Project 2001: Significant Works in Economic History
Woodrow Wilson Borah, New Spain’s Century of Depression. Berkeley: University of California Press, 1951. 58 pp.
Review Essay by Richard Salvucci, Department of Economics, Trinity University.

An Obscure Century in a Backward Country: Woodrow Borah and New Spain’s Century of Depression

In 1938, the English novelist Graham Greene traveled to Mexico to investigate the condition of the Catholic Church under the regime of President Plutarco El?as Calles. While there, Greene interviewed the strongman of San Luis Potos?, General Saturnino Cedillo. In the most memorable terms, Greene called Cedillo “an Indian general in an obscure state of a backward country.” So my title, I fear, is a plagiarism, but an appropriate one. For certainly some who read this essay will wonder why a brief (58 pages) book about seventeenth?century New Spain (as Mexico was then known) counts as influential at all, let alone very influential? After all, Lesley Simpson, an authority on Mexico, famously labeled the seventeenth as Mexico’s “forgotten” century, and everyone from Adam Smith to Thomas Jefferson thought the Spanish empire both backward and obscure.

Influence, of course, is a matter of audience. There must be few economic historians of Latin America and fewer still of Mexico who are unfamiliar with the work of Woodrow Borah and the so-called “Berkeley School” of historical demography. Even with prevailing intellectual fashions, it is hard to believe that most English?speaking historians of Latin America have not heard of Borah, although whether or not they read his work in graduate school or after is much less certain. So I might best define my task as to explain why New Spain’s Century of Depression, published in 1951 as number 35 of the University of California Press’s celebrated Ibero?Americana series, should be counted one of the truly important works of twentieth?century economic history, especially for those who have yet to make its acquaintance. I take it for granted that colleagues in my field would agree. But it is a small field, and I am under no illusion that even its best work is widely known, much less regarded as a crucial contribution to economic historiography.

Woodrow Borah, who died in 1999, was one of the outstanding members of the postwar generation of Latin Americanists that included Howard Cline, Charles Gibson, John Lynch and Stanley Stein. At Berkeley, Borah, who was Abraham D. Shepard Professor of History, was one of a stellar cast of scholars drawn from a wide range of disciplines — Sherburne Cook, George Foster, James Parsons, John Rowe, Carl Sauer, and Lesley Simpson come immediately to mind. They exercised a profound influence on each other, sometimes as collaborators, but more often as valuable colleagues. What emerged from their work was a distinctive scholarship that brought together striking research and insights drawn from the natural and social sciences, precocious social science history, you might say. And Borah, his prodigious reading, meticulous scholarship and personal austerity notwithstanding, was one of this group’s more daring and imaginative members. Indeed, in a rueful aside, Borah once told me that his critics (there were a few) had accused him of “inventing Indians,” and this he meant quite literally, not in the now prosaic historicist sense of the term.

The burden of New Spain’s Century of Depression was to suggest the impact of the massive decline of the aboriginal population of Central Mexico (whom we can simply, if incorrectly, call Indians) on the material prospects of the Iberian conquerors (whom we can simply, and equally incorrectly, call Spaniards) and their descendants. As Borah understood it, the intent of the Spaniards was to live off the labor of the dense Indian population they had encountered in Central Mexico, a population accustomed to the rule of a privileged upper stratum by generations of Mesoamerican conquerors of whom the Aztec were simply the most recent. The Spaniards’ intention was no mystery. They announced they had come to the “Indies” (wrong again, but who’s counting?) to get rich, and that they had no intention of tilling the soil “like peasants” in order to do so. To accomplish their goal, the Spaniards, victorious in the wake of Cort?s’ historic expedition, rewarded themselves with the famous encomienda, the right to extract labor from the Indians. For some, like Cort?s himself, the encomienda was the source of great personal wealth and social prestige, although others, including some of Cort?s’ outspoken critics, were less richly rewarded.

For the encomienda to function as an avenue of accumulation, evidently, there had to be Indians to be distributed. At the time of the arrival of the Spaniards, Central Mexico perhaps supported an Indian population as large as 25 million. Within a century, shockingly, the same Indian population had fallen to less than a million, the victims of European disease, massive economic disruption, and the destruction of a coherent civilization that the Spaniards willingly exploited but never really understood. It was one thing for the encomienda to yield a comfortable existence for the Spaniards when Indian labor was abundant. But, obviously, such a system could hardly be expected to function when the people who supported it had disappeared. And here, then, is the gist of the argument of New Spain’s Century of Depression. What happens to a system of colonial expropriation when the society on to which it is fixed essentially disappears?

A bald summary can hardly begin to capture the twists and turns of the research agenda that New Spain’s Century of Depression ultimately entailed. When Borah published it in 1951, Sherburne Cook and Lesley Simpson had produced the population figures for New Spain on which he relied. It would require fully another quarter century, down to 1976, for what are now the standard estimates of early colonial population to emerge. There was considerable controversy along the way, and to an extent, there still is. Yet it is important to keep several things in mind. Much of the controversy regarding the population of New Spain involves the pre?contact population. About the course of events after the Spanish invasion there is far less doubt. The Indian population fell, and it fell sharply within a century, on the order of 90 percent. From an economic standpoint, only one thing really matters: factor endowments. Before the Conquest, labor was the abundant factor in Mexico. By 1620, land had become the abundant factor. No amount of scholastic contention about how many Indians there “really” were can alter that.

The other point is that even if Borah used imperfect population figures or made arbitrary assumptions, his scholarship was sound. He knew the sources and was particularly well versed in the documents associated with the relaciones geogr?ficas, the reports prepared to give Philip II of Spain an idea of what his Mexican dominions contained. While these documents are widely available today due to the efforts of the Instituto de Investigaciones Antropol?gicas in Mexico, it must have required considerably greater difficulty to master them fifty years ago. The impression from reading Borah’s notes is of a reasonably extensive investigation of the archival and printed materials available in the 1940s. In other words, you need to know something about the history of colonial scholarship to appreciate what Borah and his colleagues at Berkeley accomplished and some of the critics simply did not.

The conclusion to which Borah came was straightforward. Beginning sometime in the 1570s, an “economic depression besetting the Spanish cities because of the shrinkage of the Indian base [would last] more than a century,” and a “large number of white families must have found themselves reduced from comparative wealth to straitened circumstances as the drag in the Indian population forced a downward spiral in the economy of the European stratum”(p. 27). Although Borah presented his findings as a “hypothesis of a century?long depression” or “a hypothesis which needs much additional investigation,” the hypothesis is generally accepted as settled fact. It was not until the early 1970s that the work of the English historian Peter Bakewell raised questions about the impact of population decline on the fortunes of silver mining, but Borah’s view of the economic circumstances of the settlers went largely unchallenged. Even John Lynch, whose brilliant synthesis, Spain under the Hapsburgs (1981), called into question the entire notion of a Mexican depression in the seventeenth century, did not address the crucial issue that Borah raised. How did the elite of Mexican society — in effect the advocates, bearers, beneficiaries and putative defenders of colonialism — adjust when deprived of the Indian population on which it depended? My suspicion is that New Spain’s Century of Depression seemed logically unassailable. Borah’s citation (p. 23) of Viceroy Velasco the Younger’s report to Philip II in 1595 was especially acute: “those who consume are many and the Indians who produce are few.” What more could be said?

If you have persisted this far, you may, perhaps, think otherwise or wonder at the peculiar way in which Borah shaped his investigation. Borah did not discuss the fate of the Indians, other than to note that they “seemed doomed to relentless extinction” (p. 28). And even so, life did not come to an end in Mexico in 1576, or 1626, or 1676. Emigration from Spain continued, a fact of which Borah was quite aware. Moreover, if Cook and Borah’s later research indicated that the Indian population reached its nadir around 1620 — Borah puts its size at 750,000 — it began to recover thereafter and probably continued to do so until the 1730s, when severe epidemic disease made is reappearance. A century of population growth in a preindustrial society, however slow, does not square easily with falling living standards. And other developments, particularly the growth of colonial textile production in the middle decades of the seventeenth century, give pause as well. If a “depression” had taken hold, and more people were producing more goods, what sort of a depression was it?

To the extent that there was much data available to answer the question — and by and large, there was not — Borah made some attempt to address the objections, postulating, for instance, the existence of not one, but two economies, one Spanish, the other Indian. But there was not much he could make of the distinction, although there was a hint as to where research might lead. A dramatic change in the land-labor ratio, with the Indian population falling by 90 percent, surely affected the marginal productivity of Indian labor.

However, as Borah pointed out (p. 21), it was inconceivable that rising productivity could have offset the sheer decline in the Indians’ numbers, but the upward drift in real wages of Indian workers in cloth manufactories toward the end of the sixteenth century suggests the horrible irony of a decimated Indian population now better able to sustain itself in the face of Spanish demands. Here was one reason for the subsequent recovery in the Indians’ numbers, along with greater resistance to European disease, more aggressive defense of the Indians’ interests by the Spanish Crown, and even changes in diet — the Spaniards brought chickens with them, which came to be a ubiquitous presence in rural villages. While Borah never said as much in New Spain’s Century of Depression, Borah and Sherburne Cook would go on to argue years later that the material conditions of a reconstituted Indian society may well have been higher than they were before the Conquest. So, in a sense, Borah’s argument about “depression” was potentially revolutionary even if, in some sense, it proved a trap to the unwary who did not think its implications through. The historical intuition was of a very high order, but it was exercised by a scholar who turned twenty in 1932; who hailed from Utica, Mississippi; and for whom the term “depression” was less a technical one than a shorthand for widespread impoverishment.

Another feature of New Spain’s Century of Depression should be attractive to economic historians. It concerns the nature of institutional change that occurred under the pressure of population decline in the sixteenth century. One is sometimes struck by the fact that much (but by no means, all) of the economic historiography that relies on institutions for explanation often does a poor job of explaining why a country has a given set of institutions to begin with. In Latin America, some mix of Divine Providence, Indians, bizarre political culture, difficult geography and dumb luck often seem to be the reasons for the existence of Mexican institutions. This, for all practical purposes, means that institutions are treated as exogenously given. Well, they aren’t, or at least, not always. While Borah, of course, never wrote in these terms, he carefully links the emergence of a Mexican regime of labor and land institutions to the shifting factor endowments with which the colonists had to work. For Borah, the ultimate significance of the dramatic decline of the Indian population was the emergence of the hacienda (which reflected increasingly abundant land) and debt peonage (which reflected increasingly scarce labor). Indeed, this was another central message of New Spain’s Century of Depression. The institutions that had given rise to the Mexican Revolution of 1910 — the hacienda and debt peonage — were a product of the seventeenth century and of the demographic disaster that had destroyed the Indians. This was a remarkably clear statement of what had long been the liberal view of the causes of the Mexican Revolution. Anyone who doubts its durability need do little more than read Alan Knight’s monumental history of the Revolution (The Mexican Revolution, 1986), which largely restates the old verities.

For an historian from Mississippi, an account of “debt peonage” as the defining characteristic of rural labor may not have been untoward. But what exactly one means by “debt peonage” is another matter. Borah’s position was a moderate one. This was not slavery, open or disguised (the enslavement of Indians was forbidden under most circumstances), but an Indian peon who owed a landlord, or, indeed, any employer money was legally required to work for that employer (and for him or her alone) until the debt was discharged. The notion that debt created a form of chattel slavery in rural Mexico does not seem to have entered the vocabulary until well into the regime of President Porfirio D?az (1876-1880, 1884-1910) and provided one explanation for the Revolution in a place like Yucat?n. For a time, colonial historians went to another extreme, intent on showing the agency of free peasants as makers of their own world. They forgot that seventeenth-century Mexico was an unlikely venue for the emergence of a smoothly functioning labor market in which buyers and sellers of labor had no recourse to force or fraud. Indeed, conquest is precisely about force and fraud, depriving the conquered of their possessions, and making them do things they otherwise would never do.

A more fruitful way of viewing the phenomenon of debt peonage — or simply workers’ indebtedness, for debt did not invariably impede their mobility — is to understand how it allowed employers to determine the rate of discount at which workers in a shifting, unstable, and terribly uncertain world valued future income. There is no point in beating around the bush. Life expectancy at birth for a Mexican in the colonial period was about twenty years, and in view of the catastrophic changes that had visited the Indian world since 1519, we can only conclude that Hobbes was right, and that Mexicans knew it. Their lives were short enough, and nasty and brutish as well. In a world in which only God (and whose God was up for grabs too) knew what the future would bring, it made sense for ordinary people to get as much as they could up front, which, after all, is all the “debt” part of debt peonage meant. This was just an extreme form of live for today, for tomorrow, literally, who knew? Workers bargained for better advances and often sought to enlarge them and employers understood this. The wide variance of debts reported by farms and factories for which we have records shows that their owners struck quite different bargains with different workers, a form of price discrimination that allowed them to “pay” no more than they had to, certainly less than raising wages to market-clearing levels. In fact, in the disorganized and fluid circumstances of the late sixteenth and early seventeenth centuries, when Indian villages were forming and reforming under the pressure of Castillian administration, it would have been impossible to gauge the overall willingness of Indians to leave their communities to work for wages, or even the willingness of their communities to allow individuals to leave, a point to which Borah was quite sensitive (pp. 41-42).

Besides, the point of indebtedness was not necessarily to reduce mobility. The Spaniards had other ways of doing so, which is another aspect of the system of land tenure they devised. As Evsey Domar once wrote, it is impossible to have free labor, free land and a nonworking landlord class simultaneously. One of the three must disappear. In Mexico, the Church prevailed in the 1540s in the struggle against the frank coercion of Indian labor. For most purposes, the labor of enslaved Africans was simply too expensive, even though there was a sizeable black population in seventeenth?century Mexico. No, the Spaniards made another choice, to deprive the Indians of access to free land, for free land they very well may have had. The dramatic decline in the Indian population left vast expanses of Central Mexico essentially empty, so what was to prevent the Indians from moving on to the land as a subsistence peasantry, to the lasting dismay of the Spaniards? The answer is that the Spaniards consciously set about driving the Indians into villages over which they could exercise some level of control, as Bernardo Garc?a Mart?nez demonstrated in Los pueblos de la Sierra (1987). At the same time, they sanctioned land?grabbing by the settlers, usually in amounts far in excess of anything the settlers could reasonably cultivate. At a stroke, the Spaniards accomplished two things. First, they shifted to a system of agriculture that reflected the abundance of land, a regime vastly different from the preconquest one based on the intensive use of labor, of which the famous raised?ridged fields (chinampas) of the Valley of Mexico were but one example. Second, they regularized the settlers’ land titles at the beginning of the seventeenth century, effectively transferring much land to Spanish control, whether or not it was cultivated. The hacienda thus circumscribed the ability of the Indian communities to survive independently of the Spanish economy, and in so doing, obviated the need for a draconian regime of forced labor, at least in Mexico.

