EH.NET Book Review

Published by H-Business (September 1997)

Store Wars: Shopkeepers and the Culture of Mass Marketing, 1890-1939, by David Monod. University of Toronto Press, Toronto, 1996. Introduction. Tables. Notes. Index. 438 pp. $55 (clothback); $22.95 (paperback).

Reviewed for EH.Net by David A. Horowitz, Department of History, Portland State University (Oregon)

More than thirty years ago, Ellis W. Hawley’s New Deal and the Problem of Monopoly(1966) depicted contradictory efforts to strengthen retail competition and consolidate the market position of independent merchants. David Monod’s Store Wars: Shopkeepers and the Culture of Mass Marketing, 1890-1939, goes a long way toward explaining this anomaly. Monod’s provocative study also offers fresh conceptual tools for dealing with much-maligned subjects such as small business, traditional economic values, the consumer revolution, and the lower middle class.

Using individual business records, bankruptcy court proceedings, and trade journals, David Monod has compiled a rich account of small business’ adjustment to the emerging mass market in early 20th century Canada. Monod acknowledges that “main street” retailers unified behind a “folkloric rhetoric” that portrayed shopkeepers as small, independent, competitive, ethical, community-based, service-oriented, and content with fair and honest profits. Yet the mercantile “collective memory” excluded poorer, “backstreet” competitors, ethnic traders, and female merchants, who remained outside normal credit and commercial ties.

Monod demonstrates how the mass merchandising of the department and chain stores was first perceived as a threat to the perpetuation of traditional shopkeeper virtues. By providing public access to stock, for example, department stores threatened the moral authority and autonomy of the old-fashioned merchant. In turn, advertising eliminated the selling functions of individual dealers. The new economy also compelled suppliers to tighten credit, forcing merchants to abandon consumer credit services and concentrate on lower prices. As early 20th century manufacturers turned to mass-produced, prepackaged goods and brand-name advertising to meet the demand for cheaper products of uniform quality, independent retailers found themselves increasingly dependent on producers, suppliers, and consumers.

Groups like Canada’s Retail Merchants’ Association (RMA) responded to the chains and departmentals with predictable criticism. Yet survival in the modern economy depended upon adjustment to big business norms. Store Wars blazes conceptual territory by outlining the complex and contradictory response of retailers to the increased competition of the consumer revolution and mass merchandising. Adopting a professional ethic of “progressive retailing,” mid-sized and larger enterprises in the RMA pushed for licensing, trade, health, and safety regulations to discourage “illegitimate” competition by backstreet traders. Conflicts between advocates of inflationary price-fixing and deflationary mass production, however, divided the independent retail lobby.

The heart of Monod’s story concerns the 1920s and 1930s, when shopkeepers were more motivated by the desire for economic security and increased profits than by fears of modernization. As department and chain stores faced mounting rental, maintenance, and advertising costs, trade associations like the RMA sought competitive advantages for members by promoting cooperative purchasing and the elimination of credit services. Grocery trade groups and some wholesalers embraced modernization through resale price maintenance (rpm) agreements, which the author equates with the systematization of retail-manufacturing relations. Meanwhile, independent Canadian pharmacists organized against traditional jobbers and the smallest retailers, portrayed as the agents of “backwardness” in distribution.

During the economic depression of the 1930s, independent trade activists pictured the crusade against chain stores as “a struggle for the soul of humanity.” Yet Monod points out that modernizing shopkeepers focused their ire on perceived distribution abuses such as bulk buying discounts and advertising allowances, not mass merchandising itself. Although Depression populists such as Reconstruction Party leader H. H. Stevens promised a social order based on small property and decentralized authority, the impact of retail activism on Canadian politics was mainly symbolic. Dismissing Stevens’s rhetoric as “retail folklore purged of its content,” Monod suggests that shopkeepers embraced dissident politics as a means of addressing the emotional agony of the economic disaster. Meanwhile, independent merchants joined trade groups to gain access to politicians. Once legislators enacted minor reforms such as the prohibition of secret rebates, retailer organizations outlived their usefulness. Predictably, almost all the decade’s discriminatory legislation had been repealed or seriously amended by 1939.

Store Wars’s account of independent merchants and the consumer economy provides a model for integrating business history with the study of social structure and political movements. Monod reminds us that economic modernization was a plastic process in which independent retailers and consumers actively participated. The author’s clever use of semitics explains how shopkeepers “vitalized the folkloric structures” of traditional values while embracing modernization. Casting aside conventional notions of “small business” unity and the “reactionary” character of the “lower middle class,” Store Wars deserves scrutiny by social and business historians.

David A. Horowitz, Professor of History, Portland State University (Oregon)

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EH.NET BOOK REVIEW

Published by EH.NET (September 1997)

David Glasner, editor, Business Cycles and Depressions: An Encyclopedia. New York: Garland Publishing, 1997. xv + 779 pp. Index. $95.00 (cloth), ISBN: 0-8240-0944-4.

Reviewed for EH.NET by Robert Whaples, Department of Economics, Wake Forest University. whaples@wfu.edu

“The motion of the economy, unlike that of heavenly bodies, conforms to no immutable mathematical laws and follows no repetitive patterns (p. 66)”

David Glasner (economist at the Bureau of Economics, U.S. Federal Trade Commission) has assembled a stellar cast who have written an exceptionally useful reference book. Business Cycles and Depressions: An Encyclopedia includes 327 original articles on every major aspect of business cycles, fluctuations, financial crises, recessions, and depressions. The articles, which range from macroeconomic theory to econometrics to the historical record, are generally up-to-date, clear and to the point. Most entries will be accessible to students, but are informative enough to benefit almost any professional, as well. Each includes a bibliography. A seven-page appendix presents international data detailing business cycle turning points and durations. Perhaps the highlight of the volume is a ten-page entry, “Business Cycles” by Victor Zarnowitz, which surveys the entire field of business cycle research and is quoted above.

EH.NET subscribers will find this work especially helpful. The encyclopedia includes biographies of dozens of economists. (These entries focus almost entirely on the individual’s contributions to the understanding of business cycles. The biography of W.W. Rostow, for example, only briefly mentions his work in the Kennedy and Johnson administrations and says little about his writings on economic growth.)

The subjects of these biographies include Moses Abramovitz, Maurice Allais, Luigi Amoroso, James Angell, Walter Bagehot, Otto Bauer, Eduard Bernstein, Eugen Bohm-Bawerk, Arthur Burns, Richard Cantillon, Carl Cassel, John Commons, Charles Coquelin, James Duesenberry, Otto Eckstein, Friedrich Engels, Irving Fisher, Milton Friedman, Ragnar Frisch, John Fullarton, Richard Goodwin, Tygve Haavelmo, Gottfried Haberler, Alvin Hansen, Roy Harrod, Friedrich Hayek, John Hicks, Rudolf Hilferding, John Hobson, David Hume, William Stanley Jevons, Nicholas Kaldor, Michal Kalecki, Karl Kautsky, John Maynard Keynes, Charles Kindleberger, Lawrence Klein, Nikolai Kondratieff, Tjalling Koopmans, Simon Kuznets, Oskar Lange, Frederick Lavington, Abba Lerner, W. Arthur Lewis, Erik Lindahl, Eric Lundberg, Rosa Luxembourg, Thomas Malthus, Alfred Marshall, Karl Marx, Lloyd Metzler, John Stuart Mill, Frederick Mills, Hyman Minsky, Ilse Mintz, Ludwig von Mises, Wesley Mitchell, Franco Modigliani, Gunnar Myrdal, Bertil Ohlin, Arthur Okun, Vilfredo Pareto, Henry Parnell, Warren Persons, A. W. Phillips, Arthur Pigou, David Ricardo, Lionel Robbins, Dennis Robertson, Joan Robinson, W.W. Rostow, Paul Samuelson, Jean Baptiste Say, Joseph Schumpeter, Anna Schwartz, Eugen Slutsky, Adam Smith, Arthur Smithies, Piero Sraffa, Paul Sweezy, Henry Thornton, Jan Tinbergen, James Tobin, Thomas Tooke, Robert Torrens, Mikhail Tugan-Baranovsky, Thorstein Veblen, Clark Warburton, J.G.K. Wicksell, Wladimir Woytinki and Victor Zarnowitz

