  Refusing a partnership, he demanded and got a high salary (equal to the President of the United States).  Might he have seen the problems with a partnership with Carnegie?

Furthermore, there were large firms that ran more smoothly and efficiently at that time.  Among them was John D. Rockefeller’s Standard Oil.  Rockefeller has been subject to much criticism, but most scholars compliment his internal management.

Interestingly, while Bostaph does a good job describing the conflicts between Carnegie and his partners, I am not sure he understands its possible implications.  U.S. Steel, the Carnegie successor firm, was noted for lackluster management.  Many scholars have attributed it to x-inefficiency and management’s emphasis on getting along with the government (Rogers, 2009).  Perhaps, the competitive problems with the American steel industry had their start with Carnegie’s inability to develop an efficient managerial system.

I got this admittedly tentative insight from Bostaph’s book.  By putting the firm’s history into an alternative economic context, this book reveals much about Carnegie and the steel industry — maybe more than the author realizes.  I hope to see similar works from him on other historical figures.

References:

Robert W. Fogel. 1964. Railroads and American Economic Growth: Essays in Econometric History, Baltimore: Johns Hopkins Press.

Robert P. Rogers. 2009. An Economic History of the American Steel Industry, London: Routledge.

Peter Temin. 1964. Iron and Steel in Nineteenth Century America: An Economic Inquiry, Cambridge, MA: MIT Press.

Robert P. Rogers is (rrogers1@ashland.edu) is a Professor Emeritus of Economics, Ashland University.  He has published An Economic History of the American Steel Industry (Routledge, 2009) and a number of articles on the steel industry.

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

Published by EH.Net (June 2016)

Allen Dieterich-Ward, Beyond Rust: Metropolitan Pittsburgh and the Fate of Industrial America.  Philadelphia:  University of Pennsylvania Press, 2016. viii + 347 pp.  $40 (hardcover), ISBN: 978-0-8122-4767-1.

Reviewed for EH.Net by Werner Troesken, Department of Economics, University of Pittsburgh.

Over the past 150 years, the population of Pittsburgh has followed an inverted U-shaped pattern.  Between 1860 and its peak in 1950, the city’s population rose by a factor of 13.7, from 49,221 to 676,806.  Since 1950, however, the city has experienced a steady and largely uninterrupted decline, with population falling by nearly 55 percent.  The rise and fall of Pittsburgh reflects a more general process of industrialization and de-industrialization that affected the broader Steel Valley region, including western Pennsylvania, southeastern Ohio, and northwestern West Virginia.

In Beyond Rust: Metropolitan Pittsburgh and the Fate of Industrial America, Allen Dieterich-Ward explores how business leaders and political elites shaped the region’s response to both industrialization and de-industrialization.  According to Dieterich-Ward, the experience of the Pittsburgh region is illustrative of a broader national story.  “At each stage of its development,” he writes (p. 5), “Pittsburgh served as a model for other metropolitan regions — it was first among large industrial cities, first to face economic collapse, and, perhaps, first to emerge from its obsolescence into a vibrant new form.”

From beginning to end, elites drive Dieterich-Ward’s narrative.  In chapter 1, he argues that the ascendancy of Pittsburgh as a steel and iron producer stemmed less from specific geographical advantages, such as access to water, than to the business acumen of Pittsburgh business leaders such as Andrew Carnegie and Henry Clay Frick.  Quoting from a letter by a Wheeling attorney written in 1899, Dieterich-Ward explains (p. 44-45) that “Pittsburgh concerns had capital, transportation, business facilities and successful management, which could not be equaled [in Wheeling].”  Hence, “when Pittsburgh’s real growth began, Wheeling died.”  While this excerpt suggests growth was a zero-sum game, in the broader narrative in this chapter Dieterich-Ward argues that Carnegie and Frick linked Pittsburgh’s success as an iron and steel producer to the broader region through the city’s dependence on coal and other natural resources.