This dramatic transition, from an economy based on intensive agriculture and the exploitation of a dense indigenous population, to one that relied on extensive agriculture and scarce Indian labor could not be accomplished rapidly. Moreover, the shift from an economy with relatively high levels of personal wealth in the form of Indians held in encomienda to a poorer one with fewer Indians and no encomiendas reduced New Spain’s capacity to import. It was now necessary to produce at home many goods that were, in the early years of the colony, imported through Spain. A reduction in consumption and a reorientation of expenditure toward investment was required to accommodate such a change. Borah, for instance, noted that the construction of churches tended to slow dramatically in the 1570s (p. 31), attributing this primarily to a redeployment of scarcer labor. (The demand for churches sadly fell as well, for there were far fewer souls to fill them.) For Borah, presumably, all this was a depression. To a later generation of historians, however, notably the British school headed by John Lynch, Borah’s “depression” was more a case of deferred consumption, the redirection of productive effort toward mining, manufacturing and farming that a colony living on its own required. None of this could have come easily or cheaply — the mining and irrigation works, the granaries, fences, sugar mills, ranches and textile manufactories absorbed resources. Hence, for Lynch and his followers, the apparent stagnation of the Mexican economy in the seventeenth century was just that, an apparent stagnation that marked the reorientation underway, one that would result in the visible renewal of economic growth under the Bourbon monarchs of the eighteenth century. It was not so much that Borah was wrong about what he had seen, but that he had, instead, seen wrongly.

Viewed fifty years after its publication, New Spain’s Century of Depression reads much like the pioneering work it was, full of insight, largely intuitive, sometimes wrong in detail and premature in judgment, but, all the same, arresting and audacious. It was, above all, a great work of history, for it sought to explain the present through the past, and to explain in simple but persuasive terms how what was distinctively Mexican, the play of institutions, political economy and an emerging social structure, came together out of the shock of the Conquest in the sixteenth and seventeenth centuries. If there is anything disappointing about New Spain’s Century of Depression, it is that the response to it has been admiration or assent from most students of Latin American history, but few studies in which appropriately trained scholars have undertaken the work necessary to establish Borah’s hypothesis fully, or to revise and extend it in ways consistent with contemporary population studies. That is the problem with writing a classic about an obscure century in a backward country: it is hard to get people to notice. Those of us who spend our time studying the history of Mexico know full well how important Borah’s elegant “hypothesis” was. It is time for mainstream economic historians, and, one hopes, their students, to develop an interest in replying to Woodrow Borah’s pioneering work as well.

Richard Salvucci teaches economics at Trinity University in San Antonio, Texas. He was a colleague of Woodrow Borah’s at the University of California, Berkeley, from 1980 through 1989. He works on the economic and financial history of Mexico between 1823 and 1884.

?

Published by EH.NET (July 2001)

Joel Best, Controlling Vice: Regulating Brothel Prostitution in St. Paul,

1865-1883. Series Eds. David R. Johnson and Jeffrey S. Adler, History of

Crime and Juvenile Justice Series. Columbus: Ohio State University Press,

1998. 175 pp. Tables, bibliographic references, and index. Cloth, ISBN

0-8142-0807-X; Paper, ISBN 0-8142-5007-6.

Reviewed for EH.NET and H-BUSINESS by Robin L.E. Hemenway, Program in American

Studies, University of Minnesota.

Soiled Doves and “Practical Men”: The Regulation of Deviance in a

Midwestern Town

In 1999, Minnesota Governor Jesse “The Body” Ventura, known for his candor

about a wide range of issues, aroused public ridicule when he suggested (among

other things) that prostitution should be legalized. “Prohibiting something

doesn’t make it go away,” Ventura claimed, in an interview with Playboy

magazine. “Prostitution is criminal, and bad things happen because it’s run

illegally by dirtbags who are criminals. If it’s legal, then the girls could

have health checks, unions, benefits, anything any other worker gets, and it

would be far better.”

Joel Best’s Controlling Vice, a “historical and sociological study” (p.

xi) of prostitution in St. Paul, Minnesota on the eve of the Progressive Era,

suggests that such pragmatic attitudes not only have historical roots in

Minnesota, but have hardly been uncommon in the United States. Best tells

the story of the informal regulation strategy that characterized the official

stance toward brothel prostitution in St. Paul from 1865-1883. During those

years, madams and their prostitutes were arrested, charged, fined and then

released to resume their activities, with the implicit understanding that the

process would be repeated on a monthly basis. This open regulation of

brothel prostitution ensured a certain degree of stability for prostitutes and

their customers, creating a “stable marketplace for vice” (p. 34). As long as

brothel madams and their prostitutes paid their monthly fines and sought to

keep drunkenness, violence, theft and other disorderly behavior to a minimum,

the police left them alone. Prostitutes who did not adhere to these

guidelines were subject to harsher sanctions. Those who behaved themselves,

however, could ostensibly remain in operation for several years.

As Best shows, St. Paul’s method of controlling prostitution provides an

intriguing opportunity for the historian, or in this case, the

historically-oriented sociologist. The public nature of the strategy (police

officers, public officials, and the press openly acknowledged that regulation,

rather than prohibition, was their aim) made St. Paul prostitution in these

years relatively visible. Best’s extensive survey of local records, arrest

ledgers, prostitute registrations, extensive local newspaper accounts, court

documents, jury lists, and the records of homes for “fallen women” allows him

to trace the relationship between prostitutes, police, and the public, and to

explore the lives of the prostitutes themselves. Arrest ledgers and

prostitution registration lists, in particular, provide a wealth of details

about the role played by brothels in the St. Paul community. Moreover,

publicly acknowledged regulation ensured that prostitutes themselves felt

little compunction about speaking to the press or calling in the authorities

when confronted with unruly or dishonest customers.

Their visibility in the public record allows Best to devote considerable

attention to the lives of the madams and prostitutes themselves.He argues that

the relative stability of this “illicit marketplace” in St. Paul allows

historians a unique opportunity to view prostitution as a profession, complete

with opportunities for advancement, geographic mobility, economic success, and

ultimately, retirement. He explores the factors leading up to the women’s

selection of prostitution as a profession, their lives within the brothels,

their relationships with each other, with their madams, with customers and

with the police, and their lives after prostitution.

Best places his study in the larger context of similar informal regulation

schemes in place across the country. As he points out, studies of

prostitution and vice control have tended to focus on large or frontier cities

and towns, ignoring more “typical,” relatively stable communities such as St.

Paul. In the late nineteenth century, Best argues, the relative stability of

these communities made the control of vice more paramount, placing more

pressure on social control agents to keep deviant behaviors such as

prostitution under wraps. Officials faced with the mandate to maintain order

found that regulation, rather than straightforward prohibition, better suited

their purposes. By the beginning of the Twentieth century, however, regulation

strategies had lost ground to prohibition as Progressive reformers succeeded

in tightening restrictions against prostitution and other vices. New concerns

about urban poverty and crime, political reform, and newly strengthened moral

reform campaigns led to the decline in regulation systems across the United

States.

Best devotes considerable energy to situating himself in the historiography of

the sociology of deviance and social control. He intends for his work to

respond to gaps in both the history of prostitution and the sociology of

deviance and social control. His main beef is with sociological studies that,

he claims, tend to oversimplify the motivations of social control agents,

assuming “that social control agents always adopt a strategy of prohibition”

(p. 10) rather than regulation. Such an approach, he argues, “distorts” the

goals and practices of social control agents; informal regulation is

interpreted as a failed prohibition effort or, worse, the manifestation of a

corrupt system. Best suggests that examining regulation systems allows

historians and sociologists to see how the twin aims of social control agents,

controlling crime and maintaining public order, can intersect in important

ways. Attention to such alternative strategies, Best claims, provides a more

nuanced understanding of deviance and social control.

Best also seeks to engage several of the debates about the gender dynamics of

prostitution, regulation, and social control. He situates himself in the

gender debate early on and periodically throughout the book, both in his

initial, tantalizing claim that “Studying gender requires examining men as

well as women” (p. viii) and in his challenge of feminist interpretations of

prostitution. Best succeeds, in part, in demonstrating the complexity of the

relationships between male social control agents and female prostitutes, and

between prostitutes themselves (he rightly points out, for example, that

feminist interpretations of prostitution should not overstate the degree of

female solidarity present among prostitutes; on the other hand he tends to

oversimplify the arguments of the aforesaid feminist studies). Scholars

interested in examinations of crime and gender may nonetheless find his

analysis a little too pat. He seems unwilling to commit to a full-on

examination of the gender dynamics of not only the St. Paul regulation scheme,

but of the interplay of vice, morality, and reform in general; nor does he

fully engage the feminist analyses he is implicitly critiquing. The lack of

more complicated attention to the gendered undertones of vice and reform

undermines his discussion in several areas, such as his analysis of the

“double-standard” inherent in St. Paul’s prosecution of female prostitutes but

not of male gamblers, andhis examination of why de facto regulation schemes

were ultimately overpowered by prohibitionist policies and practices across

the United States by 1920. Though he alludes to the increased political

success of moral reform movements, he neglects a more thorough discussion of

the increased political power of women in effecting reforms in vice arenas —

such as prostitution — considered to morally infringe upon the domestic

sphere.

A second aspect of Best’s study that may be frustrating, particularly for

historians, is the limited nature of his study. His time frame is narrow,

covering only an 18 year period, and he abruptly ends his examination in 1883,

claiming succinctly — and unsatisfactorily — that a two-year reform in the

system “created a gap in the court records, making it nearly impossible to

trace individual madams and prostitutes” (p. 97). Also, although he briefly

discusses the general social and political changes that contributed to the

decline of informal regulation, a discussion of the changing political and

social context in St. Paul and in the Midwest into the early 1900s could have

enriched his analysis. Best seems too ready to paint St. Paul as a “typical”

example of informal regulation, neglecting a more thorough examination of why

St. Paul may in fact have been unique, or at least unusual. Those familiar

with St. Paul’s similarly practical stance toward gangsters in the early

1900s, for example, may wonder if something about that city’s political and

social climate made its officials more receptive to such strategies.

One of the most important contributions here lies in Best’s insistence that

the relationship between morality and deviance has been under-examined in

analyses of deviance and social control. He makes a convincing case for

reexploring the role played by morality in the debates over illicit practices

such as prostitution. He suggests that the ultimate failure of informal

regulation strategies such as that used in St. Paul can be found in

regulators’ inability to make a “convincing moral rationale” (p. 137) for such

practices. Best positions his morality argument as a counterpoint to

“interests” interpretations that see deviance and social control as defined by

groups who gain economically or politically by doing so. However, some

readers may feel that he tends to downplay the ways in which particular groups

have investments in particular definitions of what constitutes moral or

respectable behavior. Put another way, he stops short of exploring the more

complex ways in which morality and “deviance” intersect. While historians and

sociologists will find Best’s examination of the relationship between

prostitutes, police, and “respectable” citizens both fascinating and useful

for thinking about social control and the social construction of

respectability, they may be frustrated by his unwillingness to engage the

larger questions about power that his discussion inevitably raises.

Despite these shortcomings, Best’s study is both readable and rigorous, and

the interdisciplinary nature of the work should make it accessible to scholars

from a wide range of disciplines: sociology, women’s history, business

history, criminology, political history and regional history. Readers

unfamiliar with the literature on deviance will especially appreciate his

comprehensive and clear (though at times bit repetitive) explication of the

historiography of deviance and social control. He succeeds in demonstrating

why such a case study of regulation is a necessary addition to the field.

Best’s study is especially bolstered by its investigation of the complex

realities of the lives of St. Paul’s prostitutes and their role in the larger

community. His social historical bent is enriched by his sociological

attention to detail, and he demonstrates a remarkable sensitivity for teasing

a complex portrait of madams and prostitutes, and of brothel life in general,

from his data. He is also able, with limited data, to develop an intriguing

yet carefully reasoned argument about the general public’s often ambiguous

stance toward vice and social control. All in all, Controlling Vice

provides a fascinating and detailed account of the complex intersections of

deviance and respectability in an “average” nineteenth-century city.

Robin Hemenway is on the doctoral program at the University of Minnesota. Her

main research interests are the Progressive Era and the social and cultural

history of the family. She has already published a chapter on this subject,

The Family in America, ABC-CLIO Press, and has further publications

pending.

Jon Lauck, American Agriculture and the Problem of Monopoly: The Political Economy of Grain Belt Farming, 1953-1980. Lincoln: University of Nebraska Press, 2000. xiv + 259 pp. $45 (cloth), ISBN: 0-8032-29322-1.

?

Reviewed for EH.NET by Bruce Gardner, Department of Agricultural and Resource Economics, University of Maryland, College Park.

Jon Lauck has produced an unusually multifaceted book addressed to concerns “that monopolistic corporations manipulated farm prices and would ultimately take over agricultural production” (p. 161), and related issues in market power. The focus is on post-World War II U.S. agriculture in the Midwest, up to about 1980, but the author has much to say about earlier history and about currently debated issues involving market power and farmers. He reviews trends in farmers’ worries about monopoly power, the actual situation with respect to such power, farmers’ attempts to organize countervailing power, and political responses to farmers’ complaints.

The book’s predominant tenor is of the kind of writing one finds in narrative history, heavy on wide-ranging quotations of data and opinion, interspersed with anecdotes that when successful provide a vivid context in which the reader may more readily see why the data and opinion matter — a mixed approach reflecting the author’s calling as editor-in-chief of the Minnesota Journal of Global Trade together with his varied and recent academic background. Much relevant work in economics, law, and politics is discussed. It is also notable, and refreshing, that Lauck’s treatment avoids tendentiousness and is scrupulously fair to proponents of a variety of opposing views in this hotbed of contention.

Six chapters offer discussions of specific problem areas: corporate farming, grain trading, processing of grain and meats, and farmer cooperatives and bargaining associations. The episodic approach, with less overarching organization of the material than would be ideal, stems from the origin of most of the chapters as previously published journal articles. The structure of each chapter is roughly: farmers’ concern with and actions taken in response to an issue of market power facing them is documented; politicians’ rhetorical and legislative reactions are described; and where available economists’ analyses and policy recommendations are reviewed. Introductory and two concluding unnumbered chapters attempt an overall assessment of the meaning, importance, and substantive correctness of various positions taken by a wide variety of proponents.