Among the entries that will be of most interest to economic historians are: Agriculture and Business Cycles by Randal Rucker and Daniel Sumner Bank Charter Act of 1844 by David Glasner Bank of England by David Glasner, C.A.E. Goodhart and Gary Santoni Bank of France by Pierre-Cyrille Hautcoeur Bank of the United States by Eugene White Banking Panics by Gary Gorton Baring Crisis (1890) by Richard Grossman Business Cycles in Russia, 1700-1914 by Thomas Owen Central Banking by Anna Schwartz Clearinghouses by Gary Gorton Crisis of 1763 and 1772-1773 by Eric Schubert Crisis of the 1780s by Fred Moseley Crisis of 1819 by Neil Skaggs Crisis of 1847 by David Glasner Crisis of 1857 by Hugh Rockoff Crisis of 1873 by David Glasner Crisis of 1907 by C.A.E. Goodhart Crisis of 1914 by Forest Capie and Geoffrey Wood Depression of 1873-1879 by Fred Moseley Depression of 1882-1885 by Alan Sorkin Depression of 1920-21 by Anthony Patrick O?Brien Depression of 1937-1938 by W. Gene Smiley Federal Deposit Insurance by James Barth and John Feid Federal Reserve System: 1914-1941 by David Wheelock Federal Reserve System, 1941-1993 by Thomas Havrilesky Free Banking by Philippe Nataf Glass-Steagall Act by Eugene White Gold Standard by Michael Bordo Gold Standard: Causes and Consequences by Earl Thompson Great Depression in Britain (1929-1932) by Forrest Capie and Geoffrey Wood Great Depression in France (1929-1938) by Pierre-Cyrille Hautcoeur Great Depression in the U.S. (1929-1938) by Elmus Wicker Great Depression of 1873-1896 by Forrest Capie and Geoffrey Wood Industrial Revolution (c. 1750-1850) by Clark Nardinelli Kondratieff Cycles by Robert Zevin Leading Indicators: Historical Record by Geoffrey Moore Long-Wave Theories by Massimo Di Matteo Mississippi Bubble by Larry Neal Napoleonic Wars by Larry Neal Panic of 1825 by Michael Haupert Panic of 1837 by Richard Timberlake Panic of 1893 by Richard Timberlake Phillips Curve by Richard Lipsey Political Business Cycles by K. Alec Chrystal Recessions after World War II by Alan Sorkin Recessions (Supply-Side) in the 1970s by John Tatom Reichsbank by Harold James Seasonal Fluctuations and Financial Crises by Jeffrey Miron Smoot-Hawley Tariff by David Glasner South Sea Bubble by Larry Neal Stock-Market Crash of 1929 by Eugene White Tulipmania by Peter Garber

The encyclopedia is a valuable teaching tool. It is a must for any college library.

Robert Whaples Department of Economics Wake Forest University

Robert Whaples is Associate Director of EH.NET and author (with Jac Heckelman) of “Political Business Cycles before the Great Depression,” Economics Letters, 51, May 1996.

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EH.NET BOOK REVIEW

Published by EH.NET (September 1997)

Ballard C. Campbell, The Growth of American Government: Governance from the Cleveland Era to the Present. Bloomington, IN: Indiana University Press, 1995. x + 289 pp. $35.00 (cloth), ISBN: 0-253-32871-3.

Reviewed for EH.NET by Rebecca Menes, Department of Political Science, UCLA.

Ballard Campbell has written a solid and yet fundamentally disappointing history of American government since 1887. We need a critical synthesis of our current understanding of the history of American government during the last hundred years. The size and role of the government, traditionally a source of controversy in the U.S., has been brought to the forefront of debate both by developments within our own polity and by the divergent fortunes of the different former socialist economies. The difficulties faced by former communist countries as they build the institutions of a free society have brought a new appreciation for the historical process that created a government able to oversee the capitalist economy and the distribution of both opportunity and wealth within the market framework.

In the U.S. all sides in the numerous partisan controversies over the role of government in economic, social, and private life turn to the “lessons” of the history of our government, including the phenomenal expansion of government in the twentieth century. The popular interest in government is reflected in recent interest among economists and political scientists on the history of government and the historical role of government in the U.S. However the field remains fragmented, cut both by divisions between ideologies and by divisions between disciplines. A volume that provided a critical and synthetic introduction to the current understanding of and debates in the history of American government in the twentieth century would be a book few economists, historians, or political scientists could afford to ignore. Ballard Campbell’s book, although a solid effort, is not the book we need.

The Growth of American Government leaves out or touches only lightly on many of the most interesting aspects of the growth of government, especially from the point of view of an economist. The discussion of the rise of Federal regulation is cursory, as is the discussion of the role of the courts. The discussion of macro-economic policy, fiscal or monetary, is non-existent. The discussion of local government is limited, although this is perhaps due more to the state of the literature on local government than it is to the desires of the author. There are also few international comparisons between growth of U.S. government and government in other industrialized nations. Nevertheless, the primary focus of the work- the growth of Federal spending, the concomitant changes in taxation, and the rise of the Federal government as defender of the civil rights of citizens against the depredations of State governments and fellow citizens- provides more than enough material for a book.

Unfortunately, Campbell saddles himself with two stylistic constraints that undermine the presentation of the subjects he does address. First, he adopts an “omniscient” voice. Second, he eschews any statement that might smack of partisanship. Copious footnotes and a thorough, annotated bibliography (the best part of the book) make it clear that the author is aware of debates and controversies in the historical literature, but the text is written as if all facts and conclusions were indisputable. To avoid taking sides, the author limits himself to statements that are basically indisputable. The result is a narrative description of the gradual increase in government responsibility, with no satisfactory discussion of either causes or consequences of the changes.

The rhetorical choices make it hard for the book to draw on more than the historical literature. A productive discussion of the political science and economic history literature on American government depends on the ability to present hypotheses and propose empirical tests. Neither are possible within the rhetorical constraints Campbell has imposed on himself. As a result, although the author promises to present “The course and causes of growth” (chapter 2,) his explications are limited to presenting a list of the less controversial potential causes for each change in American government. The usual suspects are collected, not evaluated.

But in the end it is the decision to avoid any suggestion of partiality that fatally undermines the book. There would be a place for a readable history of the what and when of the growth of government, even if it were necessary to go elsewhere for the causes. Campbell’s book does cover a lot of information. However, by avoiding discussion of the consequences of the growth of government, good or bad, Campbell has written a boring book. When an author, in his desire to avoid partiality, not only avoids taking sides but also refuses to acknowledge that differences of opinion are possible, the result is a text drained of any enthusiasm for its subject. To argue that the growth of government mattered means, at least temporarily, taking a side or openly acknowledging the depth of the controversies inherent in the topic. Ignoring the chasms in the field produces a text as flat and banal as a high school civics course. The reader is left, at the end of the volume, with the odd sense that government did not and does not matter.

Rebecca Menes Department of Political Science University of California- Los Angeles

Rebecca Menes is the Charles Grove Haines Visiting Assistant Professor at the UCLA Department of Political Science. Her area of studies are local government and machine politics in American cities during the Progressive Era.

(Ballard C. Campbell is a Professor of History at Northeastern University, author of Representative Democracy: Public Policy and Midwestern Legislatures in the Late Nineteenth Century and Associate Editor of American National Biography.)

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EH.NET Book Review

Published by H-Business (August 1997)

John Stewart Kennedy: A Transitional Financier

Reviewed by Albert Churella, Department of History, The Ohio State University, for H-Business

Saul Engelbourg and Leonard Bushkoff. The Man Who Found the Money: John Stewart Kennedy and the Financing of the Western Railroads. East Lansing: Michigan State University Press, 1996. xiv+257pp. Maps, notes, bibliography, and index. ISBN 0-87013-414-0 (cloth).

During the second half of the nineteenth century, financial intermediaries became more specialized and more professionalized in response to the vastly increased capital requirements of the rapidly growing railroad network, and of other industries as well. The Man Who Found the Money describes the personal journey of one mid-level financier who played an important role in the American economy, although he was never so powerful or well known as Jay Gould, Jay Cooke, or J. P. Morgan. During his career, John Stewart Kennedy (1830-1909) moved from early efforts as a commission agent to later involvement in railroad finance, and finally to a retirement devoted to carefully tailored philanthropy. As his professional abilities matured in tandem with American financial markets, Kennedy became both more successful and more focused on specific types of financing. In the process, Kennedy–like contemporary J. P. Morgan–was always acutely aware that trust was far more important than adherence to any rigidly defined code of professional conduct. Still, despite Kennedy’s almost paranoiac efforts to maintain the trust of his business associates, he often engaged in financial transactions that, in the eyes of later financial professionals, seemed to indicate serious conflicts of interest. Kennedy, like most transitional financiers, would have been puzzled by this notion, believing that so long as the relatively informal financial arrangements of the time worked in the best interest of all concerned, then investors could earn profits, financiers could maintain public trust, and “conflict of interest” was a matter of no great consequence.