To highlight the environmental impact of industrialization, Dieterich-Ward explains (pp. 47-48) that “a ton of steel required a ton and a half of iron ore, a half ton of coke, and a quarter ton of limestone.”  Mining these resources, most of which were nearby, helped build up small towns in the hinterland but also left the surrounding landscape blighted once the resources were gone.  Burning coal and creating coke was particularly odious.  “Even a well-built beehive oven converted only 70 percent of each ton of coal into coke.  This meant that the 30 percent of the suspended carbon particles, tars, hydrocarbons, carbon monoxide, methane, and sulfur dioxide escaped from the ovens in the form of smoke and noxious fumes” (pp. 50-51).  Railroads also left an indelible mark on the region, through extensive tunneling (the Steel Valley was and is very hilly) and coal smoke emissions.  In an era before meaningful environmental and labor regulations, those most affected by such environmental degradation were the workers themselves.  Given this, Dieterich-Ward (p. 52) concludes that the “integrated system of coal, steel, and rail that formed the basis of the region’s economic life thus imperiled the lives of its inhabitants even as it generated enormous [financial] wealth.”

Industrialization, however, did not only impact the physical environment; it also shaped social and political relations as business elites used their clout to manipulate the system to their favor.  Dieterich-Ward argues, for example, that for much of the nineteenth and early twentieth century business leaders fostered a fragmented and highly decentralized political system that limited the power of voters and politicians to effectively regulate their activities (pp. 62-63).  Progressive-Era reforms failed to improve the situation.

By the early twentieth century, industrialization had ravaged the region’s countryside and river, and left cities like Pittsburgh with a serious smoke control problem.  Dieterich-Ward’s narrative suggests that while Pittsburgh’s business elites played a central role in generating and creating these environmental problems, they also had a vested interest in controlling such problems in large part because of their extensive real estate holdings in the city.  He gives particular attention to the Mellon Family and the creation of the Mellon Institute, which produced some important early studies on smoke in Pittsburgh.  Concerns about smoke and other environmental problems led to the first Pittsburgh Renaissance, and the revitalization of the city’s downtown through the Golden Triangle Project and the construction of the Civic Arena in the 1960s.  Park creation in and around Pittsburgh was also seen as a central component of making a still heavily industrial city more livable.

In the second half of Beyond Rust, Dieterich-Ward gives much attention to the history of smaller cities and metropolitan areas in the Steel Valley and how they responded to the process of de-industrialization.  He discusses, for example, how in Wheeling, West Virginia, effective smoke control came later and was probably less successful than in Pittsburgh.  Similarly, as the steel industry struggled to survive in Weirton, West Virginia, workers and politicians united to create the Steel Mill of the Future, which at least for a few years, was something of a success.  Following the lead of many politicians and insiders in the broader region, Dieterich-Ward sees highways and transportation hubs as key to the survival of the smaller towns in the face of economic decline.  In this regard, he cites the experience of Martins Ferry, OH, where he claims the construction of a river front highway fostered city growth (or at least slowed its decline).  Similarly, he attributes at least part of the success of Monroeville (a Pittsburgh suburb) to the fact that it is an access point to the Pennsylvania Turnpike.  The same holds true for municipalities surrounding the original Pittsburgh international airport.

Although Beyond Rust is an important work of scholarship that is sure to interest urban planners and historians, I am less sure of its relevance to economic historians and the readers of EH.Net.  My concerns begin with what might seem like a quibble:  the definition and usage of the word “neoliberal.”  Much of Beyond Rust is dedicated to understanding the role of neoliberal policies in reshaping and redefining Steel Valley cities in the wake of de-industrialization.  As Dieterich-Ward explains, neoliberal is a vague and ill-defined term used by non-economists to refer to ostensibly free-market economic policies said to be inspired by Friedman and Hayek (p. 297, note 13).  In his narrative, Dieterich-Ward frequently uses “neoliberal” to refer to policies that used public funds to foster private economic development (e.g., pp. 187-91, 211-12, and 257-61).  Ironically, Friedman and Hayek (or any economist even loosely committed to classical liberalism and market-orientated policies) would have opposed, in no uncertain terms, the use of taxpayer funds to subsidize specific business enterprises in the absence of clear evidence of externalities or natural monopoly.

