is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

The Rise of Capitalism on the Pampas: The Estancias of Buenos Aires, 1785-1870

Author(s):Amaral, Samuel
Reviewer(s):Beatty, Edward

Published by EH.NET (June 1, 2000)

Samuel Amaral, The Rise of Capitalism on the Pampas: The Estancias of Buenos

Aires, 1785-1870. Cambridge: Cambridge University Press, 1998. xviii + 290

pp. $64.95 (cloth), ISBN: 0-521-57248-7.

Reviewed for EH.NET by Edward Beatty, Department of History, Duquesne


The large rural estates of Latin America have long attracted the attention of

historians, placed at the center of debates concerning social inequities,

political influence, and economic growth and development. Whether labeled

haciendas, fazendas, latifundia, or estancias, the large estate has often been

identified with social inequity, coerced labor, productive autarchy and

inefficiency, and technological backwardness. In short, the landed estate of

the eighteenth and nineteenth centuries has been seen as one locus of feudal

persistence in Latin America. Although many studies over the past two decades

have offered a more nuanced and largely revisionist view, only a handful have

provided systematic examinations of the internal dynamics of estate operation.

Samuel Amaral, who teaches history at Northern Illinois University and has

published extensively on Argentine rural and economic history, offers a long

overdue contribution to this subject. The Rise of Capitalism examines

the estancia, the large livestock ranch of the Argentine plains, during the era

of its critical reorientation toward the demand for cattle products generated

in the North Atlantic, circa 1780-1860. The importance of this contribution is

not so much the subject as the approach. Using detailed local sources,

including probate records, estate inventories, managers’ reports, travelers’

accounts, and agricultural surveys, Amaral presents an intensive and compelling

portrait of the internal operation of the Argentine estancia. His conclusions

— and the importance of this work –lie on two levels. First, Amaral shows

that the internal operations of the estancia were market oriented and profit

motivated. Owners and managers responded to market conditions and in their

daily behavior sought consistently to maximize efficiency and profit. Second,

Amaral shows that the estancia developed within an environment where

competitive pressures mattered more than political protection and social

privilege. This is not to say that the political environment did not matter,

for estancias evolved within a particular framework of formal law and informal

custom (and themselves helped alter that institutional context), but that

market-based allocation of the factors of production within the estancia “firm”

mattered more.

While the golden age of economic expansion in the Argentine pampas would not

come until the late nineteenth century, Amaral shows that extensive growth and

profitability were well underway in the first half of the century. The economic

foundations of the estancia lay in their use of land, capital, and labor, and

Amaral presents a systematic examination of each. Land was open and abundant

(chapters 2 & 3), estancias were capitalized largely in the cattle stock

(chapters 3 & 5), and labor consisted of relatively small numbers of slaves

(until after independence) and itinerant temporary free workers — the

Argentine gaucho (chapters 2 & 8). This last issue — labor instability in the

form of large numbers of temporary workers — receives careful treatment.

Neither labor scarcity nor cultural traits explain instability, he argues, but

rather the seasonal pattern of labor demand, patterns created by biological,

climatic, and environmental factors. Amaral is convincing here, although doubt

remains as we are given no view of the broader labor market, of gaucho society,

or of changes in labor’s price. Indeed, Amaral’s narrow focus on quantifiable

data and the dearth of reference to the broader political, social, and cultural

context throughout the book weakens and isolates the contributions that are

made here.

Perhaps the most interesting and important chapters of this work are those

which treat the environment (chapter 6), institutions (chapter 7), and

management (chapter 9). Moving beyond the more conventional issues like factors

of production and market conditions, Amaral shows convincingly that competitive

pressures and market signals mattered greatly, but mattered within a set of

environmental and institutional contexts that largely shaped their evolution.

The physical attributes of the Argentine pampas are well known. Fertile soil, a

broad frontier, and vast expanses of rolling grasslands provided an ideal

environment for grazing Old World cattle, with growing investment activity in

grain agriculture and, later, in sheep. Beyond this context, Amaral focuses on

the thistle, which grew prolifically after cattle disturbed the landscape,

providing a haven for rustlers and a constant aggravation for herders. Vast

“thistleries,” higher than a man’s head, spread across the pampas and shaped

the seasonal rhythm of estancia operations until the expansion of sheep grazing

and agriculture later in the century reduced their scope.

Like thistles, political institutions could also impinge on estancia operations

and productive growth. Both estancieros and the state had an interest in the

specification of property rights on the pampas, including survey and titling

provisions, herding conventions, stocking limits, brand management, the

depredations of wandering cattle, and law enforcement. Amaral shows that

estancieros lobbied for minimum restrictions on the full use of their property

rights (p. 150), but that they also sought increased regulation (or at least

enforcement) of their property rights (p. 147). The combination of wandering

cattle, game hunters, and unfenced lands created externalities against which

estancieros sought to rally protection. The outcome was largely a function of

estanciero’s demands, the physical environment of the pampas, and the limits

imposed on political institutions by the costliness of their enforcement in the

countryside. On most issues, all these worked in the same direction and favored

a competitive environment of private properties. Although this discussion could

use a more systematic comparison of pre-growth (circa 1780) institutional

conditions (including land grants, informal use, title legalization, and

emphyteusis) with the reforms considered in the 1850s and 60s, Amaral provides

an effective model for further work along these lines.

Management decisions were crucial to the estancia’s profitability. Allocating

the factors of production and adjusting to uncertainty required constant

vigilance and some expertise. An estancia’s success, Amaral writes, “was

guaranteed neither by vast tracts of land and large herds nor by the right

political connections. All those elements were necessary, but it was up to the

individual entrepreneur to combine them to make a profit” (p. 208). Indeed,

estancia management explains a central paradox of estancia expansion before

1860: that expansion occurred while the cost of inputs (principally land) was

rising and the price of outputs (principally cattle) was falling. Amaral argues

that estancieros succeeded in using resources more efficiently, allowing

survival, expansion, and profitability in the face of deteriorating relative


Although this book offers important evidence and insights into the formative

stages of the nineteenth century Argentine estancia, it comes at the price of

wading through pages of detailed evidence — often fascinating in itself but

also often tedious. Each chapter takes a narrative approach to the evidence,

and we get a step-by-step, at times disorderly, account of the author’s

exploration of historical minutia. It takes some effort to locate the

conclusions amidst the details (including over 120 tables and figures!),

although each chapter ends with a nice summation. The style is neither concise

nor always direct, and the historical evidence often stands alone. For

instance, Amaral’s extensive evidence on the relative costs and investments on

owned and non-owned lands (or, better put, on lands characterized by formal and

informal property rights) suggests that property right security affected

investment decisions, yet this important topic receives little direct comment

here (pp. 92ff and elsewhere).

For this reader, however, the price was well worth the effort. The Rise of

Capitalism on the Pampas is the result of intensive research, compelling

detail, sophisticated method, and convincing (if restrained) arguments and

insights. It makes a profound contribution to our understanding of this topic,

although it will not end historians’ debates on most of the subtopics. While

the book should appeal most to economic and Argentine historians, it should

also appeal to those interested in comparative agrarian history and in the role

of institutions in economic history.

Ted Beatty is author of Institutions and Investment: The Political Basis of

Industrialization in Mexico before 1911 (forthcoming from Stanford

University Press) and several articles on nineteenth century Mexican economic


Subject(s):Agriculture, Natural Resources, and Extractive Industries
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

Grand Master Workman: Terence Powderly and the Knights of Labor

Author(s):Phelan, Craig
Reviewer(s):Weir, Robert E.

Published by EH.NET (June 1, 2000)

Craig Phelan, Grand Master Workman: Terence Powderly and the Knights of

Labor. Westport, CT: Greenwood Press, 2000. 304 pp. $65 (cloth), ISBN:


Reviewed for EH.NET by Robert E. Weir, Department of Liberal Studies, Bay Path

College, Longmeadow, MA.

Few labor leaders have been vilified more than Terence Powderly. Most

historians endorse Norman Ware’s 1929 assessment that Powderly was a “windbag”

and accuse him of misdeeds ranging from authoritarian control of the Knights of

Labor to cowardly sell-outs of strikes. Powderly is conventionally seen as an

incompetent leader who was against all strikes, opposed to third party

political action, and paranoid over radicalism. Most accounts blame at least

part of the Knights’ demise on Powderly’s ineffectual leadership.

Craig Phelan, a lecturer at the University of Wales, Swansea, finds this odd

given that no union head “before or since has even approached the level of

respect and adulation accorded Powderly” (p. 1). While scholars of John L.

Lewis, Walter Reuther, or Cesar Chavez might accuse Phelan of hyperbole, his is

an overdue corrective to the historical community’s uncritical acceptance of

Ware’s thesis. (Which was based largely on information provided by Powderly’s

arch-betrayer, John Hayes.) If we look closely at the evidence, a very

different Powderly emerges. Rather than the destroyer of the Knights of Labor,

Powderly transformed it from a fringe group to the largest, most powerful, and

most diverse labor organization of the nineteenth century. In fact, Phelan

opines, only a man of Powderly’s extraordinary talent could have headed such an

unwieldy organization.