Kennedy spent much of his childhood in Glasgow, Scotland, and received there a solid education that enabled him to rise quickly from a shipping clerk to a salesman of rails and other iron products. In 1856, he became a junior partner in M. K. Jesup & Co. and subsequently spent most of his time in the United States. Kennedy served primarily as a commission merchant for various U.S. railroads, performing a wide variety of financial transactions that ranged from procuring rails and other supplies to paying interest on bonded debt to arranging for additional capital. These activities were hardly routine or specialized–instead, Kennedy relied on personal knowledge and on a carefully cultivated network of contacts in Europe and the United States, all of whom were bound together by mutual trust.

In 1868, Kennedy became a private commercial banker when he established J. S. Kennedy and Co. in New York City. (His growing financial independence may well have been influenced by the American Civil War, which had provided countless business and financial opportunities, but the authors do not mention this pivotal event in their book). Like most such banks, Kennedy’s was a small operation, with only a few partners and clerks to assist him. Kennedy still served as a commission merchant, often representing both railroad buyers and equipment sellers–hence concern over the issue of conflict of interest. Increasingly, however, Kennedy became more involved in the management of new or financially weak railroads. As a representative of the Scottish-American Investment Company, for example, Kennedy not only helped funnel Scottish capital into the U.S., he also helped rescue Scottish investors from some of their unwise investments. During the late 1870s, Kennedy helped to restore the City of Glasgow Bank to financial solvency; an activity that brought him scant financial reward, but that increased greatly the respect and trust accorded him by his financial contemporaries.

During the 1870s and 1880s, Kennedy helped to arrange financing for components of what later became the Great Northern Railway, bringing him into close association with “Empire Builder” James Jerome Hill. Kennedy’s new role as “James Hill’s emissary to the world of high finance” (p. 104) caused him to dissolve J. S. Kennedy and Co. in 1883, although he still continued to serve as a commission merchant for the procurement of two specialized items–steam locomotives and rails– for Hill. As a director and officer of the Minneapolis and Manitoba (the chief precursor to the Great Northern), Kennedy helped to shape that railroad’s policies. Kennedy and Hill had very different visions for the road’s future, however, since the former favored a conservative financial strategy that emphasized slow long-term growth as the territory served by the railroad became more developed, while the latter favored operational cost savings and frequent short-term financial offerings that would provide the railroad with just enough capital to make a rapid push to the Pacific.

Disagreements with Hill, while never terribly acrimonious, nonetheless helped to persuade Kennedy to retire. Other issues contributed to this decision. These included growing conflicts with other railroads in the Northwest (including the Chicago, Burlington & Quincy, the Chicago, Milwaukee & St. Paul, and the Northern Pacific) and stress-related illnesses stemming from involvement in several lawsuits over the course of his career and from continual efforts to defend his reputation against charges that conflicts of interest had undermined his trustworthiness. Even after his 1888 resignation from his position as vice president of the Minneapolis and Manitoba, Kennedy remained active in railroad finance. He moved gradually from professional activities to philanthropy during the 1890s, giving away a large portion of his $67 million fortune to museums, libraries, hospitals, and other charitable institutions.

The life and career of John Stewart Kennedy is certainly a fitting choice for a book. His financial dealings spanned two continents and encompassed a period that began with the first tentative railroad consolidations and ended with the Northern Securities Case of 1904. He helped to finance one of the most important railroads to be built in the United States, and served as a close adviser to railroad magnate J. J. Hill. His career reflected the broad nineteenth-century transition from the diversified activities of general commission merchants to the emergence of private commercial banks to the development of specialized financiers.

One of the most frustrating aspects of this work, however, is that Kennedy has not been effectively integrated into these larger developments. The brief segments at the beginning and end of each chapter do provide a broad overview (occasionally too broad, giving information that is almost self-evident), but these passages are often poorly integrated with the body of the text–possibly an artifact of the dual authorship of the book. The book is also somewhat disjointed, with an abundance of short chapters, one-sentence paragraphs, and awkward transitions; all indicative of a merited condensation of a much longer work–a condensation that was not, unfortunately, accompanied by a thorough rewriting. More specifically, sharper editing would have helped to reduce the frequency of cliches, jargon, and (often mixed) metaphors; for example: “In effect, events were in the saddle, and men could only ride.” (p. 142)

Without question, this is a thoroughly researched and highly detailed work. The authors (primarily Engelbourg) have marshaled an impressive array of information from a wide variety of manuscript collections and published secondary sources. While earlier works, such as Dolores Greenberg’s pioneering study of Morton, Bliss & Company, offer a more comprehensive and better-integrated overview of mid-level finance during the nineteenth century, The Man Who Found the Money is still of value to historians of nineteenth-century railroad finance for its encyclopedic coverage of an important individual financier of that era.

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EH.NET BOOK REVIEW

Published by EH.NET (August 1997)

Richard A. Easterlin, Growth Triumphant: The Twenty-first Century in Historical Perspective. Ann Arbor, MI: The University of Michigan Press, 1996. Pp. xiv + 200. $37.50 (cloth), ISBN: 0472106945.

Reviewed for EH.NET by Dora Costa, Department of Economics, MIT.

In this masterful synthesis, Richard Easterlin (Department of Economics, University of Southern California) draws on the disciplines of economic history, demography, sociology, political science, psychology, and the history of science to present an integrated explanation of the origins of modern economic growth and of the mortality revolution. His emphasis is on long-term factors and on similarities across nations. His book should be easily accessible to non-specialists and will give them a sense of why economic history can inform our understanding of the future.

Richard Easterlin convincingly argues that technological change underlies both modern economic growth and the morality revolution. Underlying this technological change is a set of procedures and attitudes that include reliance on experiments and observed facts. In the case of modern economic growth, this technological change should not necessarily be equated with industrialization, but rather is simply the introduction of new technology, including agricultural, in the economy. This technological change has produced certain commonalities in development, including the gradual acceleration in real per capita income growth, urbanization, and the growth of a white collar work force.

According to Easterlin, modern economic growth began before the modern rise in life expectancy because technological change in the physical sciences preceded technological change in health and medicine, simply because the conceptual state of the physical sciences was far more advanced. Easterlin argues that although modern economic growth may have increased resistance to disease (for example, by increasing food intake), it also increased exposure to disease. In contrast, in developing nations the mortality revolution has often preceded economic growth both because we know how to control disease (e.g. sewage and clean water) and because the necessary public health investments are inexpensive. Because urbanization created demand for public municipal services, he views the rise of government as a direct consequence of technological change.

Once mortality, particularly childhood mortality, fell, Easterlin argues that we moved from a society of high to low fertility. At first the increase in the number of surviving children caused fertility to fall after families realized that they could achieve their target number of children with fewer births, then the target number of children fell as children became more expensive thanks to advances in education, urbanization, and the introduction of new goods. The population explosion of developing countries should, therefore, slowly reverse.

Easterlin presents a very optimistic picture of the future, arguing that modern economic growth will spread to all countries of the world and neither declining population growth nor an aging population will lead to economic stagnation. We have the technology and many of the preconditions for economic growth, such as institutions for the accumulation of physical and human capital and the mobility of labor and capital, are already present in developing countries. In an example of the sort of long-run perspective that the book is best at, Easterlin shows that even the aging of the baby boomers will not produce a dependency burden that is high by historic standards.

Within this optimistic scenario, he sees two causes for concern. One is that the spread of economic growth shifts the balance of power to newer, more populous developing countries that do not share our commitment to democracy and human rights and this may produce political as well as military clashes. The other is that income cannot buy happiness and that despite previously unimaginable levels of affluence, material concerns are as pressing as ever. According to Easterlin technology will always produce new goods that we will want and, because people measure happiness in relative terms, they will forever be stuck on a hedonic treadmill.

