Project 2001: Significant Works in Economic History

Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press, 1962. 456 pp.

Review Essay by Albert Fishlow, International Affairs, Columbia University.

Alexander Gerschenkron: A Latecomer Who Emerged Victorious

Alexander Gerschenkron and his ideas have had, like excellent wine, a remarkable maturing in recent years. Rare is the sophisticated course in political economy that does not assign his model of relative backwardness as a required reading. Rarer still is the doctoral student in economic history who remains uninfluenced by his beguiling hypotheses about the process of historical change within Europe since the Industrial Revolution.

Gerschenkron’s Background and Early Career

Fortunately, as a consequence of a wonderful biography, The Fly Swatter, by Nicholas Dawidoff, (New York: Pantheon, 2002) his grandson, we know much more about his life than we had previously. Born in Odessa in 1904, he died in Cambridge, Massachusetts in 1978. His early life was eventful. He fled the Bolshevik Revolution with his father in 1920, apparently bound for Paris, but wound up in Vienna instead. The reason was his father’s immediate success in finding a position running a turbine factory. There he rapidly learned German, as well as Latin, enabling him to attempt to pass the entrance examination for secondary school within seven months. His failure, only in Latin and geometry, meant he was rejected. That challenge was overcome, months later when he easily gained admission. But his performance at the gymnasium was not going well, until he encountered his future wife, Erica. Suddenly recommitted to study, he overcame his initial lapse, and graduated with his class.

Thereafter he enrolled in the University of Vienna’s school of Nationalokonomie in 1924. His early professional career is not recorded in autobiography as was his first 20 years. Indeed, as Dawidoff summarizes it, “he didn’t much talk about the period from 1924 to 1938 because that was for him a period of growing frustration and disappointment that culminated in catastrophe.”

The University experience was the first of these disappointments. Whatever the strength in economics had been with Bohm-Bawerk, Menger and others who had pioneered in the Austrian school, it was not there in the 1920s. Gerschenkron graduated in 1928, his thesis focusing on Austria’s happy future as a Marxist democracy. He married, had a child and took a position representing a Belgian motorcycle firm in Vienna. That was successful, but inadequate. Three years later, he committed himself to politics and the Social Democrats. That ended in 1934 with the virtual civil war that terminated the party’s existence, and began the process of decline into Anschluss.

Gerschenkron’s parents left for England at that time. Four years later, he and his family would exit and join them, and hardly in easy circumstances. But the important novelty, and a decisive point in his career, was the invitation from Charles Gulick, a Berkeley professor whom he had earlier helped in his research in Austria, to come to the United States. His acceptance marked the real beginning of his academic career that subsequently was to flourish over the rest of his life.

But it began equivocally. The finished Gulick book, Austria from Habsburg to Hitler, a two-volume work, published in 1948 (Berkeley: University of California Press), was brilliant. There is good reason to credit Gerschenkron’s twelve months of continuous research and writing for that outcome. At least Berkeley provided a place for him to return, as he did in September 1939. There he was to stay for only five years before moving on to the Federal Reserve Board. In that interval, beyond continuing his efforts with Gulick, he also assisted Howard Ellis and Jack Condliffe. And he wrote, in long nights of private work, what proved to be his single piece of greatest length, Bread and Democracy in Germany, published in 1943 (Berkeley: University of California Press). That book attacked the Junkers for their exploitation of the rest of the German population, and earned him promotion to the rank of Instructor with the opportunity to teach courses. It did not earn him any greater special recognition at Berkeley — any more than Albert Hirschman’s simultaneous efforts there did — and he moved on to Washington in late 1944.

At the Federal Reserve, he established himself as an expert on the Soviet economy. This was a period when relationships with the Soviet Union became central to the United States, and when there were few others with his knowledge, interest and immense capacity to immerse himself in any and all information. He did well, advancing to head of the International Section, until the decisive moment came in 1948: Harvard offered him a position as a tenured professor, the successor to Abbot Payson Usher. He accepted, and his university career really began.

There were four parts of that career that are relevant. It all began, appropriately enough, with the Soviet Union. At Harvard, Gerschenkron established himself at the new Russian Research Center. In a notable Rand study in 1951, A Dollar Index of Soviet Machinery Output, 1927-28 to 1937, he showed that the remarkably high rates of growth of Soviet industrial production owed itself to the index number bias: a Laspeyres index calculated on the basis of 1926-27 weights significantly overstated real expansion. Rapid Soviet growth was not constructed on the basis of false statistics, but rather, inappropriate technique. The “Gerschenkron effect,” the difference between calculated Paasche and Laspeyres volume indexes, commemorates his contribution. Important as the work was at the time, deflating vastly superior Soviet growth, it was not to be the basis of his subsequent fame.

Gerschenkron’s Economic History: Understanding Economic Backwardness

His present reputation comes instead from his dedication to European economic history. He flourished as the doyen of economic history in the United States. He influenced a generation of Harvard economists through his required graduate course in economic history. His erudition and breadth of knowledge became legendary in its time. Gerschenkron defined an indelible, if unattainable, standard of scholarship for colleagues and students alike.

Backwardness was at the root of his model of late-comer economic development. His hypothesis first took form in a 1951 essay entitled “Economic Backwardness in Historical Perspective.” From that brief 25-page contribution to a conference held at Chicago, and later published in Economic Development and Cultural Change, were to emerge the central ideas that characterized his subsequent academic career. The essay gave its name to his volume of essays published by Harvard University Press in 1962. It is the opening chapter of that volume, and a significant reason that it was recently selected as one of the most influential works of economic history ever published.

The central notion is the positive role of relative economic backwardness in inducing systematic substitution for supposed prerequisites for industrial growth. State intervention could, and did, compensate for the inadequate supplies of capital, skilled labor, entrepreneurship and technological capacity encountered in follower countries seeking to modernize. England, the locus of the Industrial Revolution, could advance with free market guidance along the lines of Adam Smith. France, beginning later, would need greater intervention to compensate for its limitations. In Germany, the key innovation would be the formation of large banks to provide access to needed capital for industrialization, even as greater Russian backwardness required a larger and more direct state compensatory role.

Gerschenkron’s analysis is conspicuously anti-Marxian. It rejected the English Industrial Revolution as the normal pattern of industrial development and deprived the original accumulation of capital of its central force in determining subsequent expansion. It is likewise anti-Rostovian. There were no equivalent stages of economic growth in all participants. Elements of modernity and backwardness could survive side by side, and did, in a systematic fashion. Apparently disadvantageous initial conditions of access to capital could be overcome through new institutional arrangements. Success was indicated by proportionally more rapid growth in later developers, signaled by a decisive spurt in industrial expansion.

This model underlay Gerschenkron’s extraordinary research into the specific developmental experiences of Russia, Germany, France, Italy, Austria and Bulgaria. Those specific cases, in turn, bolstered his advocacy of a comparative, all-encompassing European structure. “In this fashion,” as he wrote in 1962, “the industrial history of Europe is conceived as a unified, and yet graduated pattern.”

Over time, and as he read prodigiously and modestly altered the theoretical foundation, the structure of his approach became ever more specific. I summarize it here in four hypotheses:

(1) Relative backwardness creates a tension between the promise of economic development, as achieved elsewhere, and the continuity of stagnation. Such a tension takes political form and motivates institutional innovation, whose product becomes appropriate substitution for the absent preconditions for growth.

(2) The greater the degree of backwardness, the more intervention is required in the market economy to channel capital and entrepreneurial leadership to nascent industries. Also, the more coercive and comprehensive were the measures required to reduce domestic consumption and allow national saving.

(3) The more backward the economy, the more likely were a series of additional characteristics: an emphasis upon domestic production of producers’ goods rather than consumers’ goods; the use of capital intensive rather than labor intensive methods of production; emergence of larger scale production units at the level both of the firm as well as the individual plant; and dependence upon borrowed, advanced technology rather than use of indigenous techniques.

(4) The more backward the country, the less likely was the agricultural sector to provide a growing market to industry, and the more dependent was industry upon growing productivity and inter-industrial sales, for its expansion. Such unbalanced growth was frequently made feasible through state participation.

The considerable appeal of the Gerschenkron model derives not only from its logical and consistent ordering of the nineteenth- and early-twentieth-century European experience. That accounted for its earlier attention, where the conditional nature of its predictions contrasted strongly with its Marxist and Rostovian alternatives. What has given it greater recent notice has been its broad scale generalization to the experience of the many late late-comers of the present Third World. His formulation dominates the stages of growth approach because of its emphasis upon differential development in response to different initial conditions. There is thus the irony of Walt Rostow’s demise at the hands of Gerschenkron – does anyone now assign The Stages of Economic Growth? — when Rostow had been the first choice of Harvard to succeed Usher in 1948.

In Gerschenkron’s own hands, his propositions afforded an opportunity to blend ideology, institutions and the historical experience of industrialization, especially in the case of his native Russia, in a dazzling fashion. For others, his approach has often proved a useful starting point for the historical discussion of other parts of the world, such as Henry Rosovsky did with Japan, and others, elsewhere. Always, application of the backwardness approach requires close attention to detail, as well as a quantitative emphasis.

Responses to Gerschenkron’s Thesis

The model is, of course, not without its limitations and its critics. History, even of Europe alone, does not in every detail bear easily the weight of such a grand design. In other parts of the world, and in a later time period, larger amendments are frequently required, and sometimes forgotten by current advocates. And somewhat surprisingly, in view of Gerschenkron’s own path-breaking essay in political economy, Bread and Democracy in Germany, there is too little special attention to the domestic classes and interests seeking to control the interventionist state. Backwardness can too easily become an alternative, technologically rooted explanation that distracts attention from the state and the politics surrounding it, rather than focusing upon its opportunities and constraints. Ultimately, as well, there are the many developmental failures — rather than only the successes — that now loom larger and attract attention. While he did explicitly treat Austria as a failed case, it was not a central part of his theoretical structure. Moreover, important current issues like globalization, the central role of international trade, and education are less significant through much of the nineteenth century in Europe.

Still, the concept of relative backwardness, and Gerschenkron’s always insightful and rich elaborations in so many national contexts, represent a brilliant and original approach to economic history that has been perhaps unequalled in the twentieth century. And more recently, with the rise of political economy as a field, his work is widely assigned as required reading. A quick measure of his current influence is the almost 2000 Google references that turn up with the entry of his name.

Gerschenkron’s Enduring Influence

His third great contribution came through his students. Dawidoff’s The Fly Swatter, provides a whole chapter, and more, focused on his role. First, in the 1950s came the students who worked upon the Soviet Union. Then, as his interests concentrated upon economic history, came his direction of the Ford Foundation supported Economic History Workshop at Harvard in the late 1950’s and 1960s. His seminar then, and the availability of fellowship support, attracted several Harvard students, and even some from neighboring MIT, to work in the field. Always, too, there were an impressive group of visitors to Cambridge who were invited to speak to the seminar, but never had permanence in its regular activities.

His recruitment techniques were subtle but effective. Economics 233, the course in economic history required of all graduate students, assigned a paper as well as a final examination. That provided a chance for him to assess each student early on through a brief visit to his office. Entry therein was a special occasion: filled as it was with books, journals, documents, maps, etc., it embodied scholarship with a capital S. Few who were recruited could desist, regardless of initial inclinations that were not directed to economic history.

The course was just the introduction. For those who went on in the field more seriously, the regular evening seminar became the focus. There ideas for dissertations were discussed and quantitative techniques evaluated. It was just as the computer was evolving and econometrics was undergoing rapid advance. Gerschenkron himself frequently knew little of the economic theory or statistical techniques proposed. He usually limited himself to a final evaluative comment, and one that either justified further research or implicitly suggested that another topic might be a better eventual choice. That judgment was informed by the previous discussion as well as his sense of the student’s intellectual capacity.