Phelan attempts — with varying degrees of success — to demolish Powderly

myths. Powderly was not a small-town moralist, he argues, rather a “child of

industrial America,” (p. 37) whose early life was shaped by Catholicism, his

machinist’s training, political squabbles within Scranton, Pennsylvania, the

Panic of 1873, and the railroad strikes of 1877. Powderly’s active role in the

Knights of Labor began in 1878, when he resolved a potentially crippling debate

over ritual (which he disliked) and by 1879, Powderly headed the organization,

though he was also the mayor of Scranton.

Phelan praises Powderly’s tireless efforts to bring the Knights to prominence.

Troubled by quinsy for his entire life, Powderly often sacrificed his own

health to build the organization. As Phelan correctly notes, the early KOL had

no central office, no staff, and a constitution that decentralized authority

beyond the means of any single individual to dictate policy. It was chronically

short of money as local assemblies were reluctant to pay their assessments.

Were it not for Powderly’s dogged determination, the Knights might have died in

1881, when membership dropped precipitously.

Phelan notes that the discontent that marked the Knights in the 1880s was a

product of Powderly’s ability to bring to the fold men and women from various

ideological persuasions, not intolerance or rigidity on his part. Nor is there

evidence to sustain charges that Powderly failed to support strikes. Phelan

convincingly demonstrates the differences between what Powderly counseled in

private and how he conducted himself publicly once conflict arose. For example,

when Pittsburgh glassblowers struck in 1883 and KOL funds proved too meager to

sustain the fight, Powderly threw his own energies into raising necessary

funds. In nearly every strike the KOL conducted, Powderly supported the rank

and file. Most that failed, Phelan claims, did so because of lack of resources

or because they were ill-advised, not because Powderly sold out workers.

One by one, Phelan refutes charges laid at Powderly’s doorstep. He was not

against third parties per se, rather he saw lobbying as a more effective

alternative. He did not understand cooperation all that well, but lent his

authority to efforts to raise money for experiments. Phelan even argues that

Powderly was never controlled by or cooperated with the Home Club, largely by

claiming that trade union malcontents exaggerated the power of the New York

City-based kickers. Phelan also blames trade unions more than the Knights for

the bad blood that existed between them. It was Samuel Gompers, not Powderly,

who sandbagged peace overtures.

Phelan deftly gives context to many of the decisions for which Powderly has

been criticized during the Great Upheaval. He argues that the KOL’s structure

was simply “too fragile” (p. 172) to sustain the furious capitalist

counter-assault its own modest successes unleashed. In 1885 alone, the KOL

endured simultaneous crises of anti-Chinese riots in Wyoming, a coal strike in

Indiana, a strike against Jay Gould’s railroads, and clashes with carpet

weavers’ and cigarmakers’ unions. This was typical of what Powderly and the

Order faced for the next three years. The organization was neither rich nor

powerful enough to stand up to organized capital. Phelan credits common sense

in Powderly’s attempts to salvage what he could from futile battles (like the

1886 Chicago packinghouse strikes) and to distance the KOL from public

relations nightmares (like association with the Haymarket anarchists).

Phelan feels the KOL would have been stronger if it had given Powderly power to

centralize authority. The Knights rejected this overture in 1886, however, and

though he gained some measure of personal control in 1888 — which Phelan too

rosily calls “a necessary evil” (p. 234) — it was too late to save the KOL.

The last five years of Powderly’s tenure were unpleasant ones marked by

internal intrigue, lost strikes, shrinking membership, and financial hardship

for both Powderly and the KOL. Phelan makes Powderly’s 1893 ouster seem like a

mercy killing, and he skips quickly over the remainder of Powderly’s life. In

an ironic coda, Phelan echoes Ware’s assertion that the Knights of Labor were

an experiment in democracy, though he sees decentralized democracy as the

source of jurisdictional battles, money crises, and factionalism. The KOL’s

demise was not Powderly’s fault, rather the failure of “horizontal unionism”

(p. 273) to take hold in a Gilded Age context.

I admire this book, Phelan’s loving attention to detail, and his challenges to

long-held stereotypes. I have, however, reservations about various parts of it.

(In the interest of full disclosure I note that Phelan takes aim at some of my

work in his book, especially as it pertains to the Home Club.) In a word, the

book lacks nuance. He sets up straw men throughout. Why does being a “child of

industrial capitalism” preclude Powderly from being a “small town moralist,” as

I and others have charged? Couldn’t he be both? (Think William Green or Philip

Murray.) In a similar vein, Powderly’s ideological opposition to strikes is so

well-documented that it’s almost perverse to paint Powderly as an ardent strike

supporter. Contemporaries like Joseph Buchanan and Eugene Debs admirably led

strikes they personally opposed. Phelan should have played off the delineation

he made between Powderly’s counsel on strikes and his leadership once they


Phelan is far too enamored of his subject and tries to rationalize unseemly

character flaws. A lovable Terence Powderly is as inaccurate as Ware’s windbag.

While it is true that Powderly was beloved by many, so too was he hated by

legions. His correspondence with men like Theodore Cuno, Charles Litchman, and

Henry Sharpe oozes venom and Powderly was not always the aggrieved party. He

could be charming, but he was also vain, cruel when angered, and a schemer. Nor

does Phelan’s whitewash of Powderly’s Haymarket response ring true. Powderly

was one of the very few labor leaders who did not endorse clemency and

historians rightly condemn his cowardice on this score. And if Powderly was as

principled as Phelan asserts, why didn’t he make good on threats to resign over

core issues like trade union policy, centralization, or the makeup of the

executive board?

I disagree with Phelan’s take on the Home Club. Suffice it to say that what he

rejects as “fanciful” requires a more improbable explanation. It’s hard to

imagine that men as level-headed, scrupulous, and as close to the truth as

George McNeill, Joseph Labadie, and Joseph Buchanan could be seduced by a myth.

Phelan categorically denies the Home Club ever controlled the KOL, but how does

one define “control?” During the crucial years of 1886 and 1887, Powderly

championed rapprochement with trade unions, centralized authority, and

curtailing strikes. He led an organization that endorsed the opposite. That

just happens to be the core of the Home Club’s agenda and sounds like “control”

to me.

Though this is hardly a flawless book, it points us in the right direction for

critically reassessing Terence Powderly and the Knights of Labor. Phelan asks

incisive and probing questions. Who, he asks, could have done as well as

Powderly in such a difficult position? What sort of labor organization would

have met laborer needs better than the KOL’s horizontal unionism? (Certainly

not the parochial craft perspectives of the Gompers clique.) Was it even

possible for workers to win the “lockout crusade” of the late 1880s? Phelan

challenges us to stop demonizing a single man and take a harder look at systems

of capitalist accumulation.

Robert E. Weir is author of Beyond Labor’s Veil: The Culture of the Knights

of Labor (Pennsylvania State University Press, 1996).

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):19th Century

The Great Transformation: The Political and Economic Origins of Our Time

Author(s):Polanyi, Karl
Reviewer(s):Mayhew, Anne

Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time. 1944. xiii + 305.

Review Essay by Anne Mayhew, College of Arts and Sciences, University of Tennessee.

Markets to Market to Protection: Karl Polanyi’s Great Transformation

Karl Polanyi, once a World War I officer in the Austro-Hungarian army, a lecturer at the People’s University, and a member of the editorial staff of Vienna’s leading financial newspaper, who had been forced first from his native Hungary and then from Vienna by the turmoil of revolutions and dictatorships, began The Great Transformation as an exile in England at the end of the 1930s. He completed it in the U.S. during World War II. The task he set himself was to explain the political and economic origins of the collapse of nineteenth-century civilization, and the great transformation that Polanyi had lived through in the twentieth. As he saw it, four institutions were crucial to the economic and political order that had characterized the North Atlantic Community and its periphery in the nineteenth century: a balance of political power, the international gold standard, a self-regulating market system, and the liberal state. The SRM (self-regulating market) was “the fount and matrix of the system,” the “innovation which gave rise to a specific civilization” (p. 3).

The Great Transformation is a history of the SRM: of its emergence from the fact that the Industrial Revolution of the late eighteenth and early nineteenth centuries took place within a thoroughly commercial though not yet thoroughly market-organized economy; its nurture through the efforts of the liberal economists and statesmen of England in the first decades of the nineteenth century; and finally its demise as a consequence of the “protective reaction” to counteract the consequences that the SRM spawned. Two crucial differences between Polanyi’s analysis and that of most other historians of the economy and of the thought of the nineteenth century are so important to understanding his work that they must be made explicit even before their role in the larger argument is recounted. Polanyi differentiated between economic systems in which there were markets and the “starkly utopian” SRM of the nineteenth century. Markets are places or networks in which goods are bought and sold; they are human interactions organized by price, quality, and quantity of traded goods and services. The SRM was a society-wide system of markets in which all inputs into the substantive processes of production and distribution were for sale and in which output was distributed solely in exchange for earnings from sales of inputs. The second crucially distinct feature of Polanyi’s analysis is his argument that the SRM could not survive — not because of the distributional consequences that play the major role in Marx’s explanation of the inevitable collapse of capitalism — but because the starkly utopian nature of the SRM gave rise to a spontaneous counter movement, even among those enjoying increased material prosperity. Society is vital to humans as social animals, and the SRM was inconsistent with a sustainable society.

