Corruption and Reform: Lessons from America’s Economic History

Published by EH.NET (August 2006)

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Edward L. Glaeser and Claudia Goldin, editors, Corruption and Reform: Lessons from America’s Economic History. Chicago: University of Chicago Press, 2006. ix + 386 pp. $75 (cloth), ISBN: 0-226-29957-0.

Reviewed for EH.NET by Louis P. Cain, Loyola University Chicago, Northwestern University, and the University of Chicago.

Corruption and Reform is a stimulating set of eleven essays that follow an instructive introduction by the editors, both of whom are Professors of Economics at Harvard. The authors, stalwarts of the National Bureau of Economic Research’s Development of the American Economy program directed by Claudia Goldin, first presented their papers at a July 2004 conference. Edward Glaeser, in collaboration with Andrei Shleifer, wrote what is perhaps the work most frequently cited in this collection, “The Rise of the Regulatory State,” which appeared in the June 2003 Journal of Economic Literature. Glaeser and Shleifer use economic history to argue that the strategy a society chooses to enforce its laws depends on each alternative’s vulnerability to subversion by affected interests. Given their research interests, it is logical that these authors address the issues raised by Glaeser and Shleifer’s hypotheses. It is logical that this book focuses on the Progressive Era which, after all, “was dedicated to the elimination of corruption” (p. 4). And, while it is unfortunate the total social costs of corruption are probably unknowable in any time or place, it is clear the reforms discussed in this collection were cost reducing.

The volume is organized into four parts; the first consists of the editors’ introduction and three essays under the heading of “Corruption and Reform: Definitions and Historical Trends.” The introduction and the first essay by John Joseph Wallis attempt to define what is meant by corruption. As the editors note, it is essential to have a consistent definition in order to do time series work, but there are many possible definitions, and Wallis’ article is particularly good in articulating the sometimes subtle differences. The definitions adopted in the other essays, while they differ slightly one from another, generally are consistent with what Wallis terms “venal corruption,” a situation where economics corrupts politics, as opposed to “systematic corruption” where the reverse is true. The editors present three series to establish a “time path of corruption in the United States” (pp. 12-18). That path appears to have rather large cycles around a relatively horizontal trend between 1815 and 1890, a downward trend between 1890 and 1930 (the Progressive Era), and much smaller cycles around a relatively horizontal trend between 1930 and 1975. This is consistent with Glaeser and Shleifer who find that regulation became the increasingly efficient enforcement strategy in the Progressive Era. One reason for the smaller cycles is that, over the twentieth century, the price paid by corrupt politicians has significantly increased. The final two essays establish time paths consistent with those of the editors. Rebecca Menes’ essay makes use of information on corrupt mayors and urban administrations, while that of Stanley Engerman and Kenneth Sokoloff examines cost overruns on major public works, beginning with the Erie Canal System and continuing into the twenty-first century.

The second section, “Consequences of Corruption,” consists of two essays. The first, by Naomi Lamoreaux and Jean-Laurent Rosenthal, discusses how the rise of corporations diminished the protection afforded minority stockholders, a particular problem given the mergers and combinations of the Progressive Era. They note the major movement toward reform here did not develop until the stock market crashed in 1929. The second, by David Cutler and Grant Miller, looks at the development of urban water systems in the Progressive Era, a time when municipalities’ access to capital was substantially increasing. This essay does not confront corruption as directly as others in the volume, in part because they find “corruption-based explanations” for these municipal improvements are not supported. This, in turn, makes the useful point that corruption generally did not interfere with the creation of public goods.

The third section consists of three essays concerning “The Road to Reform.” The two editors and Matthew Gentzkow examine the role of the media is providing a check against corruption. Their essay contrasts two eras, the first characterized by the Credit Mobilier scandal of 1870 and the second by the Teapot Dome scandal of 1922. In the first, the media was largely “partisan,” but in the second it was primarily “informative.” They attribute this change to increasing financial returns to the sale of newspapers (as production costs fell, circulation, advertising revenues, and the number of newspapers increased). They simply comment, without attribution of causality, that this contributed to reform by providing supportive news coverage. Howard Bodenhorn, looks at the development of free banking in New York, one of the first reform movements in the United States. He argues it resulted from the self-interest of one political party attempting to limit the rents of corruption accruing to the other, what Wallis terms a “classic case” of systematic corruption. He sees reform as a result of parallel forces dating from early in the century that were moving toward greater economic and political self-determination. In the third essay, Werner Troesken conjoins his knowledge of the ownership structure of utilities with a definition of corruption stressing the illicit sale of political influence to explain why there was a movement toward public ownership in the early years of the twentieth century and a movement away from it seventy-five years later. His investigation reaches the conclusion that “corruption, and the necessity to eliminate corruption when it gets too costly, accounts for the efficacy of regime change” (p. 278); the direction of change is less important than the removal of corrupt elements.

The three essays in the final section, “Reform and Regulation,” look at safety reform in the workplace (Price Fishback), the Pure Food and Drugs Act of 1906 (Marc Law and Gary Libecap), and relief legislation during the New Deal (Wallis, Fishback, and Shawn Kantor). Fishback notes that labor generally supported safety regulations in mining and manufacturing, while management generally opposed them. Mining laws were targeted to a single industry (devoid of women) often located in isolated areas where managers and owners were likely to have a disproportionate amount of political power. Manufacturing regulations were applied to a broad range of industries and raised the costs of small firms much more than those of large firms, thus the latter’s managers often favored the regulations. Law and Libecap note that the Food and Drug Administration resulted from a combination of consumers concerned about quality (concerns often attributable to muckraking journalists) and producers interested in calming those concerns. After presenting three views of Progressive Era reform (regulatory capture, public interest, and rent seeking), they argue the evidence supports a “nuanced combination” of all three. Wallis, Fishback, and Kantor argue that the move to federal provision of relief, particularly welfare and unemployment compensation, significantly reduced the corruption that had been endemic in local provision, and Roosevelt recognized the incentive he had to maintain the good will generated by the new system. Although a portion of relief provision remained under local administration, the federal government controlled the distribution of funds and required that local administration be fair and impartial.

All in all, this is a first rate collection on a topic that will always be relevant, at least from the perspective of one who lives in Cook County, Illinois. A short review such as this can not do justice to the contributions each of these essays makes on a number of different margins. Even though many are still available as NBER working papers, the intersections between them make the whole more valuable than the parts.

Louis P. Cain is Professor of Economics at Loyola University Chicago, Adjunct Professor of Economics at Northwestern University, and Visiting Professor at the University of Chicago’s Graduate School of Business where he is serving as Visiting Co-Director of the Center for Population Economics. With the late Jonathan Hughes, he is author of American Economic History, soon to appear in its seventh edition.