Gerschenkron had extremely good judgment or very good luck, or perhaps a combination of both. For the small crop of students who wrote with him over more than a decade went on to leadership as the field of economic history was just changing back from an historical emphasis to an economic one. Cliometrics was the new terminology. Leading universities absorbed his students, who almost always have had productive subsequent careers. Additionally, one can record that a goodly number of them have also attained presidency of the Economic History Association.

It was not his direct dissertation supervision that was responsible. He provided no topic, no suggestion of sources, no regular guidance, no timetable for conclusion. Most of the students chose subject matter far from continental Europe. What these persons gained was proximity to a stellar intellect, and close association with each other as they pursued their research. They also obtained a father figure whom they desperately sought to imitate in their own scholarship and subsequent teaching. Those who survived that complex relationship almost always emerged with deep affection and fond memories, even if the process was far from linear and continuous.

By the mid-1960s, ten of his students, both in Soviet economics and economic history, prepared a Festschrift in his honor. The book, Industrialization in Two Systems, was organized and edited by Henry Rosovsky, and published in 1966 (New York: Wiley). Many of the essays are still worth reading. But the dedication, from the Pirke Avot, states their strong feelings perhaps best of all: “The day is short, and the work is great, and the laborers are sluggish, and the reward is much, and the Master is urgent.”

A fourth and last relevant observation relates to his general intellect. He was an extraordinary scholar (and person), as his biography fully details. He was an exceptional reader, of good books and bad. In his own writings, his references were varied, and consciously intended to impress: “There was almost always a little Latin, unless there was a little Greek or a little German or a little Russian or a little French or a little Italian; …” Nor did he exclusively write on economic history. There were his book reviews and other essays, including the one joint work — with his wife — on the adequacy of the diverse translations of Hamlet’s quatrain to Ophelia in sixteen different languages. There were his regular lunchtime performances at the Faculty Club and Eliot House and his interactions with other Harvard scholars. His talents were notable and appreciated: what other economist would have been offered chairs in Italian literature and Slavic studies?

Not surprisingly, upon reaching the mandatory retirement age of 65 in 1969, he was offered a further five years. But those years were not a happy terminus to his long stay at Harvard. The war in Vietnam, and the student reaction, imposed a large cost, as it did to many others who had fled Europe in the 1930s. Long-standing friendships were broken, as with John Kenneth Galbraith. The end of the economic history requirement in 1973 was another major disappointment. Perhaps the greatest one, however, was his inability to publish the great work, the big book that would summarize his brilliant insights into the process of European industrial change, the book that could and would influence political scientists and economists for generations to come. Despite this lapse, Gerschenkron’s influence has subsequently blossomed. The collection of essays under review, which opens with the backwardness thesis and closes with appendices on industrial development in Italy and Bulgaria (with reflections on Soviet literature along the way) — has achieved a hallowed acceptance.

Recent Developments and Gerschenkron’s Ideas

The current surge of interest in political economy has brought a second wave of increasing interest in Gerschenkron’s insights. As the contemporary world continues to confront the problem of inadequate development, particularly over the last twenty years in Latin America and Africa, that special magic of nineteenth century backwardness stimulates greater appeal, and greater hope. So does the case of success in Asia.

The rapid pace of development in East Asia, for example, has inspired a whole set of major works over the last fifteen years, seeking to ascertain how a region, apparently condemned to continuing stagnation by religion, language and tradition, could spurt ahead in the 1970s and subsequent periods. Even the recent pause, requiring massive assistance from the IMF and extensive domestic restructuring, has come off with barely a temporary decline.

After all the discussion of major changes supposedly required in the system of international financial flows in the past few years, little has, in fact, happened. The market has continued to distribute something like $1 trillion, in both capital flows as well as foreign investment, throughout the world. Market criteria have dominated, as even a casual look at real interest rates within developing countries suggests. This has not much altered the pattern of development. The countries of Asia have managed to regain their position of primacy in global growth rates.

With AIDS spreading rapidly throughout Africa, with malaria and other diseases recurring, with environmental degradation threatening, with a demographic transition that will begin to exert the pressure of an aging population, there is no lack of additional new problems that are pressing. On the other side is the reality of declining international assistance from the already developed North.

Failure of economic development to become a global process, as it appeared to do in the 1960s, and for broad convergence in per capita income levels to occur, now constitutes a major intellectual and practical challenge. Should one opt against the pressures of increasing globalization, and return to the industrial protection and import substitution of the past? Should one seek to enhance the role of central direction and decision at the expense of decentralization and private determination? Should one attack the inequality of income and poverty by imposing greater burdens upon the domestic rich and foreign investors? Should one engage in significant land reform? Should one renationalize after the extraordinary privatization that has occurred over the last decade or so?

These new issues are not ones that Gerschenkron explicitly raised. But they are implicit in his efforts to pose the advantages of backwardness. What was an advantage in one historical setting can readily become a disadvantage in another. But the very effort to construct an explicit, and testable, model is what differentiates him from his contemporaries. Shura, as he was better known by those very close to him, is guaranteed a place in the pantheon of economic history.

Albert Fishlow is Professor of International Affairs and Director, Institute of Latin American Studies at Columbia University. He has served as Deputy Assistant Secretary of State for Inter-American Affairs; Dean of International and Area Studies at UC-Berkeley; Paul A. Volcker Senior Fellow for International Economics at the Council of Foreign Affairs; and coeditor of Journal of Development Economics, among numerous other positions.

Published by EH.NET (January 2003)

Joel Mokyr, The Gifts of Athena: Historical Origins of the Knowledge

Economy. Princeton, NJ: Princeton University Press, 2002. xiii + 376 pp.

$35 (cloth), ISBN: 0-691-09483-7.

Review Essay by B. Zorina Khan, Department of Economics, Bowdoin College.

The Gifts of Athena begins with an epigraph from Robert Hooke, a

celebrated experimental scientist often regarded as “England’s Leonardo,” who

died exactly three hundred years ago. Hooke noted that truly productive

insights were only to be attained by a “Cortesian army, well-Disciplined and

regulated, though their numbers be but small.” Hooke would not have hesitated

to induct Joel Mokyr into his “Cortesian army,” in any one of his guises as the

Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and

History at Northwestern; President Elect of the Economic History Association;

or author of The Lever of Riches (Oxford University Press, 1990).

The Lever of Riches is a standard reference for anyone who wishes an

eclectic and thought-provoking treatise on the economic history of technology.

The Gifts of Athena updates us on Mokyr’s thinking over the last decade

on the role of knowledge in generating economic growth. Lest we become

entangled in the fascinating but ultimately insoluble labyrinth of

epistemology, he immediately limits the scope of inquiry to “useful knowledge”

related to natural phenomena that can be manipulated to enhance economic

welfare. Useful knowledge comprises two categories: propositional

knowledge about natural regularities; and prescriptive knowledge or

techniques.

Propositional knowledge (denoted by the symbol Omega) refers to generalized

principles such as natural laws and empirical observations obtained through

measurement and classification. The concept is not limited to science per se,

but also extends to mechanics, geography, engineering, and socially constructed

beliefs that might be incorrect, such as my grandmother’s conviction that

exposure to evening dew caused ague. Collective knowledge ranks more highly

than what any individual knows, and raises the key question of how individual

knowledge is diffused and aggregated into the public domain. Improvements in

Omega knowledge are due to discoveries of facts that had always existed but

were previously unknown, and provide the epistemic base for the set of

prescriptive knowledge. Prescriptive knowledge (denoted by the symbol Lambda)

consists of techniques, prescriptions, and instructions, which reside in human

memory, artifacts or storage devices. Indeed, the patent law makes just such a

distinction, and awards patents for net additions to the store of prescriptive

knowledge (inventions) but not for discoveries of the sort that would fall

within the primary Omega set.

Mokyr envisages the Omega set as a prior constraint, which limits the set of

feasible techniques: “The obvious notion that economies are limited in what

they can do by their useful knowledge bears some emphasizing simply because so

many scholars believe that if incentives and demand are right, somehow

technology will follow automatically” (p. 16). As of January 2003, we do not

have a cure for AIDS or the secret to cold fusion; such knowledge might or

might not exist, but effectively the only important fact is that we do not

currently have it and this constrains our current welfare. The components of

this set also influence the costs of acquiring or using techniques. If a

solution to an industrial problem is found through serendipity but the

underlying principles are unknown, the cost and riskiness of replication tend

to be high. The conceptual system is completed by pointing out that feedbacks

can occur when the body of prescriptive knowledge serves to increase the set of

propositional knowledge.

Mokyr then poses the question that the untutored reader undoubtedly will ask:

why do we need to know a theory of knowledge? The rest of the book provides an

answer: the advances in welfare that we enjoy today are the legacy of a

revolution in knowledge that occurred some three hundred years ago in Western

Europe. The credits for its intellectual origins are shared, but in terms of

its economic exploitation Britain led the way and other countries followed. The

role of useful knowledge in this process is illustrated in chapters that center

on the British Industrial Revolution, the factory system, health and the

household, political economy, and institutions in relation to technological

change.

Growth episodes did occur before the first Industrial Revolution, but were

subject to negative feedback mechanisms that ensured the spurts were

short-lived. For instance, rent-seeking guilds raised monopoly barriers and

other coalitions suppressed the diffusion of vital technological knowledge.

However, the most important obstacle to self-sustaining growth was the narrow

base of propositional knowledge in such areas as agriculture, transportation,

power, and medicine. Thus, when the Industrial Revolution did occur, it was due

to what Mokyr calls an “Industrial Enlightenment.” Expansions in the base of

propositional knowledge, and a positive feedback mechanism between the two

types of knowledge, proved to be critical. Those who focus simply on pure

scientific discoveries miss much of the point, since valuable knowledge was

also drawn from a combination of tatonnement and conscious insight. In

the eighteenth century, exogenous discoveries about nature, changes in

artisanal knowledge, and greater access to information combined with new

inventions to create productivity advances.

Mokyr emphasizes the importance of access to knowledge, and argues that the

Industrial Revolution was accompanied by a revolution in information technology

throughout Britain, France, Germany and Scandinavia. Scholars communicated with

investigators in other countries; experts, consultants and other specialized

professionals cooperated and transmitted knowledge by varied means including

networks, job mobility and industrial espionage. The cost of access fell partly

due to innovations in postal services, improved transportation, greater

availability of cheap reading matter, and standardization of information such

as in the use of mathematics as a means of communication. Access to knowledge

also became more systematic, as in the spread of alphabetization, compilations

of technical material in encyclopedias, and the Linnaean method of classifying

and identifying botanical specimens. By the time of the second Industrial

Revolution factors that favored improved access included an institutional

environment that engendered positive interactions and the spread of free market

principles.

Knowledge and technology also caused changes in the organization and location

of production from the household to the factory. The competence levels required

of manufacturing increased and necessitated the application of more knowledge

than the ordinary household could efficiently generate, for “the division of

labor is limited by the size of the knowledge set necessary to execute and

operate best-practice techniques” (p. 140). Other explanations of the factory

system such as the role of economies of scale, transactions costs, and

increases in the intensity of work, are not regarded as alternatives, but as

complementary to this proposition. Apart from the efficiencies of specialized

knowledge, factory owners had a vested interest in adding to the skills and

knowledge of their workforce, if only to socialize their workers into

appropriate behavior. Thus, the factory system itself functioned as a conduit

through which knowledge was created, recorded, and transmitted. The mechanics

who worked for Boulton and Watt were coveted by competitors because they

embodied firm-specific techniques, insights and habits. Today, modern

innovations in communications and information technology decrease the

comparative advantage of the workplace relative to the household, and offer

some workers the prospect of a return to household production.