Polanyi developed his argument from the work of many economic historians, historians of thought, anthropologists, and others. The Industrial Revolution of the late eighteenth and early nineteenth centuries was “an almost miraculous improvement in the tools of production,” but was also an equally powerful revolution in economic organization that was in part a consequence of the introduction of the new machines into an already commercially organized economy, and in part a social experiment. Up to this point the economies of much of Western Europe, and certainly of most of Britain, had been quite thoroughly commercialized: cottage industries, paid agricultural labor, and thriving trade in towns meant that most people earned money and used that money to buy the material stuff of life. However, as Polanyi also noted, control and regulation of markets by governments and other organizations were also widespread and common. Markets were controlled; they did not control until the beginning of the nineteenth century.

In laying out this argument, Polanyi recognized the need to deal directly with the proposition, itself a creation of late eighteenth and early nineteenth century British thought, that market organization of economic activity was the natural state of human affairs. Polanyi was (counter to what many of his later critics say) quite well aware that markets and careful calculation of prices by buyers and sellers alike had long been important parts of many human societies. By use of logic and of the historical record, Polanyi developed a schema of “forms of economic integration”: that is, forms of organization for production and distribution, of which the familiar circular flow of an idealized capitalist economy (the SRM) is only one. Polanyi developed his schema for characterizing economies to show that economies could and had been organized in ways other than through an SRM. He argued that the organization of production and distribution in many societies had been accomplished through social relationships of kin or community obligations and counter obligations (reciprocity) and that other societies, on scales as small as a band of Kung bushmen or as large of Hammurabi’s empire, or even as large as the planned economy of the Soviet Union, employed redistributive systems.

In much of Western Europe a combination of redistributive and reciprocative systems dominated through the end of the feudal and manorial era, and came to be increasingly supplemented and then replaced by market trading, the control and encouragement of which was a major focus of medieval municipal and mercantilist national governments. (In The Great Transformation Polanyi also described “householding” as a form of integration, but in later work reclassified it as “redistribution writ small.”)

Then, toward the end of the eighteenth century, and with full force in the first half of the nineteenth century, two things happened. The rapidly expanding factory system altered the relationship between commerce and industry. Production now involved large-scale investment of funds with fixed obligations to pay for those funds. Producers were less and less willing to have either the supply of inputs or the vents for output controlled by governments. The second and closely related change was the development of economic liberalism as a body of thought that provided justification of a new set of public policies that facilitated transformation of land, labor, and capital into the “fictitious commodities” of a self-regulating system. Land (nature), labor (people), and capital (power of the purse) were not in fact produced for sale. Nor did the available quantity of land, labor, and capital disappear inconsequentially when relationships of supply and demand produced low input prices. This issue was, of course, particularly acute in the case of labor and led to the dismal conclusions of classical economics. Polanyi describes how, in spite of the threat to social order, the philosophy that came to be called “laissez faire” was “[b]orn as a mere penchant for non-bureaucratic methods . . . [and] evolved into a veritable faith in man’s secular salvation through a self-regulating market” (p. 135). Polanyi describes this evolution of British thought from the humanistic approach of Adam Smith, who wrote in a time of “peaceful progress,” through Malthus’s acceptance of poverty as part of the natural order, and on to the triumphant liberalism of the more prosperous 1830s. What is important is that a set of recommendations about public policy was transformed into widespread acceptance as the laws of a natural order.

Polanyi called the continuing tension and conflict between the efforts to establish, maintain, and spread the SRM and the efforts to protect people and society from the consequences of the working of the SRM “the double movement.” On one side was a concerted philosophical and legislative program to establish the SRM from the enclosures of the 1790s through the Poor Law Reform of 1834 to the Ricardian Bank Charter Act of 1844 and the repeal of the Corn Laws in 1846. The other side was a widely varying, unorganized set of movements, legislative reforms, and administrative actions to limit the effects of self-regulation, from the Chartists through early legislation to limit the hours and places of work of women and children, through the growth of labor unions, and through the emergence of the Bank of England as lender of last resort, to reimposition of tariffs on foodstuffs, and to the first legislation presaging the welfare state. As the SRM was impaired in operation, justifications for international economic cooperation and the liberal state weakened.

Polanyi’s story of the tensions in and collapse of the self-regulating economies that developed in the first half of the nineteenth century differs sharply from the story that Marx anticipated and from the story that Marxian economists have told. Though Polanyi argues that perception and response to the damages of the SRM varied by class, and therefore “the outcome was decisively influenced by the character of the class interests involved,” (p. 161) it was not unfair distribution of total output via exploitation that caused the tensions and ultimate collapse of the SRM system. The working class did not rise up to overthrow the system. Rather, land owners and bankers as well as merchants, whose interests were often threatened by fluctuations in trade, joined workers in seeking protection. As they got protection, the SRM was “impaired,” eventually the point of collapse. Increasing protection so impaired the SRM that it could no longer coordinate the world’s economy when World War I destroyed Europe’s balance of power. The struggle to restore the nineteenth century system by reestablishing the gold standard destroyed the international financial system.

Dictatorships in some places and more benign management elsewhere emerged in nationally varying responses to the collapse of the SRM system. Polanyi was optimistic but uncertain about what the longer term results of the reaction to the nineteenth century utopian experiment in economic organization would be, and if he were alive today his answer might remain uncertain for, to a remarkable extent, the conflicting sides of Polanyi’s double movement still dominate debates in public policy. As neo-liberalism founded on faith in secular salvation through the natural emergence of a self-regulating market system has spread in Central and Eastern Europe and in Asia, Africa, and Latin America, so too have calls for protection of man, nature, and national interests. The framework that Polanyi provided for understanding the collapse of nineteenth century civilization and the rise of the troubled twentieth remains powerful.

Having said this, however, it must also be said that The Great Transformation contains some major errors of omission and interpretation. Most striking to me, as an economic historian of the United States, is his cavalier and quite wrong assertion that a double movement did not develop in the U.S. until after 1890 because, until then, “free land,” a ready supply of cheap labor, and a lack of commitment to keeping foreign exchanges stable meant that a fully self-regulating market did not exist and no protection was needed. This is plainly wrong. In addition, some students of England in the late eighteenth and early nineteenth century quarrel with his interpretation of the Speenhamland system of subsidies in aid of wages.

However, the strongest and most long lasting criticism of The Great Transformation has been directed at the passages where he argues that reciprocative and redistributive forms of integration have been much more common in human history than self-regulating market systems. These criticisms invariably focus, however, not on the forms of integration themselves but on the mistaken proposition that Polanyi assumed the forms to be founded on different human motives: the SRM on self-interest and rational calculation and reciprocative systems on kindness and generosity. (Far less has been said about motives associated with redistribution, probably because emphasis has been on the contrast between greed and kindness, and on the proposition that “you cannot change human nature,” with the associated proposition that the nineteenth century British economy was truly natural.) The original attack of this kind came, not from economists or economic historians, but from anthropologists whose disciplinary literature Polanyi had used in making his assertion. Beginning in the early 1960s, anthropologists, for reasons having to do with changing political structures in the worlds that they studied and because of the evolution of thought in their discipline, began to insist that the primitive and peasant peoples whom they studied were as rational as any westerners.

These anthropologists — known as formalists in the debates that ensued — found in Polanyi, and in the work of some of his followers such as George Dalton, a convenient target. They accused Polanyi and his followers of romanticism about other peoples. Description of behavior in reciprocative systems was fodder: “The premium set on generosity is so great when measured in terms of social prestige as to make any other behavior than that of utter self-forgetfulness simply not pay” (italics added, p. 46). To anthropologists, who ignored the crass and rational self-interest implied by the phrase that I have italicized, this smacked of saying that non-modern, non-western people were “different” and not self-interested and rational. They disagreed and by extension dismissed the rest of Polanyi’s argument about reciprocity and the SRM.

Very similar arguments have been mounted by some economists. The passage most often quoted in ridicule of Polanyi’s argument is this: “previously to our time no economy has ever existed that, even in principle, was controlled by markets . . . gain and profit made on exchange never before [the nineteenth century] played an important part in human economy” (p. 43). Deirdre McCloskey, both in print and in a heated exchange on the FEMECON list serve, faults Polanyi in a way that illustrates precisely the difficulty that many readers, anthropologists and economists alike, have had with the book. McCloskey says that Polanyi asked the right question, but gives the wrong answer in saying that markets played no important role in earlier human societies. As proof McCloskey cites evidence that, the further away from their source of obsidian the Mayan blade makers were, the less was the ratio of blade weight to cutting length. To McCloskey this indicates that “By taking more care with more costly obsidian the blade makers were earning better profits; as they did by taking less care with less costly obsidian” (1997, p. 484). Ergo, Polanyi is wrong, presumably about the existence of other forms of integration and their importance. To be more careful with harder to get valuables is certainly rational, but it is not evidence of how blade makers were provisioned with material means for their sustenance or joys.

It is one thing to note that people for whom shipment of obsidian was difficult treated it with care; another to assume that they used it to produce goods that they sold for profit. Polanyi is in fact careful to note that the range of human motives varies little across systems, with the specific form of action that any motive such as self-interest, generosity, anger, or jealousy may take dependent upon the system. The economic system does not, however, depend upon the presence, or absence of the preponderance of any one motive. That this is perhaps the most difficult point that Polanyi makes is itself testament to the success of those who created the justifications for the nineteenth century.