It is this last point, “the triumph of material wants over humanity” that I found controversial and whenever there is controversy, the drawbacks of a synthesis become readily apparent. The reader wants to know more, wants further breakdowns of the data. Easterlin cites surveys that show that people in both the United States and abroad are no happier than they were twenty years ago despite increases in per capita income. He also cites surveys that show that personal income, family, and health are individuals’ primary concerns in all countries surveyed. But, what about recent polls showing that 48 percent of U.S. workers had either cut back on hours of work, declined a promotion, reduced their commitments, lowered their material expectations, or moved to a place with a quieter life during the preceding five years? What about the tremendous decline in market hours of work, whether measured in terms of weekly hours, increased vacation time or sick leave, or increasing number of years spent in retirement? As wages have risen so has the opportunity cost of these hours. The history of modern economic growth is not just one of increasing numbers of consumer goods, but also one of increasing hours of leisure. These hours of leisure have enabled more and more individuals to achieve some kind of self-realization. There will always be individuals who will not know what to do with their free time or spend it in ways we disapprove of, such as watching television. But, what of the individuals who work in order to be rock climbers or who teach classes in order to do research? I am not surprised that when surveyed individuals state that they would like more money (more is always better than less), but the question that we must ask is whether they are willing to trade off time that could be spent with family members or in enjoyable pursuits for more material goods and how this trade-off has changed over time.

Dora L. Costa Department of Economics Massachusetts Institute of Technology

Dora Costa is author of a forthcoming (1998) book, The Evolution of Retirement: An American Economic History, 1880-1990.

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EH.NET BOOK REVIEW

Published by EH.NET (August 1997)

Michael Perelman, The End of Economics. London and New York: Routledge, 1996. $59.95 (cloth), ISBN: 0415137373.

Reviewed for EH.NET by Anthony O’Brien, Department of Economics, Lehigh University.

Michael Perelman’s new book argues that there is a flaw in the working of the market system; a flaw that has caused problems in the past and that is likely to cause disaster in the future. The result will be the inevitable end of economics and the beginning of a new system in which competition and the market system as we know it will no longer prevail. There are some good things in the book: Perelman tells his story clearly and directly, he has some interesting things to say about the last hundred years of macroeconomic history in the United States, and it is certainly easy to be sympathetic with his argument that neoclassical economics is sometimes disconnected from the workings of the real world. But, overall the book is rather a disappointment. It could easily have been much better. Perelman’s thesis will strike most economists as implausible, but it is not indefensible. Unfortunately, Perelman (Department of Economics, California State University, Chico) has allowed some avoidable roughness in his presentation to make his arguments appear even weaker than they are. This is Perelman’s fifth book in fifteen years. This book lacks a preface or acknowledgments, which makes me wonder how much feedback he received before it was published. My guess is this would have been a better book if he had taken more time with it.

Perelman’s basic idea is that economists have by and large failed to understand the enormous negative consequences for the workings of the market system of the increasing importance of fixed costs. He believes that since the Civil War fixed costs have been a large fraction of all costs in many U.S. industries and that the importance of fixed costs continues to increase (although neither point is well documented). In an industry with high fixed costs, what Perelman refers to as “unbridled competition” will result in disaster, because firms will find their prices will be driven to the level of marginal cost. The substantial losses resulting from these low prices will eventually lead to widespread bankruptcy. He believes that at least since the experiences of the railroads in the 1890s some non-mainstream economists and many businessmen have realized that competition has to be constrained in order for the market system to function. Such constraints are all that has stood between the economy and disaster. So, while essentially all mainstream economists act as if our economy is highly competitive -and build ever more elaborate models that assume the existence of competition- in fact, the economy is not very competitive and moves to make it more so run the risk of unleashing the consequences of increasing fixed costs.

There are several problems with Perelman’s discussion of this thesis. He presents it in a rather off-putting polemical style, he commits a number of avoidable blunders with respect to theory and history, and, perhaps most disappointingly, he never deals with — and gives the impression of perhaps not even being aware of — the conventional responses to his main argument.

Perelman’s style is a mixture of debatable obiter dicta and remarks that leave the unfortunate impression that he believes those who disagree with him are either stupid or sellouts. The tenor of Perelman’s style is indicated by a few excerpts:

[The government] creates a legal structure that gives business the upper hand relative to labor. When the economy falters, it increases spending, often discovering imaginary threats that require more military spending (p. 5).

Economics provides an ideological justification for atavistic methods of providing for our economic and social needs. It leads to economic practices that create great harm to both people and the environment (p. 8).

Graduates [of Ph.D. programs in economics] soon develop a professional persona with a vested interest in not rocking the boat, recognizing that, to launch a significant challenge to orthodox beliefs can lead to professional ostracism…. Finding an academic job does not free the young economist from the clutches of the corporate sector, since winning grants is often an important consideration in the promotion process…. [E]conomics is not a science, but an ideology designed to defend existing practices (pp. 23, 26, 29).

We live in an economy in which many corporations are large enough to make decisions that threaten our welfare in obvious ways- spreading toxic substances, selling dangerous products, or putting the health of their workers at risk. Those public agencies, which are supposed to protect us from corporate misconduct, seem thoroughly beholden to those whom they are supposed to regulate (p. 111).

This kind of thing is pretty tiresome. I don’t believe the people at the EPA and OSHA are “thoroughly beholden” to those they regulate, there may be academic economists defend the market system only so as to be able to make their next mortgage payment, but I’ve never met one, and so on. Writing in this way is counterproductive. By about page 10 anyone who doesn’t already believe the market system is bad is likely to stop reading, leaving Perelman to preach to the choir.

Perelman makes a number of statements that indicate there are significant gaps in his knowledge of the economic history and history of economic thought literatures. For instance, how many economic historians still believe the old chestnut that the Civil War was an important watershed in the development of U.S. manufacturing?

During the war, the military created levels of demand that were previously unknown, setting off an unprecedented economic boom. Because the war drained off so much labor and grain prices were so high, farmers invested heavily in labor saving devices, such as reapers. No doubt, other businesses followed a similar course. Certainly, the railroad boom was part and parcel of this process (p. 54).

How many economic historians believe the price deflation of the late nineteenth century was due to excessive competition, as Perelman apparently does (p. 59)? How many historians of economic thought would buy the notion that marginal productivity theory was developed in an attempt “to cool the radical ardor of farmers and workers by crafting an abstract theory based on mathematical theorems that supposedly demonstrate that labor could do no better than to trust its fate to the market” (p. 77)?

How many observers of the controversies in macroeconomics of the last forty years would call Milton Friedman a disciple of Leon Walras (p. 78)? A key reason why Friedman has not been taken entirely seriously either by his Keynesian critics of the 1960s and 1970s or by his latter-day putative followers like Robert Lucas and Thomas Sargent is that he has declined to reduce his story to a neo-Walrasian model- the sine qua non of modern theoretical work. These sorts of slips significantly undercut the authority of Perelman’s presentation.

The biggest problem with the book is Perelman’s failure to deal with or, in many cases, even to mention the arguments of the critics of the notion that high fixed costs lead to destructive competition. Perelman discusses approvingly and at length the ideas of a group of late nineteenth century economists who became convinced that large fixed costs and excess capacity in the railroad industry meant that unbridled competition would be ruinous both there and in other industries with similar cost structures. The writings of these economists brought forth a number of critiques — almost entirely unmentioned by Perelman — that, for mainstream economists at any rate, were quite telling. Perhaps the best known was Eliot Jones’s 1920 Quarterly Journal of Economics article, “Is Competition in Industry Ruinous?” Many latter articles- and, for that matter, most industrial organization textbooks- have discussed the supposed evils of cutthroat competition and, by and large, have come to the conclusion that they are greatly exaggerated. Now, these conventional arguments may be correct or incorrect, but surely Perelman needs to deal with them.

Finally, if the market system does not work well and can’t be made to work well, what would Perelman replace it with? He doesn’t really say:

I do not pretend to offer some simple crackpot reform that will magically solve all economic problems. Instead, I intend to expose economics as a pseudo-science that stands in the way of human betterment in the hopes that we can develop new practices and better institutions that will allow us to manage our lives in a more satisfactory manner (p. 7).

Unfortunately, the history of the twentieth century doesn’t inspire much confidence that replacing market practices and institutions with non-market ones will lead to human betterment.

Anthony O’Brien Department of Economics Lehigh University

Anthony O’Brien is author of a number of articles– all of which are entirely above criticism ;-). These include “The Importance of Adjusting Production to Sales in the Early Automobile Industry,” recently published in Explorations in Economic History and (with Judy McDonald and Colleen Callahan) “Trade Wars: The Canadian Reaction to the Smoot-Hawley Tariff” forthcoming in the Journal of Economic History.