There are three potential problems with using targeted public subsidies as was done throughout the Pittsburgh Renaissance.  First, such subsidies distort relative prices and thereby lead to a misallocation of resources.  If relative price changes are telling workers and capital to flee a region or industry, public subsidies can do little to prevent that, nor should they.  Second, proponents of these so-called neoliberal policies typically ignore the fact that targeted subsidies do nothing but move resources and employment from point A to point B, and do little to stimulate new activity.  It is well known, for example, that the billions of public dollars used to build new sports arenas have done almost nothing to promote overall growth in metropolitan areas but have only succeeded in moving economic activity from one part of a city to another (see, for example,  John Siegfried and Andrew Zimbalist, 2000, “The Economics of Sports Facilities and Their Communities,” Journal of Economic Perspectives, 14 (3): 95-114).  Third, targeted public subsidies, especially when they are engineered and pushed by the same business and political elites who will be the primary beneficiaries of those subsidies, will often represent nothing more than crony capitalism masquerading as philanthropy.  Any book that seeks to assess the impact of the public-private partnerships associated with the various incarnations of the Pittsburgh Renaissance needs to confront these issues head on.  Beyond Rust does not.

Whether we are talking about shopping malls, downtown revitalization projects in smaller cities in the Steel Valley, or the $90 million in taxpayer subsidies the City of Pittsburgh gave to Lazarus and Lord & Taylor to open downtown department stores (stores that survived only a few years) the elite driven rebirth of cities in the Steel Valley often looked a lot like crony capitalism, disproportionately benefiting a few relatively wealthy individuals at the expense of the many.  In one of the few triumphs of the ordinary taxpayer, voters in Wheeling, West Virginia managed to block the construction of an expensive downtown revitalization project, and instead, pursued a much less expensive mall project seven miles outside of town (pp. 194-97).  In evaluating this outcome, Dieterich-Ward seems to quote with approval a business owner in Wheeling who called popular opposition to the downtown revitalization efforts “hubris.”  I fail to see how taxpayers objecting to having their money taken and then used by a much wealthier individual for his own ends is hubris.  Dieterich-Ward concludes this section by arguing that the failure of Wheeling to pursue this expensive downtown revitalization project left the city “unprepared for the economic cataclysm of the 1980s.”  The evidentiary basis for this interpretation is not clear.  Wheeling did no better or worse than any of the other small cities in the Steel Valley.  Population losses decimated everyone, regardless of how many millions of dollars they spent trying to mitigate and control such losses.

Perhaps the clearest example of crony capitalism in the Pittsburgh Renaissance was a massive North Shore revitalization project that included the construction of PNC Park and Heinz Field.  The total cost of this project was around 1.4 billion in today’s dollars, which translates into a large tax burden for a metropolitan area with fewer than 700,000 residents and even fewer taxpaying households.  Pittsburgh-area residents repeatedly voted down this plan as too expensive in local referendums, but the Pittsburgh elite and Mayor Tom Murphy got the plan funded using mechanisms that did not require taxpayer approval.  Dieterich-Ward says very little about this sordid episode (see p. 263).  Given the magnitude of this project and the duplicitous way that it was imposed on the region, that is unfortunate.

Elsewhere, Dieterich-Ward seems happy to assess the success of such public-private partnerships by simply recounting the rhetoric of the politicians who sponsored them, or by a naive accounting of jobs.  For example, in describing the effects of two taxpayer subsidized industrial parks, he explains that the parks “accounted for 10,000 jobs” (p. 162).  The notion that the $28 million in taxpayer subsidies that helped underwrite these projects did not create new jobs, but merely moved them from one location to another, does enter the discussion, here or anywhere else in the book.

Werner Troesken is the author of Why Regulate Utilities? (1996), Water, Race, and Disease (2004), The Great Lead Water Pipe Disaster (2006) and The Pox of Liberty: How the Constitution Left Americans Rich, Free, and Prone to Infection (2015).

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