In the years after publication of The Great Transformation Polanyi and a number of colleagues and students expanded analysis of the forms of economic integration and produced the collection of essays published as Trade and Markets in Ancient Empires. Both books present Polanyi’s understanding of what made the economies of the nineteenth and of the twentieth centuries so different, and with such far-reaching consequences, Polanyi created a way of thinking about economies and societies that has had substantial impact on economic history, anthropology, and the study of the ancient Mediterranean. The Great Transformation remains important as a highly original contribution to the understanding of the Western past; it has been and is important in methodological debates in the social sciences. Beyond that, as the double movement continues, the book is likely to remain one of the best guides available to what brought us to where we are.

Annotated References:

Polanyi, Karl. 1944, 1957. The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon Press by arrangement with Rinehart & Company, Inc. (The Beacon Press version remains in print and is the version for which page numbers are given in this essay. The book has been translated into and published in Hungarian, Chinese, Japanese, French, German, Portuguese, and Spanish).

Dalton, George. 1961. “Economic Theory and Primitive Society,” American Anthropologist 63 (Feb.): 1-25. [One of the articles that sparked the formalist-substantivist dispute in economic anthropology.]

Drucker, Peter. 1979. Adventures of a Bystander. New York: Harper & Row. [This book contains an account of the remarkable Polanyi family by a friend who knew them in Vienna.]

Duncan, Colin A.M. and David W. Tandy. 1994. From Political Economy to Anthropology: Situating Economic Life in Past Societies. Montreal and New York: Black Rose Books. [Selection of papers from annual Polanyi Institute Conference.]

Finley, Moses I. 1978. The World of Odysseus . New York: Viking Press. [Classic application of Polanyi to the ancient world.]

Halperin, Rhoda. 1988. Economies Across Cultures: Towards a Comparative Science of the Economy. New York: St. Martin’s Press.

Mayhew, Anne. 1972. “A Reappraisal of the Causes of Farm Protest in the U.S., 1870-1900.” Journal of Economic History 32 (June): 464-475. [Though not acknowledged as such, this was an application of Polanyi’s ideas to the U.S. economy.]

Mayhew, Anne. 1980. “Atomistic and Cultural Analyses in Economic Anthropology: An Old Argument Repeated,” in John Adams, editor, Institutional Economics: Contributions to the Development of Holistic Economics . Boston: Martinus Nijhoff.

McCloskey, Deirdre N. 1997. “Polanyi was Right, and Wrong.” Eastern Economic Journal 23 (Fall): 483- 487.

North, Douglass C. 1977. “Markets and Other Allocation Systems in History: The Challenge of Karl Polanyi.” Journal of European Economic History 6 (Winter): 703-716.

Polanyi, Karl, Conrad M. Arensberg, and Harry W. Pearson. 1957. Trade and Market in the Early Empires: Economies in History and Theory. Glencoe, Illinois: The Free Press.

Sievers, Allen M. 1974. The Mystical World of Indonesia: Culture and Economic Development in Conflict. Baltimore: Johns Hopkins University Press. [Polanyi applied to development issues.]

Schaniel, William C. and Walter C. Neale. 2000. “Karl Polanyi’s Forms of Integration as Ways of Mapping.” Journal of Economic Issues 34 (March): 89-104.

Tandy, David W. 1997. Traders and Warriors: The Power of the Market in Early Greece. Berkeley: University of California Press. [Recent application of Polanyi to the ancient world.]

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

The Natural Instability of Markets: Expectations, Increasing Returns, and the Collapse of Capitalism

Author(s):Perelman, Michael
Reviewer(s):Hall, Thomas E.

Published by EH.NET (May 2000)

Michael Perelman, The Natural Instability of Markets: Expectations,

Increasing Returns, and the Collapse of Capitalism. New York: St. Martin’s

Press, 1999. xiv + 188 pp. $39.95 (cloth), ISBN: 0-312-22121-5.

Reviewed for EH.NET by Thomas E. Hall, Department of Economics, Miami

University, Oxford, Ohio.

Economists have long known that competition has some ugly side effects. In

competitive industries, firms go out of business. The competitive process

exhibits Schumpeter’s creative destruction as new technologies come along which

displace existing industries. Workers lose their jobs, and firm owners lose

wealth. This is all very unpleasant for the people who are adversely affected

by these changes, but in the net society is better off by reaping the benefits

of economic efficiency. At least, that is what economists generally believe

about the competitive outcome. This is why most economists argue that (with the

exceptions of a few cases such as public goods and natural monopolies) a policy

of enhancing competition is desirable.

Michael Perelman challenges this conventional economic orthodoxy by arguing

that the economic instability caused by competition may be so large that it

outweighs the beneficial effects of economic efficiency. In fact,

competition is so awful that “the tendency of the competitive process is to

lead to depressions” (p. 62). Perelman does not argue that monopolies are the

solution, instead he contends that society’s welfare is enhanced by having an

industrial structure that is neither too competitive, nor too concentrated. The

optimal structure lies somewhere in between, where the gain in economic

stability resulting from a less than perfectly competitive structure exceeds

the loss to society of lower economic efficiency.

It’s an interesting argument, but one that isn’t well enough documented for

most people to accept. Too much of Perlman’s discussion focuses on what’s wrong

with competitive markets, and too little on the benefits they create.

Yes, the competitive process can cause wrenching changes in society, but what

about the lower prices we pay, the wider variety of goods and services we

choose among, the improved quality of products…? These considerations are

given short shrift compared to the evils of “instability.”

A serious weakness of the book is its lack of a discussion on the role of

demand. For example, Perelman considers economic depressions to be the

intensification of the competitive process. While most of us would agree that

competition among firms is more intense during economic recessions,

would we extend the argument by saying that competition caused the downturn? I

don’t think so. Economic recessions are typically caused by slowdowns in

aggregate demand growth. As spending growth slows, firms have to compete more

intensely for scarcer sales. Thus, we observe more competition during

downturns, but competitive pressures hardly caused the recession.

Perelman also argues that high wages during recessions are good since “high

wages represent a healthy stimulant to the economy . . . because high wages

will encourage productivity” (p. 121). This efficiency wage argument has merit,

but taken to extremes it could cause major problems. After all, if promoting

high wages is such a great idea, during the next recession let’s be sure to

raise the minimum wage to $1 million per hour and see how well that stimulates


We often tell students not to get caught looking at the trees when they should

be concentrating on the forest. I think the opposite applies to this book.

Several of Perelman’s trees, i.e., the specific cases he discusses to buttress

his argument, are quite interesting. For example, there is an informative

history of entry and exit in the automobile industry, an excellent discussion

of x-efficiency, and a summary of estimates of the costs of unemployment in

terms of numbers of suicides, homicides, and such that would be useful to

instructors of macroeconomics principles classes.

However, I am considerably less enamored with the forest, the idea that

competition creates more problems than it solves.

Thomas E. Hall is the coauthor (with J.D. Ferguson) of The Great Depression:

An International Disaster of Perverse Economic Policies

(University of Michigan Press, 1998).

Subject: V, W Geographic Area: 7 Country/Region: U.S.

Time Period: 8, 9

Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Lawyering for the Railroad: Business, Law, and Power in the South

Author(s):Thomas, William G.
Reviewer(s):Childs, William R.

Published by EH.NET (May 2000)

William G. Thomas. Lawyering for the Railroad: Business, Law, and Power in

the South. Baton Rouge: Louisiana State University Press, 1999. xxii + 318

pp. Maps, photographs, notes, Note on Manuscript Sources, bibliography, and

index. $47.50 (cloth) ISBN 0-8071-2367-6; $24.95 (paper) ISBN 0-8071-2504-0.

Reviewed for H-Business and EH.NET by William R. Childs,,

Department of History, Ohio State University.

A Flawed Attempt to Synthesize Business, Legal, and Regional History

Focused on a topic which historians have not investigated in any depth–the

role of lawyers in the evolution of the railways in the South–this is a book

that scholars of business, the South, and the law should consult. But there are

problems with the book: It is not well-conceived or written and too often it is

not always clear in the footnotes what sources sustain the author’s assertions.

The major strength of the book lies in the sources that William G. Thomas

uncovered, particularly records of over 40 railway legal departments. He

supplemented these organizational records with another 20 manuscript sources,

mostly the papers of individuals, but also including the voluminous Baker &

Botts History Collection, which chronicles the important history of the

Houston, Texas, law firm. His short “Note on Manuscript Sources” furnishes a

concise overview and helpful comments on the significance of some of the

sources. Nonetheless, the manner in which Thomas conveys the results of his

research is disappointing.

Perhaps the problem lies in Thomas’s effort to meet too many purposes in

writing the book. Thomas, who studied at the University of Virginia, where he

is now director of the Virginia Center for Digital History, is interested in

lawyers (his family has many) and their work, in the South as a region, and in

how “monopoly power worked” (xi). He attempted an

“interactive” approach to the law and society in which “law and legal processes

both shape and derive from social and economic change” (xiiin1).

He also tried to write a social history of Southern lawyers, as well as a

business history of railroading from the perspective of the legal department.