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EH.NET BOOK REVIEW

Published by EH.NET (August 1997)

Daniel Nelson, Farm and Factory: Workers in the Midwest, 1880-1990. Bloomington, IN: Indiana University Press, 1995. 258 pp. Includes tables, bibliographical references, and index. $29.95 (cloth), ISBN: 0-253-32883-7.

Reviewed for EH.Net by William A. Sundstrom, Department of Economics, Santa Clara University.

Daniel Nelson’s latest book delivers both more and less than it promises. On the plus side, the book is actually more general than the title would suggest, providing a useful survey of much of the literature on twentieth-century American labor history. Although many of the book’s examples are drawn from midwestern industries and cities, much of the literature cited is not geographically specific. In this sense, the book is a worthy sequel to the author’s Managers and Workers (University of Wisconsin Press, 1975), updating, extending, and broadening that book’s coverage. The greatest virtue of Nelson’s work in the past has been his attention to both the management and labor sides of the employment relationship, as well as the political context of industrial relations. Farm and Factory shares these virtues, synthesizing a wide range of secondary sources from labor, social, and economic history. The book contains less original historical research than many of Nelson’s previous efforts, although it makes extensive use of his own work on such topics as company unions and rubber workers.

On the minus side, Nelson (Department of History, University of Akron) never makes a compelling case for the distinctiveness of the Midwest’s labor history, which would justify the book’s regional focus. Admittedly the region’s industrial composition was unlike that of other regions, with its unusual mix of agriculture and heavy industry. But Nelson claims that these quintessential midwestern sectors had relatively little influence on each others’ labor history. Thus it might be argued that the evolution of the institutions and politics of labor in the Midwest was largely shaped by industry rather than location. Contrast this implication of Nelson’s book with Gavin Wright’s Old South, New South, (Basic Books, 1986) another book about a regional labor market during the twentieth century. In it, Wright depicts a southern labor market that was truly unique in its institutions and development, in large part because of its isolation.

This is not to deny that Nelson has identified some aspects of the midwestern labor experience that had a unique regional character. The socialist and farm-labor political coalitions associated with such names as Robert LaFollette, for example, appear to have been a homegrown midwestern phenomenon; but at the same time, Nelson notes that such coalitions were short-lived and had little lasting influence. Nelson also notes that union density was higher than average in the Midwest, which became the crucible of the twentieth-century industrial union movement. Again, however, it is not clear whether this was the product of some peculiarly midwestern predisposition toward unionism or merely an accidental consequence of the region’s industrial structure. Such a question could be sorted out with careful comparative analysis, contrasting the industrial union movements in the Midwest and, say, the Middle Atlantic regions for similar industries. But Nelson’s book provides very little in the way of comparative research.

Farm and Factory is arranged in sections chronologically. The first period covered, 1880-1900, sets the stage. In 1880, about half of midwestern workers were engaged in farming, and farm employment increased in numbers over the next two decades. At the same time, the period witnessed a dramatic increase in the relative importance of industry. Because the demand for agricultural labor continued to grow, the industrial labor market depended largely on immigrant workers for its supply, rather than rural-urban migrants. The immigrant character of industrial employment was not, of course, unique to the Midwest at this time.

The book’s first chapter, on farming, includes the first installment of what was for me one of the book’s most fascinating recurring themes: the nature and evolution of women’s work. Nelson’s book demonstrates how much scholarship over the past two decades has been devoted to the area of women’s labor history. In the case of farming, Nelson describes the gender division of labor, how it differed across different farm products, and how by the second half of the century the increased complexity of the farming business (and perhaps the increased educational attainment of farm women) resulted in many farm wives assuming the role of business manager. Later in the book he examines the feminization of clerical work, and the postwar growth of women’s labor- force participation.

Nelson’s attention to clerical and service-sector labor is welcome, given the traditional emphasis of labor history on industrial work, but after a promising discussion of office work near the turn of the century in Chapter 3, the remainder of the book devotes only a handful of pages to the service sector and clerical or white-collar employment. No doubt this lacuna reflects shortcomings in the secondary literature that Nelson draws upon, as well as Nelson’s view that the character of office work was subject to less dramatic technological and institutional changes over the course of the century. Be that as it may, “farms and factories” are indeed the book’s central focus; the rest of the midwestern labor market is treated as a residual category that soaked up a growing share of the work force as employment in agriculture and industry shrank relatively and, eventually, absolutely.

Nelson’s history of labor and labor management in the mass production industries of the Midwest is fairly conventional. He highlights the role of the federal government in creating a political and legal environment that facilitated the rise of industrial unionism: the protective legislation of the NRA and NLRA and the subsequent wartime boost given to unionism by war production demand and government intervention. Nelson’s narrative of the sit-down strikes, the escalation of hostility between labor and capital during the thirties, and the rivalry between the AFL and CIO also suggests the importance of historical contingency in creating the system of labor relations that would persist over the decades that followed.

The book’s final chapters describe the brief postwar “golden age” of economic prosperity and relatively stable industrial relations between Big Business and Big Labor. Nelson provides a multifaceted picture of the demise of this golden age. Economic change was clearly one challenge: competition from lower-cost regions and foreign producers placed pressure on the region’s bread-and-butter manufacturing industries. To this conventional deindustrialization story Nelson adds another critical factor in the demise of union influence in the Midwest: rising racial tensions as the Great Migration brought large numbers of black workers into northern cities. The generally progressive stance on racial issues of the CIO unions alienated a large portion of the rank and file during the tumultuous sixties, with the consequence that “[r]ace, more than any other issue, undermined the unions’ carefully nurtured influence outside the workplace” (p. 187).

In his concluding chapter, Nelson traces the roots of the Midwest’s woes during the 1970s and 80s to various “institutional constraints” put into place beginning in the 1930s, which served to reduce the regional economy’s flexibility and innovativeness. “By the 1970s midwestern workers faced the worst of both worlds: some producers had become obsolete, while others continued to innovate in traditional ways (mechanizing operations, for example) that limited employment opportunities” (p. 203). This claim is provocative, and echoes some of the criticisms of U.S. institutional rigidities to be found in the work of authors like Sabel and Piore or Lazonick. But Nelson provides only the sketchiest defense of this view. Is it not possible that the Midwest was just a victim of bad luck, its economy more dependent on Rust Belt industries than other regional economies for largely unavoidable historical reasons? To shore up his claim of institutional failure, Nelson would have to show what other regions did differently to avoid the Midwest’s difficulties. Again, the absence of a comparative approach precludes his doing this.

In sum, Farm and Factory would serve as a solid textbook in twentieth century U.S. labor history, in spite of its regional focus. The coverage of union and nonunion developments, the evolution of personnel management, the role of politics and government, and nontraditional sectors and workers (including women and minorities) is, to my knowledge, unavailable anywhere else. This breadth of coverage, of course, comes at the cost of diminished depth. One particularly misses a compelling account of how the Midwest’s sad economic fate at the end of the century was the product of the region-specific historical evolution of its labor institutions and politics.

William A. Sundstrom Department of Economics Santa Clara University

William A. Sundstrom is Associate Professor of Economics at Santa Clara University. He is the author of numerous articles on the history of U.S. labor markets, including, most recently, “The Racial Unemployment Gap in Long-Run Perspective” (with Robert W. Fairlie), American Economic Review Papers and Proceedings (May 1997).

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Thomas R. Heinrich. Ships for the Seven Seas: Philadelphia Shipbuilding in the Age of Industrial Capitalism. Baltimore: The Johns Hopkins University Press, 1997. x + 290 pp. Illustrations, tables, notes, essay on sources, and index. $39.95 (cloth), ISBN 0-8018-5387-7.

Reviewed by John K. Brown, University of Virginia, for H-Business <

Forty or more years ago, business, economic, and technological historians took a great interest in ships, maritime trade, and shipbuilding, topics of seminal works by Robert G. Albion, Howard I. Chapelle, Louis C. Hunter, John G. B. Hutchins, Samuel Eliot Morison, David B. Tyler, and others. After the fertile work of this World War Two generation of scholars, academic historians turned away from the sea just as earlier Americans did following the War of 1812. But the popular interest in maritime history remains strong on many levels, as evidenced by: the present craze over the Titanic, resurgent interest in maritime museums, Jack Aubrey’s continuing chain of victories over Napoleon’s naval might, and the improbable success of a twelve-volume maritime history encyclopedia. Little wonder. So much of maritime history consists of those transforming events that offer dramatic narratives: humans’ epic struggles with the sea, the rise of successive maritime powers, voyages from old worlds to the New, and technological transformations from wood to iron and steel ships and from sail to engine-driven vessels.