The fifth chapter deals with the household’s use of technologies, and its

“recipes” or additions to prescriptive knowledge. Unlike markets, households

are not entirely subject to competitive pressures, so we unfortunately cannot

count on a Darwinian process to ensure the elimination of inefficient

homemakers. Nevertheless, changes in propositional knowledge at the household

level can be credited with significant advances in human welfare, such as the

fall in infectious disease that favorably affected the morbidity and survival

rates of infants. The results of empirical studies regarding sanitation and

hygiene had a significant impact on household practices and beliefs. Mokyr

highlights the “war on dirt,” the germ theory of disease and the “war on

insects,” and advances in nutritional science. These discoveries diffused due

to the “paternalism of the educated classes and the greed of commercial

salesmen” (p. 188). The working class was persuaded by the weight of

statistical evidence (some of it incorrect), and the judicious example of their

social superiors such as the British Ladies’ National Association for the

Diffusion of Sanitary Knowledge to emulate the “culture of respectability” (p.

207). These developments shifted the onus of dealing with death and diseases

from a passive reliance on the (unknowable) vagaries of Providence to the

(knowable) responsibility of individual households. As a result of this change

in health-related household knowledge, homemakers spent more time in creating

nutritious meals, a hygienic environment, and caring for children. Indeed, it

is possible that factors such as “overenthusiastic rhetoric and brainwashing by

soap commercials” (p. 212) may have led to a suboptimal and excessive level of

devotion to cleaning and housework. Moreover, this exaggerated commitment may

have delayed the entrance of some married women to the labor force.

The next chapter deals with the political economy of knowledge, and centers on

two propositions: first, the progress of useful knowledge is far more

influenced by political economic forces than we realize; and second,

technological inertia does not indicate that individuals are irrational, but

may be the outcome of rational choice. Entrenched elites may manipulate

cultural standards and religious principles to avoid innovations that threaten

their position. The existence of democratic free market processes is no

safeguard, and indeed under some circumstances may serve to enshrine

inefficient technologies to a greater degree than other less desirable

political systems. The final chapter concludes that “useful knowledge

mattered.” Expansions in the set of useful knowledge can be induced to some

extent by social agenda, appropriate institutions and relative prices.

Nevertheless, fundamentally its growth is a function of the dea ex

machina, for there is “a great deal of autonomy to it, which cannot be

explained in terms of demand or factor endowments” (p. 293).

Starvingmind.Net refers to the “peerless scholarship” of The Gifts of

Athena, for good reason. One is impressed by the plethora of allusions

drawn from science, economics, history, Greek mythology, studies of the effects

of fluoride on the tooth decay of Colorado children, household hints from

The Woman’s Book (1911), and some thirty nine pages of references. The

description it offers of the European experience is superb, and a fair reviewer

would not fault a work for achieving its aims admirably. An editor of my

acquaintance insists that what really matters is the subtitle, which suggests

that this book is about the historical origins of the knowledge economy. I

cheerfully admit to my biases, but I have strong doubts about the relevance of

the European experience to understanding either the information economy or

global technology and culture today.

Britain restricted useful knowledge to an elite (“whose numbers be but small”),

and its institutions functioned in such a way as to prohibitively increase the

costs of access to the working class. Had the United States crafted its own

institutions in the image of Britain my counterfactual suggests that I would

not be typing this review on my own computer, but instead would be sharpening a

formidable array of pencils. (Indeed, I acquired a PC before the British Patent

Office did.) Based on comparative economic history, I am more sanguine about

the effectiveness of efforts directed towards inducing increases in useful

knowledge unaided by Athena; I am less sanguine about the welfare gains from

improved access, in the absence of institutions deliberately designed to ensure

a process of democratization.

What does the book have to tell us about the information economy in 2003 and

beyond? As a careful economic historian, Mokyr is reluctant to engage in

futuristic predictions. He speculates that such large gains in useful knowledge

were experienced in the 1990s that they possibly amounted to another industrial

revolution. He highlights the fact that marginal access costs have been

“reduced practically to zero” (p. 77). However, contemporary applications are

admittedly not a major focus of the book. So perhaps it is once again Robert

Hooke who offers us the best insight into the ambiguities of the so-called

knowledge economy: his classic treatise, Micrographia (“humbly” placed

at Charles II’s “Royal feet ? [despite] the meanness of the Author, and

of the Subject”) was printed in 1665 to great acclaim; today anyone can have

access to the digital edition at Octavo.Com — for a price of $30, or $550 for

the “research edition.”

Zorina Khan is Associate Professor of Economics at Bowdoin College, Faculty

Research Fellow at the NBER, and a member of the editorial board of the

Journal of Economic History. She has published on the history of patents

and copyrights, as well as economic history and the law.

Published by EH.NET (July 2002)

Joel Perlmann and Robert A. Margo, Women’s Work? American Schoolteachers,

1650-1920. Chicago: University of Chicago Press, 2001. x +188 pp. $32

(hardcover), ISBN: 0-226-66039-7

Reviewed for EH.NET by Susan B. Carter, Department of Economics, University of

California, Riverside.

Women’s Work is an interdisciplinary, collaborative effort by two

well-known scholars. Joel Perlmann, trained as a social historian, is Levy

Institute Research Professor at the Jerome Levy Economics Institute of Bard

College. Robert A. Margo, trained as an economic historian, is professor of

economics at Vanderbilt University and a research associate of the National

Bureau of Economic Research. Together they explain women’s integration into the

teaching profession in the United States over more than two centuries. The tale

stops in 1920 because by that point, in their view, the die had been cast.

Teaching, especially at the elementary school level, had become Women’s

Work. Despite the wrenching social, economic, demographic, and political

upheavals of the subsequent eighty years, women’s predominance in the

elementary school teaching field was one feature of American life that remained

unchanged.

This work is an exemplar of excellence in inter-disciplinary social science

research. The authors note in their preface that: “The issues the book

addresses, and the formulations with which it discusses, would have differed

considerably had either of us tried to carry out the research, or write the

book, alone.” Scholars will be grateful for the collaboration.

The approach of Perlmann and Margo makes use of the regional character of the

feminization process. Feminization advanced first in the Northeast and only

much later in the South. The North-South differential was retained as the

population moved West, finally disappearing in the early-twentieth century,

when teaching was established as Women’s Work nationwide.

Following a Preface and Introduction, the book is organized into five separate

chapters. Chapter One is a survey of schools and the teaching profession in New

England as these institutions evolved over the first two hundred years of

European settlement. Perlmann and Margo argue that the early development of the

two-tier public education system was key in creating the first feminine toehold

in the profession. The upper tier was devoted to Latin instruction, reserved

for boys, and taught in winter by men; the lower tier taught reading and later

writing to young children — girls as well as boys. It was taught in the summer

and from a remarkably early date it was often taught by women. Perlmann and

Margo speculate that women may have predominated among teachers in this lower

tier, summer session, as early as 1750. Economic and cultural forces, including

the thinness of the population, the parsimony of local school boards, the young

age of the students, the availability of an educated female population, and the

“ideals of the revolutionary era” which supported “more basic learning for the

people” all played a part in rationalizing the employment of women. In outlying

hamlets with populations that were too small to warrant the two-tier system,

Latin was downplayed and women were hired as teachers for what was in effect a

one-tier system. “Some women were already teaching in the winter sessions in

1830, well before Horace Mann or other reformers of the common school era began

to call for that change” (p. 27).

Chapter Two contrasts developments in the South of the same period. Here public

primary education was much less well supported than in the North. Families with

adequate resources hired private teachers for their children. The state

supplied vouchers for children whose families were too poor to pay. For a

variety of reasons, the two-tier system does not seem to have developed in the

South and, perhaps as a consequence, women teachers were far less common in

Southern as compared with Northern schools. Perlmann and Margo consider a host

of alternatives to this institutional explanation, including social structure,

demography, and gender wage ratios. None of these alternatives appear to offer

as compelling an explanation for the patterns they observe.

Chapter Three examines women’s involvement in teaching as the population moved

westward over the course of the nineteenth century. The authors choose Illinois

for their detailed assessment because it was settled by migrants from both the

North and the South and displayed a wide range of local arrangements for the

education of the young. They find that differences across counties in economic

conditions, population concentration, fertility rates, and women’s education,

explain only a little more than half of the differential in the use of female

teachers in the northern and southern counties of the state. That leaves

settlers’ state of origin to account for over forty percent.

If these regional institutions are so powerful then how does one account for

the eventual feminization of teaching even in the South and in regions settled

by former Southerners by 1920? That is the subject of Chapter Four, “Explaining

Feminization.” Perlmann and Margo cite four factors. The first is the

experience with women teachers during the Civil War. The departure of male

teachers to either fight or to take other jobs to more directly support the war

effort forced school districts to hire women. Perlman and Margo document

increases of ten percentage points and more in women’s share of teaching

between 1860 and 1870. In many areas, the experience of having female teachers

during the Civil War appears to have permanently changed the attitudes of

school board members, because the female share did not return to the pre-war

level. For Perlmann and Margo, this evidence suggests that the women were doing

a good job:

At the same time, the fact that the shift could be so great and that so much of

the effect was sustained rather than erased after 1865 also suggests that there

was a certain fit between the effect of the wartime shock to the system and the

social and cultural conditions on the eve of the war. Large gains for female

machinists during World War II, after all, were not sustained after 1945 (p.

89).

In a section entitled “Dynamics of Diffusion” the authors neatly summarize

other events that operated to bring women into teaching. Over time, they argue,

even the last bastions of male hegemony were removed. These events were

temporary financial strains, women’s “increasing mastery of the advanced rural

school curriculum,” apparent improvements in pupils’ behavior while in school,

and the sex-typing of school teaching as women’s work.

In Chapter Five, “Labor Market Outcomes in Urban Schools — The Role of

Gender,” the authors switch gears to examine gender differences in the

structure and rewards to teachers in bureaucratic urban schools. They make use

of detailed personnel records to document discrimination against women in both

pay and promotion. They suggest that women’s curtailed geographic mobility may

have allowed local school boards to act as monopsonists, while men’s mobility

caused them to be paid a wage closer to that of a competitive market.

Did it matter that women played such a prominent educational role so early in

American history? Absolutely! The use of female teachers reduced the cost of

human capital development.

Because female teachers were cheaper to hire than male teachers were, the

economic cost of producing human capital was cheaper than it otherwise would

have been, providing a boost to its production and hence to long-term economic

growth. Regions that lagged behind in their exploitation of female teachers in

this sense, such as the South, lagged behind in the production of human capital

and, in consequence, in per capita incomes and economic development (p.

129-130).

In addition, the lure of teaching raised girls’ incentive to attend school;

mothers who were former teachers probably instilled the importance of education

in their children; and the teaching style of females may have been the source

of a national character that internalized the need for good behavior. It

doesn’t get any better, as long as you don’t think about the low pay.

Susan B. Carter is Professor of Economics and Director of the Center for

Teaching Excellence at the University of California, Riverside. She is author

of numerous articles on American economic history, including “Occupational

Segregation, Teachers’ Wages and American Economic Growth,” Journal of

Economic History 46 (2) (June 1986): 373?83. She is currently

co-editor-in-chief of Historical Statistics of the United States, Millennial

Edition, to be published by Cambridge University Press in three volumes and

in an electronic edition in 2003.

Published by EH.NET (June 2002)

Alice Kessler-Harris, In Pursuit of Equity: Women, Men, and the Quest for

Economic Citizenship in Twentieth-Century America. New York: Oxford

University Press, 2001. xi + 374 pp. $35.00 (cloth), ISBN: 0-19-503835-5.

Reviewed for EH.NET by Joyce P. Jacobsen, Department of Economics, Wesleyan

University.

Alice Kessler-Harris, Professor of American History at Columbia University,

has produced in this book an integrative piece of scholarship that brings

together cohesively a number of strands of her thinking that were mainly

implicit in earlier works. Its main theme is that the quest for “economic

citizenship,” i.e. “the independent status that provides the possibility of

full participation in the polity” (p. 5), characterizes U.S. women’s struggle

for equality in the labor market over the past century. This book lacks the

color of Kessler-Harris’s substantial history of women’s work in America,

Out to Work: A History of Wage-Earning Women in the United States

(Oxford, 1982), which relied extensively and effectively on primary sources to

develop working women’s voices through the years. It also lacks the

provocativeness of her set of essays on gendered wage determination, A

Woman’s Wage: Historical Meanings and Social Consequences (University Press

of Kentucky, 1988), which provided an enjoyably combative counterweight to the

stereotypical economist’s view that wages are mainly determined by market

forces. Instead, it is a mature, balanced work that argues for use of a

consistently gendered focus in interpreting relevant parts of U.S. legislative

history (mainly those parts dealing with employment policy, including income

tax and social security legislation). The other main theme, that gender

stereotyping, or as Kessler-Harris characterizes it, the “gendered

imagination,” plays at all times a substantial role in employment policy

formulation, is developed convincingly. The book’s heavy reliance on the

substantial number of secondary sources now available for women’s economic

history in the United States, while necessary in order to develop this theme,

makes it less than a compelling read, but it is a serious book that should and

no doubt will receive wide readership among professional historians, whether

labor, social, political, or economic. Hopefully it will also reach a wider

audience; students of political science and public policy in general; current

and future policymakers in particular.

The book develops these themes through an approximately chronological series of

case studies of the political debates surrounding various federal initiatives.

These include unemployment insurance, the Fair Labor Standards Act, the Social

Security Act and its subsequent amendments, the development of the income tax

code (in particular with how it related to separate v. joint income taxation

for married couples), and Title VII. In each case, Kessler-Harris illustrates

the nature of the assumptions that various participants brought to the debate

in terms of what roles men and women do and should hold in the economy. In

addition, the roles in these debates of various women political leaders, both

feminist and afeminist, both political appointees and elected officials, are

scrutinized throughout, often with an eye as to how these women either echoed

the status quo, or tried to widen the views that the policymakers held

regarding what roles women play in the economy.

Narrow conceptualizations of workers and/or families led to large groups of

uncovered persons in several of these cases. In the case of unemployment

insurance, many “so-called marginal members of the labor force” (p. 95) were

not covered, leading to exclusion of a majority of wage-earning

African-American women (p. 96). In the case of Social Security, the view that

women would generally withdraw from the labor force upon marriage and have

limited future participation led to the belief that having their social

security payments determined by their husband’s contributions rather than by

their own contributions would be advantageous to them. But this led to a number

of problems in dealing with all the exceptional cases. For example, how should

young widows be treated, and should it matter whether they have children or

not, and if they remarry or not? And what about widowers? As Kessler-Harris

points out, the 1939 amendments “did not extend benefits to the surviving

children of covered women or to aged husbands, aged widowers, or widowed

fathers of small children. Thus fatherless children might learn the sweet

lesson of continuing parental support beyond the grave, and aging wives would

continue to be dependent, though on phantom earnings. But motherless children

and aged husbands without resources received quite another lesson in

citizenship rights” (p. 141).

Kessler-Harris also considers how implementation proceeded in these various

cases, and how various problems with the policies came to the forefront during

implementation, leading in many cases to policy modifications. Chapter six

provides a particularly penetrating discussion of the early history of the

EEOC. No one expected five thousand complaints to be filed with the EEOC in its

first eight months of operation, let alone that over a third of them would be

complaints of sex discrimination. Hence the implementation process led to

additional information on which to base future policy. It is also clear from

this discussion that an implementing agency may end up being the arbiter when

competing interest groups clash. Early procedures and remedies were applied

quite differently by the EEOC for minorities than for women (p. 278), and

affirmative action programs focused initially on race rather than gender (p.

275).

The six-page Epilogue, starting with a discussion of the EEOC v. Sears case and

Kessler-Harris’s role in it (discussed in greater degree in her 1988 article,

“Academic Freedom and Expert Witnessing,” Texas Law Review 67, no. 2:

429-440), and ending with Justice Antonin Scalia’s minority opinion in a 1987

reverse discrimination case, is the most thought-provoking part of the book.

Both of these matters relate (in sparse economists’ terms) to whether

occupational gender segregation is viewed as a supply side or a demand side

phenomenon, and how much this continuing phenomenon is viewed as a limitation

on our imagination as to what work roles men and women might assume. Indeed,

the continuing centrality of occupational gender segregation as a defining

characteristic of the workforce is one of the central puzzles for social

science to unravel. Modern U.S. society provides plenty of fuel for the

argument that gendered imaginations still predominate.

Whether a gendered imagination indicates lack of imagination, a tendency to

believe received knowledge and tradition rather than statistics, or a willful

wishing that gender roles were clear-cut and stable over time is not clear. One

might argue that the history presented in this book is the history of how

governmental policymaking has moved away from legislation aimed at the norm to

legislation aimed at covering the exceptions. This movement has been furthered

by the more visible heterogeneity in American society and by the increasing

availability of reliable statistics (which help to make clear that

heterogeneity exists in a way that earlier policymakers did not have access

to). However, this book lends a strong argument for the importance of diversity

in government so that diverse views will be represented (even out of proportion

to their weight in society as a whole) in policy-formulating bodies.

Joyce P. Jacobsen is Professor of Economics at Wesleyan University. Her

publications include The Economics of Gender (Blackwell, second edition,

1998).

Published by EH.NET (April 2002)

Janet Irons, Testing the New Deal: The General Textile Strike of 1934 in the

American South. Urbana: University of Illinois Press, 2000. x + 262 pp.

$45.00 (cloth), ISBN: 0-252-02527-X; $16.95 (paper), ISBN: 0-252-06840-8.

Reviewed for EH.NET by Gerald Friedman, Department of Economics, University of

Massachusetts at Amherst.

If America is exceptional, the South is extraordinary. Unions and radical

political movements have been weaker in the United States than in other

advanced capitalist democracies for a century. But it is the South that has

been the most conservative region in a conservative country, the region where

unions have been the weakest. The South has been the home of American

exceptionalism.

Like exceptionalism in general, Southern exceptionalism has been used as

evidence that American workers are fundamentally conservative, opposed to

collective action and to movements to restrict capitalism. But there has been

another approach to studying the South. Instead of focusing on stable

conservatism, some emphasize episodic radicalism and periods of dramatic

upheaval. Rather than view southern workers as actively pro-capitalist, it sees

them as defeated, passive because they have been forced to submit to capitalist

rule. Their real nature has been revealed only on a few occasions when they

rose up in failed rebellions. Perhaps the most spectacular of these rebellions

came in September, 1934 when for three weeks nearly 200,000 southern textile

workers, two-thirds of the total workforce, conducted the largest single strike

in southern industrial history. Spreading their message with ‘flying squadrons’

of car-borne strikers, these textile workers showed none of the conservatism

and docility associated with southern labor. They were the cutting edge of

1930s labor unrest that in Michigan, Pennsylvania, California and elsewhere in

the North led to the establishment of strong labor unions and stable collective

bargaining. But in Alabama, Georgia, and the Carolinas strike defeats led to

the nearly complete eradication of independent unionism.

Janet Irons tells the story of this strike to make a larger point about

southern exceptionalism. In her account, southern deunionization does not

reflect the wishes of southern workers. Instead, it was created by relations of

power favoring employers and conservative politicians. Given opportunities,

southern workers rushed to join unions and to support working-class based

movements for social change. During World War I, for example, southern workers

formed unions under the protection of the War Labor Board. But, once the war

ended, the withdrawal of government support allowed employers to crush these

independent unions quickly. These struggles suggest to Irons “that workers

would willingly join unions if afforded the opportunity.” But, “in the absence

of some countervailing power, such as that of the federal government . . .

state officials did not hesitate to use state militia to eliminate” unions. “If

southern textile unions were to succeed,” she concludes, “it would be necessary

for the balance of power to shift. Textile workers needed allies,

constituencies in the larger society who would be willing to weigh in against

the power of the mill owners” (p. 22).

The union boom and the strike of 1934 are the core of Irons’s study, the

substance of her argument that conflict, power, and repression are the keys to

understanding southern labor. Southern textile workers wanted collective

representation, she argues, but southern textile unions grew after 1928 because

there were new opportunities created. Facing declining real wages and increased

workloads at the end of the 1920s, southern textile workers joined strikes and,

again, looked to form independent unions. The support of northern unions after

the election of Franklin Roosevelt and the enactment of the National Industrial

Recovery Act (NIRA), gave them a fresh opportunity, which they seized to form

unions. To increase their own economic and political influence, northern

textile unionists (in the United Textile Workers) sent paid organizers into the

South and provided advice, research, and encouragement for union organization.

Labor’s enhanced status in the Roosevelt administration encouraged workers to

join unions. “It is impossible,” Irons writes, “to overestimate the sense of

hope mill workers felt because of the Code. It legitimized their sense of place

in society. It also created an intense loyalty to the New Deal and to President

and Mrs. Roosevelt” (p. 77).

Union membership jumped sharply with the enactment of the NIRA. Some mills

achieving universal membership even while others remained completely nonunion.

Again, Irons concludes that the difference reflected “the divided mindset among

southern manufacturers about how to respond to Section 7(a) [of the NIRA] . .

.” Many mills “brazenly ignored 7(a), others did not attempt to interfere with

union organizing; some even explicitly recognized their workers’ unions” (p.

69). But workers quickly grew disenchanted with the NIRA when it failed to

protect workers’ right to organize or to provide higher wages or better working

conditions. They concluded that either through delay or design, the NIRA

bureaucracy was more responsive to employers than to workers. “Out of several

hundred cases on the stretchout we have placed before the Board,” UTW president

Thomas McMahon complained, “we haven’t received one adjustment” (page 119).

Desperate for protection from anti-union employers and to get help in improving

conditions but convinced that management had no “notion of living up to Article

7a,” UTW locals throughout the South moved to take direct action and to strike.

The UTW voted nearly unanimously for a general strike in August 1934.

The UTW entered the strike with no money and minimal staff. Nonetheless, the

strike attracted wide support throughout the South and was supported with a

missionary spirit by workers who saw themselves as righteous agents of New Deal

justice. “The first strike on record,” Roy Lawrence, president of the North

Carolina Federation of Labor, said, “was the strike in which Moses led the

children of Israel out of Egypt. They too struck against intolerable

conditions” (p. 121). But despite widespread support and innovative tactics,

employer resistance overwhelmed the strike. Irons describes the often brutal

tactics of anti-union southern employers, the beatings and discriminatory

firings, the evictions from company-owned towns, and the murders. State

governors in North and South Carolina promptly deployed militia to drive away

pickets and to help private mill guards; Georgia’s governor waited till after

the state’s primary to declare martial law and arrest strike leaders throughout

the state. At Duneen Mill in Greenville, South Carolina, for example, 425

national guardsmen were deployed to break up pickets. These guardsmen never

acted on their instructions to ‘shoot to kill,’ but nearby, in Honea Mill,

private mill guards killed seven strikers (p. 133).

Southern textile workers could not overcome such powerful repression on their

own. Their only hope was to arouse enough northern support to force their

employers to negotiate. But, as at the end of Reconstruction in the 1870s, the

North had little patience for southern strife. Rather than condemn the guards

and their employers for the murders at Honea Mill, for example, Secretary of

Labor Francis Perkins called the affair ‘an unfortunate situation” (p. 149).

Such words were hardly designed to galvanize public sympathy for the textile

workers. Instead, news of the killings validated what many in Washington

thought they knew: that the strike was a foolhardy enterprise.

Denied northern support, southern textile workers lost their strike and their

union, a failure that unleashed a flood of recriminations and employer

retaliation that would undermine any renewed organizing drive for decades.

Southern exceptionalism was created in 1934 when national politicians and

northern unions abandoned southern workers’ attempt at win union status.

Through the rest of the twentieth century, low southern wages and nonunion

working conditions would undermine northern unions and liberal politics.

Perhaps, Irons implies, rather than blaming some mythic southern

exceptionalism, it was their own fault.

An important event in American labor history, the southern textile strike of

1934 was one of the turning points where southern history did not turn. Janet

Irons has told an important story in a book that should be read by all

interested in the development of modern American history and economics.

An economic historian at the University of Massachusetts, Gerald Friedman has

written extensively on the development of the labor movements in the United

States and Europe. He is the author of State-Making and Labor Movements: The

United States and France, 1876-1914 (Ithaca, Cornell University Press,

1998) and “The Political Economy of Early Southern Unionism: Race, Politics,

and Labor in the South, 1880-1953,” Journal of Economic History (June

2000).

Published by EH.NET (November 2001)

Robert E. Wright, The Origins of Commercial Banking in America,

1750-1800. London and New York: Rowman & Littlefield Publishers, 2001. xii

+ 219 pp. $65 (cloth), ISBN: 0-7425-2086-2; $24.95 (paperback), ISBN:

0-7425-2087-0.

Reviewed for EH.NET by Edwin J. Perkins, Professor of History, emeritus,

University of Southern California.

Robert Wright has written a highly original book that merits our attention.

First, he overlaps the late colonial period and the first decade of the early

national era — an uncommon periodization for financial historians. Previous

authors typically have covered either the colonial period or the national

period, not both. Second, Wright approaches the subject mainly from an

economic perspective rather than from a political angle. Earlier writers have

been mostly concerned with the public policy ramifications of legislative

debates over financial matters, and they have been less concerned with the

impact of financial legislation on the economy. Trained as a historian but

employed for several years in the economics department of the University of

Virginia, Wright has a unique academic profile. That interdisciplinary

background has enabled him to generate an analysis of critical financial

issues during this era that is unmatched by any of his predecessors. For

economists, in particular, this volume stands as the new starting point for

gaining an understanding of the evolution of U.S. commercial banking.

Wright focuses throughout on the perpetual demand for improved liquidity. The

colonial economy had no active private banks. Likewise, there was no uniform

currency since the British had forbidden the establishment of a colonial mint.

As a result, most of the coinage in circulation originated in Spain’s colonial

empire in the Western Hemisphere. The paper currency issues of the various

colonial legislatures supplemented these hard monies. Capital markets in the

colonies were non-existent or thin. Only Massachusetts had a public debt that

was privately held and occasionally traded. The whole financial system was

institutionally immature. A huge percentage of the outstanding colonial

mercantile debt could be traced back to the London money market. Colonial

merchants did make use of domestic and foreign bills of exchange, but it was

nearly impossible to convert these financial instruments into cash during

periods of stringency. While the financial system was sufficiently functional

to support steady increases in the size of the colonial economy (primarily due

to population growth), its overall performance was less than optimal.

Liquidity was sorely lacking. Merchants, family farmers, great planters, and

artisans all sought some form of institutional relief.

Parliamentary regulations and the negative attitudes of distant British

administrators who were responsible for colonial affairs discouraged private

initiatives. Colonial leaders from South Carolina to New England periodically

sought legislative permission to create banks of one variety or another, but

none of these attempts produced anything sustainable. Wright covers these

early efforts in a fair amount of detail. He views these abortive efforts as

legitimate antecedents of the private commercial banks that emerged after

1780.

After the achievement of independence, the new nation began to experiment with

modern commercial banking. Luckily, these experiments, which aroused much

public debate and legislative controversy at the state and federal levels,

almost immediately led to the creation of viable institutions. I say “luckily”

because the effort to create similar institutions in many other emerging

nations over the last two centuries has produced numerous tragic missteps.

The Bank of North America, the brainchild of Robert Morris, the famous

treasurer of the confederation government, became the prime model for all

subsequent commercial banks. It issued currency supported by adequate specie

reserves, accepted deposits, discounted mercantile notes, and turned a

respectable profit for investors. Other commercial banks operating under state

charters began to multiply. The problem of illiquidity in the U.S. economy was

steadily alleviated thereafter. The national government created the Bank of

the United States, which was the largest economic unit in the economy

throughout its twenty-year life span. Commercial banks were the pillars and

catalysts for the expansion of the U.S. economy from 1790 forward. We are

finally coming to the realization, thanks largely to the contributions of

Richard Sylla and his collaborators, that improvements in financial services

preceded advancements in agriculture, transportation, and industry.

For his discussion of events after 1780, Wright draws most of his information

from a careful analysis of banking in Pennsylvania and New York. His

conclusions contrast at many points with Naomi Lamoreaux’s study of New

England banking during the same period. In her research, Lamoreaux found that

commercial banks were typically closely held; the major investors dominated

the board of directors and made numerous insider loans to themselves. Wright

has found a different pattern in the middle Atlantic region. These banks had a

larger capitalization and a broader ownership. They made loans mainly to

depositors, not owners, and the occupations of borrowers varied — from

merchants to farmers to artisans. As much as I admire Wright’s detailed

discussion of the development of the commercial banking system, I would have

gone about this project in a different manner — not necessarily better, but

different and complementary. Since I have been working in this subfield for

decades, I offer my own admittedly biased opinions without apology.

Whereas Wright concentrates on the demand for liquidity, I would have

celebrated the supply side of the equation. I am not convinced that the

colonial demand for liquidity was any different than the persistent demands of

thousands of urban merchants in past civilizations. I take the demand for

superior financial services as a given — a truism. What was astonishingly

different in the eighteenth century was the institutional response in the new

United States. Borrowing piecemeal from the example of a handful of British

private bankers and the singular Bank of England, the first generation of

independent Americans were imaginative and prudent institutional innovators.

Despite their strategic differences, Hamiltonians and Jeffersonians both

wanted a successful financial system — if only to prove to a skeptical world

that a republican form of government could survive and indeed thrive

financially as well as politically.

I also wish Wright had cited the public loan offices created by the colonial

legislatures as the prime forerunners of the modern commercial bank. Across

the Atlantic Ocean, advocates of land banks had tried for centuries to gain

the attention and approval of the ruling classes. Their proposed land banks

were designed to offer loans to citizens with real estate as collateral. None

of these European schemes proved viable. But in English North America, land

banks in the middle colonies (but not in New England) operated successfully

for decades. They made loans to a wide swath of landholders; they experienced

few losses; and they generated substantial interest revenue for their

provincial legislatures. Their issues of paper currency were retired at their

original purchasing-power values; depreciation was not a serious problem. The

Pennsylvania legislature imposed no new taxes for decades because interest

income from the loan office covered its modest annual expenses. True, the loan

offices did not accept deposits and did not discount mercantile paper, but

they succeeded over a long period of time, whereas similar efforts in all

other contemporary societies had failed. The colonial land offices were

remarkable enterprises for their era and deserve more recognition as emulative

institutional models.

My third friendly amendment relates to the coverage of the Bank of the United

States. Wright just does not devote sufficient space to this novel

institution. It too was highly innovative. Unlike the Bank of England, its

main customers after 1795 were private citizens, not governments. It possessed

branch offices in major port cities. As David Cowen has recently argued, the

BUS in tandem with the U.S. Treasury Department acted very much like a modern

central bank. Fourthly, Wright might have cited the recent work of Glenn

Crothers on commercial banking in northern Virginia in the 1790s. I had better

stop here with my recommended additions or I might be roundly accused of

criticizing the author for not writing the book I had envisioned rather than

the book he chose to write. By revising the analytical model for all subsequent

historians who embark on an examination of the origins of U.S. commercial

banking, Robert Wright has made a major scholarly contribution. The supply

side innovations did not occur in a vacuum, Wright reminds us; they came about

because thousands of participants in the eighteenth-century economy desired

increased levels of liquidity. If the author has gone slightly overboard to

prove a valid point, he has done so in a noble cause.

Edwin J. Perkins has written extensively about financial history. His books

include American Public Finance and Financial Services, 1700-1815 (Ohio

State University Press, 1994). His most recent publication is Wall Street

to Main Street: Charles Merrill and Middle Class Investors (Cambridge

University Press, 1999).

Eli F. Heckscher, Mercantilism. London: George Allen and Unwin, revised, second edition, edited by Ernst F. S?derlund, 1955, 2 volumes. (Originally published as Merkantilisment: Ett led i den ekonomiska politikens historia. Stockholm: P. A. Norstedt and S?ner, 1931.)

Review Essay by John J. McCusker, Departments of History and Economics, Trinity University.

Heckscher: Mercantilism Redivivus

Eli Filip Heckscher (1879-1952) obviously wrote one of the seminal books of twentieth-century economic history. Originally published in Swedish in 1931, it was translated into German the next year and, from the German edition, appeared initially in English in 1934. (Heckscher reviewed and revised the English translation himself [1]). It attracted immense critical attention from the first, partly because it touched a nerve among economic historians of his era, many of whom were vexed as much by its contemporary political ramifications as they were by its implications for economic history (2). The book and its subject had less play in the second half of the twentieth century when the worries of the world shifted from a fear of totalitarianism of the right to a fear of totalitarianism of the left. Indeed, by mid-century, some were prepared to deny that mercantilism as an economic doctrine had ever existed, effectively reducing Heckscher to insignificance. At the end of a devastatingly horrendous century of world wars, hot and cold, perhaps we can better assess Heckscher — and mercantilism — less in the shadows of fascism and communism and more for the monumental work of scholarship that it was and is.

To begin it is important to understand mercantilism as a set of beliefs — a doctrine — about how the components of modern western society (workers, business and the state) should be organized for the common good. Mercantilism privileged the nation. The argument ran that, without a strong central government, society would revert of the chaos of feudal parochialism, a dark age. (One may or may not accept the characterization of that which people needed to fear in order to accept that “dark ages” worked well as a negative reference point.) It followed then, as day follows night, that the balance in society must be tipped in favor of the central government in order to avoid such a sorry fate. The interests of business and workers were secondary; everything had to be channeled to the interests of the nation. In pursuit of the common good, the nation must come first.

It may also be pointed out that the successor doctrines competing for custodianship of that common good later argued for the primacy of business (capitalism) and the primacy of workers (socialism). Observe that none of them denied the importance of the others, asserting only primacy. Note, too, that government’s role as the organizing agent is central in all three doctrines. In reality there was never any such thing as laissez-faire. In all three modes government is to do all that it can to protect, to promote, to encourage. Under mercantilism, government is to organize the economy in the best interests of the nation; under capitalism, for the best interests of business; and under socialism, for the best interests of workers — all for the common good. The critical question was cui bono? (3)

Heckscher strove simply and successfully to spell out the premises and workings of mercantilism the doctrine as it developed over time. Based on what he wrote, one can define mercantilism as a set of policies, regulations and laws, developed over the sixteenth through the eighteen centuries, to support the rising nation states of Atlantic Europe by subordinating private economic behavior to national purposes. The key to that goal, quickly identified, was government promotion of overseas trade because that trade could be taxed to the benefit of central government much more efficiently and with very many fewer negative domestic consequences thanany other activity.

The neatness of the definition disguises the inchoateness of a doctrine that was the creation of business leaders and government leaders who found common ground in certain practical policies. There was no single evangelist of mercantilism who authored its tenets nor codifier who formulated them. Adam Smith came as close as anyone to lending the “modern system” a patina of cohesion but he did so after the fact, the better to argue its faults. All have agreed that mercantilism contributed little to advance economic science — as if that were some kind of benchmark to establish either the reality or the importance of such a doctrine. The policies that mercantilists pursued were the designs of people who shared the notion that all were better off in a nation that was strong enough to protect them. Such strength cost money. The best way to raise that money was by taxing overseas trade. Government could increase its revenues by promoting the expansion of overseas trade. A strong nation benefited all of its people, especially those who engaged in overseas trade.

The elevation of foreign trade meant the relegation of other sectors of the economy — not their elimination, just their relegation to a secondary status. All modes of economic enterprise — agriculture, fishing, manufacturing, domestic trade, overseas commerce — were necessary in an economy but under mercantilism the overseas commercial sector was the favored child. If push came to shove, if a choice among competing interests had to be made, that which was the most necessary to a taxable foreign trade won out. Those who were less favored naturally complained about the tyranny of trade — just as, under a capitalist regime, workers learned to lament the overweening power of big business.

In telling the tale of Europe’s journey from medieval chaos to the modern nation state Heckscher’s book ranged widely across the continent beginning in the late middle ages and ending “after mercantilism” with a discussion of nineteenth-century liberalism. He discovered evidence of the origins of a mercantilistic impulse in early interaction between the guilds and the monarchies of France and England. A realization that internal economic regulation benefited both business and government translated readily into a broader sense that foreign trade provided even richer possibilities for mutual aggrandizement. Portugal and Spain, The Netherlands, England and France all, successively, adopted and profited from mercantilist policies that offered the central government regular funds through taxes on the trade and emergency monies through borrowing from the very merchants whose trade government promoted. Stronger central governments could more powerfully protect those same businesses who bought and sold the produce of the land and put workers to work, all to the improvement of society. The acquisition of gold and silver was the means to that end; the balance of trade was the measure of success. Other, smaller states followed the leaders, emulated their goals, envied their triumphs. The richer the nation, the stronger the nation; the stronger the nation, the better for every member of that kingdom. Or so preached mercantilist doctrine, according to Heckscher’s exegesis.

Heckscher, in detailing the origins, development and workings of mercantilism, may have sounded a bit too triumphalist a note but the simple fact is that mercantilism accomplished what it proponents promised. Over the three centuries down to the middle of the eighteenth century, many of the parochial domains of feudal Europe had coalesced into mercantilist nation states, creating a political map dominated by leviathans. Each of these nations in its turn had established an empire to expand its overseas trade the better to fund its political aspirations (a subject not developed by Heckscher), the most successful of the lot being Great Britain. That mercantilism, in its victory, sowed the dragons’ teeth of capitalism, does not for one moment diminish the presence or power of mercantilist doctrine in its own day (4).

Heckscher’s readers in the 1930s had barely survived the first half of a two-part world war between nations created under mercantilism and they felt the second half of that struggle looming ever closer. His critics may be forgiven if they took issue with his analysis of a doctrine, however out-dated, that visited its own brand of chaos upon them and their children. Even though the doctrines of capitalism had won out a century earlier and business interests had learned to control the levers of power in those nations, the frightening echoes of mercantilism resonated in its invocation by totalitarian nations that sought legitimacy by conjuring up the tenets of the dead doctrine. Many perceived in Heckscher’s rational exposition of the origins and development of mercantilism a rationalization for those who sought to justify the domination by the state of the lives of its citizens, a totalitarianism of the state (5). Still, as Heckscher himself argued (1936), he and most of his critics agreed on the basic elements of his work, however much they may not have liked his persuasive summary of what mercantilism was all about. It is always dangerous to be the bearer of an unwelcome message (6).

As World War II came and passed, many thought they saw the future in an even newer and now victorious doctrine, socialism. For them Heckscher was even less relevant — or, better put, mercantilism was irrelevant. After the demise of the world of nation states, it seemed to some best forgotten and, with it, the doctrine that had served to underpin its foundation. By the middle of the twentieth century more than one writer on the early modern period of Western European history was prepared to deny mercantilism’s very existence. Heckscher’s exposition of this doctrine thus came to be less and less read or referenced. The most extreme of these writers, D. C. Coleman (1980, p. 791), classed mercantilism with other “non-existent entities.” It was an invention, conjured up “to prevent the study of history from falling into the abyss of antiquarianism” (7). With hated capitalism under attack from the bastions of academe, mercantilism suffered the even worse face of being ignored. It is only at the end of the twentieth century, as capitalism and socialism seem willing to entertain a peaceful co-existence, that writers can with some dispassion once again explore the origins and nature of the doctrine that preceded them both: mercantilism (8). As a consequence Heckscher’s star has risen in the firmament, a guiding light to the economic doctrine preached and practiced over the sixteenth through the eighteen centuries as the nation states of western Europe struggled to establish themselves — and did, for better or worse.

John J. McCusker is the Ewing Halsell Distinguish Professor of American History and Professor of Economics at Trinity University in San Antonio, Texas. He has written many books and articles on the economic history of the early modern Atlantic World. If all goes according to plan, in the year 2001 — the first year of the next century — he will publish The Early Modern Atlantic Economy (Cambridge, England: Cambridge University Press), co-edited with Kenneth Morgan; a second edition of How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States (Worcester, Massachusetts: American Antiquarian Society); and Mercantilism and the Economic History of the Early Modern Atlantic World (New York: Cambridge University Press).

Notes:

1. The translation from the German was done by Mendel Shapiro. The revised edition has since been reprinted and reissued at least twice, most recently in 1994 with an introduction by Lars Magnusson.

2. Many but not all. For a partial list of Heckscher’s contemporary critics and a summary of their comments, see Magnusson (1994), p. 32.

3. These themes are elaborated in McCusker (2001).

4. For the beginnings of the end of mercantilism as the dominant doctrine during “the pre-classical period” prior to 1776, see Hutchison (1988).

5. See especially Judges (1939).

6. It did not help Heckscher’s case that many of his insights were grounded in the scholarship of nineteenth-century German writers interested in the processes of national unification. Such efforts culminated in Schmoller (1884), the second part of a twelve-part exposition of the progress of the German state between 1680 and 1786. See also Schmoller (1896).

7. Beginning in 1957, Coleman had authored several attacks on mercantilism — and on Heckscher in particular. See Coleman (1957) and (1969), especially the editor’s introduction to the latter.

8. Foremost among such efforts is Magnusson (1994). Compare Allen (1987). See also Ekelund and Tollison (1981). Unfortunately in their exploration of the subject Ekelund and Tollison offer little more than “poor history,” “circular arguments,” and a disinterest “in what the mercantilist writer actually wrote,” according to Magnusson (p. 50), an evaluation with which I can only agree, sadly.

References

William R. Allen. 1987. “Mercantilism,” in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate, and Peter Newman, 4 vols. London: The Macmillan Press Ltd. Volume III, 445-449.

Donald C. Coleman. 1957. “Eli Heckscher and the Idea of Mercantilism,” Scandinavian Economic History Review, V, no. 1, 3-25.

Donald C. Coleman, editor. 1969. Revisions in Mercantilism. London: Methuen and Co., Ltd.

Donald C. Coleman. 1980. “Mercantilism Revisited,” Historical Journal, XXIII (December).

Robert B. Ekelund, Jr., and Robert D. Tollison. 1981. Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station, Texas: Texas A & M University Press.

Eli F. Heckscher. 1936. “Mercantilism,” Economic History Review, [1st Series], VII (November): 44-54.

Terence W. Hutchison. 1988. Before Adam Smith: The Emergence of Political Economy, 1662-1776 Oxford: Basil Blackwell.

Arthur V. Judges. 1939. “The Idea of a Mercantile State,” Transactions of the Royal Historical Society, 4th Series, XXI: 41-69.

Lars Magnusson. 1994. Mercantilism: The Shaping of an Economic Language. London: Routledge.

John J. McCusker. 2001. Mercantilism and the Economic History of the Early Modern Atlantic World. Cambridge: Cambridge University Press.

Gustav F. Schmoller. 1884. “Das Merkantilsystem in seiner historischen Bedeutung: St?dtische, territoriale und staatliche Wirtschafts-politik,” Jahrbuch f?r Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, VIII: 15-61

Gustav F. Schmoller. 1896. The Mercantile System and Its Historical Significance Illustrated Chiefly from Prussian History, translated by W. J. Ashley. New York and London: Macmillan & Company, Ltd.

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.

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Published by EH.NET (August 2000)

Marc Linder and Lawrence S. Zacharias, Of Cabbages and Kings County:

Agriculture and the Formation of Modern Brooklyn. Iowa City: University of

Iowa Press, 1999. x + 478 pp. $21.95 (paper), ISBN: 0-87745-714-X; $32.95

(cloth), ISBN: 0-87745-670-4.

Reviewed for EH.NET by David B. Danbom, Department of History, North Dakota

State University.

I need to begin with a disclaimer. This year I was chair of the Agricultural

History Society committee that choose Of Cabbages and Kings County for

the Saloutos Prize, given annually to the best new book on agricultural and/or

rural history. Be advised that I am favorably disposed toward this book.

In Of Cabbages and Kings County, Marc Linder, a law professor at the

University of Iowa, and Lawrence Zacharias, who teaches management at the

University of Massachusetts at Amherst, attempt to show how rural Kings County,

New York villages such as Flatbush, New Utrecht, Bushwick, Flatlands, and

Gravesend were transformed from agricultural places to suburban or urban

components of Brooklyn and later New York City, why that transformation took

place, and whether there was an alternative to the result. They are not

satisfied with the simple answer that market forces determined Kings County’s

fate, noting that the market is a human creation vulnerable to the vagaries of

human nature. Not all of their alternative answers are definitive or even

necessarily satisfactory, but in the process of formulating them, Linder and

Zacharias provide us with the fullest examination of the urbanization — or

de-agriculturalization — process I have seen.

Linder and Zacharias devote the first section of their book to a discussion of

Kings County agriculture, with special reference to the nineteenth century. The

dominant farmers in the county were the descendants of the original Dutch

settlers, and in some ways their agriculture had not evolved very much since

the seventeenth century. The authors do not romanticize these folks, whose

narrow social conservatism was symbolized by the tenacity with which they clung

to the institution of slavery. Linder and Zacharias tend to downplay the

significance of the market in these farmers’ decisions, but one could argue

that the major change in farm operations during the 1860s and 1870s — the

shift from small grain to vegetable production — was dictated by the expanding

metropolitan market for potatoes, cabbages, and so forth. In any event, Kings

County quickly became one of the leading truck farming counties in the nation,

producing vegetables on fields fertilized with urban waste. The authors’

discussion of Kings County farming is fascinating, but at times Linder’s legal

background is betrayed by a tendency to over-argue, in the style of a legal

brief, and by instances of special pleading.

The heart of the book is devoted to a discussion of the process whereby this

agricultural area became suburbanized and then urbanized. The authors’ analysis

is impressively subtle and thoroughgoing, and they succeed in exploding a

number of simplistic popular myths. For example, they refute the notion that

property taxes are a device for driving farmers out of urbanizing and

suburbanizing areas by showing that agriculture enjoyed favorable tax rates. In

addition, they cast doubt on the notion that farmers were either grasping land

barons, or, alternatively, bucolic simpletons, by noting divisions among

farmers themselves over such issues as annexation, land-use restrictions, and

the extension of streets, streetcar lines, water systems, and other

improvements.

As Linder and Zacharias elaborate it, the process of de-agriculturization is a

complex and subtle one. On the one side, real estate developers offer

increasingly attractive incentives for farmers to sell, and they are always

able to find some who are willing. On the other side, the Dutch patriarchs die

out or retire from farming, leaving the land in the hands of tenants or

children less committed to an agricultural life. As urban development slowly

unfolds, the agricultural infrastructure decays, labor become more expensive,

and farmers find themselves encroached upon by people with little sympathy for

farming, who steal or vandalize crops, and who complain of the noise of farm

wagons or the pungent smell of agriculture. As this process advances, a sense

of the inevitability of suburbanization takes hold, and farmers decide not to

reinvest in agriculture, looking to sell out to developers instead. As

individuals sell out, the implicit pressure on their neighbors to do the same

increases. Linder and Zacharias detail the push-pull process in an admirable

fashion, providing a sophisticated and convincing explanation of a complex

phenomenon.