So, he wanted to synthesize business, legal, and social history in a regional

setting, an endeavor that requires not only expertise in each field but also

facility in composition. Had Thomas been more careful in writing introductions

and conclusions to each chapter–helping the reader keep clear the many threads

of his complicated tale–he might have accomplished many of these goals.

Instead, anecdotes are not always clearly related to the larger themes;

repetition of evidence appears without reason; and themes (such as federalism)

are introduced and dropped without adequate development in the text or notes.

And, as those of us who have worked in Southern history understand only too

well, trying to generalize across the region holds numerous traps. While in

many ways southern, Texas,

for example, does not always fit the general economic and political patterns

found in the rest of the Old Confederacy; yet, much of Thomas’s key evidence

comes from Texas.

The book generally follows a chronological approach over nine chapters.

When railroads first appeared, Thomas argues, they hired local lawyers to help

in establishing rights-of-ways and to work with construction aspects of the

business. Once the railways were up and running, the need for a permanent legal

department emerged. In chapters 3, 4, and 5, he attempts to show how the growth

of railways changed the nature of legal departments

(they became more hierarchical and bureaucratic) and how litigation,

particularly personal injury lawsuits, evolved. Growth also forced railway

lawyers into the role of lobbyist in the state legislatures, and eventually in

congress. Thomas spends a lot of time focusing on personal injury litigation

(almost to the exclusion of the important work of regulation).

He indicates that tensions emerged as corporate managers attempted to demand

total loyalty from the hired hands; local lawyers had to weigh the balance

between the steady assignments associated with the interstate railroad legal

department and the negative impact that work would have on the rest of their

local practices.

In chapter 6, “Progressive Reform and the Railroads,” Thomas argues that the

consolidation movement in railroading at the turn of the century prompted many

Southerners to oppose the “monopoly” power of the railways.

The 1890s and first decade of the 20th century were busy times for railway

lawyer-lobbyists as they attempted to undermine legislative controls before

they were enacted and, if failing that, after they were enacted. Several

anecdotes indicate that the lawyers and the corporate managers sometimes took a

cost-benefit approach in deciding whether to fight legislation and complaints

from customers; sometimes it made more economic sense to clean up a work yard

in order to reduce the number of potential personal injury suits. Beyond the

anecdotes, however, Thomas does not indicate to what extent lawyers became

involved in the management decisions of the railways.

Meanwhile, lawyers began to engage in their own profession-specific

associational activities. They used this associational power to prepare for

appeals in the Federal court system and to lobby against bills in Congress,

but there remained tension among the members, for they often met one another as

adversaries in personal injury suits.

Chapters 7 and 8 continue the story of southern railway lawyers interacting in

the national arena. Chapter 7 is notable for its confusing narrative on

delaying tactics (see pp. 218-219 and the citations in 219n42, where Thomas

confuses state and national delay tactics). In Chapter 8, Thomas discusses the

liability issue as it relates to the Federal arena. Congressional legislation

in 1906 and 1908 prompted railway legal departments to move liability cases to

Federal courts in order to avoid more onerous state laws. The several pages at

the end of this chapter on the conflicts between state and Federal regulation

add nothing to what scholars already know on this subject. In fact, Thomas is

not very sure footed on the evolution of the regulation of railways. To cite

one example, he claims that Munn v.

Illinois (1877) was reversed in 1890 (p. 170) and does not seem to

understand that the U.S. Supreme Court waxed and waned on the issue of state

versus Federal regulation of railways before and after Munn nor that

Munn was more important for what it said about government regulation of

business than it was for state-Federal jurisdiction. Chapter 9, “The Changed

Law Business,” repeats too much information from earlier chapters,

yet fairly well summarizes the author’s overall argument. Still, Thomas relies

too heavily here on Texas (and on Baker & Botts) and Virginia to make the

generalizations that he does about the entire region.

While Thomas ignores for the most part the role of lawyers in the development

of regulation, he does include helpful insights on a few key topics, including:

analysis of the free pass, which dominated much of the politics of railroading

at the turn of the century (I learned a lot from this; see especially pp.

92-96, 178-181); a useful overview of the railways’ attempts to sidestep Jim

Crow laws (219-225); and, interesting anecdotes on particular train wreck cases

(Chapters 3 and 4 especially).

Thomas occasionally alludes to the lawyers’ attempts to settle cases out of

court, but, as with much else in the book, he does not elaborate on this

important insight. In short, specialists interested in these topics should

consult the book. Other readers might benefit from reading Chapter 9 and the


Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):19th Century

The Solidarities of Strangers: The English Poor Laws and the People, 1700-1948

Author(s):Lees, Lynn Hollen
Reviewer(s):Boyer, George R.

Published by EH.NET (May 1, 2000)

Lynn Hollen Lees, The Solidarities of Strangers: The English Poor Laws and

the People, 1700-1948. Cambridge: Cambridge University Press, 1998. xii +

373 pp. $64.95 (cloth), ISBN: 0-521-57261-4.

Reviewed for EH.NET by George R. Boyer, Department of Labor Economics, School

of Industrial and Labor Relations, Cornell University.

This book presents a broad overview and interpretation of the English poor

laws from the late seventeenth century up to the early twentieth century. In

the introduction Lees states that, despite the large literature on the poor

laws, “we know relatively little about how such institutions operated, how

their practices changed over time, and how they were regarded by ordinary

people” (p. 9). Her book is a very good first step toward filling that gap in

the literature.

The book is divided into three roughly equal parts. Part One (Chapters 1-3)

deals with poor relief up to the Poor Law Amendment Act of 1834. While most of

the discussion is based on secondary sources, Lees nicely summarizes the recent

literature on the poor law, and offers her own well-reasoned interpretations of

the role of poor relief in the lives of the poor. Lees contends that, at least

before 1800, the legitimacy of the poor laws was accepted both by recipients

and by local taxpayers. Members of the working class might not have liked

applying for relief, but they often were forced to turn to the poor law during

bad times, and they strongly defended their right to public assistance. And

while taxpayers, then as now, grumbled about the level of their taxes, they saw

the payment of poor relief to the unfortunate of the community as a duty.

Sometime around 1800, however, the middle class began to question the

legitimacy of poor relief and to view applicants for relief as undeserving.

According to Lees, this change in opinion largely was a result of the sharp

increase in relief expenditures and numbers on relief that began in the late

eighteenth century, and it was accelerated by the writings of Thomas Malthus

and other classical economists claiming that the poor laws actually created

pauperism. The middle class began to feel that the role of the poor law was not

simply to relieve the poor but also to discipline and reform them.

Part Two deals with the early years of the New Poor Law, from 1834 to 1860.

Chapter 4 contains a discussion of the activities of the Royal Poor Law

Commission, its condemnation of current welfare practices, and its

recommendations for implementing the New Poor Law. Chapter 5 examines the

responses of the poor to the New Poor Law. While the middle classes had come to

view acceptance of relief as a sign of moral failings, the working class

continued to regard public relief as an important form of social insurance.

Lees rejects the argument of some historians that workers hated the poor laws,

noting that it is necessary “to distinguish between the rejection by the poor

of specific welfare institutions [such as the workhouse] and their adamant

insistence upon their own entitlement to parish relief” (p. 165). Chapter 6, on

the local administration of poor relief from 1834 to 1870, is the best chapter

in the book. Lees convincingly shows that the official statistics of poor

relief for this period do not accurately measure the incidence of relief or the

type of relief recipients. She calculates that between 1850 and 1870, 10 to 13

percent of the population of England and Wales received poor relief each year;

over a three-year period perhaps a quarter of the population received

assistance. Despite a boom in the construction of workhouses, most paupers

continued to receive outdoor relief. In order to determine the composition of

the “pauper host,” Lees studied the settlement examinations for three London

parishes and six towns — Bedford, Cambridge, Cheltenham, Shrewsbury,

Southhamption, and York — for the years around 1850. While her sample of

provincial towns is not representative of urban Britain in 1850 — it includes

no large cities and no northern industrial towns — the data she collects

provide a more detailed, and almost certainly more accurate, picture of

applicants for and recipients of relief than do the official statistics. She

finds that large numbers of prime-age males continued to apply for relief in

the provincial towns during the 1840s, and that a majority of those assisted

were granted outdoor relief. Adult females were more likely to get relief in

counties where the demand for their labor was relatively high, and yet few

unemployed women appear in the account books Lees examined. She concludes that

women who applied for relief told overseers stories that were likely to produce

assistance, stressing widowhood, desertion, sickness, or pregnancy rather than

lack of work.

Part Three covers the period from 1860 until the official repeal of the poor

laws in 1948. Lees maintains that the late nineteenth century saw a decline in

the legitimacy of the poor laws in the eyes of both the middle and working

classes. The crusade against outrelief in the 1870s led to a sharp decline in

numbers on relief, as cities throughout Britain refused outdoor relief to both

able-bodied and non-able bodied paupers, and large numbers of applicants for

relief refused to enter workhouses. Lees’s discussion of the crusade against

outrelief and the Charity Organization Society in Chapter 8 is disappointing.