So popular interest in maritime history continues, despite the waning of academic studies. Analysis has dethroned narrative in the work of professional historians, perhaps one reason for their apparently declining interest in maritime topics. But the moment is ripe for a new cadre of Morisons who combine the two approaches. A good story always interests general audiences — indeed a powerful tale can even sway the most rarefied intellectual. Furthermore, many of the analytical approaches and insights of the past forty years of land-based scholarship should travel well. In going to sea they offer new departures for maritime history.

Thomas Heinrich demonstrates this potential for a new maritime history in his Ships for the Seven Seas. Written for a broad range of readers, the book provides a “history of iron and steel shipbuilding in metropolitan Philadelphia . . . from the Civil War to the 1920s” (pp. 2-3). Heinrich takes the stance of an industrial historian — combining threads from political, labor, business, economic, and technological history. This multi-faceted approach is one of the book’s major strengths. For instance cogent summaries of merchant and naval history in each shipbuilding epoch provide admirable technological and economic context about the markets in which the shipbuilders operated. The book is well-designed, nicely illustrated, and free of most proofing errors (although misspelled proper nouns crop up too often). Heinrich tells a good story, and the book deserves the broad readership that its publisher wisely targeted.

Academic historians will find many rewards here too. Throughout the book Heinrich leavens his narrative with analysis, applying to his study of maritime industry the insights offered by labor process studies, Chandlerian business history, and accounts of batch production by Scranton and Zeitlin. On balance, however, Heinrich favors narrative over analysis — a wise choice given the limitations and problems of the original sources available to him. In sum, this is a finely-crafted book on a fascinating period when technical transformations, political compromises, broad economic changes, and world power aspirations reconfigured American shipbuilding. With its skillful blending of narrative and analysis, it is far more comprehensive and insightful than David Tyler’s The American Clyde, written forty years ago, which covered the same period and firms.

Philadelphia-area builders created the American metal shipbuilding industry, they dominated the trade until 1900 or so, and some of the city’s firms remained major players until after World War Two. So Heinrich has ample justification for his geographic focus. The book’s organization places a thematic approach within a chronological narrative. Chapter One provides an overview of wooden shipbuilding. The wooden builders enjoyed notable success for a century-and-a-half, but sank after the 1850s under combined weight of rising British iron shipping (sail and steam), trade disruptions during the Civil War (when Northern shippers registered their vessels under neutral foreign flags), and the broad shifts in investment capital from shipping to railroads, commerce to manufacturing.

In Chapter Two, Heinrich lays out the Civil-War-era foundations for Philadelphia shipbuilders in shifting from sail to steam and wood to iron. In a well-cast and original analysis, he argues that Philadelphia firms’ wartime success in building steam-driven ironclads established embryonic but valuable skills that later served in building iron steamers for the civilian merchant marine. Philadelphia’s strengths in mechanical engineering and metalworking and its proximity to the iron regions provided further advantages to the city’s early iron steamer industry.

Chapter Three focuses on the business history of the leading Philadelphia shipbuilders following the war. Here Heinrich contrasts proprietary capitalism (dominating at the shipyards) with the new corporate managerial capitalism introduced by the railroads. As he observes, the two forms of business organization became mutually dependent when the shipping subsidiaries of major railways became major customers for the shipyards’ iron steamers. Perhaps more insightful are this chapter’s discussions of the integration of marine engineering (design and construction of power plants for vessels) with shipbuilding — a unique attribute of the Philadelphia firms — as well as their disintegrative strategy of relying on extensive sub-contracting.

In his fourth chapter, Heinrich sketches the growing scale of iron shipbuilding firms circa 1875-1885. The American industry never approached the size, specialized capacities, efficiency, or sophistication of its counterpart in Britain. As a result, “American steamship operators paid 25-35 percent more for iron tonnage than their British rivals” circa 1880 (p. 78). But such U.S. builders as Roach, Cramp, and Harlan and Hollingsworth nonetheless achieved growth in this period. Naval construction did not yet amount to much, but Congress gave US shipbuilders a protected market, requiring American-built ships in the coastwise trade (i.e.: all marine freight and passenger traffic within U.S. borders). Although wooden sailing vessels carried most domestic marine commerce, Philadelphia-built iron steamers had few viable competitors in niche markets: oil tankers on routes from Texas to the East coast, overnight passenger steamers on Long Island Sound and Chesapeake Bay, coastwise towboats in the coal trade, and ocean freighters laden with passengers and Hawaiian sugar. On international routes, some American-owned shipping lines chose to buy U.S. vessels, notwithstanding their higher price. Having sketched the “anatomy of a shipbuilding boom” circa 1880 in this chapter, Heinrich then gives an able description of the labor processes involved in iron shipbuilding and marine engineering. From this he briefly considers labor-management relations and class formation in the industry.

By 1885 or so, American iron shipbuilders had established themselves, yet cheap wooden sailing vessels from Maine limited their ability to penetrate the domestic carrying trade, while cheap iron steamers from British yards took most international commerce. So builders like Cramp and Roach turned to the United States Navy after 1885 — the subject of Chapter Five. Here Heinrich ably describes naval procurement policies and the shipbuilders’ lobbying efforts to create a military-industrial complex that would finance plant expansions and the acquisition of subsidiaries while sustaining their yards when the civilian market evaporated, as it often did. Heinrich takes a critical view of naval shipbuilding and its effect on the yards, arguing that builders “preferred private contracts because they involved fewer organizational problems and were usually more profitable.” The yards had little choice — naval work was better than none — but the “potpourri of high-technology naval construction and low-quality commercial shipbuilding was not terribly efficient” for yard managers, workers, or systems (p. 120).

The history of commercial shipping, naval procurement, and steel shipbuilding from 1898 to 1914 occupies Chapter Six. Here themes of earlier chapters are largely reprised: a growing scale of operations despite boom and bust markets, enhanced skill requirements among the workers needed to operate technically-sophisticated production machinery, further innovations in the yards’ products, the challenges of complex and ever-evolving naval work, and the inefficiencies of generalist production in American yards. New issues in the industry circa 1900 included: the rise of competitors (in Philadelphia and elsewhere) seeking to capitalize on America’s new aspirations as a naval power, labor activism and management’s vehement counter thrusts, and a new corporate model of shipyard management. Narrative dominates in the chapter, leaving this reader wishing for a bit more analysis. For instance, Heinrich details a number of problems with the new managerial capitalism adopted at the Cramp shipyard after 1900. Yet he never really offers a verdict on the suitability of corporate management practices in this industry with its vast sales fluctuations, high skill requirements, and circumscribed influence over markets.

World War I occupies Chapter Seven. Beyond the predictable expansions in wartime, here the story centers on Philadelphia’s massive Hog Island Yard. This wartime emergency plant represented a government-funded experiment in standardized ship construction. With its fifty building ways, Hog Island was the world’s largest shipyard. But intractable problems discredited this attempt to produce ships in volume: inadequate transportation from inland fabricating shops to the yard, coordination difficulties once materials did arrive, and an overburdened market for shipbuilding labor in the Philadelphia area. Heinrich has sifted through a multitude of government reports, and he tells this story well.

The book closes out with an eighth chapter on the 1920s depression. The yards came on hard times when the predictable postwar glut in merchant shipping was matched by the novel Washington Naval Disarmament Treaty of 1922 that closed off naval work for a number of years. The shipbuilding depression reached around the world; in Philadelphia the yards responded by further diversifying into non-marine work (the Cramp yard pioneered this strategy circa 1900). Heinrich uses Cramp as a anchor throughout the book, so when that old-line firm dies in 1927, he conducts a detailed autopsy. His verdict: Cramp lost its viability after Averell Harriman merged the builder into his ocean shipping empire. When the Harriman shipping lines foundered, they dragged down Cramp as well. Heinrich also points to excessive competition in the industry and “the lack of an intelligent [federal] merchant marine policy” (p. 212).

A short Epilogue ends the book, wherein Heinrich summarizes his three main analytical points: 1. Naval demand laid foundations for metal steamship construction; thereafter it provided a useful but problematic market, 2. The American merchant marine and its supporting shipbuilders suffered because the federal government failed to pass maritime policies that offered “incentives for investment” for private American firms engaged in international shipping (p. 221), 3. In the absence of those policies, U.S. metal shipbuilders pursued a generalist policy, building whatever tugs, sand barges, passenger liners, or battleships that their markets demanded. This century’s slow withering of America’s merchant marine and the Philadelphia yards closes out the story.

In ways that may not be immediately apparent in this sketch of its contents, Heinrich has pulled off something of a gamble in this book. Despite the fact that essentially no business papers survive from Philadelphia’s metal shipyards, the author has produced a comprehensive history. He builds his portrait from exhaustive searches of periodical records, newspapers, trade and professional society journals, union periodicals, government documents, insurance surveys, and all relevant secondary sources. It is a monumental effort. Still the lack of internal business papers leaves the book with only scattered insights into profits or losses, work force fluctuations and pay rates, capital/labor ratios, the bidding process, cost accounting controls, the quality and severity of price competition, etc.

If the archives had been more forthcoming, it is possible to project a different explanation of American shipbuilders’ inefficiencies. Heinrich explains their shortcomings by pointing to the lack of federal support for U.S. firms in international shipping. This in turn limited the overall market and forced shipyards into an inefficient generalist approach in production. Charles Cramp and other builders made a similar argument in calling for subsidies during the Gilded Age.

While this view has merit, one could advance an argument that I think is equally plausible: namely that the yards’ inefficiencies arose from those federal policies that protected shipbuilders by targeting their chief customers, the shipping lines engaged in domestic commerce. The statutory requirement for American-built ships in coastwise and inland navigation chiefly benefited New England’s wooden yards since their cheap wooden sailing vessels took most of the business. But such slow schooners were simply unsuited to many trades: passenger service, high-value freight traffic, transport of bulk oil, the Hawaiian sugar trade, etc. Through 1900 or so, ship owners seeking metal steamers for these trades had little choice but to deal with the Philadelphia yards. Without protection, these American pioneers in metal shipbuilding would never have begun; with it they never approached the performance of the world’s leading yards in Britain.

Testing this alternate argument would require the sort of internal business papers that simply do not survive. Equally, this perspective and Heinrich’s argument may both be valid. I only raise the point to underscore how the lack of hard data and extensive sources renders any authoritative analysis problematic. Notwithstanding these difficulties, Heinrich has written a detailed, compelling account of iron and steel shipbuilding — an industry vital to America’s economic growth and its rise to world-power status.

Jack Brown

Division of Technology, Culture and Communication School of Engineering and Applied Science Thornton A-216 University of Virginia Charlottesville, VA 22903 jkb6d@virginia.edu (804) 924-6177

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EH.NET BOOK REVIEW

Published by EH.NET (August 1997)

Dudley Baines, Emigration from Europe 1815-1930. New York: Cambridge University Press, 1995. 84 pp. $10.95 (paper), ISBN: 0 521 55783 6; $34.95 (cloth), ISBN: 0 521 55270 2.

Reviewed for EH.NET by Simone A. Wegge, Department of Economics and Business, Lake Forest College.

This book is part of the series commissioned by the Economic History Society entitled New Studies in Economic and Social History. As such, the author’s intent is to summarize the literature on nineteenth-century European emigration, covering both key findings and current debates, as well as unresolved questions. Professor Baines meets this objective in admirable fashion, always communicating his ideas on migration in a well thought-out manner and making them easily accessible to both historians and economists. Baines knows the data and the issues, but even more importantly what we do not know and what we cannot answer at present. Baines (Department of Economic History, London School of Economics) focuses most of his discussion on understanding the motivations of emigrants but also touches on issues related to immigration, such as the effects of labor inflows on economies of the destination countries, or the assimilation of migrants in their adopted homelands.

In the first few chapters, Baines lays out the main questions of the literature. Chief on Baines’ list is the issue of how to model and ultimately explain emigration behavior. Throughout the book Baines makes use of two models of migration to discuss emigrant behavior, the standard Heckscher-Ohlin model in international economics that explains factor mobility, and a “core-periphery” model from development economics, which states that as more advanced core countries further industrialize their demand for unskilled labor or unskilled migrants increases. Baines raises a very interesting question in his discussion of migration models: can one explain emigration with a single elegant model? Unfortunately not, as the author appropriately points out, “…one problem has been the ability of different models to obtain different but statistically significant results about the same group of emigrants” (p. 20). Baines blames this on a lack of proper data as well as the use of inappropriate models.

A heavier dose of micro models could have been added to the presentation of the material. Oded Stark’s work on the microeconomics of migration comes to mind, particularly his emphasis on risk-avoidance, family decision models, and relative-deprivation as motivation for mobility. Still, Baines encourages readers to view migration more generally as an economic decision at the individual level: whether an individual decides to emigrate or not depends on how he perceives his economic options at home and abroad. Migration models at the individual level also help us to understand how emigrants are self-selected. The historical evidence shows that emigrants are self-selected on the basis of occupation, gender, and most importantly, on the basis of youth.

Further, Baines believes that the role of information is crucial to understanding the individual decisions of emigrants. What sorts of information did emigrants have about the various destination countries, and how did they view their prospects? All very difficult, if not impossible, questions to answer. Some of this we may be able to glean from emigrant letter studies. Emigrant letters, used to study the issue of information and motivation and ultimately chain migration, however, cannot be viewed as an unbiased source. Baines notes one of these biases, that some letters may have been written with the intent of encouraging the recipients to emigrate (p. 32). There are, however, additional biases. For example, emigrants only wrote home when there was someone to write to, thus leading the examiner of letters to uncover chains and perhaps over-emphasize the influence of chain effects on emigration behavior.

These sorts of observations buttress the author’s preference for studies of migration at the lowest level of analysis possible. Emigration rates, for instance, certainly vary by country but they also vary at the intra-country level as the author discusses in Chapter 4. Here Baines, as in his other writings, advocates breaking down the country emigration rates by region and preferably by village if they are to be understood properly. Baines refers to chain migration for a possible explanation, but may too hastily claim that regions with sustained traditions of high emigration rates were places where chain migration mattered the most (p. 28). I suggest that the reader defer to future research.

In contrast to the variance in rates, nations experienced both high and low points in the rate of emigration at similar points in time. Baines argues that there were enough differences between countries, and thus we must base this on the cyclical nature of the destination countries’ economies. The reader should note that the evidence for this (Brinley Thomas’ Migration and Economic Growth, Cambridge, 1973) is mostly for the decades after 1870. Here, Baines supports his argument on an examination of possible factors in European nations that might contribute to emigration, including high population growth rates, a fixed supply of land, political discrimination, and so forth. This exercise, he argues, does not help us to understand why more Europeans did not leave. Therefore, we should look at the various peculiarities facing potential emigrants in their hour of decision. Wage and unemployment rates are discussed, but according to the author future mileage might be gained by getting a hand on internal and return migration, as well as using cross-sectional rather than time series data. Baines should stress that we also need more studies of those who stayed.

Return migration is briefly considered in Chapter 5. Why did more people not return to their homelands? Indeed, more emigrants did return in the post-1860 era of cheaper transport. A more complete answer has to do with emigrants’ ages, the degree to which emigrants were economically connected with their family and community back in the homeland, and whether they were male. The percentage of men among the returnees was higher than among the emigrants (p. 36).

Emigration changed in other important ways over the nineteenth century, as Baines notes in Chapter 6. Early migrations tended to be composed of many families, while later migrations contained more single individuals. This is as of yet not completely understood, but Baines suspects that the decline in transport costs had the effect of making emigration decisions less final and more attractive to individuals who planned to return within a short period. But more simply, the drop in the real price of passage made emigration also more possible for a larger segment (younger) of the European population.

Baines discusses how industrialization over the nineteenth century made a difference for emigrants in Chapter 8. Many economists might think that little or no economic growth will induce high emigration rates, as the cases of Ireland and Italy demonstrate. But we also have England, which experienced heavy economic growth and high rates of emigration, making for a contrasting case study. Baines draws on the Scandinavian literature and his own work on Britain to expand this into a discussion on stage migration and internal migration. He argues that stage-migration is more important for Scandinavia than for England (p. 53).

Cross-country comparisons and almost two centuries of immigration experience provide a fertile backdrop in Chapter 9 for a discussion on the economic effects of immigration. In an environment where resources were abundant and laborers scarce, most destination countries did not experience a reduction in the rate of income growth over the historical period of analysis. When labor markets were affected, unskilled workers in industries with few economies of scale bore the brunt of wage declines, while “immigration allowed other workers to be upwardly displaced … into sectors that did have increasing returns” (p. 55). Hence, economies of scale, the ability of destination countries to increase investment, and the degree of segmentation of labor markets all played a part in determining whether immigrants were welcomed or disdained.

For the scholars and students wishing a concisely worded statement on the economic history of emigration, this is the book to read. Baines has a deep and thorough understanding of emigration and addresses many of the interesting and relevant questions in the literature. His intimate knowledge of the primary sources underlying emigration studies is well apparent in his advice to the reader about the biases and the quality of existing historical sources of migration data. Typical of other studies in this series, the bibliography contains short descriptions for many of the works cited, making for a helpful reference guide. Finally, those familiar with Baines’ other writings on emigration, in particular his book on British emigration, Migration in a Mature Economy (Cambridge, 1985), may wish that this little book had been quite a bit longer and contained even more of his insights into nineteenth century European emigration.

Simone A. Wegge Department of Economics and Business Lake Forest College

Simone Wegge is author of a dissertation entitled “Migration Decisions in Mid Nineteenth-Century Germany,” completed in May 1997.

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H-NET BOOK REVIEW

Published by H-Business@eh.net (July, 1997)

Jonathan B. Baskin and Paul J. Miranti, Jr. A History of Corporate Finance. New York: Cambridge University Press, 1997. x + 350 pp. Tables, epilogue, appendices, notes, and index. $29.95 (cloth), ISBN 0-521-55514-0.

Reviewed for H-Business by Robert E. Wright, Temple University The Alleged Poverty of Positivism and the Modern Theory of Finance

A History of Corporate Finance is a solid contribution to scholarship that should gain the interest of historians, lawyers, economists, and business persons. Its unusual combination of scope, clarity, and brevity, combined with its reasonable price, may induce professors to make it required reading for advanced undergraduate and graduate courses in economic or business history, or in management education courses. Highly interpretive, the book is more a work of synthesis than of original research in primary sources. At 350 pages, the book is hardly comprehensive, but it nevertheless manages to tie much temporally disparate material into its thesis.

That thesis the authors lay out carefully in the introduction, “History and the Modern Theory of Finance.” Citing Keynes and Schumpeter, Jonathan Baskin and Paul Miranti remind readers of the “complementary” nature of history and finance and announce their intention to employ “historical methods to amplify an important contemporary paradigm” (pp. 1-2). That paradigm, the “modern theory of finance,” seeks to evaluate the “financing question” (optimal capital structure decisions), and the “dividend question” (distribution of income to shareholders). The early leaders of modern finance theory were Franco Modigliani and Merton H. Miller. Based on an abstract model, they argued that “firms cannot increase value by issuing either debt or equity” and that “managerial decisions are irrelevant” (p. 16). Questioning conclusions based on what they consider to be ungrounded, formalized models, Baskin and Miranti argue that the modern theory of finance needs to take greater recognition of “path dependence and historical evolution” (p. 3). To substantiate their view, they describe the intellectual history of economics (economiography?) since the diffusion of Karl Popper’s “falsifiability” philosophy of science, and, at the end of each chapter, they test the assumptions and real-world applicability of theoretical models. Generally, they find the abstractions empirically deficient, and thus call into question “the profession’s current infatuation with models that lend themselves to formal mathematical explication” (p. 23).

Divided into three parts, “The Preindustrial World,” “The Rise of Modern Industry,” and “The Transition to the Contemporary Era,” the main body of the work opens with a discussion of medieval and renaissance finance. After a brief description of the medieval commercial revival, Florentine and Venetian finance is treated at some length with emphasis on enterprise organization. The authors conclude, not surprisingly, that “other factors than those considered in the modern theory as laid down by Modigliani, Miller and others had been foremost in defining early financial institutions” (p. 51).

Corporate finance in the age of global exploration, especially the rise of joint-stock trading companies like the East India Company, forms the basis of chapter 2. Baskin and Miranti conclude that the “pecking order” hypothesis of Gordon Donaldson, “the traditional explanation of funding decisions prior to Miller and Modigliani,” best explains the East India Company’s financial decisions (pp. 22, 84). Donaldson’s hypothesis predicts organizations will finance operations first from retained earnings, then from debt, and lastly from the sale of additional equity. With debt interest rates lower than equity returns, business cycles violent, and the probability of losing control of the company in an equity expansion high, East India Company managers borrowed capital with short-term debentures.

Chapter 3 takes up the emergence of public markets for investment securities from the Glorious Revolution to the final defeat of Napoleon. Predictably, the Bank of England, John Law, and the South Sea Bubble are the major subjects covered, but an interesting twist, the notion that the “watershed of 1720” caused British and French financial development to diverge markedly, enlivens the discussion. If true that France turned “antitrade and antimarket” after the “Law fiasco,” the authors have hit upon a major explanation for the Anglo-American victory in the struggle to control North America (French and Indian War [1755-1764] or Seven Years’ War [1756-1763]) and an important cause of the French Revolution (p. 114). In any event, Baskin and Miranti’s main goal in the chapter is again to attack the modern theory of finance by pointing to the “high risk in economic affairs and poor information” facing eighteenth-century investors. In that environment, low-risk government debt was a more attractive investment option than equities (p. 122).

The problems involved in accurately valuing equities persisted into the nineteenth century, the age of massive infrastructure improvements. With particular emphasis on canal and railroad corporations, the authors describe the evolution of preferred stock, a hybrid between debt and equity financing. Preferred stock paid a guaranteed dividend, but conferred no voting privileges, thereby allowing managers to maintain control over the corporation. Also, unlike bond payments, dividend payments could be suspended without forcing the corporation into receivership. The creation of preferred stock, the authors believe, supports the “pecking order hypothesis” more than the modern finance theory. By incorporating the fixed-income and non-voting characteristics of debt instruments into a hybrid equity form, managers transcended some of the limitations of the pure debt market and staved off the flotation of true equities.

After 1900, the authors admit in the next chapter, a broad, impersonal market in common stock arose in both Britain and the United States. Managers, however, continued to prefer retained earnings, fixed debt, and preferred stock over the flotation of common stocks. The main body of the book concludes with two long chapters of in-depth analysis of the financing of center firms, conglomerates, and leveraged-buyout partnerships. Not surprisingly, the pecking order hypothesis again emerges as the key means of understanding successful corporate financing strategies. By downplaying the successful initial phase of the post-1960s merger movements, the authors portray conglomerates and LBOs as failures inspired by the over-simplistic models of academics. For instance, they label Henry G. Manne’s contract theory “underspecified” because it fails to account for the effects of government regulation and the importance of manager tenure (p. 287). However, Baskin and Miranti admit that although the pecking order hypothesis generally “predicts the progression of corporate financial preferences, it does not provide guidance with respect to either the relative weight placed on these alternative sources or the rates at which this process progressed” (p. 297).

The book suffers, in places, from an over-rigid style, poor balance, and uneven organization. Over one-half of the book, for instance, covers the twentieth century.

Also, the epilogue and two appendices seem out of place. The former reads like a conclusion except for the formulation of an original algorithm that purports to explain the relationship between short-term, firm-specific factors and long-term environmental elements in financial development. If truly significant, the algorithm should be explained in the introduction and applied throughout the narrative. Appendix A, a short description of finance and informational asymmetries in the ancient world, rightfully belongs in chapter 1. Appendix B, “International Patterns of Corporate Governance,” contrasts Anglo-American financial markets with their equivalents in Japan and Germany. The main contention is that, because of its transmission of “reliable information” to investors, the Anglo-American financial system is more efficient and conducive of economic growth than the “opaque regimes of Japan and Germany” (p. 322).

Although probably correct and extremely interesting, the presentation is ad hoc and, at 8 pages, too truncated to be entirely convincing. I hope that Miranti will take up a broad, comparative study of financial institutions since the late nineteenth century as his next major project. Although an outstanding study that will deservedly gain a wide audience, the book ultimately fails to reconcile the methods and outlook of history with those of economics. The belated algorithm is a step in the right direction, but still short of creating realistic (adequately specified) models that can be quantitatively tested. Though it is true that some past models have been unrealistic in some regards, nothing in this book will convince economists to abandon formal, mathematical theorizing. Baskin and Miranti, in other words, have rightly called the modern theory of finance into question, but have not set forth a completely viable alternative.

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