Linder and Zacharias conclude with a rather unsatisfactory discussion of

whether the de-agriculturization of Kings County was inevitable. They argue

that it was not, citing farm-preservation programs in nineteenth-century

European cities and in such selected areas of the modern United States as

Oregon and Long Island. I find this conclusion unsatisfactory in part because

it ignores the strong traditional American bias in favor of individual control

of private property — a bias that has hardly disappeared — and because it

seems to suggest, ahistorically, that nineteenth-century Americans could have

behaved in a way in which they almost never behaved.

The conclusion to Of Cabbages and Kings County is one of the few

unsatisfactory portions in what is overall an attractively produced, abundantly

illustrated, and impressively argued book. Marc Linder and Lawrence Zacharias

have made a major contribution to the sub-fields of urban, rural, and economic

history, and the American history as a whole.

David Danbom’s recent works include “Born in the Country”: A History of

Rural America (Johns Hopkins University Press, 1995).

Fernand Braudel, Civilization and Capitalism, 15th-18th Century, in 3 volumes, New York: Harper and Row, 1981-84, original editions in French, 1979.

Review Essay by Alan Heston, Departments of Economics and South Asia Regional Studies, University of Pennsylvania.

Fernand Braudel’s Civilization and Capitalism

Fernand Braudel is associated with the influential Annales School (La nouvelle histoire) that advocated a major break from the dominant narrative paradigm of the early twentieth century embracing an approach to history integrating the social sciences with a problem-focused history. Braudel is uniformly praised as one of the most influential historians of the twentieth century, but a hard act to follow. Braudel immersed himself into masses of materials and emerged with plausible broad-brush stories to tell, teaching others how to replicate this approach is problematic. While the Annales School has made only a small dent in the economic history curriculum in the United States, it has had much more influence on social history worldwide and on economic history in France, Europe and the rest of the world. Rondo Cameron (1989, p. 406) in speaking of Civilization and Capitalism says, “it contains a wealth of factual information, mostly correct, but the brilliance of its author’s rather idiosyncratic interpretation has been exaggerated by the popular press.” Whether one buys the whole quotation, one can certainly agree with Cameron that Braudel builds very idiosyncratic interpretations based upon a wealth of information, often very imaginatively used.

This essay will not pretend to cover the three volumes of Civilization and Capitalism but rather touch on some broad themes that have had influence on our understanding of world economic history. These themes include Braudel’s emphasis on the economic condition of every-man, on a global approach to economic and social history, and on the process of capitalism and its geographical spread. This essay will begin with Braudel’s uses of capitalism, and then take up themes from the volumes of Civilization and Capitalism.

Before dealing with capitalism, some background on Braudel’s career is needed. Many consider The Mediterranean and the Mediterranean World in the Age of Philip II (1966 English translation) published in France in 1949 as his defining work. Braudel began this research in 1923 at age twenty-one and it was envisaged as his doctoral dissertation and was to concentrate on the policies of Philip II in the form of a conventional diplomatic history. Braudel taught secondary school in Algeria from 1923 to 1932 and then lived in Brazil where he taught at the University of Sao Paulo from 1935 to 1937. During this period he kept up with developments in Paris including establishment of Annales in 1929 by Marc Bloch and Lucien Febvre. The long gestation period of this impressive work undoubtedly had much to do with how different was the final product from the original design. Braudel says that he began to see the sense of writing a history of the Mediterranean world in discussions with Febvre circa 1927 but that he did not find models upon which to build. And then in 1934 he began to find quantitative data on ship arrivals and departures, cargoes, prices and other economic data that he felt would be the bricks and mortar of an economic and social history of the Mediterranean. By 1939 he had an outline of what he wished to say, but he was captured by the Germans in 1940 and was imprisoned for the next five years where amazingly he wrote the first draft of The Mediterranean totally from memory. The Mediterranean focuses on the history of one world region in a wide-ranging intellectual breakthrough, involving the geographic setting, transport and communications, urban and hinterland developments, trade, empires and more political themes.

In 1950 his mentor, Lucien Febvre, asked Braudel, who was then teaching at the College of Paris, to contribute a volume to a series on world history. This series was to feature a volume on “Western Thought and Belief, 1400-1800,” that Febvre would prepare while Braudel would focus on the development of capitalism over the same period. Febvre died before he could complete his volume. Braudel succeeded Febvre in 1956 at the Ecole Pratique des Hautes Etudes where he headed the Sixth Section, history. Braudel took responsibility for preparation of what became a three-volume series and was sole editor of the Annales during its most influential period. Braudel published the first volume of Civilization and Capitalism in 1967, and it was translated as Capitalism and Material Life, 1400-1800 in 1973. Volume II, Les Jeux de l”Echange and volume III, Le Temps du Monde, were published in France in 1979; volume II was translated and published as The Wheels of Commerce in 1982 and volume III as The Perspective of the World in 1984, a year before his death. (When the three-volume set was prepared, Volume I, Les Structures du Quotidien: Le Possible et L’Impossible, was a substantially rewritten version of the 1967 edition and was published in France in 1979. The English translation, The Structures of Everyday Life: The Limits of the Possible, was published in 1981. That translation followed the form of the original translation, Capitalism and Material Life, 1400 – 1800, incorporating new materials and changes. In the text, Volume I will be referred to as Capitalism and Material Life.)

A number of centers that focus on aspects of his work were begun during Braudel’s lifetime. Immanuel Wallerstein was instrumental in establishing the Fernand Braudel Center at Binghamton University (SUNY) in 1976. Their journal, Review, begun in 1977, explores a variety of issues relating to the evolution of capitalism, and the study of world systems, about which more below. The Fernand Braudel Institute in Sao Paulo is a think tank that has a strong social dimension to its studies. The economic history emerging from these centers is likely to emphasize the impact of capitalism on the social structures of society and the dependencies involved in the evolution of a worldwide economy over the past five hundred years.

1. Capitalism

Braudel emphasizes that capitalism is something different from the market economy, a distinction that should be kept in mind in understanding Civilization and Capitalism. In lectures in 1976, he said, “…despite what is usually said, capitalism does not overlay the entire economy and all of working society: it never encompasses both of them within one perfect system all its own. The triptych I have described–material life, the market economy, and the capitalist economy–is still an amazingly valid explanation, even though capitalism today has expanded in scope.” (-Afterthoughts on Material Civilization and Capitalism, p. 112) Whether or not one agrees with Braudel, this is his explanation of the order of the three volumes moving from the lower level of the daily material life of everyman to the market economy to the highest level of capitalism. It is a structure of thinking that is rather alien to trends in economic research that seek to explain the behavior of households, markets and business firms using similar economic models, a point discussed further below.

What is capitalism? For Wallerstein capitalism is a system built upon the international division of labor in which the core of the resulting world system prospers, if not at the expense of the others, at least relative to others. A familiar enough theme from the recent Seattle World Trade Organization protests. While Wallerstein took inspiration from Braudel, this is not what Braudel means by capitalism. Braudel viewed the capitalist economy as in the above paragraph, namely as something above everyday material life and the operation of markets. Capitalism takes advantage of high profit opportunities generated by linking markets into a world economy. Braudel distinguishes between the world economy and a world economy, a distinction that is not felicitous, but as one searches for alternatives, such as “regional economy” for a “world economy,” it seems better to stay with his language.

For Braudel a world economy features a core capitalist city whose commercial and financial spread may be well beyond national political boundaries. However, for Braudel there may be several world economies operating at the same time, and for each there will be a dominant core city. Capitalism may utilize an international or larger spatial division of labor but the hegemony of any particular core city for a world economy will wax and wane over time. Further, Braudel believes there have been capitalist worlds from the Italian city states or earlier, whereas Wallerstein’s analysis relies more on a Marxian progression from feudalism to capitalism. Further, Wallerstein treats the political empires like Rome, the Ottomans or the Mughals as non-capitalist systems while Braudel would be inclined to see in them some capitalistic features. He says, “…I am personally inclined to think that even under the constraints of an oppressive empire with little concern for the particular interests of its different possessions, a world-economy could, even if rudely handled and closely watched, still survive and organize itself, extending significantly beyond the imperial frontiers; the Romans traded in the Red Sea and the Indian Ocean, the Armenian merchants of Julfa, the suburb of Isfahan, spread over almost the entire world; the Indian Banyans went as far as Moscow; Chinese merchants frequented all the ports of the East Indies; Muscovy established its ascendancy over the mighty periphery of Siberia in record time” (Perspective of the World, p. 55). Braudel’s position would clearly find support in Mancur Olson’s work.

One further point on capitalism concerns its origins. Wallerstein seeks the origins of the capitalist world system in the feudal breakdown of the agrarian society of Northern Europe in the sixteenth century. Braudel is less concerned with questions of origins, but would certainly place a European world economy much earlier, perhaps in fourteenth-century Italy. Braudel is equally uncomfortable with Max Weber and any attempt to tie capitalism to the Protestant reformation (see Stanley Engerman’s essay in this project). Again, his first line of attack would be to point to all of the developments in the Italian city states that long pre-dated Luther and Calvin.

One point deserves further mention, namely the emphasis that Braudel gives to the ebb and flow of world economies over time and space. There is an element of Joseph Schumpeter’s creative destruction in Braudel’s view of the process but with a spatial spin. Schumpeter saw new innovations involving new entrepreneurs replacing older businesses along with their technologies and labor force. For Braudel the slowly shifting boundaries of world economies have two important implications. First, some areas never become involved with a world economy and their economic level remains very low. And second, some areas that were in a world economy, and were perhaps a core city, lose their place as boundaries of world economies change over time.

2. Capitalism and Material Life

Braudel and the Annales School represented a reaction to traditional narrative history with its emphasis on major actors, usually political or economic elites. More problem-oriented social and economic history has been mainstream for such a long period that present-day readers are unlikely to see anything revolutionary in Braudel’s work. However, in Volume I the chapter headings at that time were themselves a statement, beginning at the lowest level of economic and social organization.

Braudel begins Volume I of Civilization and Capitalism with a discussion of world population during the fifteenth to nineteenth centuries, including an evaluation of the reliability of the numbers and a description of the balance of peoples around the world. Beginning his study with counting all of humanity, Braudel starts off with a global view, involving the rich and the poor, and all regions of the world. He takes on social classifications, like civilized and barbaric, providing an overview of global social divisions. Public health receives major emphasis throughout but certainly the importance of the education of mothers on the health of children does not find its way into Braudel’s treatment. It is a man’s world and although his wife, Paule, was an important contributor to his research, one has to look hard in Braudel for that half of humanity.

Braudel follows population in Capitalism and Material Life with chapters on the major categories of consumer expenditure, bread and cereals, other foods and drink, and clothing and housing. These chapters, enriched with appropriate illustrations, include the diets of the poor, food fashions of the rich, the lack of furnishings of the homes of the poor and middle classes, and the increasingly elaborate interiors of the more affluent. The treatment of fashion and necessity in clothing is wide ranging. While much of this is based on the research of others, it is an extraordinary synthesis of materials from many sources and it is good reading.

The focus on everyday life in Capitalism and Material Life represents a concern shaping many areas of study after 1950, a movement from the study of elites to those of more ordinary people. This entered archaeology, as excavations moved from the palaces and temples to remains of foods, bones, and the dwellings of the poor, or lack thereof. Braudel’s emphasis thus fit very well into much Marxian history and with a view that capitalism grew at the expense of the lower classes. The following quotation referring to Naples is in his chapter Towns and Cities, and is from one of several sketches of cities of the era. It gives the tone of Braudel’s treatment of income inequality.

“Both sordid and beautiful, abjectly poor and very rich, certainly gay and lively, Naples counted 400,000, probably 500,000 inhabitants on the eve of the French Revolution. It was the fourth town in Europe, coming equal with Madrid after London, Paris and Istanbul. A major breakthrough after 1695 extended it in the direction of Borgo de Chiaja, facing the second bay of Naples (the first being Marinella.) Only the rich benefited, as authorization to build outside the walls, granted in 1717, almost exclusively concerned them. As for the poor, their district stretched out from the vast Largo del Castello, where burlesque quarrels over the free distribution of victuals took place, to the Mercato, their fief, facing the Paludi plain that began outside the ramparts. They were so crowded that their life encroached and overflowed on to the streets. ? These ragged poor numbered at the lowest estimate 100,000 people at the end of the century” (Volume I, p. 532).