Lauck is patient with farmers’ expressions of pain and protest, of economists’ claims of monopoly power related to market structure, and is critical but fair in discussing “Chicago School” (the term he uses) claims that a small number of competitors is not sufficient to warrant antitrust action. The detailed chapters are in sympathy with farmers’ concerns but in substance mostly deflationary of their economic importance, as is the “Conclusion” chapter, which wanders off into interesting but diffuse ruminations on rural culture that I took as matters to talk about in solidarity with farmers after dismissing the substance of their populist agenda.

It is therefore somewhat surprising when the closing “Epilogue” ends by inviting the Courts to smite concentrated agribusiness more firmly. Lauck endorses “post-Chicago” analysis that “allows for greater consideration of the particulars in antitrust cases,” (p. 181) such as information availability and the sophistication of firms; and he appears to believe that since legislation has promoted the enhancement of farmers’ market power, the Courts should too. His general even-handedness has deserted him here. The facts and literature he cites do not make the case that any significant part of farmers’ economic problems is attributable to the market power of firms that buy from them. One could as well use Lauck’s text to argue that, in antitrust cases against agribusiness, the unreadiness of courts to take into account politicians’ verdicts as expressed in farm legislation is a virtue of an independent judiciary, not a vice.

Because the book ends most of its detailed assessments around 1980, it misses a recent diminution in concerns about the market power of agribusiness. A telling contrast is between the considered opinions of people speaking for farmers from the 1920s through the 1950s and today. When the post-World War I price collapse of 1920 triggered the first sustained farm crisis of the century, a commission was convened that placed lack of farmers’ bargaining power near the top of the list of causes, leading to antitrust recommendations and to the Capper-Volstead Act and other legislation that Lauck addresses. Lauck cites evidence of the continued intensity of these concerns in the 1950s and 1960s. Yet during price collapse of 1998-2000, antitrust issues were practically invisible in the policy debate. The Commission on 21st Century Production Agriculture, created by the FAIR Act of 1996, issued a final report in 2001 which almost completely ignored agribusiness power as a problem needing remedy. Even the Clinton Administration’s Small Farm Commission, which included more representatives of traditional opposition to agribusiness, gave no salience to antitrust.

It would be wrong to conclude this review on a carping note, for Jon Lauck has produced a most valuable account of key issues in the market power of agribusiness in the 1950-1980 period. The specifics he lays out of farmers’ complaints and actions, historians’ assessments, politicians’ effusions, and economists’ mix of assertion and analysis is both informative and entertaining to read. And his general good sense and effort to be fair to all sides make this a book one can read and learn from without unduly raising one’s blood pressure, whatever one’s prior views.

Bruce Gardner is Distinguished University Professor, Department of Agricultural and Resource Economics University of Maryland, College Park. He is author of American Agriculture in the 20th Century: How It Flourished and What It Cost, forthcoming from Harvard University Press, 2002.

?

Published by EH.NET (May 2001)

Richard Whatmore, Republicanism and the French Revolution: An Intellectual

History of Jean-Baptiste Say’s Political Economy. Oxford: Oxford

University Press, 2000. xiv + 248 pp.$70 (cloth), ISBN: 0-19-924115-5.

Reviewed for EH.NET by William Baumol, Department of Economics, New York

University.

The central objective of this book is to describe, both in light of the

writings of contemporaries and from internal evidence in Jean-Baptiste Say’s

own writings, the underlying orientation of that author — the political

philosophy by which he was guided. The author, a lecturer at the University of

Sussex, is extraordinarily well informed about the pertinent literature of the

time, and perhaps tells us more about this material than some readers may want

to know. But, on the basis of those writings, he offers us insights into Say’s

predilections and, in particular, his views on political and social issues,

that are likely to have escaped even careful readers of Say’s best-known

writings. In particular, the author emphasizes that Say was not a liberal in

the tradition of the British classical economists, nor a full-fledged follower

of the path of Adam Smith (though he points out in the very first page of

Chapter 1 that Jean-Baptiste’s own son, Horace Say, asserted that, contrary to

Whatmore, such was indeed his father’s orientation). Here, we are told, Say’s

position also did not favor full democracy or even the constitutional royalist

regime of the United Kingdom at the beginning of the nineteenth century.

Instead, Say’s position was consistent and avid “republicanism.”

The term, however, is used in a sense very different from ours. The author

describes eighteenth century “republican political economy” in the following

passage: Republican political economy demanded the establishment and

maintenance of a moderate level of wealth for all citizens. Ranks had to be

abolished to prevent aristocracy or inequality from recurring. The sovereignty

of the [propertied] people was to be coupled with the decentralization of

political and administrative power to the citizens of a locality. Despite

this, the republic was to remain a unified state. Its laws would embody the

public good and its patriotic citizenry would be dedicated to defending and

maintaining the state. The modern republic was a commercial society in the

sense that wealth derived from trade and industry was to be encouraged as an

antidote to the poverty of the state and the citizenry. Commercialization was

to be welcomed as long as it remained compatible with republican morality and

an egalitarian social structure. A republic was therefore not solely to be

created by making laws that prevented domination and abolished monarchy, as

many eighteenth-century British radicals supposed. Far more important was the

creation of a republican political culture based on a blend of commercial with

traditionally conceived virtuous manners. Without cultural transformation any

projected political innovations would be doomed to failure. (p. 31)

Implicit in this passage are the other goals that the author claims to have

been Say’s — severely reduced inequality with moderate wealth for all,

dedication to virtue and good manners on the part of the population, and

education of the public as well as the members of government to the need for

and benefits of such behavior, as well as the requirements of a

well-functioning economy that is a necessary condition for achievement of

these goals.

All of this is entirely plausible, though the author provides us with

remarkably little in Say’s writings, at least after he had attained maturity,

that makes these points explicitly. But Whatmore goes further than this. He

implies that this is what Say’s Trait? and his other writings in

economics are, essentially, all about. Even Say’s law is not to be properly

understood without this information: “In consequence, it ismisleading to group

him [Say] with exponents of classical political economy in Britain, as many

historians of economic thought continue to do. Say’s conception of utility

must be seen as a product of a French discussion about public virtue rather

than a partially-formed building block of a new science. Say’s ‘Law’, by

contrast with the use made of it by British Ricardians, was intended to combat

fears of ‘general gluts’ by the introduction of specific ranks and manners”

(p. 218).

In taking this position, it seems clear to me, the author goes too far.

Rereading of the Trait? surely indicates that the author intended the

book to be a work of political economy in the standard sense, and one

completely divorced from political connotations. Indeed, Say emphasizes this

in the first page of his introduction: “Since the time of Adam Smith, it

appears to me, these two very distinct inquiries have been uniformly

separated, the term political economy being now confined to the science

which treats of wealth, and that of politics, to designate the

relations existing between a government and its people, and the relations of

different states to each other” ( A Treatise of Political Economy,

American translation of the fourth edition of the Trait?, Philadelphia,

1834, pp. xv-xvi).

This is not to deny that Whatmore’s observations are illuminating. They do

help us to understand Say as author, just as Jacob Viner’s emphasis (The

Role of Providence in the Social Order, Princeton: Princeton University

Press, 1972, p. 81) of the religious connotation of Adam Smith’s invisible

hand passage (“invisible hand” being a common eighteenth-century reference to

the hand of Providence) helps us to understand what Smith meant in this

passage. But a claim that The Wealth of Nations is therefore to be

interpreted as predominantly a religious tract would surely be misleading. And

it seems to me equally misleading to interpret the Trait? as a manual

of republicanism rather than, primarily, as a work of political economy, as

the title of the book tells us, and as Say tells us the term was

conventionally interpreted at the time.

William J. Baumol, Professor of Economics, New York University. is currently

working on a book investigating the explanation of the superior growth record

of free-market economies and, most recently, is co-author with Ralph Gomory of

Global Trade and Conflicting National Interests, MIT Press, 2001.

Published by EH.NET (January 2002)

Geoffrey Channon, Railways in Britain and the United States, 1830-1940.

Aldershot: Ashgate Publishing, 2001. xi + 341 pp. $79.95 (cloth), ISBN:

1-84014-253-7.

Reviewed for EH.NET by Albert J. Churella, Social and International Studies

Program, Southern Polytechnic State University.

The title listed above provides a hint of the ambitious geographic and

chronological scope of this work. The author’s intent is not to provide a

thorough or comprehensive treatment of his subject but rather to explore

selected topics in “railway promotion and its associated finance; the

recruitment of railway directors; investment appraisal by a mature company;

management structures; inter-railway relationships; locomotive production; and

the powers of, and relationships between, different corporate ‘stakeholders,’

including shareholders, directors, managers, and labour” (p. 296) in barely

more than three hundred pages. At its worst, this multifaceted approach to so

many diverse subjects is fragmented to the point of schizophrenia; at its

best, however, the book offers important insights into British and, less

compellingly, American railway practice over the span of more than a century.

In the first two chapters, the author sets up Alfred D. Chandler, Jr., as a

kind of straw man, in particular preparing the reader for attacks on the

id?e fixe of the primacy of the unrestrained visible hand and the

syllogism that American managerial capitalism always trumped British familial

capitalism. This somewhat oversimplified distillation of the Chandlerian

synthesis seems unnecessary, since business and economic historians (including

several quoted by the author) have thoroughly explored the rich complexity of

American and British business enterprise. This minor criticism aside, the

author does provide an excellent overview of the seminal literature relating

to railways on both sides of the Atlantic.

The heart of the book begins with a series of case studies on selected topics

in British and American railway practice. Channon examines the role of Bristol

merchants in financing the Great Western Railway in the 1830s, indicating that

traditional financial methods, based on reputation and trust, provided

sufficient capital for this enterprise of unprecedented scale. When a

different railway, the Midland, constructed a new line to London in the 1860s,

this decision was based neither on traditional business models of profit

maximization nor on the systemized chain of command represented by

organizational charts. Instead, the general manager, anxious to increase his

power and status within the organization and within the larger realm of

British business, persuaded a small but influential group of directors to

authorize construction. Personal goals and corporate culture thus had a

significant impact on corporate policy.

Channon next provides a brief discussion of largely unsuccessful pooling

arrangements to regulate traffic and revenues between England and Scotland in

the mid-to-late 1800s. He returns to the Great Western in the following

chapter, showing how the failure of multi-company cooperative agreements led

to state-mandated consolidation in the form of the 1921 Railways Act. Many of

the companies grouped into the Great Western system had been, in effect,

subsidiaries of that company before 1921; this, combined with managerial

intransigence (in the form of an inflexible corporate culture) and a depressed

coal market, severely limited gains in efficiency stemming from consolidation.

Ultimately, the Transport Ministry, like the American Interstate Commerce

Commission, did not appreciate the extent to which railroads constituted only

one facet of a transportation industry that was rapidly becoming more

competitive.

The next three chapters, perhaps the most compelling of the book, provide a

group biography of the directors of the Great Western during the nineteenth

century. The author’s assertion that these directors “… shared the same

(elite) social, educational and cultural backgrounds and assumptions” is

hardly surprising, nor will the reader be shocked to learn that they were “…

also men who were influential in a political sense …” (pp. 301-02). What is

fascinating, however, is the depiction of the acculturation process that

ensued when members of Britain’s landed aristocracy first viewed railway

directorships as a socially acceptable form of contact with the hurly burly

world of commerce and industry, then used their railroad experience and

connections to infiltrate corporate boardrooms in other industries.

There follows a quantum leap both in geography and subject matter in two

chapters depicting labor relations on the Pennsylvania Railroad during the

late nineteenth and early twentieth centuries. Channon argues that the

“Standard Railroad of the World” had shown little interest in standardizing

labor policies before the First World War, preferring to let local supervisors

establish hiring guidelines, wage rates, and disciplinary procedures on an ad

hoc basis in response to local conditions. The growing strength of organized

labor, not the visible hand of management, finally forced the Pennsylvania to

adopt standardized and centralized labor policies.

In the only truly comparative chapter in the book, Channon analyzes the

divergent paths of the American and British locomotive industries. This

divergence resulted from conditions unique to each country, and indicated that

there was no one best practice for locomotive manufacture. Still, the British

tradition of railroad-built locomotives more nearly fit the Chandlerian model

of vertical integration than did the American practice of buying locomotives

from outside suppliers.

The scope of Railways in Britain and the United States is commendably

wide, yet Channon’s reach exceeds his grasp. He simply attempts to cover too

much territory, introducing compelling topics without being able to fully

follow through on their analysis. He provides several superbly researched

chapters on British railways, yet these chapters fall well short of a

comprehensive treatment of a particular railway or its managerial structure as

it changed over time. His discussion of American labor practices lacks any

basis of comparison in the British experience. Channon correctly points out

that the 1921 Railways Act in Britain represented far more comprehensive state

regulation of private enterprise than did the 1920 Transportation Act in the

United States, yet does not provide an American regulatory counterpoint to the

British experience. At the risk of oversimplification, much of the book seems

to be an attempt, if not to refute Chandler, at least to indicate that the

railway industry in the United States is far more complex and less

managerially driven than Chandler alleged, and that British enterprise is more

efficient, more thoroughly integrated, and less dominated by family

connections than Chandler’s Scale and Scope might indicate. These

points are well taken, but they have been explored more thoroughly in other,

better-integrated studies.

These criticisms by no means destroy the value of the book, however. As

Channon points out, Railways in Britain and the United States is a

collection of essays, not a monograph or a synthesis. The somewhat curious

selection of topics notwithstanding, many of these essays raise fascinating

issues and should stimulate further discussion and research. The

breathtakingly high cost of the book begs the question of whether the author

could have found a more affordable venue for some of the more

thought-provoking essays — in journal articles, for example — but every

serious student of British or American railroad history, and anyone who

remains convinced that the Chandlerian synthesis explains absolutely

everything, should order this book (through interlibrary loan) and appreciate

its insights into the messy and unpredictable world of railroad transportation

in Britain and the United States.

Albert J. Churella is an assistant professor in the Social and International

Studies Program at Southern Polytechnic State University. He is the author of

From Steam to Diesel: Managerial Customs and Organizational Capabilities in

the Twentieth-Century American Locomotive Industry (Princeton: Princeton

University Press, 1998).