She has little to say about the causes of the crusade, and she ignores the

important work on the subject by Mary MacKinnon and Robert Humphreys. Aside

from a brief discussion of case records for Stepney, in East London, for

1876-89, there is no detailed examination of relief practices at the local

level to match her study of settlement examinations in 1850. In Chapter 9, Lees

argues that by the end of the nineteenth century public assistance had become

more avoidable as a result of rising incomes and the availability of private

insurance through trade unions and friendly societies. As the demand for

assistance declined, workers came to see poor relief as stigmatizing. Chapter

10 examines the decline of the poor law after 1906, and its replacement first

by social insurance and then, after World War II, by the welfare state.

While the analysis of late nineteenth century poor relief needs to be

supplemented by other sources, there is much to be commended in this book.

Especially noteworthy are Lees’s discussions of the extent to which the precise

methods and generosity of relief were determined by “welfare bargaining”

between applicants for relief and local poor law officials, and of the changing

attitudes of the working class toward poor relief. Lees also significantly

extends our knowledge of how female-headed households were treated under the

poor laws, and how the comparative treatment of male and female relief

applicants changed over time. Overall, The Solidarities of Strangers

provides an excellent introduction to the changing nature of the English poor

laws over three centuries.

George Boyer is author of An Economic History of the English Poor Law,

1750-1850 (Cambridge University Press, 1990), and of “The Historical

Background of the Communist Manifesto,” Journal of Economic

Perspectives, Vol. 12 (Fall 1998).

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

The State, the Financial System and Economic Modernization

Author(s):Sylla, Richard
Tilly, Richard
Tortella, Gabriel
Reviewer(s):Fohlin, Caroline

Published by EH.NET (May 1, 2000)


Richard Sylla, Richard Tilly, and Gabriel Tortella, editors, The State, the Financial System and Economic Modernization. New York: Cambridge University Press, 1999. xiv + 295 pp. ISBN: 0-5215-9123-6.

Reviewed for EH.NET by Caroline Fohlin, Division of the Humanities and Social Sciences, California Institute of Technology.;

The role of the financial system in industrial development is a topic of perennial interest to economic historians, and there is no shortage of volumes dealing with the topic. Though this book enters a crowded field, it still manages to offer a valuable contribution. In particular, this volume of a dozen essays takes a comparative approach to the question of state involvement in the development of financial institutions — a less-researched topic that is gaining greater attention among economic historians, as well as among economists of the modern stripe. At least according to the preface, the collection began as a conversation among old colleagues and grew into a project that would involve well-known scholars mainly of Europe, but of the U.S. and Argentina as well. Hardly any contributor will be a stranger to consumers of the financial history literature. The approach is intended to be Cameronian, and the volume is explicitly dedicated to that role-model of comparative financial history.

The editors’ introductory essay calls for rejoining the study of public and private finance and for taking an international, comparative approach in such work: “[The book’s] intent is to demonstrate, through comparative historical analysis, the richness of the history of modern financial systems and to restore the state to its primary role in the shaping of those systems” (p. 3). After surveying the landscape of the book, the authors set out four main themes to watch out for in reading the chapters to follow: 1. Inter-country differences in the mix of public and private finance and role of the state are significant, 2. States affected private development by altering information flows relevant to private financial decision making, 3. Economic history has important things to say about the relative effectiveness of ‘market-oriented’ and ‘bank-oriented’ financial systems as development mechanisms, and 4. Short-run state policy responses to immediate problems could have long-run effects.

The book includes entries on nine countries: France, Belgium, England (and Wales), Germany, Spain, Italy, Russia, Argentina, and the United States. Forrest Capie, in studying the role of central banking in Europe, offers the only comparative essay of the group, other than the introduction. The first half of the paper sets out to define the idea of central banking and of the role of lender of last resort — an important first step, it turns out, given the variety of experiences and interpretations. The second part of the chapter then applies these hypotheses to the British and continental European records. In pointing to the role of central banks as ‘lender of last resort,’ Capie argues that the Bank of England was a full-fledged LOLR-central bank by the 1870s and then makes the somewhat surprising claim that true central banking arrived on the European continent only in the twentieth century. This argument is based on the idea, drawn in part from the classical writers on the subject as well as the more recent work by Charles Goodhart, that the LOLR should shoulder responsibility for the stability of the banking system without regard to its own profitability. Such a shift in policy is difficult to date precisely, but the evidence laid out on Germany, Austria, France, Italy, Belgium, the Netherlands, Scandinavia, and Iberia does, for the most part, support the author’s conclusions quite compellingly (though one might want to quibble with certain details, such as the notion that the universal banking systems were more concentrated than the specialized system of Great Britain).

Taking the reader off the beaten path of European and U.S. financial history, Roberto Cort?s Conde offers a quick tour of the Argentine financial system of the nineteenth and early twentieth centuries. The inclusion of this less-frequented area of the literature will broaden the book’s appeal beyond the normal Euro-centric audience. The chapter mainly provides a descriptive primer on the country’s monetary and financial systems — the first discount and issue bank in 1822, the founding of the first National Bank in 1826, the government-dominated operations of the Buenos Aires Provincial Bank, the founding of the second National Bank in 1872, and the passage of the free banking legislation-rather than a unified analysis of the government’s role in that development. The author follows the many financial twists and turns (particularly interesting is the discussion of the free banking act, designed to closely resemble the American National Banking System) and comes to rest at a two-fold conclusion: that the main business of the banks was seignorage and that the banks were primarily used to dispense funds to the government and its allies. After this chapter, the reader will not question the “whats” of the rather poor performance of the Argentine financial and monetary system, but many will be left wondering about the “hows” and the “whys.”

A real stand-out is Phil Cottrell and Lucy Newton’s chapter on banking liberalization in England and Wales between 1826 and 1844. The authors mine the archives of the large banks as well as the pages of the Circular to Bankers, to offer a new look at the earliest formations of quasi-corporate banks. In particular, the authors review the politics of money and banking at the time and especially surrounding the 1826 banking act, analyze and explain the expansion of joint-stock banking in the 18 years following the Act, and assess overall the impact of banking liberalization on English banking after 1826. The active involvement of the state in commercial banking policy, spurred by the banking crises of the early 1820s, followed a century of legislative silence. Of course, the Bank of England’s monopoly over joint-stock banking from 1707 (the famous six-partner limitation on banking firms), essentially a political kickback for financing the government’s wars, determined the industrial organization of banking up until its reform. In a political debate that seems to presage the branching debate in the U.S., small, country bankers opposed the lifting of the ban on large banking partnerships, since the law safeguarded each little patch of monopolistic territory. Widespread banking collapses in 1825-26 finally ensured the success of the liberalization measures, and the number of joint-stock banks exploded from 3 in 1826 to 113 a decade later (including 59 promotions in 1836 alone). The middle portion of the paper presents the bulk of the primary-source research; offering detailed insight into the management, competitive positions, and share flotations of the new banks as well as the gathering anxiety over speculation in the new shares.

As with any edited volume, a reviewer must pick and choose. But readers will learn much from other offerings as well — Fran?ois Crouzet’s tale of politics and banking in Napoleonic France, Gabriel Tortella’s look at government policies and their connection to banking sector development in Spain, Boris Anan’ich’s exploration of government control of Russian banking (if there was one case in which the government played a role in banking, this was it), and the two chapters on the U.S. by Richard Sylla and Mira Wilkins. In addition, Hermann van der Wee and Monique van der Wee-Verbreyt cover 175 years of Belgium’s top bank, while Peter Hertner investigates two decades of relations between the top two Italian universal banks and the central bank. Both these chapters make use of extensive archival evidence in developing their stories. Finally, Richard Tilly poses some rather provocative hypotheses about the relative efficiency of the German capital markets (e.g., that the Berlin market rivaled or exceeded London on certain performance measures).

Though the topics are all of great interest, with fewer than 300 pages for all twelve essays and the index, the treatment is not as deep as one might prefer (and specialists will likely recognize material in certain chapters). Many readers will likely yearn for a more explicit link among the various contributions — perhaps a final chapter to tie it all together — and the cliometrically-inclined might hanker for more formalized hypothesis testing. Most important among these relatively small quibbles, this book demonstrates the entrenchment of certain views and paradigms in financial history: the dichotomy between banks versus markets, for example, and the connection between a country’s geographical position relative to the UK and the role played by financial and government institutions. These shortcomings, however, do not spoil the usefulness of a volume that permits one to travel several areas of the globe, gleaning insights on an important topic, all in one place. As a result, this book will be a useful reference both for established scholars and for students in search of research topics in the political economy of banking from an historical perspective.

Caroline Fohlin is Assistant Professor of Economics at Caltech. She has published several articles on financial history, including “Relationship Banking, Liquidity, and Investment in the German Industrialization,” (Journal of Finance, 1998) and “Universal Banking in Pre-World War I Germany: Model or Myth?” (Explorations in Economic History, 1999). Her manuscript in progress, Financial System Design and Industrial Development: International Patterns in Historical Perspective, has just been granted the ninth Sanwa Monograph Award from the Center for Japan-U.S. Business and Economic Studies at New York University’s Stern School of Business.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

European Industrial Policy: The Twentieth-Century Experience

Author(s):Foreman-Peck, James
Federico, Giovanni
Reviewer(s):Fauri, Francesca

Published by EH.NET (May 1, 2000)

James Foreman-Peck and Giovanni Federico, European Industrial Policy: The

Twentieth-Century Experience. Oxford: Oxford University Press, 1999. xvi +

466 pp. $105 (cloth), ISBN: 0-19828998-7.

