Published by EH.NET (February 2007)

David S. Landes, Dynasties: Fortunes and Misfortunes of the World’s Great Family Businesses. New York: Viking, 2006. xx + 380 pp. $26 (cloth), ISBN: 0-670-03338-3.

Reviewed for EH.NET by Peter Temin, Department of Economics, MIT.

David Landes, professor emeritus at Harvard University, presents a dozen or so engaging stories of family firms, as we have come to expect from him over his long career as economic historian and popular author. Some of the accounts are well known, like the Rothschilds, Morgans, Fords and Rockefellers, while others will be new to most of us. We have heard of the Barings, Agnellis, and Wendells, but we typically know little about them. All of the stories are written with Landes’s unique combination of good anecdotes, sharp judgments and felicitous prose.

To tie these essays together, Landes makes the case for the importance of family firms today. He acknowledges the force of Chandler’s emphasis on managerial capitalism, but he argues that family firms have a prior role in economic development. In this claim, he associates himself on the one hand with Marc Bloch, who argued that Europe picked itself up from chaos in the tenth century by relying on the value of family connections. Landes associates himself on the other hand with modern economics and its concerns with asymmetric information and principal-agent problems. Landes argues that the failure of many development programs has been the neglect of the information and loyalty that are qualities of families ? in his word, dynasties.

The stories illustrate these points, but Landes’s urge to tell a good story is at gentle odds with this justification for them. Most of the dynasties in this book have ruled over substantial enterprises. These enterprises employed many people other than family members. Normal business practice prevailed once these enterprises became major banks, auto firms, or mining companies. The importance of asymmetric information must have been concentrated in the early years. Yet the early years of well-known businesses often are shrouded in mist, and famous people often rewrite their history, as Landes reminds us. More often, the records only include success, not the early steps along the way. Landes, faced with the choice of examining the early, unknown years of these dynastic firms or telling a good story, opted for the latter.

The stories illustrate both successes and failures. Families may be the most trustworthy, but they are not always the best businessmen. The Baring story that opens the book is perhaps the most spectacular. It starts with Barings being saved by principals in the international financial markets in the crisis of 1890 and ends with the ignominious failure of Barings a century later without aid. Ford went through difficult periods because of Henry Ford’s domination and pig-headedness, while French and Italian auto firms had checkered lives in the tumultuous European economies during and after the Second World War.

Landes opens a chapter with the admission that, “the Rockefeller story is really that of the meteoric rise of one person, John D. Rockefeller” (p. 217). He could have said as much about Nathan M. Rothschild, Henry Ford, and J. P. Morgan. In these stories, the making of a dynasty was more a function of biology than business. If there were sons who could take over the business ? daughters would not do ? then a dynasty could be created; if not, then the illustrious founder sold the company. Several of the stories hinge on the lack of an heir or the unsuitability for business of an heir. Only the Rothschilds seem to have benefited from the kind of family information that Landes describes in his introduction. Perhaps one moral of these stories is that the demographic revolution, by substituting quality children for numerous children, has reduced the role of families in economic development. Landes argues for their importance in less developed countries, precisely where the demographic transition has not taken place or is in its early stages.

One cavil may be permitted. Landes correctly includes the railroads in his story of Rockefeller and Standard Oil, but he misses the essential interaction. The railroads tried unsuccessfully to form a cartel and profit from shipping oil, but they could not cooperate. Their solution to the problem of cartel design was to recruit a fox to help police the chicken coop; they recruited Standard Oil to ensure that the railroads did not cheat on one another. Previously a railroad might agree to participate in a cartel and then quietly arrange with a few refineries to ship some extra oil more cheaply. By the time the other railroads found out, the deal was done, and the cartel was in shambles. Under the new scheme, Standard Oil forestalled cheating by committing to reduce the amount of oil it shipped over any railroad that violated the agreement. In return, it received both a rebate on its own shipments of oil and a drawback on its competitors’ shipments. The fox enjoyed his access to chickens, and Standard Oil received about half of the profits from the railroad cartel.[1]

In sum, the book is a good read. Landes yet again demonstrates his ability to put together tales of economic and business history that are fun and informative.

Note: 1. Elizabeth Granitz and Benjamin Klein, “Monopolization by ‘Raising Rivals’ Costs’: The Standard Oil Case,” Journal of Law and Economics, 39 (April 1996).

Peter Temin, Professor of Economics at MIT, is author of “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History” (with Naomi R. Lamoreaux and Daniel M. G. Raff), American Historical Review, 108 (April 2003), 404-33 and “Economic Theory and Business History” (with Naomi Lamoreaux and Daniel M. G. Raff), in Geoffrey Jones and Jonathan Zeitlin, editors, Oxford Handbook of Business History, forthcoming.