Published by EH.NET (December 2000)

?

John Majewski, A House Dividing: Economic Development in Pennsylvania and Virginia, 1800-1860. New York: Cambridge University Press, 2000. xx + 214 pp. $49.95 (cloth), ISBN: 0-521-59023-x.

Reviewed for EH.NET by Thomas Weiss, Department of Economics, University of Kansas

John Majewski (University of California-Santa Barbara) has produced an interesting comparative history in an attempt to show the impact of slavery on long-term economic development. He argues that Pennsylvania and Virginia, as well as two counties in each state — Cumberland in Pennsylvania and Albermarle in Virginia — were comparable in many ways, except one. Slavery was virtually absent in Pennsylvania and Cumberland county, but comprised a substantial share of the population and labor force in Virginia and Albermarle. The consequence was that slavery held back economic development in Virginia and Albermarle county, so that by the time of the Civil War there was a substantial gap between their economies and those of their northern counterparts. Or as the book’s jacket puts it “The chains of slavery… also shackled the invisible hand of the market.”

Majewski argues that the states and counties he has chosen hold constant the effects of geography, climate and timing of settlement and enable him to isolate the economic impact of slavery. This enables him to go beyond the previous, well known national and international comparisons done by Fogel and Engerman, Wright and others. Moreover, by focusing in detail on these few places he can examine slavery’s impact over a much longer time span.

One of his major contributions is to show that residents of both the northern and southern locales were not averse to economic progress or the extension of the market economy. Virginians and Pennsylvanians were more alike than is captured in the physical similarities of geography and climate. He uses archival materials, such as stockholder lists and corporate records, to show that the residents in both states and in both counties were interested in economic progress and appear to have been willing to invest in ‘developmental corporations’, such as the James River and Kanawha Company in Virginia or the Harrisburg, Carlisle and Chambersburg Turnpike in Pennsylvania in order to spur the growth of their pertinent markets. By linking the stockholders to census and tax records he shows that investment in these corporations was made primarily by local residents. (In an appendix he describes these samples and the methods and problems of linking observations).

There were differences to be sure — Albemarle’s investors were predominantly a small number of slave holders; Cumberland’s investors were more numerous, investment was more equally distributed, investors were more diverse occupationally, and Cumberland’s developmental projects were started a decade or more before Albemarle’s — but there was an essential similarity, namely the use of developmental corporations to mobilize local capital to finance unprofitable improvements. In addition, in both places, the local populace made investments even though the transportation corporations did not do well financially. Rather, they invested in the hopes of raising their land values and improving access to markets. This behavior, he argues, reveals that economic development was not restricted to places and societies that stressed individualism and competition; community values and ties were compatible with economicdevelopment — indeed, they may have been essential in the cases he examines.

Despite the similarities and apparently equal desire to experience economic development, Virginia and Albemarle county could not keep up with Pennsylvania and Cumberland county. The chain of causation is at once both a familiar story and a different one. The old part is that because of slavery, Virginia suffered from insufficient market demand. In the older argument, associated, say, with Genovese, this insufficient demand prevented the growth of industry because southern firms would not be able to take advantage of scale economies. Majewski’s twist is to stress that this insufficient demand meant an inability to develop major urban centers that had advantages of agglomeration. Those advantages manifested themselves in various ways in the labor and capital markets, as well as by contributing to a cultural system that encouraged technological advance, with the Franklin Institute being one such example. More specifically, without an urban center, Virginia did not have the concentration of capital or political influence to build the interregional transportation networks that made for Pennsylvania’s success.

Before reaching this conclusion we are treated to discussions about the developmental corporations and transportation projects that were tried in Albemarle and Cumberland counties. These were intriguing vehicles that were essentially similar in both counties in that their purpose was to mobilize local capital to finance unprofitable improvements. Because the investment returns would come about indirectly, primarily through an increase in land values, the majority of investors were residents in the county or state in which the project would be undertaken, and the closer one’s land to the project the greater the investment. Even still, there was the problem of the free rider, those who knew their land values would rise even if they did not invest in the project. This was circumvented by kinship ties, community spirit or boosterism, friendship and even honor.

Majewski shows clearly that these corporations were not profitable and did not pay much in the way of dividends. He claims the indirect benefits were large and substantial, but this is less well documented. For example, in the 1820-40 period he shows that property values in the towns of Charlottesville and Scottsville increased, but has no evidence about rural values. He says at one point that “rural property values generally stagnated from 1820 to 1840,” but later claims that “Developmental corporations to a lesser degree also raised rural land values” (p. 29). For Cumberland he allows that the “evidence about indirect benefits occurring for the period 1820-40 is inconclusive…” (p. 53). He can not cite land values, so he argues that they must have been beneficial because they were used. Even if land values rose, as they did between 1850 and 1860 in both Albermarle and Cumberland counties, we do not know how much was attributable to the developmental corporation’s project and how much to other things.

Majewski presents as well an enlightening account of the politics of market development (chapter 4). He points out that concerns about large or special corporations that reflected the republicanism of the time played out to some extent at the local level. And to some extent so too did national issues — such as those confronting the Bank of the United States — reverberate locally. But there were some seeming inconsistencies, perhaps especially as regards the chartering of banks within a state or county. Although banks or corporations represented the sort of political power republicans feared or distrusted, they also promoted development. So in both Albemarle and Cumberland counties the populace accepted pertinent corporations because they wanted development; but they kept a watchful eye. The long history of legal conflict between the James River and Kanawha Company and the Shadwell Mills demonstrates that local juries and state courts in Virginia “believed that even the cause of improvedtransportation failed to justify the uncompensated taking of private property” (p. 96).

In the end, it was private investment that seemed to make the difference in Pennsylvania. The state’s attempt at a canal system is a well-known failure, and may have retarded the development of a superior transportation system. The Mainline canal subsidized Philadelphia and Pittsburgh at the expense of the entire state. All of which raises doubts about the benefits of the developmental corporations, and whether Virginia’s even poorer performance in this regard mattered much. The Pennsylvania Railroad (PRR), on the other hand, appears to have been of great consequence, and voters rejected both state and local investment in this enterprise. This was the key trunk line between Philadelphia and Pittsburgh, which also linked those cities to larger rural markets. And it was the PRR that made some good business decisions — to build a railroad to compete with a canal near Pittsburgh and to buy the Mainline near Philadelphia — that made the system more efficient. The PRR appears to have persuaded the state legislature to pass certain rules that made the system more efficient as well — at least for transportation within Pennsylvania.

Why could such a private company arise in Pennsylvania and not in Virginia? Majewski’s argument is that this was because Philadelphia was located in the former, whereas the latter had no such concentration of population and thus no concentration of wealth that could have financed such a project. Philadelphia’s superiority over any city in Virginia reflected “the cumulative nature of urban development,” which had transpired over three periods: the colonial period when staple production shaped development; the early republic when rural markets were the key; and the antebellum period when agglomeration advantages favored Philadelphia and thus Pennsylvania. There is no doubt that by 1840 Philadelphia had advantages over any smaller Virginia city. (Majewski cites the populations for 1860, indicating that Philadelphia was nearly 14 times the size of Richmond, the largest city in Virginia — and the situation must have been very similar in 1840). The key issue then for Majewski’s thesis is what held back the growth of southern cities in the first two periods he delineated. He argues that in the colonial period the processing of tobacco discouraged the settlement of towns and cities in Virginia, whereas wheat and other grains required processing centers. Between 1800 and 1840, Philadelphia made the transition to a manufacturing city because it had access to the denser rural markets in Pennsylvania, whereas Virginia cities were restrained by the limited market imposed by slavery.

Majewski has certainly weaved together a plausible story. He has done a good job of tying together some statistical evidence with more traditional narrative in an engaging and generally convincing way. But his story may not be the only one, and his rests on two key matters. Were these locales essentially the same except for the presence of slavery in Virginia and Albermarle and its absence in Pennsylvania and Cumberland? And was Philadelphia’s early success tied to the rural hinterland, while urbanization in Virginia floundered because of the inadequate demand arising from the presence of slavery?

Even Majewski points out that his hinterland-agglomeration model has “limitations when applied to America as a whole” (p. 143). The presence of thick rural markets does not work well for New England, while New Orleans was a large city that appears not to have industrialized. He notes that Baltimore, located in a slave state, subsequently developed because it had access to a free-labor hinterland, but one can imagine that western Virginia served the same role in Virginia. He does admit that the Navigation Acts, as well London and Glasgow, shaped the developmental path of Virginia in ways that were not conducive to growth in the early national period. So, one wonders whether in the absence of those factors Virginia’s development would have been different even in the presence of slavery.

Were these counties and states comparable in all regards, except for slavery. Of course, one cannot expect that he could hold constant all other variables, but did they have as much in common as he claims. Early on he argues that Cumberland and Albermarle counties had both been settled rapidly in the late colonial period, had significant commercial links with the Atlantic world, and had benefited from rising prices of staple crops (wheat in Cumberland, tobacco in Albermarle). But as he notes later, and as becomes important to his thesis, Cumberland had the advantage of strategic proximity to Philadelphia and Baltimore. He might have pointed out as well that Cumberland’s population exceeded Albermarle’s from some early date. He does not present time series for both counties going back into the colonial period, but his evidence does show that Cumberland’s population of 24,000 in 1779 was twice the size of Albermarle’s a decade later. In other words, at some point in time before the early national period, Cumberland had advantages in population density. It would have been useful to have included a clear comparison of the population history, and so far as possible the economic history of the two counties and states.

Of course, some of those desired comparisons would not possible, but the notes and narrative suggest that more direct and compelling comparisons could have been made. Rather than have to look here and there for some pertinent statistic for one county to compare to a series presented in tabular form for the other county, I would have liked to have seen a more comprehensive and consistent presentation of the data on pertinent variables. For example, Majewski makes a tabular presentation about the increase in farm value per improved acre in Albermarle between 1850 and 1860 based on a careful study of a sample of farmers, but for Cumberland he gives only a summary statement, that U.S. census data show that farm values went up by 62 percent in the 1850s (p. 79). That increase for Cumberland was almost exactly equal to the increase shown in the table for Albermarle, but of course the latter was a sample statistic.

Despite these problems, the book is intriguing and provocative; so much so that I thought it worthwhile to look at some pertinent census-based information that was readily at hand. One bit of information strengthens Majewski’s case. The increase in farm value per improved acre that occurred between 1850 and 1860 for all farms in Albermarle county was only 53 percent; less than the sample statistic and noticeably less than the increase in Cumberland. But both counties are outliers. Cumberland showed one of the better performances in Pennsylvania; its increase of 62 percent was nearly twice the 33 percent increase for all non-urban counties in the state. Albermarle, on the other hand, was a relatively poor performer in that decade; its increase of 53 percent was below the 64 percent increase for all non-urban counties in Virginia. These calculations are not quite as comparable as desired because the counties that became West Virginia were excluded from the Virginia totals, whereas the more remote western counties in Pennsylvania were included in that state’s totals, but it does raise some question about the typicality of these two counties. Moreover those same data raise questions about the indirect benefits of the improvements in the transportation system.

My quick calculations revealed also that between 1850 and 1860 real agricultural output per rural person (valued in 1860 prices) increased much faster in Albermarle than in Cumberland (71 percent versus 34 percent) and faster in Virginia as a whole (again excluding West Virginia) than in Pennsylvania (27 versus 9 percent for non-urban counties). The average output in Cumberland and Pennsylvania was higher in both 1850 and 1860, but the gap was narrowing. In 1850 agricultural output per rural person in Cumberland county was $61 versus $44 in Albermarle; the latter amounting to only 72 percent of the former. In 1860, however, the figures were $81 in Cumberland versus $74 in Albermarle, a difference of only 10 percent. In other words, even though the rural market in Cumberland county was growing faster in the aggregate thanks to a much faster rate of population growth, a substantial portion of Virginia’s rural hinterland was not doing too badly.

This is not to suggest that the House was not Dividing, but it does raise some questions as to the impact of the developmental corporations and transportation improvements that were spawned by Philadelphia’s presence, and suggests there is yet a fuller story to be told. The industrious rural population in Pennsylvania was, of course, doing other things besides farming, and those activities were no doubt stimulated by the transportation improvements, but other factors must have played some role as well. There was some increase in urbanization there unlike in Albermarle, but one has to wonder why would that occur in the shadow of Philadelphia and Baltimore. As Majewski says, “urbanization and industrialization, despite decades of intense scholarly research, are still mysterious enough to undermine almost any generalized model” (p. 143). He has taken us a step further, but there remains more to learn about these two states and counties. More importantly, his book has set out an approach that many more comparative explorations could follow fruitfully.

Thomas Weiss is currently engaged in collaborative research on economic growth in the Lower South. An article written with Peter Mancall, “Was Economic Growth Likely in Colonial British North America?” was published in the Journal of Economic History, March 1999.

Lance E. Davis and Douglass C. North (with the assistance of Calla Smorodin), Institutional Change and American Economic Growth. Cambridge: Cambridge University Press, 1971. viii + 282 pp.

Review Essay by Cynthia Taft Morris, Department of Economics, Smith College and American University.

Davis and North Launch Neoclassical Institutional Theory

This book is an early major step in the evolution of the thinking of Douglass North and his collaborators on the “new” neoclassical theory of institutional change — the institutional arm of the new economic history that began to flourish in the 1960s. Among the many notable later steps are The Rise of the Western World (1973) with Robert Paul Thomas and “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice” with Barry Weingast (1989) — which ranks third in citations among articles ever published in the Journal of Economic History.

Lance Davis and Douglass North develop a theory of institutional change so familiar that it is easy to forget the theory was ever “new.” They lay out a model where the core logic of institutional change is neoclassical cost-benefit analysis and the motivating drive for institutional change is profit maximization. The goal of the authors’ “intellectual journey through American economic history [is] . . . to provide a description of the processes that have produced the present structure of economic institutions. That description, in turn, is the basis for a first (and very primitive) attempt at the formulation of a specified, relevant, and logical theory of the birth, growth, mutation, and, perhaps, death of these institutions. The book is a study of the sources of institutional change in American history. It is concerned with the relationship between economic organization and economic growth” (p. 4).

Chapter 1 presents the concepts and definitions (institutional and economic environments, institutional arrangement, institutional instruments, and institutional innovation). An institutional arrangement will be innovated if the expected net gains exceed the expected costs. Arrangements range from purely voluntary to totally government controlled and operated and seek to realize economies of scale, lowered transactions costs, internalization of external economies, reduction of risk, or redistribution of income (pp. 10-11).