Reviewed for EH.NET by Francesca Fauri, Professor of Istituzioni Economiche

Europee, Faculty of Political Sciences, University of Bologna in Forl?.

The aim of this multi-authored volume is to contribute to an understanding of

European industrial policy, broadly interpreted, by introducing an historical

perspective. The collection of case studies allows the reader to become

familiar with the differences among countries, and the remarkable continuity

within countries, of European national industrial policies.

The book analyses the industrial policies of four broad groups of countries:

the largest Western European states – Britain, France, Germany and Italy – a

group of small, but highly productive nations – Sweden, the Netherlands,

Belgium and Ireland – three states with a long tradition of state industrial

regulation: Spain, Portugal and Greece, and finally the case of Russia, a huge

economy with a deep-rooted tradition of centralized decision making and state


British industrial policy from the nineteenth century was characterized by

economic liberalism, and despite the greater industrial role of the government

after the First World War, it clung to the liberal precepts of minimum state

expenditure and ‘self-regulation’ during the inter-war period. It was only

after 1945 that the Labour government took a much more interventionist

stance-nationalizing industries such as the coal industry, gas, electricity and

railways and adopting a variety of measures including import controls and

industrial subsidies at levels unknown in the past. In the 1980s, the state

reversed to more market-oriented industrial policies: it abandoned state

ownership and direction of industry, radically improving the performance of

British economy (even though the author claims that the redirection of economic

activity was not necessarily ideal and skill and learning deficiencies began to


The French claim to have invented the concept of industrial policy and, as a

matter of fact, since Colbert, the idea that productive capacity can be

increased by state aid has never been abandoned by French governments.

Curiously enough, the chapter on Germany is titled “The Invention of

Interventionism,” contending with the French for the primacy. The first and

most important industrial policy instruments used by the German government

since the 1880s have been tariffs and subsidies. In this case economic

performance has shown that state interventionism and a positive economic trend

are not incompatible at all. Also the Italian state has a long-standing

tradition of intervention, progressively shifting its range of interest from

railways, tariffs and public procurements to bailouts, planning regulation,

subsidization and the use of state-owned enterprises. Albeit, not with German

results, being in the words of the authors “much less effective than it may

have been given the large resources allocated to industrial promotion.”

Small states such as Sweden, the Netherlands, Belgium and Ireland, all

experienced, though in different historical periods, state attempts to

influence industrial growth, usually ranging from rare selective interventions

(protection, subsidies, nationalization) in the past, to general efforts to

facilitate and stimulate industrial growth in more recent times. The

Netherlands is a case in point: arguably the most liberal country in Europe

since its creation in the sixteenth century, between 1948 and 1963 the

government actually intervened in support of declining industries as had never

done before (or has done since).

Spain, Portugal and Greece, three latecomers in the industrialization process,

all present, with different degrees of intensity, a key state role in the

promotion of industrial development. Spain, as the other two, was characterized

by a long-term presence of an authoritarian government, but it was the only one

to combine authoritarianism with a political ideology of intense and

large-scale industrialization. Yet, results were meager: the state

interventionist approach proved not very efficient, supporting the

implementation of a rigid system of import substitution that soon became not

only superfluous, but harmful to overall economic growth.

Russia is the utmost example of industrial policies with maximal state

intervention, at least until the 1990s. During the Tsarist peacetime economy

(1890-1913) the state promoted the development of heavy and defense industry in

order to remedy the technological backwardness of the country. The main

beneficiaries of Tsarist industrial policies were the railway, engineering,

iron, steel and defense industries, with much of the burden falling on the

agricultural sector as a result of tax policies. After the New Economy Policy

interval (1921-27) in which the Bolshevik policy-makers tried to reverse the

policy of nationalization by privatizing small industrial enterprises,

industrial policy in the Stalinist era became highly centralized, the state

owned all productive assets and quantity-oriented plans were utilized as the

main coordination mechanism. State planning was retained as the key industrial

policy instrument until 1992 when economic decision-making started being

decentralized to banks, firms and regions and Russia started its difficult

transition to a market economy. Yet, historical traditions are likely to

influence the pattern of industrial organization and policies that Russia will

develop in the future.

The introduction of a cultural theory of industrial policy in the last chapter

helps explaining why European industrial policies show different degrees of

state intervention. Inter-country differences in the propensity to intervene

also depend on the dimension of trust: industrial policy requires an adequate

degree of trust to succeed.

Surely this volume has two great merits: it provides a collection of case

studies constructed along the same line of discussion themes, thus facilitating

comparative analysis, and it offers a synthesis of a great deal of literature

unavailable in English. Undoubtedly, the book has fulfilled its task of

rendering the future writing on the history of European industrial policy more


Francesca Fauri is author of “A Comparative Analysis of Italian and British

Management before World War II” in Vera Zamagni and Lars Engwall, editors,

Management Education in Historical Perspective (Manchester University

Press, 1999) and “Economic Miracle and Italy’s Chemical Industry: A Missed

Opportunity” in Enterprise and Society (forthcoming, summer 2000). She

is currently working on a book on “L’Italia e l’integrazione economica europea


Subject(s):Economic Planning and Policy
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

The British Motor Industry, 1945-94; A Case Study in Industrial Decline

Author(s):Whisler, Timothy R.
Reviewer(s):Bowden, Susan

Published by EH.NET (April 2000)

Timothy R. Whisler. The British Motor Industry, 1945-94; A Case Study in

Industrial Decline New York: Oxford University Press, 1999. ISBN:

0198290748 Cloth Price $105

Reviewed for H-Business and EH.NET by Susan Bowden, University of Sheffield,

Four months after the publication of Whisler’s British Motor Industry,

BMW announced its intention to dispose of Rover. The publication of Whisler’s

assessment of the decline of the British motor industry would thus appear to be

well-timed. It is also against this announcement that readers will come to

Whisler’s book for an understanding of how and why this once dynamic industry


The British Motor Industry is a welcome addition to the now voluminous

literature on the motor industry in the UK. Whisler’s has produced a “new”

synthesis which aims to place the declining fortunes of the industry into an

overall explanatory perspective. That perspective is grounded in economic

theories of path dependency and lock-in. His thesis is that strategy formed a

managerial lock-in which meant that despite the numerous structural and indeed

personnel changes in the industry over time, the industry was locked into a

prevailing ethos which failed to read the signals of changing market

conditions. The strategy was inherited from the original founder, Morris, and

was to pervade all subsequent manifestations of organizational form and

structure. Strategy was the outcome of a pervading if mis-calculated belief in

the innate superiority of the company’s products: all the company had to do was

make cars.

The thesis was originally set out by Roy Church in the Economic History

Review. In that sense, Whisler’s perspective is not new. What is new is the

detailed elaboration of how that ethos dominated managerial thinking.

Much of the book concentrates on the earlier formations of the company,

most notably events prior to the spectacular collapse of 1975. Chapters follow

a thematic approach detailing, inter alia, with design and development, product

quality and reliability, production methods, domestic and export markets and

distribution structures: all of which contain an immense amount of detail, but

all of which tend to focus more on the specifics of one firm rather than the

industry as a whole.

The problem with the path dependency, lock-in thesis, is that it can become a

retrospective self-justification for the problems of the industry,

especially when applied not, as in the usual case, to technology but to

managerial culture. Thus reference to the new literature on professional

lock-in might have helped – as it is some readers might feel confused as to

exactly how and why cultural lock-in should occur. Equally, readers from the

industrial, economics and managerial disciplines might question why reference

to market signals– most particularly why the strategy and culture did not

respond to changed signals–is not addressed by Whisler.

Thus we have references to issues of asymmetric information and transaction

costs, but such issues are never really fully explored. The role of the

financial markets, shareholders and Government – who were as much agents in

this story as management – is equally never fully assessed. The pages dealing

with divided issues, for example, relies on one source and fails to pick up the

relations between the company and its shareholders.

The issue of Government policy is particularly pertinent in this respect.

The news of BMW’s decision has been dominated by the “employment” question.

If one is to understand path-dependency then one has to look to game theory and

to bargaining between agents. A self-perpetuating ethos may be allowed to

continue, if the agent concerned has superior bargaining leverage.

Whilst Government’s prioritized employment in marginal constituencies (as motor

plants were located), then management was under no real pressure to effect real

change. This theme runs through the entire history of the industry–from the

first assessments of the future prospects towards the end of the Second World

War, to civil servants meetings under the Thatcher Regime and indeed to the

current Government’s reaction to BMW’s decision.

Dissecting and synthesizing the troubled history of the British motor industry

is not an easy task, and Whisler is to be congratulated for taking this on and

for producing a wealth of detailed analysis which makes an important

contribution to the literature. As the above makes clear, this reader would

have welcomed more–but surely an indication of a good book is that the reader

becomes engrossed and finishes wanting not less, but more.

The Making of Harrod’s Dynamics

Author(s):Besomi, Daniele
Reviewer(s):Keen, Steve

Published by EH.NET (April 2000)

Daniele Besomi, The Making of Harrod’s Dynamics. New York: St Martin’s

Press and London: MacMillan, 1999. (Published in the Studies in the History

of Economics series, D.E. Moggridge, editor). xii + 289 pp. $75

(hardcover), ISBN: 0-312-21908-3.

