History Matters: Essays on Economic Growth, Technology, and Demographic Change

Published by EH.NET (April 2004)

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Timothy Guinnane, William Sundstrom, Warren Whatley, editors, History Matters: Essays on Economic Growth, Technology, and Demographic Change. Stanford: Stanford University Press, 2003. xiv + 510 pp. $65 (hardcover), ISBN: 0-8047-4398-3.

Reviewed for EH.NET by Lance Davis, Division of Humanities and Social Sciences, California Institute of Technology.

The three editors have produced an excellent and — in terms of the range of subjects covered — extensive volume. In the first substantive chapter, Paul Stoneman shows that if two technologies are partial substitutes, the adoption of either would increase profits and the adoption of both increases profits by more than the adoption of either alone, but it would increase profits by less than the sum of the gains from the adoption of each alone. In the process he has shown that such a model exhibits path dependence and that the optimal technology’s capital intensity is not “monotonically related to the interest rate.”

Next, Douglas Puffert examines “Path Dependence, Network Form and Technological Change.” Drawing on almost a dozen case studies, he concludes that economists have tended to ignore the fact that network integration often leads not to a singles world standard but to multiple regional standards and that subnetworks based on different techniques are often integrated with each other by means of gateways. While some resulting integrations are close to perfect, some “gateways offer only a relatively imperfect and costly integration.” Thus his findings support the conclusions of Paul David and Brian Arthur rather than the critique of Liebowitz and Margolis.

In Chapter 4, Melvin Reder writes about “the tension between history and strong economics.” He suggests that for most adherents on either side of the issue, “the choice is not absolute but varies with the problem at hand.” He concludes that the set of assumptions that should be used to replace the “neoclassic vision” would be based on the question at hand “without a strong prior drawn from any abstract vision.” Reder’s chapter is followed by Charles Calomiris’s “Financial History and the Long Reach of the Second Thirty-Year’s War (1914-1944).” He concludes that “to a great extent, the financial institutions and rules that dominate the domestic and global economies remain influenced by the specific history of the second thirty-year’s war.”

The fifth substantive chapter is by Philip Wonhyuk Lim who writes about “path dependence in action: the adoption and persistence of the Korean model of economic development.” He concludes that the Korean model, centered as it was on export-led industrialization and government risk partnership, encouraged rapid capital accumulation and produced spectacular economic growth; but it also locked in the government’s participation. Thus the country did not evolve into a market-oriented economy; and, by the mid 1990’s, this lack of fundamental reform proved fatal for the Korean economy.

Lim’s paper is followed by Peter Temin’s “Continuing Confusion: Entry Prices in Telecommunications.” Temin is concerned with the role of government price regulation in the telecommunications industry. He concludes that the government believes that the potential exercise of market power by incumbent firms requires a heavy regulatory hand. In his words “although relative prices are changing there is no evidence that regulation decreases as prices approach ‘costs.’ We might do well to consider whether a lighter regulatory hand would be more appropriate to increasingly competitive conditions.”

Chapter 8 is Paul Rhode’s “After the War Boom: Reconversion of the Pacific Coast, 1943-1949.” The author is particularly concerned with “home market effects”; the impact of an enlarged market. Using both economic theory and econometrics he argues that the years after World War II displayed strong evidence of home market effects. The “home market” effect refers to the rapid inflow of “new branches of national manufacturing firms, a vigorous expansion of existing operations, and a surge of small local startups.” Rhode notes that, first, the home market effect was strongest in the inter-war years, not in the immediate post war years; and, second, that those effects became weaker as the region matured.

In “Standardization, Diversity, and Learning in China’s Nuclear Power Program,” Geoffrey Rothwell sets out to establish the optimal level of diversity among the number of different plant types that were to be built in the first stage of China’s nuclear program. The planners’ object is assumed to be the maximization of Chinese social welfare; a goal that involves “minimizing the price of electricity, maximizing the profitability of the enterprises involved with the industry, and encouraging industrial development in China.” Rothwell notes that there is a conflict between the goal of developing a policy that relies on learning through cooperation and a strategy that minimizes cost through competition. He then goes on to lay out a four step program that he argues would best maximize that country’s social welfare.

“Incentives, Information, and Welfare: England’s New Poor Law and the Workhouse Test,” by Timothy Besley, Stephen Coate, and Timothy Guinnane, argues that the “Poor Law lost most of its functions during the early twentieth century and was formally abolished shortly after World War II. In its place arose a vast welfare state.” The New Poor Law’s creation and demise thus reflect two transformations in English society and the English economy. As market relations gradually replaced personal relations, the New Poor Law — a short-lived program between parochial relief and the welfare state — “can be explained as economizing on the need for information during a period when the information was no longer available on a personal or local basis, and not yet available on a bureaucratic basis.”