Chapter 2 analyses the government’s role in redistribution. The authors’ purpose is to include the role of government in their theory of institutional change in spite of the unsatisfactory state of political theory. To exclude it would likely “yield a model of institutional change no more useful in the growth context than are the present models with their ceteris paribus assumptions about institutions” (pp.37-38). In their analysis, governments with effective coercive power will be the preferred vehicle for institutional innovations where governments are well developed but markets are not, where external benefits are large but property rights are dispersed, where benefits are substantial but indivisible, and where benefits are not increased and the goal is redistribution. The costs of using government to appropriate others’ wealth and income depends on the numbers and heterogeneity of the persons organized, the feasibility of excluding outsiders from benefiting, the complexity of political coalitions, the rules of the political game, and the character of electoral suffrage.

Chapter 3 specifies the dynamics of the model in the context of American history. The authors seek to predict both the institutional “level” of change and the time lag from first perception of profit opportunity to institutional innovation: New institutional arrangements will be innovated where profit or income opportunities appear that require institutional changes or where cost reductions can be achieved with new business forms or political moves redistributing income. Among many influences changing the benefits and costs of institutional innovations are changes in market size, technical change, changes in income expectations, organizational changes in closely related activities, cost reductions associated with government-financed information or reductions in risk, and political changes altering voting or property rights. All these except political changes have parallels in neoclassical theories of technical change. However, “to do no more than assert a relationship between income changes and arrangemental innovation is hardly a significant step; . . . it is our intention to offer a theory that helps predict (or explain) the emergence of these new or mutated arrangements. In particular, the theory predicts the level (individual, voluntary cooperative, or governmental) of the new institutional arrangement and the length of time that passes between the recognition of the potential profit and the emergence of the new arrangement” (p. 39).

The core of chapter 3 divides the causes of varying lags between the perception of an innovation and its successful emergence into four steps: perception and organization, invention, menu selection, and start-up time. (i) The time lag between perceived profit and the organization of a “primary action group” depends on how much profits there are and their certainty. (ii) Where no suitable options are immediately available, time is required for invention. (iii) Where options are available, time is required to search out and select the most profitable ones. (iv) The start-up time for the innovation will vary with the “level” of institutional change, that is, according to whether it is an individual arrangement (shortest lag), a voluntary cooperative one (a longer lag because of more complex arrangements), or a governmental innovation (a still longer lag because political organization is required).

The final chapter of Part I on the theory deals with the exogenous institutional environment, and thus the initial conditions in Davis and North’s model of institutional change. Chapter 4 sketches substantial historical changes in the institutional environment: the rules governing the extent and weighting of voting rights, the legal basis for private property, and “the expectational weights that the community chooses to apply to the future costs and revenues of particular arrangemental innovations — weights that are the product of experience triggered by events exogenous to the model” (p.65). Important sources of change in these three aspects of economic life are (i) the Constitution and its interpretation by the courts, (ii) the common law, and (iii) “the external changes in the political and economic life of the nation that affect the people’s attitudes toward government” (p. 65). A lively sketch of dramatic historical changes and fluctuations over 175 years in each of these categories follows.

Part II consists of six historical chapters in which Davis and North apply their model of institutional change to American economic history by telling vivid stories of changes in land policies, financial institutions, transportation, market structure in manufacturing, the organization of the service industry, and labor market changes affecting unions and education. These stories illustrate well the explanatory potential of their model by describing the history of business and labor responses to changing profit and income opportunities through the adoption of new institutions or adaptations of old ones. No attempt is made here to evaluate these stories since this reviewer has no specialized expertise in American economic history. Of necessity given space constraints, they are selective and reflect the specialties of the authors, as they themselves carefully state in the introduction to the book.

The great strength of the neoclassical theory of institutional change is that it yields an insightful and plausible “explanation” of a wide range of institutional changes over time in individual market economies where the private profit motive is strong and neoclassical-type market supply responses are already widespread. An enormous volume of literature has developed in response to the work of Douglass North and his colleagues. North himself has been an outstanding leader in the expansion of the scope of applications of neoclassical institutional theory.

The limitations of the theory are most evident in the study of cross-country differences in institutional responses to the challenges of opportunities for profit and higher incomes. The new economic theory of institutional change is a variant of historical challenge and response theories, all of which suffer from a similar problem. To quote Nathan Rosenberg’s discussion of David Landes’s Unbound Prometheus (1969), “the industrial world is full of ‘challenges’ and always has been. Why do some challenges in some places at certain times generate successful responses and at other times do not?” (1971, p. 498). Telling historical stories consistent ex post with theories of institutional change does not address the questions raised by many historical instances when profitable opportunities for institutional change did not bring forth historical responses that helped accelerate economic growth. Constrained by its focus on market opportunities and responses, the neoclassical institutional theory poorly accommodates institutional changes driven by nationalist, religious, or imperialist motives so intense as to sacrifice economic gain. Also, the theory accommodates poorly historical country-specific institutional developments that are the outcome of chance and strong path dependency such as are evident in historical patterns of private land acquisitions or foreign domination in some developing countries.

The limitations to the excellent work of North and his collaborators are noted here as a warning that no one theory handles well the diversity of comparative historical experience. Casual empiricism is the usual practice in delimiting the countries and periods to which each theory applies. Because of this, the entire literature on institutional change is particularly weak on the diverse consequences of similar economic, demographic, and technological changes in different institutional settings. We all need to delimit more effectively the domains to which familiar models apply (Morris and Adelman, 1988, p. 32).

References

David S. Landes. 1969. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge: Cambridge University Press.

Cynthia Taft Morris and Irma Adelman. 1988. Comparative Patterns of Economic Development, 1850-1914. Baltimore: Johns Hopkins University Press.

Douglass C. North and Robert Paul Thomas. 1973. The Rise of the Western World: A New Economic History. Cambridge: Cambridge University Press.

Douglass C. North and Barry Weingast. 1989. “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History, 49 (December): 803-832.

Nathan Rosenberg. 1971. “Review of the Unbound Prometheus,” Journal of Economic History, 31 (June): 497-500.

Cynthia Taft Morris is distinguished economist in residence, American University and Charles N. Clark Emeritus Professor of Economics, Smith College. She is past president of the Economic History Association.

?

Published by EH.NET (October 2000)

Kenneth Pomeranz, The Great Divergence: China, Europe and the Making of the

Modern World Economy. Princeton, NJ: Princeton University Press, 2000. x

+382 pp. $39.95 (cloth); ISBN: 0-691-00543-5.

Reviewed for EH.NET by Deepak Lal, Department of Economics, University of

California, Los Angeles.

Kenneth Pomeranz (Professor of History at the University of California,

Irvine) has written an important and scholarly book. Yet, despite his

scholarship, at the end of the day I was not convinced by his basic thesis.

The question he asks is one that has tantalized scholars for over a century:

Why did Europe alone of the great Eurasian civilizations escape the binding

land constraint and initiate that process of unbounded Promethean intensive

growth which has transformed humankind’s economic prospects, so that, mass

structural poverty need no longer be the universal scourge it has been for

millennia? As a scholar of China he uses the comparative method to see if any

advantages can be discerned which led core areas in Europe to diverge so

markedly from the core areas primarily in southern China, but also in Japan and

India. In this task, he brilliantly deconstructs the various materialist

explanations that have been advanced by economic historians to explain this

great divergence.

He shows quite convincingly that, until the turn of the eighteenth century,

there was no marked divergence in living standards between the Chinese and

European cores. He then painstakingly shows with an impressive command of the

Chinese literature (much of it recent) that various purported differences in

demography, ecology, accumulation and the pervasiveness of markets which have

been claimed to have given the Europeans an inherent advantage do not stand up

to scrutiny. As late as 1750, the similarities between the Yangtze Delta and

England were greater than the differences. So why did England and subsequently

Europe not follow the labor-intensive path of the “industrious revolution” of

their Far Eastern cousins, and instead take the capital-intensive path of the

industrial revolution?

His answer is in two parts. The first is that coal, which fueled the English

industrial revolution, was geographically not as readily available to the

eighteenth-century core in southern China, since it was concentrated in the

Northwest. The spectacular development of the coal and iron complex in the

northwestern China in the eleventh century, documented by Hartwell, was

dismantled and depopulated by the invaders of the twelfth century, and by the

fifteenth century when the region was stabilized China’s economic and

demographic center of gravity had shifted to the South. He notes that,

retrospectively, the returns to linking the Yangtze delta with the northwestern

coal deposits were huge, but that these returns were invisible ex ante, and it

is not clear what could have been done to realize them. But this explanation

surely will not do, for the Chinese state had acted under the Sung to

disseminate the new wet rice technology to southern China. If the coal-steam

technology had been available to China — as it was in principle but not

developed for reasons to be taken up below — could the powerful bureaucratic

authoritarian state that has ruled China not have taken the necessary action to

link these two geographical regions under its sway?

Nor does the relative geographical distribution of coal reserves in the various

Eurasian civilizations bear up as the decisive factor in the European

divergence, if we consider their location in another Eurasian civilization —

India. Its core lay in the eastern Gangetic plain — in modern Bihar — because

it was here that they found the iron deposits they needed for the iron

implements needed to clear the forests and the iron ploughshares for deep

ploughing. We now know that this area also contains India’s coal reserves. But

despite this, no one has claimed that the Indians could have developed the

coal-steam industrial revolution. By contrast, we know China had nearly all the

ingredients of this revolution in place by the eleventh century, and it still

did not take place. It is highly dubious that the geographical distribution of

its coal reserves had anything to with this lapse.

The second part of Pomeranz’s answer about the causes of the great divergence

is Europe’s discovery and exploitation — partly through trade — of the New

World. There can be no doubt that this extended Europe’s land frontier. But how

decisive was it and why could China not do something similar?

Pomeranz, himself in his last chapter in a section called “Comparisons and

Calculations: What Do the Numbers Mean?” admits the increment to the supply of

land- intensive products from the New World to Europe could not have been

large, but then uses various forms of handwaving including an appeal to chaos

theory to justify his thesis that they were the basis of the great divergence!

But it is the larger question — why did China not seek to exploit areas where

free land was available overseas to overcome its growing land constraint —

which points to the basic flaw in Pomeranz’s and other purely materialist

explanations for the great divergence. As Pomeranz shows, there were empty

lands in South East Asia which “like the post-contact New World, was sparsely

populated and capable of supplying vast quantities of land-intensive resources

that were in demand ‘back home.’ Chinese went there in significant numbers, but

South East Asia never became for coastal China what the New World was for

western Europe” (p. 200). Why? Because unlike Europe’s New World empires, “the

Chinese merchants . . . established themselves in South East Asia without state

backing” (p.200). This is the crucial point. To see why, it is important to

note two important points not even taken into account by Pomeranz.

First, under Kublai Khan the Chinese had created a powerful navy. The famous

admiral Cheng Ho took his “treasure ships” on expeditions to the India Ocean in

the fifteenth century, and William McNeill (The Pursuit of Power:

Technology, Armed Force, and Society since A.D. 1000, University of Chicago

Press, 1982) notes that these expeditions eclipsed anything that the later

Portuguese explorers could muster. Nor did Cheng Ho desist from coercion. He

sealed Chinese suzerainty everywhere he went if necessary by force. McNeill

argues that if the Chinese had continued to expand their overseas empire “a

Chinese Columbus might well have discovered the west coast of America half a

century before the real Columbus blundered into Hispaniola in his vain search

for Cathay. Assuredly Chinese ships were seaworthy enough to sail across the

Pacific and back. Indeed, if the like of Cheng Ho’s expeditions had been

renewed, Chinese navigators might well have rounded Africa and discovered

Europe before Prince Henry the Navigator died (1460)” (p.45).

But instead — the second point — after 1433 the Chinese abandoned their navy

and began to restrict foreign trade and contacts. The shipbuilding and

sea-going skills thereafter degenerated, and China continued in relative

isolation until the “new barbarians” came knocking at its doors in the

nineteenth century.

To understand this shift in policy and the accompanying closing of the Chinese

mind — and the comparable one in Japan following its adoption of the policy

sakoku under the Tokugawa — one has to look at what I have elsewhere (in

Unintended Consequences) called the “cosmological beliefs” of the

various Eurasian civilizations. As these cosmological beliefs are also related

to the different polities, they also help to explain the divergences in state

policy. It would take me too far afield to outline this story here. But without

bringing the mind back in, there is no way to explain China’s failure to

generate the coal-steam industrial revolution and the overseas empire, which

Pomeranz with so many other economic historians rightly see as the proximate

causes of the European miracle.

The great historian of Chinese science, Joseph Needham, used to maintain that

the rise of the West could not be explained in terms of a single or a few

factors but was due to a “package.” Pomeranz’s greatest service is to show that

the material differences in this “package” cannot account for the great

divergence — particularly once one discounts his own materialist differences

as being unconvincing. So as both Weber, and more recently Landes have

maintained, we are back to culture. Both, however, in my judgment got the date

of this cultural divergence wrong. I have argued in Unintended

Consequences that it goes back to at least the sixth century. But that is

another story.

One indication of this cultural divergence is provided by a visit to the great

archeological museum in Xian. The first few rooms of the collection show the

great cultural and scientific efflorescence in China from neolithic times to

the middle ages, and then in room after room there are the same shapes, the

same forms continuing in unending repetition — at least to this untrained eye.

It is to see a civilization that seemed to have seen itself as reaching

perfection and then being frozen in aspic from about the sixteenth century. By

contrast in England this was to be the age of Shakespeare, followed by those of

Locke, Newton, Hume and Smith. The sheer intellectual curiosity and

creativeness of these centuries preceding the industrial revolution are in

stark contrast to what was happening in the other great Eurasian civilizations.

If we are to understand the modern world it is this great divergence which

needs to be explained, and which Pomeranz’s book does not even touch upon.

Deepak Lal is James S. Coleman Professor of International Development Studies,

University of California, Los Angeles, and the author of Unintended

Consequences: The Impact of Factor-Endowments, Culture and Politics on Long Run

Economic Performance (MIT Press, 1998). A third collection of his essays

entitled Unfinished Business, was published by Oxford University Press

in 1999.

Joseph A. Schumpeter, Capitalism, Socialism and Democracy. New York: Harper & Row, 1942, 381 pp.; Third edition, 1950, 431 pp.

Review Essay by Thomas K. McCraw, Harvard Business School.