Reviewed for EH.NET by Steve Keen, Department of Economics and


University of Western Sydney (Australia).

Movie-going economists might recall the line in Apollo 13 that NASA

learned more from this failed mission than it had from all its previous

successes. In part, Daniele Besomi tries

to achieve something of the same in Roy Harrod’s failure to inspire economists

to adopt a dynamic approach to their discipline.

There is little doubt that Harrod’s adventure into dynamics was a failure,

in that little if any of what he saw as the dynamic way of thinking took root

in economics. Indeed, economics today is distinguished from almost all other

sciences by a central reliance upon static analysis, rather than the dynamic

and evolutionary approaches which characterize other disciplines.

If Veblen were alive today, his seminal methodological work would not be

titled “Why is Economics not an Evolutionary Science?”, but “Why is Economics

the Only Non-Evolutionary Science?”

Much of the answer lies in the strengths, failings and foibles of Roy F.

Harrod, the economist who most openly and prominently championed economic

dynamics, and in the reactions of other economists to his challenge. While this

point is taken up in Besomi’s epilogue, the main purpose of Besomi’s treatise

is to uncover the process by which Harrod developed his approach to dynamics.

Through his comprehensive survey of Harrod’s published writings and

correspondence with other economists, Besomi finds more method in Harrod’s

quest to develop a dynamic economics than is apparent to

anyone who simply relies upon Harrod’s major works on dynamics (I take these to

be “An Essay in Dynamic Theory” [1939], “Towards a Dynamic Economics” [1948],

“Second Essay in Dynamic Theory” [1960], “Themes in Dynamic Theory” [1963], and

“Economic Dynamic s” [1973]). These works in themselves appear a patchy melange

of concepts to anyone well-versed in modern dynamic analysis, with inexplicable

attempts to define the greater part of economics as the province of “Statics”

rather than “Dynamics,” a painfully

slow development of analytic technique – if indeed there was any development

at all – and gross inconsistency over time, as highlighted many years ago by

David McCord Wright (1949).

However, there is methodological consistency, Besomi argues, but it can

only be seen if one looks through Harrod’s eyes and in Harrod’s time.

Harrod believed that the Marshallian theory of value could be extended in

stages to cover dynamics, with an essential first step in this being

generalizing Marshallian analysis to cover imperfect competition. Thus those

of us who normally associate the theory of imperfect competition with Robinson

and Chamberlin learn that Harrod devised the concept of marginal revenue, and

developed the formula relating it to price and the inverse elasticity of


The belief that there was continuity between static and dynamic analysis

appears curious to a dynamicist today – as curious as the belief that, to ride

a bike, one must first learn how to balance it while it is stationary.

But it is explicable in the context of Harrod’s time, especially when Harrod’s

extremely limited understanding of mathematics is taken into account. However,

this perceived continuity, which he stressed so much in his writing, made it

very difficult for Harrod to convince economists that he was saying something

new – and made it more difficult still for economists to accept that, where

Harrod was obviously saying something new,

he was not also saying something quite wrong.

This problem was sharpest with the next essential element in Harrod’s

methodology, the belief that a dynamic economics required “abandoning the

assumption of stability of equilibrium, and introducing some destabilizing

factor in the model at the outset” (Besomi, p. 3). Here arose many

misunderstandings of Harrod, largely because economists of his time (and many

since) could

not accept that an unstable equilibrium was a meaningful concept. Hicks’s

(1949) erroneous but widely believed statement that “A mathematically unstable

system does not fluctuate; it just breaks down” was typical of the manner in

which this crucial aspect of Harrod’s dynamics was dismissed by economists.

Finally, Harrod was competing for attention at a time when many others –

most notably Keynes – were vying for the attention

of economists, with many calls of new ways to think economically. Besomi

emphasises the extent to which Harrod was a participant in, and product of

these debates, while at the same time establishing that Harrod was as guilty of

misunderstanding his fellows – again, most notably Keynes – as they were of

misunderstanding him.

Besomi also indicates the extent to which Keynes played an important role in

helping Harrod formulate his ideas. Keynes proposed a “fundamental growth

relation” – in terms of the multiplier and accelerator – to Harrod before he

had devised his own (Besomi, pp. 138-150). Keynes’s notion of dynamics was also

much richer than Harrod’s: “What Keynes held against Harrod in the course of

their debate, and what Harrod did not understand,


that in dynamics time must be the ordinary time, full of hopes and

disenchantment, enabling one to recognize the importance of the uncertainty

regarding the future course of events as distinct from the certitudes of the

past” (Besomi, p. 162).


most direct competitors were the econometricians, following on from Frisch, who

modeled the trade cycle as the product of a stable propagation mechanism

reacting to exogenous shocks. Here he lost out completely – so much so that his

own “model” of cycles,

which he insisted could not be reduced to the mechanical interaction of lags,

was recast in precisely that mould by Hicks, Samuelson et al in a fashion which

divorced growth and trend

Harrod was not necessarily correct to oppose a lagged reformulation of his

analysis. Elsewhere (Keen 2000) I argue that the Hicks-Samuelson second order

difference equation was in fact the product of bad economics, and that Harrod’s

model can be stated in a lagged form in which growth and cycle are

interdependent. However,

he was correct to oppose basing cyclical behavior upon lags alone, and

divorcing growth from cycle. But he had little chance of defending this

position against the far more technically proficient Hicks, Samuelson, and

econometricians generally. As Besomi

observes, “We may thus agree with Goodwin, and Samuelson before him, that

Harrod’s intuition was far superior to his mastery of the analytical tools he

devised for solving the important problems he was posing” (Besomi, p.


Given all this, it is remarkable that anything of merit emerged from this sea

of confusion. Yet something of merit did. Harrod’s dynamics, with its

well-known but misunderstood emphasis upon instability, and its poorly known

but important emphasis upon nonlinearity, did contribute something new and

important to economic theory – regardless of whether or not these ideas ever

took root in mainstream economics.

Precisely because these valid ideas did not take root, Besomi’s book is as much

a study in the pathology of economics as is it a study of Harrod per se. Many

of those who are critical of the twists and turns mainstream economics has

taken since World War II point a finger at textbooks, and here Besomi is no

exception. He observes that “The story of the textbook recognition of Harrod’s

contributions concludes even more sadly: since the 1980s, Harrod’s name rarely

appears in the author indexes of books on macroeconomics. Surveys of trade

cycle theory hardly mention his contributions, while endogenous growth

theorists seem to remember Harrod only in passing, for his ‘production

function with little substitutability among the inputs’ used ‘to argue that the

capitalistic system is inherently unstable'” (Besomi, p. 209, citing Barro and

Salai-Martin (1995), p. 10).

Besomi’s Harro dian saga is a useful tonic to the textbook view of the history

of economic thought. Far from showing a linear progression from old ideas to

new, good ideas to better ideas, we see a haltering to and from movement, with

Harrod buffeted by the debates of his day, publishing what he thought would

communicate well rather than what he necessarily thought, tailoring articles

to the desires of editors All stuff with which practitioners in economics are

familiar, but which has rarely been as well

documented for

a major figure like Harrod.

There is, therefore, much that economics could learn from Besomi’s anatomy of

Harrod’s Apollo 13. However, I disagree with the conclusion Besomi

himself draws, when he states that “it would seem that the success of a theory

does not depend only upon its clarity, logical consistency, and heuristic

value, let alone empirical accuracy, but also on its capacity to be integrated

within the accepted currents of thought. To generate

interest, a theory must contain some element of novelty; but to be

understood and integrated, the break with tradition must not be too radical”

(Besomi, p. 214).

I would instead argue that Harrod’s false belief that dynamics did not

constitute “too radical a break with tradition” is part of the reason why

economic dynamics was stillborn in Harrod’s hands.

(Daniele Besomi is an independent research scholar (lucky man!) based in



R. Barro and X. Sala-I-Martin, 1995. Economic Growth, New York:


R. F. Harrod, 1 939. “An Essay in Dynamic Theory,” Economic Journal, 49:


1948. Towards a Dynamic Economics, London: Macmillan.

,1960. “Second Essay in Dynamic Theory,” Economic

Journal, 70:


, 1963. “Themes in Dynamic Theory,” Economic Journal,

73: 401-421.

, 1973. Economic Dynamics, London: Macmillan.

J. R. Hicks, 1949. “Mr. Harrod’s Dynamic Theory,” Economics 56: 106-121.

S. Keen, 2000. “The Nonlinear Economics of Debt Deflation,” in W. Barnett


C. Chiarella, S. Keen,, R. Marks, and H. Schnabl, editors, Commerce,

Complexity and Evolution, New York: Cambridge University Press.

D. M. Wright, 1949. “Mr. Harrod and Growth Economics,” Review of Economics

and Statistics, 31: 322-328.

Steve Keen’s principal interests are in dynamic modeling and Hyman Minsky’s

Financial Instability Hypothesis. He is co-editor of Commerce, Complexity

and Evolution (see references above), to be published this August by

Cambridge University Press. Works in progress include Debunking


(Zed Books) and Finance and Economic Breakdown (Edward Elgar).

Subject: L Geographical Area: not relevant Country/Region: not relevant Time

Period: 8, 9

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII