The Economic Future in Historical Perspective

Published by EH.NET (June 2004)

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Paul A. David and Mark P. Thomas, editors, The Economic Future in Historical Perspective. Oxford: Oxford University Press, 2003. xvi + 528 pp. $74 (hardcover), ISBN: 0-19-726237-6.

Reviewed for EH.NET by Philip R. P. Coelho, Department of Economics, Ball State University.

This book is a compilation of seventeen different papers written by twenty-six authors; the collected works were presented at a symposium convened to honor Charles H. Feinstein prior to his retirement as the Chichele Professor of Economic History at the University of Oxford. The essays are gathered into three broad categories proceeded by editorial comments that can be quite extensive. The three parts of the volume are: 1) “Drivers of Long-Term Economic Growth”; 2) “Changes in Economic Regimes and Ideologies”; and 3) “Welfare, Well-being, and Personal Economic Security.”

The overviews by the editors, Paul David and Mark Thomas, are both thought-provoking and frustrating. Thought-provoking because they do touch upon relevant issues, frustrating because they are opaque and deliberately refuse to evaluate arguments and render judgment. In their initial “Introduction,” the editors present a defense of economic history and a methodological review of equilibrium and path dependence. They defend the utility of economic history as a way “… of researching the past deliberately for the purpose of better informing future policy analyses” (p. 6). Yet they stress (p. 8) “the significance of specific institutional details” and “the timing of exogenous events” as being crucial in determining outcomes. I think economic history would be better served by stressing the commonalities of historical episodes and using the exceptional circumstances to explain confounding predictions. We use economic analysis to elucidate history because all societies at all times face fundamental economic problems that are amenable to rational analysis. What decisions are made and how they are made have effects both direct and indirect (feedback). Consequently, I am at a loss to explain what economic history is if it is not primarily about the application of economic analysis to history. The editors think otherwise (p. 10).

The editorial comments on path dependency are meant to deflect critics of economic history who argue that history is not relevant to the analysis of contemporary problems. The editors devote too much space to the defense of history to take the argument seriously. The critics of history, to be credible must know history and the analysis before their criticism can be credible; they do not, so their criticisms are uninformed.

The study of history is based on the premise that to understand the present it is necessary to have knowledge of the past. The resources and institutions that we have are legacies from the past; understanding them is crucial to any analysis of contemporary problems. Our species, H. Sapiens, is a social one; society, social norms and attitudes are a result of a series of interactions taken in the past. To argue that history, the path taken, does not affect the present, and will not affect the future is not credible. A more pertinent and insightful question concerning the importance of history is: How much does the past matter? The answer depends upon the particulars of the question and the historical circumstances. The past matters a great deal when assessing rates of return to competing investments in Denmark or Afghanistan, but it matters much less in a similar comparison between Denmark or Finland. The legacy of the past affects contemporaneous societies, but it does not condemn them to a predetermined future path. Societies do change, and the changes do affect their abilities to produce economic goods and services. Will these changes be beneficial or detrimental? An honest answer is that we do not know; that is why we do history and study current events.

The editorial discussion on equilibrium analysis is derivative from their discussion of history and path dependency. I believe that their discussion (and most discussions) of equilibria are fundamentally flawed. Equilibrium analysis, like supply and demand, is a way of organizing our thinking; equilibria are not observable phenomena. Restating it, equilibria have no physical presence; they can not be captured, observed, nor unambiguously defined and identified. Since they have no physical existence, proving equilibria exist, or are stable, is akin to proving that Superman can thrash Captain Marvel. “Proofs” of mathematical stability (or theorems) are mathematical exercises testing the internal consistency of mathematical descriptions. They are that, and just that; they should not be confused with incontrovertible evidence, which is another (and more commonly used) meaning of the word “proof.” The mathematical proof of the instability of a system, in and by itself, has no significance to economic reality or policy. To have any relevance to the world in which we live and work, the instability of a system has to be: 1) quantified (how unstable), and 2) its actual temporal sequence has to be predictable in real time. Deidre McCloskey made the point that there is a distinction between statistical and economic significance; to be economically significant, a statistically significance variable has to be large enough to have a meaningful impact on the specified functional relationship. Similarly, if a system is identified as mathematically unstable we have to predict not only how unstable, but its path in real time before we can assess its economic significance. More succinctly, in addition to McCloskey’s how much, we have to know how soon. Suppose that the mathematical model of our economy is unambiguously shown to be unstable, increasingly cyclical, and predicted to have a cataclysmic explosion (implosion). If the cataclysmic event is predicted to take place a thousand centuries from the present, will it have any measurable effects upon human behavior during the next ten generations? Rational economic behavior gives vanishingly small weights to economic events expected to take place a hundred years from now, and virtually none to events predicted to take place 100,000 years from the present. This means that without further information, the existence or non-existence of equilibria and whether they are stable or not, are questions that may concern mathematicians, but, by themselves are irrelevant to policy makers, economists, and historians. Nevertheless, the editors seem to be mesmerized by the importance of the methodological underpinnings of equilibria and path dependent analyses. And I, too, have devoted too much space to them.

The first essay in Part 1 is by Jan De Vries. He gives a very good summary of his thesis of an industrious revolution and how it affected economic growth. He argues that people working harder were the reasons for economic growth before the industrial revolution (pp. 48-51). He recognizes (p. 53) that work intensification may be the result of better nutrition; thus, rather than the cause of higher living standards, it could have been a result of economic growth. De Vries has a very interesting section summarizing how European consumption changed in the eighteenth century. Readers of this volume would to well to read De Vries’ essay in conjunction with Avner Offer’s essay (Chapter 12) on alternative measures of economic well-being. The juxtaposition illuminates both.

Jane Humphries has an interesting piece on apprenticeship. However the essay raises some issues that should be clarified; “In a competitive economy with no market imperfections workers invest in and firms provide efficient levels of general training.” (p. 81) The imperfections are unmentioned; if “market imperfections” include the cost of transaction and enforcement, then this is a restatement of the Coase Theorem. If it means something else, it should be clarified. Humphries provides a wealth of details, but the framework tying them together and quantifying the importance of apprenticeship programs is nebulous. She argues that the apprenticeship program was relatively benevolent, efficient and significant in providing England with skilled workers before the Industrial Revolution. She also believes that legislation, rather than codifying behavior, was instrumental in changing it, and necessary for the establishment of apprenticeships.

Stephen Broadberry’s essay on “Human Capital” is a comparative history of the growth of productivity in Germany, the United States, and the Britain. The essay summarizes his published works. It is a comprehensive essay continuing to the present. This causes a slight problem because he states that aggregate productivity in Britain is behind that of Germany and the United States, yet the last data (2004) released had Britain exceeding Germany’s per capita output. In identifying the contributions of “skills,” “capital,” and the “residual” to the differential in labor productivities (Tables 11 and 12) between Britain, and the United States and Germany, the “residual” is typically the largest single explanatory variable. In some observations the residual has the largest absolute contribution and is negative; this does not inspire confidence.

In “General Purpose Technologies” Paul David and Gavin Wright argue that sporadic surges in productivity are typically part of the economic landscape. Surges can be attributed to the adoption of a technology that has a myriad of facets, and affects many different productive activities. Their study emphasizes American electrification in the early twentieth century. They suggest the decline in the capital-output ratio that occurred in the period 1924-37 was attributable to electrification, and that it had a similar impact in other countries. The evidence is not entirely convincing; if wages were falling relative to capital prices, then rational behavior would substitute labor for capital. In the 1930s the decline in the capital-output ratio may have been a result of declining wages, rather than a productivity surge.

Nick Von Tunzelmann’s essay on “Technological Systems” concludes Part 1. It is not clear what he is attempting and he admits that his paper is “a start on trying to affect a union between such strange bedfellows” (p. 167). They may or may not be strange, but they are certainly not well identified. He argues innovation depends more on “knowledge rather than information,” (p. 168) where knowledge is uncodified, and information is available through the market. This dichotomy is simply asserted. His essay touches on a variety of subjects and countries that may have a relation to one another, but the relationships are not apparent. He does make some remarkable assertions; one of which is that late twentieth century America’s “shortcomings in learning production processes were partially solved by removing such processes off shore to cheaper labour countries … cost competitiveness was maintained by downgrading wages rather than upgrading methods” (p. 183). International trade is not his strong suit.

The editorial introduction to Part Two, “Changes in Economic Regimes and Ideologies,” argues that the unifying element in the six essays is how economies react to “shocks” that disrupt established regimes” (p. 197). In “The East Asian Escape” Nicholas Crafts examines and explains the growth of Asian economics in the twentieth century. This essay is valuable for its data and analysis. Part of the explanation for East Asian growth is a “catch-up” (or Gershenkron) effect. Crafts argues that in the developing East Asian economies: 1) the institutional groundwork had to have been in place, and conducive to growth before rapid growth could commence; and 2) their initial institutional endowment does not insure that these countries will, indeed, catch-up. Institutional changes may have to precede further development. The Japanese stagnation of the 1990s certainly supports the need for institutional change.

Christopher Davis and James Foreman-Peck’s essay on the “Russian Transition” in historical perspective makes comparisons between the Russian transition from Communism to the present post-Communist regime, and the United Kingdom from war to peace following the two World Wars. The essay describes the British transition from war to peace after World War I as failing relative to the transition that took place after World War II. Both post-war periods were adversely affected by fixed exchange rate policies. It seems that free-market policies were tried in all markets except the currency markets. The attempt to fix exchange rates after both wars led to severe problems — unemployment post-World War I, and price controls and other restrictions post-World War II. Their discussion of the Russian transition from Communism illuminates a confusing period. However they do not examine the data closely enough. Post-collapse Russian GDP fell substantially, but the fall in consumption per capita was significantly less. One could interpret this as implying that part of the output decline was fictitious because the output was not valued.

Carol Leonard’s article focuses on agricultural policies in Russia from 1861-2000. The details are interesting but the analytic framework is suspect: 1) (paraphrasing pp. 274-75) in the Post-Soviet period there was a misallocation of resources because low world grain prices led labor away from grain production into labor-intensive farming; 2) “After Emancipation, as the state gradually recovered from financial destabilization during the Crimean War, the need for ad hoc taxes grew, especially since Russia lacked a stable currency” (p. 277); and, 3) prior to the Revolution, “preference for the pooling of production resources was common as it was during and after collectivization in Soviet Russia.” (p. 275) Similar statements appear in the essay to its detriment.

Francis Wilson’s essay on South Africa, “Understanding the Past to Reshape the Future,” is marred by exaggeration. Examples are claims that: 1) equate the institutions governing race established in white-ruled South Africa with a “modernized form of slavery” (p. 302); 2) the educational system of white South Africa was designed with the intention of making black South Africans illiterate and innumerate; (p. 311) and 3) “the [labor] system was part of a process that generated poverty whilst simultaneously producing wealth for others” (p. 304). These statements betray a complete indifference to economic analysis; the author knows better, but moral indignation trumps scholarship.

In contrast, Leandro Conte, Gianni Toniolo, and Giovanni Vecchi in “Lessons from Italy’s Monetary Unification,” have a very good, scholarly essay explaining the ins and outs of the adoption of one currency after Italian unification. They do a commendable job describing and explaining the economic integration that occurred after political unification. A difficulty I have with their paper is that when analyzing the unification of labor markets they use nominal wage data. Rational behavior suggests that suppliers of labor respond to real wages, rather than money wages. But it is too much to expect the authors to develop a series of regional price indices on top of what they have done in fourteen pages. Their essay should be required reading on Italian economic and monetary unification.

In the article “Ideology and the Shadow of History,” Barry Eichengreen and Peter Temin argue that: 1) the consensus that the gold standard “turned an ordinary business downturn into the Great Depression” (p. 357) is correct; and 2) the ideology of the gold standard developed such a hold on the mind-set of the times that it prevented economic recovery and was a primal cause of the Great Depression (pp. 358-59). Unfortunately, ideology can not be measured, but if ideology caused policies designed to: 1) hold prices and wages above market clearing levels; 2) reduce real output; 3) increase taxes; 4) reduce world trade; 5) penalize economic success; 6) follow redistributionist policies and, 7) ignore the disastrous effects that governmental policies caused to the monetary and banking systems, then ideology did play an important role in bringing about and prolonging the Great Depression. But sans the policies and with the ideology, the economic history of the 1930’s would have been much brighter; their argument on the primacy of ideology is not persuasive.

The third and final section of the book, “Welfare, Well-being and Individual Economic Security,” starts with an admirable essay by Avner Offer, “Economic Welfare Measurements and Human Well-being.” It reviews the literature on the alternatives to income per capita as a measure of well-being. It is a comprehensive, wide-ranging, and useful guide to anyone who wants an introduction to the alternative measures of well-being. Per capita income is a widely accepted measure of well-being; this is an important reason why alternative measures should be considered. If the Physical Quality of Life Index or the Anthropometric Index give different accounts of changing living standards compared to income per capita, then a closer examination of all the measures is required. When basic economic attributes are changing (as in De Vries’ industrious revolution) less conventional measures of well-being may illuminate issues.

Essay thirteen, Roderick Floud’s “The Human Body in Britain,” fits very well with Offer’s work. It is a comprehensive review of the anthropometric history of Britain. The argument in favor of anthropometric history is that heights at various ages are an accurate gauge of the nutritional intake and exposure to disease, and that these variables are not captured in per capita output data. Furthermore anthropometric data may more accurately reflect the distribution of well-being among classes, ages, and the sexes. The charts and data presented are very interesting, including the revelation that male modern heights and standards were achieved by the birth cohort of 1925. Does this imply that the welfare policies of the post-World War II era had no affect upon British stature? This question explains why some find anthropometrics fascinating.

In chapter 14, “Height and the High Life,” Timothy Leunig and Hans-Joachim Voth continue with anthropometrics; they argue that in the future data on heights in developed countries’ will be less valuable as indicators of well-being because improved living standards will cease to affect heights. There is a biological limit on how tall human beings can be. Poor nutrition, diseases, and injuries can prevent humans from attaining their potential (genetic) height, absent these, increasing nutrition will not increase the maximum attainable stature. They also make an interesting speculation: because Communist regimes emphasized spending on (socialized) medical care and insuring a basic minimum diet, the economic history of the countries in transition from Communism to market oriented societies may show a divergence between anthropometric data and income per capita. Thirty years or so from now we will be able to test this speculation.

Anne Digby and Shelia Ryan Johansson in “Producing Health in Past and Present,” write a wide-ranging overview of medicine and health over the past millennium. Medicine did not extend the lives of elites relative to ordinary people at least to the seventeenth century. In the present day they point out that good health can be acquired at relatively low cost as a number low-income of countries and regions do (p. 454). Their essay concentrates on different systems’ medical delivery in the production of health; they do not place enough emphasis on the impact of non-medical expenditures on health, both past and present. The most cost-effective expenditures per life saved are those on: potable water, waste removal, sewers, sanitary food, and, probably most importantly, education. Ignaz Semmelweiss is widely credited with discovering that high rates of maternal mortality were caused by the unsanitary bodies of medical practitioners. Washing hands with chlorinated water was not high tech in the nineteenth century, but it was effective in reducing sepsis and puerperal fever. Drains and sewers were known in ancient Rome, and when they were employed in the nineteenth century they were highly effective in reducing contagions. Many of the health problems of the twenty-first century can be prevented most cheaply by changing behavior. The incidence of AIDS, venereal infections, pulmonary disease, and cardiovascular diseases can be reduced significantly by at-risk populations changing behaviors. The authors’ discussion of traditional/alternative versus biomedical/scientific medical system is interesting, but, in producing health in the past both systems take a back seat to public health systems.

Peter Solar and Richard Smith in “An Old Poor Law for New Europe?” have written a short synopsis of the English Poor Laws, both Old and New. They contend that: 1) the local oversight was effective and “served the English well” (p. 473) in the administration of the Old Poor Law; and 2) the Industrial Revolution and economic integration led to the more restrictive New Poor Law. The authors make some final comments that are interesting speculations on the effects that the enlargement of the European Union may have upon national welfare systems that differ in benefits delivered.

Mark Thomas and Paul Johnson, in “Paying for Old Age,” have the last chapter of the book. Their paper discusses the financial problems of increased life expectancy. They do an admirable job of laying out the data, and the financial issues facing societies with ageing populations, with one major exception: they ignore the elephant in the room. The “problem” is that people are living longer, and if retirement occurs at 65 (or earlier) the retirees will be unable to support their expenses over their remaining life without increased state expenditures. Increased life expectancy increases the percentage of retirees to the working population. In pay-as-you-go state pension schemes, this creates a severe financial crunch. The obvious solution is to increase the age of retirement. The average person of 65 in today’s developed world is healthier than the person of 55 years of age a century ago. Relative to the 55 year olds of 1904, today’s 65 year olds: 1) have longer life expectancies; 2) are taller and fitter; and 3) have more human capital. Hard physical labor in OECD countries is a small and diminishing percentage of employment. Services are the largest single employment sector and are growing; is there any reason why the providers of services cannot be 68 or even 70? The problem of pensions is a political problem. There is no reason that the retirement age picked by Bismarck in the late nineteenth century should be sacrosanct in the twenty-first century. Politicians whose careers depend upon not saying unpalatable truths have legitimate reasons for avoiding the “elephant,” but I can not understand intellectuals doing so. Increased life expectancies have made the “problem” of retirement at 65; designing solutions to maintain the current retirement age is analogous to finding ways to keep warm when frigid winds are blowing through an open door. It is much simpler to shut the door.

In sum this book has some very nice essays, and some others. Should you purchase it or order it for classes? Graduate courses surveying issues in economic history and policy could use these essays as a framework for discussing issues. For the most part, the essays are broad and wide-ranging; they do provide competent reviews of the current state of their various topics, but the topics (except for anthropometrics in chapters 12-14) are heterogeneous. Whether one does or does not acquire the book depends upon the overlap between the interests of the reader and the book’s topics.

Philip R. P. Coelho has written on and is continuing his study of long-run economic growth and the impact of biology upon economic growth and development; he is currently sidetracked writing on ethical behavior. His articles have been published in the Journal of Economic History, the American Economic Review, Explorations in Economic History, Economic Inquiry and other journals.