The Creative Destroyer: Schumpeter’s Capitalism, Socialism, and Democracy

Does Joseph Schumpeter’s Capitalism, Socialism and Democracy rank with the most important works of economic history of the twentieth century? Of course it does. Has there been a more penetrating analyst of capitalism than Joseph Schumpeter? No, I do not think there has.

Schumpeter led a melodramatic life (1883-1950), moving from Austria to England to Egypt to Germany before coming to Harvard for good in 1932. He was a phenomenally productive scholar, despite occasional forays into business and government in addition to a plethora of romantic liaisons that included three marriages. His first published article appeared in 1905, his last in 1950. His output included fifteen books (several of immense length), six pamphlets, about one hundred book reviews, and 148 articles, comments, and occasional pieces.

Long after his death, his influence continues to grow. Massimo M. Augello’s Joseph Alois Schumpeter: A Reference Guide appeared in 1990 and ran to over 350 pages. Since then, several dozen articles on Schumpeter have appeared, in addition to biographies by Eduard M?rz, Robert Loring Allen, Richard Swedberg, and Wolfgang Stolper. All of this work has enriched our knowledge of this remarkable polymath.

Just how great was Schumpeter? Tibor Scitovsky places him at the very top: “America’s most brilliant economist.” The intellectual historian Martin Kessler agrees, arguing that Schumpeter was, apart from Keynes, “the only truly great economist the twentieth century has produced.” Oskar Morgenstern sensibly comments that at this level rankings become pointless, that “all will agree that [Schumpeter] belongs to that small top group where a further ranking becomes almost impossible.”1

Many scholars of business history, most notably Alfred D. Chandler, Jr., have looked to Schumpeter as the economist who best understood the rise of big business and the central roles of innovation and entrepreneurship.2 In economic history, the work of Nathan Rosenberg and William Lazonick, among others, is imbued with Schumpeterian insights.3 In the study of “business strategy,” a term probably coined by Schumpeter in Capitalism, Socialism and Democracy, Michael Porter’s seminal work places a distinctly Schumpeterian emphasis on relentless innovation as the essence of competitive strategy.4 Within economics, Schumpeter’s influence in America is perhaps best exemplified by the work of F. M. Scherer and Richard R. Nelson. Scherer, a prolific scholar and author of a standard textbook in industrial organization, acknowledges his intellectual debts in a book entitled Innovation and Growth: Schumpeterian Perspectives . Nelson’s Schumpeterian proclivities are on display in An Evolutionary Theory of Economic Change , co-authored with Sidney G. Winter.5 A few other economists have tried to implement parts of the Schumpeterian system, particularly those having to do with innovation.6

Most mainstream economists have been frustrated by the difficulty of operationalizing Schumpeter’s models. His aversion to equilibrium as a realistic picture of capitalist economies restricts the mathematicization of his system. Then, too, because he insisted on fusing economics with history, sociology, and psychology, the number of variables becomes almost impossible for the analyst to control.7

As a scholar Schumpeter never advanced a program of economic reform. He believed that doing so compromised “scientific” work. In particular he criticized Keynes and other English economists for their “Ricardian Vice” of leaping into policy debates with abstract models as general prescriptions for change.8 Schumpeter himself took a very different approach in Capitalism, Socialism, and Democracy.

Capitalism, Socialism, and Democracy and Its Predecessor Book

Schumpeter’s core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets:

1. The essence of capitalism is innovation (“creative destruction”) in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, can therefore disguise reality and mislead scholars and students.

2. The virtues of capitalism–in particular its steady but gradual pattern of growth–are long-run and hard to see; its defects, such as inequality and apparent monopoly, are short-run and conspicuously visible.

3. It is dangerous for economists to prescribe “general” recipes, because political and social circumstances are always changing.

Capitalism, Socialism, and Democracy was Schumpeter’s most popular success by far. Translated into at least sixteen languages, it still sells widely in paperback editions. Although the author often compared it unfavorably with his more scholarly books, it retains its seminal quality three generations after it appeared.

Despite the book’s title, it contains little of lasting interest about either socialism or democracy. But it bursts with ideas about capitalism, and as a “performance”–a term Schumpeter liked to apply to others’ works–it may be the best analysis of capitalism ever written.

Only three years before the appearance of this great work, Schumpeter had brought out another book he thought would be his magnum opus: the 1100-page Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. The virtues of the second book, Capitalism, Socialism, and Democracy, can be fully understood only against the shortcomings of this prior work.

The first problem with Business Cycles was its extraordinary and wholly unnecessary length. A second characteristic was the author’s misguided attempt to turn business cycle patterns into predictive scientific wave theories borrowed from physics. As Schumpeter wrote, “Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars [8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a Juglar–not as an average but in every individual case.” Why this was so, he admitted, “is indeed difficult to see.”9 As his former student Paul Samuelson wrote thirty-five years later, the whole exercise “began to smack of Pythagorean moonshine.”10

The third noteworthy aspect of Business Cycles was its remarkable richness of historical detail and understanding. Though the explanation of cycles remained problematical, the historical vision was squarely on point: that capitalism–not all economic activity, just capitalism–is fundamentally an unstable, disequilibrating process.11

Simon Kuznets, a macroeconomist and future Nobel laureate, wrote for the American Economic Review a fifteen-page analysis of Business Cycles. It was the most thorough and important of the reviews, kindhearted in tone but still devastating. Kuznets conceded that Schumpeter had written a “monumental treatise” that raised all the right questions and did relate short-term business cycles to long-run economic movements. Still, Kuznets wrote, business cycles are essentially quantitative phenomena. Instead of robust statistical argument, Schumpeter had presented the reader with “an intellectual diary,” an account of his own “journey through the realm of business cycles and capitalist evolution, a journal of his encounters there with numerous hypotheses, diverse historical facts, and statistical experiments.” These efforts could not substitute for robust quantitative analysis.12 Two other reviewers noticed Schumpeter’s implicit distaste for macroeconomics, referring to his “vigorous stand against ‘the curse of aggregative thinking.'”13

Given the harsh reception of Business Cycles, published only three years earlier, the content and also the detached and ironic tone of Capitalism, Socialism and Democracy appear in a different light. It is as though Schumpeter, now deeply pessimistic about the state of the world, decided to unburden himself not only on economics but on a broad array of other subjects as well. Hence the candor and breadth of the 1942 book, which produced thousands of future citations by scholars in sociology, history, economics, and other disciplines.14

Some of the major themes represent reworkings of ideas Schumpeter had first presented in articles published long before, while in his twenties (he was fifty-nine in 1942). A capitalist economy, he now wrote in Capitalism, Socialism and Democracy, “is not and cannot be stationary. Nor is it merely expanding in a steady manner. . . . Every situation is being upset before it has had time to work itself out. Economic progress, in capitalist society, means turmoil.”15

In a 54-page analysis of Karl Marx at the beginning of Capitalism, Socialism and Democracy, Schumpeter considers Marx as Prophet, Sociologist, Economist, and Teacher. It’s hard to avoid the thought that the author construed himself in the same roles. Certainly his critique of Marx is full of insight: “Now Marx saw this process of industrial change more clearly and he realized its pivotal importance more fully than any other economist of his time.” He accomplished a fusion of history and theory whose result represented something different from either one alone. Marx “was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raison?e.” Nevertheless, Schumpeter’s final verdict is negative, because of the “failure of [Marx’s] prediction of increasing misery,” which in turn derived from “wrong vision and faulty analysis.” Although Marx the economist and sociologist was mostly correct, Marx the prophet and teacher proved to be disastrously wrong.16

As prophet, the same might be said of Schumpeter himself. On page 61 of Capitalism, Socialism and Democracy Schumpeter asks, “Can capitalism survive?”, then replies, “No. I do not think it can.”17 This provocative passage may have been sincere, or simply Schumpeter’s way of getting the reader’s full attention. His purpose was to lay bare the core nature of capitalism–to show how it works, to demonstrate why, on balance, it is a good thing; and then to highlight its fragility.18

In response to the standard charge that capitalism distributes its fruits inequitably, Schumpeter points out that “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.”19

A by-product of capitalism is the dominance of all life by an economic calculus, which Schumpeter calls “rationality.” He shows how powerfully the economic way of thinking bestows rewards and penalties: “Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money. . . . The promises of wealth and the threats of destitution that [this arrangement] holds out, it redeems with ruthless promptitude.” Constant, relentless change is the hallmark of capitalism. “It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx.”20

Underscoring the deficiencies of any conceptual system that proceeds from static assumptions, Schumpeter compares the universe of Adam Smith and other classical economists with the reality of modern industry. The classicists “recognized cases of ‘monopoly,’ and Smith himself carefully noticed the prevalence of devices to restrict competition.” Yet neither Smith nor most other classical and neoclassical economists “saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think. If we look more closely at the conditions . . . that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it.”21

Schumpeter contrasts this situation with modern business, parts of which involve constantly evolving oligopolies. These new situations do not easily lend themselves to mathematical modeling. In oligopolies, “there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms.”22

The contemporary structure of business is best understood as having evolved from long “organizational development.” It reflects a “process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”23

In sum, the process is one of “creative destruction”–the sweeping out of old products, old enterprises, and old organizational forms by new ones. It is what capitalism consists in and what every capitalist concern has got to live in.”24 For the scholar, this necessitates a lengthy time frame for analysis: “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . . As long as this is not recognized, the investigator does a meaningless job.25

One result of this approach should be a sharper focus on product quality and on marketing, and a reduced emphasis on price. “[I]n capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” A theoretical analysis that “neglects this essential element of the case . . . even if correct in logic as well as in fact, is like Hamlet without the Danish prince.”26

Schumpeter then turns to the question of monopoly. He mounts a devastating attack on what he regards as popular American attitudes toward this subject, which, in his judgment, spill over onto big business in general. Much of what Schumpeter says here was conditioned by what happened in the 1930s, and specifically by New Dealers’ assaults on big business. He argues that the very nature of giant, capital-intensive enterprise requires strategic behavior not contemplated by orthodox economic theory except to the extent that the theory holds such behavior monopolistic. As a matter of historical record, Schumpeter insists, long-run price rigidities are practically unknown. The same is true of long-run cases of monopoly, which are rarer than instances of perfect competition.27

It seemed plain to Schumpeter that big business, instead of exploiting consumers, had radically elevated their living standards. Organizational innovation, not monopolistic profits, accounted for the prosperity of most great companies. They should be viewed with pride and awe, not with detestation and fear. “These units not only arise in the process of creative destruction and function in a way entirely different from the static scheme, but in many cases of decisive importance they provide the necessary form for the achievement. They largely create what they exploit.” Monopoly rents might flow for awhile, but they are inevitably temporary, “the prizes offered by capitalist society to the successful innovator.” Under capitalism, the idea of a permanent monopoly is ludicrous, especially in manufacturing.28

Schumpeter next mounts a savage assault on the idea of perfect competition. He implies that it has evolved from an analytical tool of theoretical economics into an ideal toward which theory should guide public policy. This, he suggests, is catastrophic:

If we try to visualize how perfect competition works or would work in the process of creative destruction, we arrive at a still more discouraging result. . . . In the last resort, [cases approaching perfect competition, such as] American agriculture, English coal mining, [and] the English textile industry are costing consumers much more and are affecting total output much more injuriously than they would if controlled, each of them, by a dozen good brains.29

Pushing his analysis to its limits, Schumpeter identifies capitalist entrepreneurship with technological progress itself. As a matter of historical record, they were “essentially one and the same thing,” the first being “the propelling force” of the second.”30

At this point in the book, Schumpeter begins to lay the foundations for his famous argument that capitalism contains the seeds of its own destruction–not for economic reasons but for sociological ones. His reasoning proceeds as follows:31

1. In pre-capitalist times, no sheer economic achievement, by itself, could advance anyone into the ruling class.

2. When capitalism began to develop, persons of “supernormal ability and ambition” became upwardly mobile provided they would “turn to business.”

3. It was hard to succeed in business, yet success remained inglorious: “no flourishing of swords about it, not much physical prowess, no chance to gallop the armored horse into the enemy. . . . The stock exchange is a poor substitute for the Holy Grail.”

4. There can be no assurance that people are “happier” or “better off” under industrialism than in the medieval manor or village. Efficiency is only one of many human desiderata, and perhaps not the most important one.

5. So the future of capitalism can’t be assured purely because of its economic superiority. “I am not going to argue, on the strength of that performance, that the capitalist intermezzo is likely to be prolonged.”

6. Capitalism all but destroyed most of the secular underpinnings of civilized society–the manor, village, and craft guild. Yet it replaced these institutions with nothing: no idealism, no sense of organic life, no essential ability for social organization of a non-economic nature.

7. In particular, the talents necessary for economic success don’t translate well into other realms of life. “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose–both in the drawing room and on the platform.”

8. So, without protection from some other source, “the bourgeoisie is politically helpless and unable not only to lead its nation but even to take care of its particular class interest.”

9. Because capitalist evolution, and particularly the rise of big business, attacks masses of small producers and merchants, it alienates its natural allies, indirectly giving reinforcements to the enemy.

10. The substitution of a share of stock for tangible goods “takes the life out of the idea of property.” If this process goes on long enough and thoroughly enough, “there will be nobody left who really cares to stand for [property].”

11. Capitalism works gradual changes within the psyches of individuals. By reducing everything to an economic calculus, it “rationalizes” thinking. It “creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own.”

12. The philosophical case for capitalism is beyond the intellectual capacity of most persons, even most economists. “Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.”

13. Most important, the case for capitalism “must rest on long-run considerations.” In the short run, it is impossible for most people, even intellectuals, to ignore exasperating “profits and inefficiencies” and focus instead on long-range trends.

14. Uniquely among types of societies, capitalism is so successful economically that it “creates, educates and subsidizes a vested interest in social unrest.” It underwrites a class of hostile intellectuals who have no “direct responsibility for practical affairs” and little experience in managing anything.

15. The rise of mass media makes this situation more dangerous by multiplying the access of demagogues to short-run human instincts and desires. In the process, “public policy grows more and more hostile to capitalist interests.”

16. Bureaucracies in Europe antedate the capitalist epoch and owe no allegiance to bourgeois values. Bureaucracies in America, however, with no real civil service tradition, hold onto their antipathy toward capitalism because they don’t grasp the vast stakes at issue. Given the “legislative, administrative and judicial practice born of that hostility, entrepreneurs and capitalists–in fact the whole stratum that accepts the bourgeois scheme of life–will eventually cease to function.”