Here in the midst of a description of impoverishment in Naples we also have imbedded an estimate of the homeless as 20 to 25 percent of society, a typical quantitative illustration that Braudel uses to great effect. He also tells us that the rich have the political power to live in more desirable locations, nothing new there. It is not surprising that Marxist historians would find much to like in Braudel, but there is very little ideological in his writings.

In fact, Braudel is much more interested in putting the everyday life of all peoples in perspective by comparisons of 1400 to 1800 and to contemporary levels of living. Braudel admired Simon Kuznets’ work on national income but does not appear familiar with concepts like urban versus rural versus national growth rates, and his career predates the development of poverty weighted growth rates. But one senses from his discussions of material life that Braudel would have found these comfortable constructs with which to work. He also suggests that he would have liked to use cliometrics in the analysis of his period but that there were not adequate data. However, Braudel would have probably wanted to build up social and national accounts rather than deal with behavioral models.

3. The Wheels of Commerce

It is curious that Volume I devotes chapters to Money and Towns and Cities, which seem much more the subjects of Volume II, The Wheels of Commerce. However, Braudel looks at money as an indicator of the degree of monetization of societies and the complexity of their economies. And as we have noted, the increase in towns and cities during the 1400-1800 period meant an increasing number of poor making their material life in urban areas. On the other hand, this curious treatment may only reflect the evolution of Civilization and Capitalism, in which Capitalism and Material Life was fairly self contained and appeared thirteen years earlier than the remaining volumes.

Wheels of Commerce moves from markets to capitalism and society. Although Braudel does not use the language, he is concerned with the development of institutions, ideology and social norms. He offers a justification for employing the term capitalism, noting that it was not a term used by Marx, only his followers. Capitalism for Braudel involves not only the use of capital but also its position at the apex of material life. As discussed, it is this aspect of Braudel that has had a large influence on those associating the expansion of capitalism and world systems as necessarily intertwined. The first chapter of Wheels of Commerce is called the Instruments of Exchange, by which Braudel means the types of markets in which exchange took place; it is followed by a chapter on Markets and the Economy. The two may only be separate because together they are the length of an average book. Braudel deals with local commodity markets serving surrounding villages and market towns serving their hinterland, as well as wholesale and financial markets. Markets for financial instruments including bourses and exchanges, as well as credit institutions like banks, are also discussed. Bourses, after the Hotel des Bourses in Bruges where early meetings of merchants took place, also dealt in wholesale commodity trade, especially for articles like pepper, cotton, tea and the like. For Europe the 1400-1800 period sees the development of exchanges in Amsterdam and London that while subject to bubbles, also provided a basis for financial intermediation for even small investors.

In treating the development of markets Braudel gives emphasis to the geography of markets, and his treatment is often imaginative, though not terribly systematic. He analyzes the frequency and density of fairs and markets in England and France. He gives more cursory treatments of other parts of the world, though both India and China receive their fair due. G. William Skinner’s treatment of Chinese market towns and cities is discussed in terms of the hexagons of Walter Chrystaller and August Losch. Here Braudel argues that the size of the hexagon embracing different size market towns varies inversely with the density of population (II, pp.118-19). He then applies this to puzzles in French history about the varying boundaries of pays, which he argues may well have been due to changing population densities over time–a rather nice cross-section, time-series application.

Braudel asks questions about markets that are fundamental but often not treated systematically. When do wholesale markets emerge? What leads to the establishment of year-round shops versus occasional markets and fairs? Why did the number of shops proliferate during the 1400-1800 period? When are peddlers really agents of wholesalers and when are they petty traders? Braudel concludes that the expansion of markets was stronger in England than in France, though he does not probe further into why this may have been so. And he argues in terms of his view of hierarchy, that the development of capitalism was interdependent with the expansion of exchange. He also notes that France and particularly China had administrations that constrained the expansion in markets and hence the amount of capitalistic development.

How do markets relate to each other? One way they are integrated is through the activities of the same firm, most typically in this period, an extended family firm. Braudel examines these connections mainly in Europe. The extended family firm was a common practice of merchants from India, China and the Middle East, some of which are discussed by Braudel. While he recognizes the importance of business families in extending the boundaries of any world economy, this also poses a puzzle in some of the diasporas that Philip Curtin has described so well.

For example, in Asia, which in 1400 contained more than half of world population, income and wealth, there was an established pattern of trade prior to European incursions involving intersections of an East Asian world economy that was linked to an Indian world economy stretching from Malacca in the Malaysian Peninsula to Calicut and Cambay in Western India. This in turn joined with what Braudel terms an Islamic world economy extending from the East Coast of Africa through the Arabian Peninsula, Egypt, Turkey and Persia. However, when Vasco da Gama arrived in Calicut in 1498, it was not the core city of an Indian world economy, nor is it obvious that there was such a core city. Vijayanagar was a major South Indian empire at this time but its ability to expand northward was constrained by the presence of the five hostile Bahami kingdoms. The Mughal empire only emerges after 1526. Calicut is itself ruled by the Zamorin, a Hindu ruler whose state was physically quite small, and who did not have territorial ambitions. As Braudel notes, the proportion of Arabs, Indian Muslims, Hindus, and Chinese among the actual merchant groups and shippers varied over the centuries. Diasporas like Malacca and Calicut were home or branch office to Arabs, Armenians, Chinese, Hindus, Bohras, Khojas and similar Muslim groups, Jews, Malays and others. The activities of these traders seem to fit Braudel’s model of high profit seekers linking smaller markets. However, the claim that these Asian world economies of the fifteenth and earlier centuries involved core cities seems strained. Even after the Mughal, Ming, Ottoman and Persian empires were established, it is problematic.

The remaining chapters of Wheels of Commerce deal with the development of capitalism and the role of the state in markets and in establishing monopolies including a lengthy treatment of the activities of the merchant trading monopolies in Africa, Asia and the Americas. Braudel’s treatment of society is a wide-ranging social and political analysis including discussions of hierarchies, revolts and the state and social order. Braudel does not use the terminology, “social norms,” but in a section “Civilizations do not always put up a fight” (II, p. 555) he certainly explores their importance. He says, “When Europe came to life again in the eleventh century, the market economy and monetary sophistication were ‘scandalous’ novelties. Civilization, standing for ancient tradition, was by definition hostile to innovation. So it said no to the market, no to profit making, no to capital. At best it was suspicious and reticent. Then as the years passed, the demands and pressures of everyday life became more urgent. European civilization was caught in a permanent conflict that was pulling it apart. So with a bad grace, it allowed change to force the gates. And the experience was not peculiar to the West.”

4. The Perspective of the World

In his very ambitious last volume, Braudel deals with long cycles, the emergence of various world economies, historical problems in measuring GDP per person, the colonial economies and the industrial revolution. It is certainly successful in one of its aims, to treat the economic history of the 1400-1800 period as a story of the world, not simply Western Europe. There are rich discussions of Africa, the Americas, and Asia balancing well the perspective of the colonizer and the colonized. In his essay on Max Weber, Engerman (p. 5) places Weber and Braudel, along with David Landes, Joel Mokyr, Douglass North, Nathan Rosenberg and others as scholars dealing with the “perceived uniqueness of the Western European economy.” Let me close this essay by arguing that while Braudel has a lot to say about developments in Western Europe, he did not see a simple explanation of the causes of growth in the West, nor did he think this was the most interesting question to explore.

The uniqueness of Western European experience has certainly been taken as the phenomenon to be explained by many economic historians. Writers like Weber not only looked at European evidence in the Protestant Reformation but also offered explanations of why the religions of other societies, such as India, were less conducive to growth. Braudel is not at home with Weber, nor does he seem to give great importance to institutions like private property, contract, and the like. In fact, he does not seem to accept even the premise that there is something unique to be explained about the development of capitalism in Europe.

It might be argued that this is because of Braudel’s idiosyncratic view of capitalism. Let me again quote Braudel;

“Throughout this book, I have argued that capitalism has been potentially visible since the dawn of history, and that it has developed and perpetuated itself down the ages. (III, p. 620) … It would however be a mistake to imagine capitalism as something that developed in a series of stages or leaps–from mercantile capitalism to industrial capitalism to finance capitalism, with some kind of regular progression from one phase to the next, with ‘true’ capitalism appearing only at the late stage when it took over production, and the only permissible term for the early period being mercantile capitalism or even ‘pre-capitalism’. In fact as we have seen, the great ‘merchants’ of the past never specialized: they went in indiscriminately, simultaneously or successively, for trade, banking, finance, speculation on the Stock Exchange, ‘industrial’ production, whether under the putting-out system or more rarely in manufactories. The whole panoply of forms of capitalism–commercial, industrial, banking–was already employed in thirteenth century Florence, in seventeenth-century Amsterdam, in London before the eighteenth century”(III, p. 621).

Here Braudel strongly sees in his period and earlier the same business forms that exist today and to which others attribute the uniqueness of Western European experience.

However, the following quotation perhaps illustrates where Braudel imparts his own special view of capitalism. He says,

“The worst error of all is to suppose that capitalism is simply an ‘economic system,’ whereas in fact it lives off the social order, standing almost on a footing with the state, whether as adversary or accomplice: it is and always has been a massive force, filling the horizon. Capitalism also benefits from all the support that culture provides for the solidity of the social edifice, for culture–though unequally distributed and shot through with contradictory currents–does in the end contribute the best of itself to propping up the existing order. And lastly capitalism can count on the dominant classes who, when they defend it, are defending themselves.

Of the various social hierarchies–the hierarchies of wealth, of state power or of culture, that oppose yet support each other–which is the most important? The answer as we have already seen, is that it may depend on the time, the place and who is speaking” (III, p. 623).

Braudel has a number of elements of Schumpeter in his view of world economic history, in particular long cycles and creative destruction. One of his important insights shared by many others who stress uneven or unbalanced growth is that world economies have changing borders and that there are often areas not included in any world economy. Indian software programmers are writing for Oracle in Bangalore while other areas of India (and many other world areas) are as yet unaffected by the information technology revolution. Most large countries have special development programs for backward areas, of which many have had flourishing histories, such as natural resource-rich Bihar and Eastern Uttar Pradesh in India, the seat of the Mauryan Empire and the birthplace of the Buddha.

However, Braudel departs sharply from Schumpeter in how he views the capitalist entrepreneur. For Braudel the monopolistic character of capitalism is the key element of privilege and the link between the state and society. He says,

“The rise of capitalism in the nineteenth century has been described, even by Marx, even by Lenin, as eminently, indeed healthily competitive. Were such observers influenced by illusions, inherited assumptions, ancient errors of judgement? In the eighteenth century, compared to the unearned privileges of a ‘leisured’ aristocracy, the privileges of merchants may perhaps have looked like a fair reward for labour; in the nineteenth century, after the age of the big companies and their state monopolies (the Indies companies for instance) the mere freedom of trading may have seemed the equivalent of competition. And industrial production (which was however only one sector of capitalism) was still quite frequently handled by small firms which did indeed compete on the market and continue to do so today. Hence the classic image of the entrepreneur serving the public interest, which persisted throughout the nineteenth century, while the virtues of laissez-faire and free trade were everywhere celebrated. The extraordinary thing is that such images should still be with us today in the language spoken by politicians and journalists, in works of popularization and in the teaching of economics, when doubt long ago entered the minds of the specialists…”(III, pp. 628-9).

These closing quotations from Braudel restate his view that everyday material life and operation of markets proceed at one level while capitalism carries on at a higher level above the others. Further Braudel sees capitalism as closely related to the political elites of the world economy in which they are operating. While Braudel’s view of the world economy is shared by many Marxist historians it is also consistent