Chapter 11, “Family Matters: The Life Cycle Transition and the Antebellum American Fertility Decline,” is written by Susan Carter, Roger Ransom, and Richard Sutch. The authors propose an “explanation for the decline in American fertility based on the idea that life-cycle determinants of fertility gradually came to dominate the traditional old age security motive for high fertility.” They draw three specific conclusions: (1) “Child default was the catalyst that triggered American fertility decline”; (2) “The target bequest model specified with land availability variables intended to be applicable to the nineteenth century rural population is rejected”; and (3) “The David-Sundstrom model of interregional bargaining is best interpreted if it is embedded into an explicit path dependent story of the adoption of life-cycle behavior.”

David E. Weiman’s “Building ‘Universal Service’ in the Early Bell System: The Coevolution of Regional Urban Systems and Long-Distance Telephone Networks” draws on a detailed quantitative history of (1) wholesale trade and early long-distance telephone service and (2) the design and operation of regional toll network. The author focuses on two causes of increasing returns in networks — economies of scale and interdependent demands and network externalities — and concludes with an examination of the market sources of those increasing returns.

Next is Trond Olsen’s “International Competition for Technology Investments: Does National Ownership Matter?” Given increased international mobility of capital and other productive resources Olsen notes that “governments have adopted policies to attract and maintain favorable investments from firms in their national economies.” His model depicts a “bargaining situation between a unique large MNE (agent) and two independent countries (principals). The model yields two propositions. (1) If “technologies (including spillovers) are symmetric between the two countries … then the first-best as well as the second-best allocations under international cooperation are symmetric, and the latter always exhibits lower investment than the former. These allocations are not influenced by the distribution of ownership between the two countries. The equilibrium under international competition is, however, influenced by this ownership distribution and the equilibrium may entail overinvestment relative to the first-best allocation in one country.” (2) If there is tax competition and technologies (including spillovers) are symmetric between the two countries keeping the outside owner share fixed, the firm’s equilibrium profits are maximal when ownership is equally distributed between the two countries. The aggregate welfare for the two societies is also maximal for this ownership structure.

Chapter 14, “Conjectural Estimates of Economic Growth in the Lower South, 1720 to 1800” is written by Peter Mancall, Joshua Rosenbloom, and Thomas Weiss. The authors, drawing on Paul David’s conjectural estimates of economic growth, estimate GDP per capita for colonists and slaves as well the native population. Unlike the standard view of robust growth in the British mainland colonies, they conclude that the lower south “did not advance over the course of the eighteenth century, and may have even declined slightly.” In the authors’ words, “If the lower south’s economy were the most export-oriented and one of the most successful in British America, then it seems unlikely that the growth of GDP per person for the entire British mainland colonies could have been as high as 0.5 percent a year, or even above 0.3 percent per year.”

Mark Thomas and Charles Feinstein’s “The Value Added Approach to the Measurement of Economic Growth” concludes that the decision about how to measure historical economic growth needs closer attention than it is usually given. In particular, researchers and critics should exercise a healthy skepticism in evaluating measures of economic growth that rely on indicators or on single-deflated value added. In addition, the authors conclude that the Fisher ideal index proves very resilient when used as a substitute for the Divisia index.

Chapter 16, “A User’s Guide to the Joys and Pitfalls of Cohort Parity Analysis,” is written by Warren Sanderson. “CPA has three distinct parts. The first is a target parity distribution, a distribution of continuously married women by the number of children they have borne, cross-classified by age at marriage a duration of marriage.” “One goal of CPA is to provide upper and lower bounds on the proportion of the target population who controlled their fertility.” “The model parity distribution, the second part of CPA, comes from a population like the target population except without the influence of fertility control. The third part of CPA is the methodology by which inferences are made from those two parity distributions.” “CPA needs a user’s guide because there are real pitfalls. Without proper guidance it is possible to use inappropriate models and target distributions and obtain incorrect results.” The author then describes three problems that the user needs to avoid: “(1) the natural fertility pitfall, (2) the unnatural fertility pitfall, and (3) the supernatural fertility pitfall.” The final chapter is “Stochastic Dynamic Optimization Models with Random Effects in Parameters: An Application to Age at Marriage and Life Cycle Fertility Control in France under the Old Regime,” by Thomas Mroz and David Weir.

As I noted earlier the three editors have brought together a series of papers that range from very good to excellent. The book is dedicated to Paul David: “Teacher, scholar, mentor, friend.” He should be very pleased with the results – a book which should be read by every economic historian with an interest in long-run institutional change and economic growth.

Lance Davis is Mary Stillman Harkness Professor of Social Science, Division of Humanities and Social Sciences, California Institute of Technology. Among his works in progress are an “Economic History of Naval Blockades” (with Stan Engerman) and “The Impact of the Rules of the London, New York, and Paris Stock Exchanges on the Efficiency of the Exchanges” (with Larry Neal and Eugene White).

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