17. Most alarming of all, the bourgeois family may disintegrate. As soon as men and women “introduce into their private life a sort of inarticulate system of cost accounting,” they will become aware that “children cease to be economic assets.” When this happens, the last pillar of bourgeois society will fall.

Much of Schumpeter’s argument here might be interpreted as a cry from the heart of a brilliant but unlucky European elitist, who had witnessed one catastrophe after another during the bloody first half of the twentieth century. Even in contemporary America, a unique opportunity for the development of an advanced capitalist society stood on the edge of disaster. It was happening in the United States because of the Great Depression, the ascendance of fascism and communism in Europe, and the onset of World War II. It had not happened earlier because “The scheme of values that arose from the national task of developing the economic possibilities of the country drew nearly all the brains into business and impressed the businessman’s attitudes upon the soul of the nation.”32

Schumpeter professed to see not only the decline of capitalism but also the ultimate triumph of socialism. “Can socialism work?” he asks. “Of course it can.” In large part, it can work because it inspires people to noble ends, to something larger than themselves. Socialism implies “a new cultural world” whose psychic rewards may be worth the price of optimal economic efficiency. For true believers, “Socialist bread may well taste sweeter to them than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it.”33

Despite memorable aphorisms such as this one, Schumpeter’s analysis of socialism and democracy is a good deal less compelling than his dissection of capitalism. He says of democracy that it is best understood not as a system but merely a “method”–an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.” Of course there is much more to democracy than this, but Schumpeter’s real interests lie elsewhere.34

At the very end of Capitalism, Socialism and Democracy, Schumpeter delivers a philippic about the intrusion of modern government, and specifically the New Deal state, into economic life. He mentions counter-cyclical policies, redistributive taxation, antitrust, price controls, monetary policy, the regulation of labor, securities legislation, and the “indefinite extension of the sphere of wants” to be supplied by public enterprise. Yet, ever the “scientist” reluctant to succumb to the Ricardian Vice, Schumpeter closes with this remarkable statement: “It would spell complete misunderstanding of my argument if you thought that I “disapprove” or wish to criticize any of these policies. Nor am I one of those who label all or some of them “socialist.”35

The Book’s Reception

Capitalism, Socialism and Democracy received a modicum of attention in 1942, when it was first published. A second edition, which appeared in 1946, attracted wider notice, and the third, in 1950, became an international best-seller.

Reviewing the first edition, the Cambridge economist Joan Robinson found that Schumpeter “has little love for socialism, and none at all for socialists. His natural sympathy is all with the heroic age of expanding capitalism.” Herself a leading theorist of imperfect competition, Robinson found Schumpeter’s analysis of that subject the “most brilliant” part of the book: “his argument blows like a gale through the dreary pedantry of static analysis.” Although Schumpeter had little to say about contrary evidence, especially in his argument about the fadeout of capitalism and its replacement by socialism, “The reader is swept along by the freshness, the dash, the impetuosity of Professor Schumpeter’s stream of argument.” Whether or not the reader was totally convinced, “this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre.”36

Reviewing the 1946 edition of Capitalism, Socialism and Democracy, Arthur M. Schlesinger, Jr. wrote that the book “burst into the generally sterile atmosphere of political discussion like a collection of firecrackers and skyrockets.” Schumpeter’s analysis made it pointless to keep repeating mindless slogans about the evils of monopoly. Even if he were wrong, “there is no percentage in dodging the uncomfortable points he raises. The intellectual rigor of his analysis sets a standard that liberal writers should try to meet.” The book “is the performance of an intellectual virtuoso, brilliant, complex, perfectly controlled.”37 In 1981, a retrospective analysis of the book appeared, entitled Schumpeter’s Vision: Capitalism, Socialism, and Democracy After 40 Years.38 Here several of Schumpeter’s former students and associates joined with some European scholars in evaluating the book’s legacy. Paul Samuelson led off, conceding that the subject under discussion was “a great book.” He added that from a game theoretic viewpoint Schumpeter might have taken account of the propensity of democratic groups to change the nature of capitalism and to bend it to their own self-interest. Schumpeter’s praise of Marx for “being learned, bold to speculate, and broad in his dynamic vision” describes Schumpeter himself, Marx thereby being “a veritable chip off the new block.” Yet “Schumpeter was of all my teachers the one whose economics was essentially farthest from Marx’s.”39

The sociologist Tom Bottomore, a man of the Left, lamented Schumpeter’s disinclination to cast his analysis in terms of economic and social class. Thus, he had overlooked some important changes that now (in the 1980s) were clearer: “A very large part of the middle class, in spite of variations. . . has maintained a political orientation which is much more favourable to parties of the right and the centre than to those of the left. . . . [Schumpeter] thought that the ‘march into socialism’ was well-nigh irresistible, and deplored the fact. I, on the contrary, think that this ‘march’ has come to an untimely halt, and regret the eclipse of the highest ideal that has emerged in modern Western culture.”40

In a third essay, Schumpeter’s fellow Austrian and longtime Harvard colleague Gottfried Haberler wrote that although Schumpeter never said so in Capitalism, Socialism and Democracy, it was clear that his “real feeling” was “that capitalism or the ‘bourgeois’ society is very much worth fighting for.” Schumpeter’s forecast of capitalism’s downfall “has shocked and puzzled many people. If all qualifications, reservations, and elucidations are given their proper attention, however, the forecast of capitalism’s early doom becomes less apodictic and the demise of capitalism loses much of its inevitability.” Then, too, Schumpeter’s emphasis on rising resentment of taxation anticipated the American tax revolt that began in the 1970s, a movement of extraordinary importance.41

The economist Robert L. Heilbroner, a first-rate stylist himself, judged Capitalism, Socialism and Democracy partly on artistic terms: “There is [in the book] a great deal of attitudinizing. . . an open delight in epater le bourgeois and tweaking the noses of radicals. There is also pomposity and pedantry, mixed with an arrogance that teeters on the edge of a dangerous elitism.” Yet the book remains full of “perceptive insights,” such as Schumpeter’s remark that “The evolution of the capitalist lifestyle is best described ‘in terms of the genesis of the modern lounge suit,’ a remark worthy of Thorstein Veblen.”42

Arthur Smithies, Schumpeter’s former student and colleague, saw Capitalism, Socialism and Democracy in part as a reaction against Keynesianism. Schumpeter had openly derided the “stagnation thesis” introduced in Keynes’s General Theory. This thesis holds that as a country grows richer investment opportunities shrink but the propensity to save increases; therefore savings and investment balance only at high unemployment. “If valid,” wrote Smithies, “the long-run Keynesian argument provided an impregnable case for socialism.” Yet Schumpeter saw that the underpinnings of the stagnation thesis were the atypical conditions of the Great Depression. He “maintained his sanity” and insisted that such problems were not permanent but cyclical. As for Schumpeter’s concern with inflation, in the 1940s Anglo-American economists thought it “obsessive,” but in fact Schumpeter proved remarkably prescient.43

Herbert K. Zassenhaus, another economist from the generation just behind Schumpeter, detected “a certain mysticism” in Capitalism, Socialism, and Democracy. “In the shape of the ‘entrepreneur,'” Schumpeter introduces “a social miracle in the precise sense of the word: an event beyond the laws of nature and society.”44

In perhaps the most telling of all the retrospective comments, the Dutch scholar Henrik Wilm Lambers recalled Schumpeter’s influence on him as a youth and the continued appeal of his book. In Capitalism, Socialism and Democracy, Lambers wrote, “Schumpeter accomplished the feat of moving five layers of thought–the firm, the markets, the institutions, the cultural values, the leaders of society–as one interwoven dynamic process. With incomparable skill he made history go through time as one stream.” Lambers’ own students were invariably taken with the book: “After many an oral graduate examination, I have often heard remarks like: ‘to be honest, the one stimulating book was Schumpeter’.” Radical and conservative students alike “say, each in their own way, ‘he keeps me puzzled: is it my fault or did he intend to?'”45

Capitalism, Socialism, and Democracy continues to puzzle and provoke readers–to make them think, to question their own perceptions measured against their own ideologies and to wonder about the author’s intentions. Only the very greatest books do this, and age so well.

Endnotes:

1. Tibor Scitovsky, “Can Capitalism Survive? — An Old Question in a New Setting,” Ely Lecture, American Economic Review, 70 (May 1980), p. 1; Martin Kessler, “The Synthetic Vision of Joseph Schumpeter,” Review of Politics, 23 (July 1961), p. 334; O. Morgenstern, “Obituary,” Economic Journal, 61 (March 1951), p. 203.

2. Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise, Cambridge, MA: MIT Press, 1962, p. 284; and Chandler, Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge: Harvard University Press) pp. 597, 830-831 n1.

3. See, for example, Lazonick, Competitive Advantage on the Shop Floor, Cambridge: Harvard University Press, 1990, pp. 3, 10, 323-324; and Rosenberg, “Joseph Schumpeter: Radical Economist,” in Exploring the Black Box: Technology, Economics, and History, New York: Cambridge University Press, 1994. Schumpeter often spoke on the relationship between history and theory: “Personally, I believe that there is an incessant give and take between historical and theoretical analysis and that, though for the investigation of individual questions it may be necessary to sail for a time on one tack only, yet on principle the two should never lose sight of each other”; see Schumpeter’s 1949 essay, “Economic Theory and Entrepreneurial History,” reprinted in Richard V. Clemence, editor, [Schumpeter’s] Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, New Brunswick, NJ: Transaction Publishers, 1989. See also Schumpeter, “The Creative Response in Economic History,” Journal of Economic History, 7 (November 1947).

4. Porter, The Competitive Advantage of Nations, New York: Free Press, 1990, p. 778 n.46.

5. Frederic M. Scherer, Innovation and Growth: Schumpeterian Perspectives, Cambridge, MA: MIT Press, 1984. Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press, 1982. Part V of this book (pp. 273-351) is entitled “Schumpeterian Competition,” and in it the authors try, mathematically, to apply Schumpeter’s insights to the process of innovation.

6. See, in general, Richard V. Clemence and Francis S. Doody, The Schumpeterian System, Cambridge, MA: Addison-Wesley, 1950. For more specialized efforts, and critiques of them, see Carolyn Shaw Solo, “Innovation in the Capitalist Process: A Critique of the Schumpeterian Theory,” Quarterly Journal of Economics, 65 (August 1951), pp. 417-428; Franklin M. Fisher and Peter Temin, “Returns to Scale in Research and Development: What Does the Schumpeterian Hypothesis Imply?” Journal of Political Economy, 81 (January/February 1973), pp. 56-70 [see also Comments by Carlos Alfredo Rodriguez and Reply by the authors in Journal of Political Economy, 87 (April 1979), pp. 383-389]; Morton I. Kamien and Nancy L. Schwartz, “Market Structure and Innovation: A Survey,” Journal of Economic Literature, 13 (March 1975), pp. 1-37; Carl A. Futia, “Schumpeterian Competition,” Quarterly Journal of Economics, 94 (June 1980), pp. 675-695; Meir Kohn and John T. Scott, “Scale Economies in Research and Development: The Schumpeterian Hypothesis,” Journal of Industrial Economics, 30 (March 1982), pp. 239-249; and Horst Hanusch, editor, Evolutionary Economics: Applications of Schumpeter’s Ideas, Cambridge: Cambridge University Press, 1988.

7. During the 1990s the Schumpeter literature became especially voluminous, with articles in such publications as the Journal of Evolutionary Economics and the Journal of Institutional Economics. These pieces often drew as much on Schumpeter’s sociology as on his economics. Several sought to apply biology to Schumpeter’s evolutionary analysis.

8. Schumpeter actually used the word “sins”: “I did not exactly wish to put Ricardo and Keynes on the same level, but I do think that there is striking similarity between their sins.” (Letter to Arthur W. Marget, Feb. 24, 1937, Schumpeter Papers, Harvard University Archives.)

9. Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, New York: McGraw-Hill, 1939, Volume I, pp. 169, 173, 174.

10. Samuelson, “Joseph A. Schumpeter,” Dictionary of American Biography, Supplement Four, 1946-1950, New York: Scribner, 1974, p. 723.

11. In this book the orientation appears most clearly in some vivid passages on pages 220-245 of Volume I.

12. Simon Kuznets, American Economic Review, 30 (June 1940), pp. 257, 266-271.

13. E. Rothbarth, Economic Journal, 52 (June-Sept. 1942), p. 229; J. Marschak, Journal of Political Economy, 48 (Dec. 1940), p. 892.

14. An insightful analysis of Schumpeter’s state of mind when he wrote Capitalism, Socialism, and Democracy may be found in Chapter 7 of Richard Swedberg, Schumpeter: A Biography, Princeton, NJ: Princeton University Press, 1991.

15. Capitalism, Socialism, and Democracy, New York: Harper Torchbook Edition, 1976, pp. 31-32.

16. Capitalism, Socialism, and Democracy, p. 32, 34, 44.

17. Capitalism, Socialism, and Democracy, p. 61.

18. In the revised edition of Capitalism, Socialism and Democracy appears Schumpeter’s final paper, “The March into Socialism” (December 1949). Here he speaks candidly about capitalism’s social implications: “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce: it means a scheme of values, an attitude toward life, a civilization–the civilization of inequality and of the family fortune” (p. 419).

19. Capitalism, Socialism, and Democracy, pp. 67-68.

20. Capitalism, Socialism, and Democracy, pp. 73-74, 77 n1, 82. In History of Economic Analysis, published posthumously (New York: Oxford University Press, 1954), Schumpeter wrote that in capitalism, “Disequilibrium prevails throughout, but Marx saw that this disequilibrium is the very life of capitalism” (p. 1051).

21. Capitalism, Socialism, and Democracy, pp. 78-79.

22. Capitalism, Socialism, and Democracy, p. 79.

23. Capitalism, Socialism, and Democracy, p. 83.

24. Capitalism, Socialism, and Democracy, p. 83.

25. Capitalism, Socialism, and Democracy, pp. 83-84.

26. Capitalism, Socialism, and Democracy, pp. 84-86.

27. Capitalism, Socialism, and Democracy, pp. 93, 99.

28. Capitalism, Socialism, and Democracy, pp. 101-102.

29. Capitalism, Socialism, and Democracy, pp. 104-106.

30. Capitalism, Socialism, and Democracy, p. 110. Schumpeter adds that making such a distinction is “quite wrong–and also quite un-Marxian.”

31. My summary here is abstracted from Capitalism, Socialism and Democracy, pp. 124-157.

32. Capitalism, Socialism, and Democracy, p. 331. This point echoes one of Schumpeter’s pet themes: that all societies suffer from a paucity of first-rate talent. Legal issues, labor problems, price control issues, and antitrust prosecutions add up to a “drain on entrepreneurial and managerial energy.” So much effort is expended on such issues that an executive often “has no steam left for dealing with his technological and commercial problems.” One consequence is that except in very large companies, which can afford numerous specialists, “leading [management] positions tend to be filled by ‘fixers’ and ‘trouble shooters’ rather than by ‘production men'” (p. 388.)

33. Capitalism, Socialism, and Democracy, pp. 167, 170, 190.

34. Capitalism, Socialism, and Democracy, p. 269.

35. Capitalism, Socialism, and Democracy, p. 418. This passage is from Schumpeter’s last address, delivered to the American Economic Association in December, 1949, three weeks before his death. The address was entitled “The March into Socialism.”

36. Joan Robinson, in the Economic Journal, 53 (December 1943), pp. 381-383.

37. Arthur M. Schlesinger, Jr., in The Nation, April 26, 1947, pp. 489-491.

38. Arnold Heertje, editor, Schumpeter’s Vision: Capitalism, Socialism and Democracy after 40 Years, New York: Praeger, 1981.

39. Paul A. Samuelson, “Schumpeter’s Capitalism, Socialism and Democracy,” in Schumpeter’s Vision, pp. 1, 13, and passim.

40. Tom Bottomore, “The Decline of Capitalism, Sociologically Considered,” in Schumpeter’s Vision, pp. 22-29, 44.

41. Gottfried Haberler, “Schumpeter’s Capitalism, Socialism and Democracy after Forty Years,” in Schumpeter’s Vision, pp. 70, 71, 74-75, 83, 84, 89.

42. Robert L. Heilbroner, “Was Schumpeter Right?” in Schumpeter’s Vision, pp. 95, 96, 99-100, 101-102, 106.

43. Arthur Smithies, “Schumpeter’s Predictions,” in Schumpeter’s Vision, pp. 130-132, 145-146.

44. Herbert K. Zassenhaus, “Capitalism, Socialism and Democracy: The ‘Vision’ and the ‘Theories,'” in Schumpeter’s Vision, pp. 173, 176, 181, 189.

45. Hendrik Wilm Lambers, “The Vision,” in Schumpeter’s Vision, pp. 107-129.

Thomas K. McCraw is the Isidor Straus Professor of Business History at the Harvard Business School and editor of the Business History Review. He is author of Morgan Versus Lilienthal (William P. Lyons Award, 1970), TVA and the Power Fight (1971), co-author of Management Past and Present (1996); and editor of Regulation in Perspective (1981), America Versus Japan (1986), The Essential Alfred Chandler (1988), and Creating Modern Capitalism (1997). His book Prophets of Regulation won both the Pulitzer Prize in History for 1985 and the Thomas Newcomen Award for 1986. His American Business, 1920-2000: How It Worked (2000) was recently reviewed on EH.NET.

?

Published by EH.NET (August 2000)

Charles R. Geisst, Monopolies in America: Empire Builders and Their Enemies

from Jay Gould to Bill Gates. New York: Oxford University Press, 2000. x +

355 pp. $30 (cloth), ISBN: 0-19-512301-8.

Reviewed for EH.NET by Werner Troesken, Departments of History and Economics,

University of Pittsburgh.

Monopolies in America by Charles R. Geisst, is a history of the trust

and antitrust movements from their inception in the late nineteenth century

through to the present day. In light of the on-going struggle between Microsoft

and the Department of Justice, this is a timely contribution to the vast

literature on the political economy of antitrust. The book is organized

chronologically and summarizes some of the more colorful developments in the

historical battle between big business and its critics, in and out of

government.

Geisst’s central conclusion is that “monopoly is the logical outcome of free

market economic organization (p. 319).” This conclusion does not sit well with

either standard economic theory or previous historical studies. Economic theory

suggests monopoly — or more precisely high degrees of market concentration —

only in industries with substantial entry barriers and economies of scale. But

in industries where entry barriers are low and economies of scale are limited,

both theory and casual empiricism (look at agriculture or retailing) indicate

much less concentration and market power. Indeed, previous historical studies,

notably Naomi Lamoreaux’s The Great Merger Movement in American Business

(New York, 1985), find that far from being inevitable, the great industrial

combinations of the late nineteenth century were anomalies: most trusts and

combinations failed. Geisst does not discuss the predictions of standard

economic theory, nor does he discuss or cite the work of Lamoreaux.

Chapter 1, “The Monopolist Menace,” focuses on the development of the railroads

and their close ties to state and federal legislators. Geisst emphasizes the

economic and political corruption that came with the railroads. For example, he

explains how the managers of railroads routinely “watered stock” and made the

stock market a very dangerous place for investors. Despite such pervasive

corruption on the part of managers, Geisst claims that investors “always came

back for more,” attracted by the promise of riches floated by inaccurate press

accounts (p. 19). Apparently, investors during this period were a gullible lot.

Later in the chapter, Geisst describes how state legislatures routinely “looked

the other way” as the railroads plundered consumers and investors (e.g., pp.

24-25). Why did voters tolerate such abuses? Explaining the ease with which

Pennsylvania railroads secured patently pro-business legislation, the author

writes that “the people and politicians in Pennsylvania still came under Adams’

criticism as being ‘not marked by intelligence; they are, in fact, dull,

uninteresting, very slow and very persevering.’ It was just this sort of

plodding dullness that made corporations work relatively efficiently” (p. 21).

This portrayal of state legislators as the tools of railroad interests

contrasts sharply with other studies of state railroad regulation, which have

found strong evidence that state regulators were quite sympathetic to the needs

of farmers and shippers. See, for example, Christopher Grandy, “Can Government

Be Trusted to Keep Its Part of the Social Contract?: New Jersey and the

Railroads, 1825-1888,” Journal of Law Economics and Organization, 1989;

Mark T. Kanazawa and Roger G. Noll, “The Origins of State Railroad Regulation:

The Illinois Constitution of 1870″ in Claudia Goldin and Gary Libecap, editors,

The Regulated Economy, (Chicago, 1994); and Gabriel Kolko’s Railroads

and Regulation, 1877-1916 (Princeton, 1965). These studies are neither

discussed nor cited.

Chapter 2, “‘Good’ and ‘Bad’ Trusts,” is broader in scope, discussing such

combinations as the Meat-Packing Trust, the “Banking Trust,” and Standard Oil.

Geisst argues that the rise of the great industrial trusts was driven by a

“general price deflation” which pushed “down profit margins,” and the severe

economic slowdown after 1893 (p. 51). He also ascribes the rise of large

combinations to tariffs, lax antitrust enforcement, and other policy mistakes

(e.g., pp. 51 and 319). Alfred Chandler’s competing interpretation in The

Visible Hand (Cambridge, MA, 1977), which emphasizes the efficiency

characteristics of large firms, is not discussed or cited. This omission occurs

despite well-known studies by economic historians showing that the largest and

most successful combinations persisted in industries experiencing rapid

technological change and exhibiting significant economies of scale. (See, for

example, John James, “Structural Change in American Manufacturing, 1850-1890,”

Journal of Economic History, 1983; and Gary D. Libecap, “The Rise of the

Chicago Packers and the Origins of Meat Inspection and Antitrust,” Economic

Inquiry, 1992).

In discussing Standard Oil, Geisst points out that Standard received large

rebates from the railroads. From Geisst’s perspective these rebates constitute

prima facie evidence that Standard was behaving in an anticompetitive manner

(see, for example, pp. 37-38). Yet it is well-known that Standard Oil received

these rebates, at least in part, because Standard, unlike most of its

competitors, shipped its oil via tank cars rather than barrels. (See Harold F.

Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of

Illumination, 1859-1899, Evanston, IL, 1959, pp. 528-37.) There was a sound

efficiency rationale for giving Standard rebates for using tank cars — they

were cheaper and safer for the railroads to haul than barrels. The rebate

programs may well have had anti-competitive effects, but given their historical

significance, efficiency rationales deserve at least some hearing.

To be clear, I do not wish to imply that all was goodness and light with the

trusts. There is compelling evidence that the trusts repeatedly used

anticompetitive strategies in an effort to gain market power. For example,

event study methodology shows that the tobacco trust used predatory pricing to

reduce the acquisition cost of its competitors (Malcolm R. Burns, “Predatory

Pricing and the Acquisition Cost of Competitors,” Journal of Political

Economy, 1986); direct evidence shows the sugar trust earned a sixty

percent rate of return on its investments in predation (see, generally, David

Genesove and Wallace P. Mullin, “Testing Static Oligopoly Models: Conduct and

Cost in the Sugar Industry, 1890-1914,” Rand Journal of Economics, 1998;

and “Predation and Its Rate of Return: The Sugar Industry, 1887-1914,” working

paper); and event study methodology and voting analyses show how the sugar

trust used its political clout to alter tariff policy. Clearly the trusts

corrupted the democratic process — though they certainly were not alone in

this (Sara Fisher Ellison and Wallace P. Mullin, “Economics and Politics: The

Case of Sugar Tariff Reform,” Journal of Law and Economics, 1995) — and

event study methodology shows the merger of several railroads to create the

Northern Securities company was anticompetitive (Robin Praeger, “The Effects of

Horizontal Mergers on Competition: The Case of the Northern Securities

Company,” Rand Journal of Economics, 1992).

Moreover, historical experience and economic theory both tell us that antitrust

policy can ameliorate things: clearly, the break-up of AT&T increased consumer

surplus and reduced the political clout of a corporate titan; and there is

evidence that had the Supreme Court broken up U.S. Steel in 1920 it would have

accomplished similar ends (see George L. Mullin, Joseph C. Mullin, and Wallace

P. Mullin, “The Competitive Effects of Mergers: Stock Market Evidence from the

U.S. Steel Dissolution Suit,” Rand Journal of Economics, 1995).

My point, then, is simply this: Geisst omits an important piece of the story

when he fails to consider efficiency interpretations of the trusts, and he

would not have omitted this aspect of the story had he considered the entire

corpus of historical and economic knowledge. Even potentially complementary and

supportive studies, like those cited in the two preceding paragraphs, are

omitted from the analysis.

Chapter 3, “Looking the Other Way,” focuses on the 1920s. After claiming that

the twenties were halcyon days for the rich and big business, Geisst observes

(p. 93): “Yet amidst what appeared to be prosperity, the wages of the average

worker were actually dropping. The rich got richer while the working class

scraped to make ends meet. The F.W. Woolworth Company reported profit margins

of 20 percent but actually lowered the wages of salesgirls in its stores,

citing the need for belt tightening.” In short, the rich got richer, and the

poor got poorer. Geisst is not the first writer to make this claim about the

1920s, and he undoubtedly will not be the last. Alas, even when read in a light

favorable to such pessimistic views, the evidence on this point is decidedly

mixed, and when read in a more objective light, the existing evidence

contradicts the pessimistic case. Good summaries of the academic debate about

what happened to wages in the 1920s can be found in any introductory textbook

on American economic history, such as Walton and Rockoff; Atack and Passell; or

Hughes and Cain. The basic thrust of the debate can also be captured by looking

at the Historical Statistics of the United States (1976, pp. 164-68),

which reports a steady increase in the earnings of most industrial workers

between 1921 and 1929.

Later in the chapter, Geisst discusses the shady brokerage practices of banks

in the era before the Glass-Steagall Act. He writes (pp. 102-03): “Many of the

banks produced literature designed to educate investors on the intricacies of

stocks and bonds. What was less apparent, however, was the fact that many of

those investors were sold securities that the banks had a vested interest in,

namely, securities underwritten and held by the banks themselves. Investors

were not aware that the banks were selling them their own inventories, many

times at greatly inflated prices. At other times the risks associated with many

bonds sold by bank subsidiaries were not made clear to their buyers.” This

passage contains no notes or cites to supporting studies, nor is it followed by

any sort of presentation of supporting evidence in the form of statistics

and/or anecdotes. Nonetheless, Geisst goes on to assume that such abuses were

commonplace, and given this, concludes that laws like the Glass-Steagall Act

were “steps in the right direction” and “served to police malefactors in the

banking business” (p. 135).

There are competing interpretations. Probably the best known of these is a

paper in the American Economic Review (1994), “Is the Glass-Steagall Act

Justified? A Study of the U.S. Experience With Universal Banking Before 1933,”

by Randall S. Kroszner and Raghuram G. Rajan, both economists at the University

of Chicago. Kroszner and Rajan systematically compare the securities

underwritten by commercial banks and those underwritten by investment banks.

Their findings suggest investors anticipated the conflicts of interest that

confronted commercial banks and thereby constrained underwriting behavior and

forced commercial banks to deal in better known, low risk securities. Geisst

neither discusses nor cites Kroszner and Rajan.

Subsequent chapters in Monopolies in America are similar in tone and

presentation to those just discussed, with a few notable exceptions. In chapter

7, Geisst discusses McGee’s well-known study of Standard Oil, and the Chicago

School approach to antitrust more generally (e.g., pp. 244-45). And in chapter

8, he briefly considers academic defenders of hostile takeovers and other

controversial developments during the 1980s. He writes (p. 303): “Another

business school professor, Mike Jensen at the University of Rochester, gained

wide notoriety by being one of the few academics to defend corporate raids and

takeovers. He also argued against a growing trend that decried executive

compensation as being too high. He actually favored paying corporate executives

more, not less.” For readers unfamiliar with this line thought it would have

been helpful if Geisst had explained why Jensen made these arguments. Instead

Geisst chose to summarize Jensen’s reasoning curtly: “In [Jensen’s] view,

hostile takeovers were nothing more than businesses vying for a position, a

natural series of events (p. 303).” The discussion of McGee and the Chicago

School in chapter 7 is equally illuminating.

Monopolies in America is best described as a work of popular history:

the writing is clear; important persons and events are usually recounted ably;

the anecdotes are interesting, though not necessarily instructive; and the

narrative is not cluttered with caveats and footnotes. But given the

shortcomings discussed above, it says nothing specialists will find

particularly interesting, nor does it survey the existing literature in a way

that would make it useful in undergraduate courses on economic history.

Werner Troesken is Associate Professor of History and Economics at the

University of Pittsburgh. He has published a book and several articles on the

political economy of regulation.