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The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities

Author(s):Booth, Anne
Reviewer(s):Touwen, Jeroen

EH-NET BOOK REVIEW

Published by EH.NET (October 1998)

Anne Booth, The Indonesian Economy in the Nineteenth and Twentieth

Centuries: A History of Missed Opportunities. Basingstoke: Macmillan

and New York: St. Martin’s Press, 1998. xvi + 377 pp. Includes

bibliographical references and index. $19.95 (paperback), ISBN

0-333-55310-1 (Macmillan). $79.95 (hardcover), ISBN 0-333-55309-8

(Macmillan) and 0-312-17749-6 (St. Martin’s Press)

Reviewed for EH-NET by Jeroen Touwen, Historical Institute, Leiden

University, The Netherlands.

BAD LUCK IN A VERY RESOURCEFUL ECONOMY

Which Lessons Can Indonesia Learn from its Past?

This is a volume in a new and ambitious series named A Modern Economic

History of Southeast Asia, edited by Anthony Reid, Anne Booth, Malcom

Falkus and Graeme Snooks, initiated by the Australian National University

in Canberra, and published by Macmillan. Of the eighteen volumes

planned (dealing either with themes or with countries), three have be

en published so far, of which this is one.

Professor Anne Booth of the School of Oriental and Asian Studies (SOAS) in

London has a long experience in the scholarship of the Indonesian economy.

She is known for her monograph Agricultural Development in Indonesia

(Sydney: Allen and Unwin, 1988) and for two influential edited volumes: A.

Booth, W.J. O’Malley and A. Weidemann (eds), Indonesian Economic History

in the Dutch Colonial Era, (New Haven: Yale Center for International Area

Studies, 1990), which is generally regarded as the first survey of modern

economic history of Indonesia), and A. Booth (ed.) The Oil Boom and After;

Indonesian Economic Policy and Performance in the Suharto Era

(Singapore: Oxford University Press, 1992). In addition, she ha

s published a long list of contributions in journals and edited volumes. In her

work,

she has consistently applied systematic quantitative macroeconomic

analysis in combination with a more qualitative evaluation of government

policy and growth theory. But what is also quite significant in her work

(including the present book under review) is her attention for a

combination of the colonial and the independent eras of Indonesian

history. Booth is one of the few historians who easily jumps back and

forth between these two periods, drawing parallels and making comparisons.

Thus, she is able to conceive a long-term view on economic development,

an approach which has often been ignored by economists and historians.

At first sight, the reader of The Indonesian Economy in the Nineteenth and

Twentieth Centuries is confronted with a provocative subtitle: A

History

of Missed Opportunities . To this subtitle a streak of irony is added by

the picture on the cover of the book: a photograph of the Indonesian

government aeroplane factory in Bandung. The Indonesian airplane industry

IPTN (Industri Pesawat Terbang Nasional), in which present-day president

Habibie played a leading role, has often been viewed as a symbol of

irresponsibly large expenditure on prestigious high-tech projects,

significant for the 1980s and 1990s Suharto-era. Does Booth criticize such

projects and imply that the Indonesian economy would have been better off

with investments in different sectors, or a different (more balanced)

economic policy? And which other opportunities have been missed by

Indonesia? Indonesia is one of the poorest countries of Southeast Asia and

has been lagging behind several of its neighbors for many decades. Only

during the recent period of export-oriented growth (ca. 1980-1997) did it

began receiving international praise for its economic performance – praise

that has melted away since the monetary crisis (and subsequent political

unrest) brought the Indonesian economy to a virtual stand-still and scared

off most foreign investors.

In the following, I will first review the contents of the book and outline

some of its characteristics. In conclusion, I will return to the question

of which opportunities were missed and how this affected Indonesian economic

development.

An extensive introduction (Chapter 1) describes the formation of an

‘Indonesian’ economy, highlights the current debates in the historiography,

and states the aims of the book, which consists of six chapters (excluding

the introduction and conclusion) dealing with thematic aspects of the

Indonesian economy.

Chapter 2 is called ‘Output Growth and Structural Change between

1820-1990′, and places the important political events in a chronological

survey of economic performance. This chapter has an essential function

in providing a chronological framework and evaluating the different

indicators and measurements of long-term economic development. Within

each sub-period, the trends in output growth are linked to changes in

domestic economic policies (reflecting changes in political priorities) and

to world market trends (p. 16). Particularly the phases of growth (p. 15,

85-87) should be mentioned here. In combining political events and

economic situation, Booth identifies the following 10 phases:

  • 1) 1830-1870 rapid export growth, slowing down after 1840
  • 2) 1870-1900 policy reforms but sluggish growth
  • 3) 1900-1930 ethical policy and export expansion
  • 4) 1930-1942 world depression leading to contraction of export volume
  • 5) 1942-1950 Japanese occupation and independence struggle (harming

    economic performance)

  • 6) 1950-1958 rehabilitation of the economy, output growth
  • 7) 1958-1966 declining per capita GDP, structural retrogression
  • 8) 1966-1973 economic recovery
  • 9) 1973-1981 the oil boom period
  • 10) 1981-1990 non-oil exports production leading to output growth

economic performance)

Chapter 3 is called ‘Living Standards and Distribution of Income’ and sets

out to investigate why the relative rapid growth of GDP, almost certainly

faster than population for much of the last two centuries, did not result

in broadly based improvement in living standards. Booth argues that,

in fact, we should examine the growth of the part of GDP that is devoted

to household consumption, after subtracting government expenditures

and expenditures on capital formation, of which the returns are not

shared by all classes of society. Of course, also foreign remittances

should be disregarded in this context. The chapter argues that ‘the

growing expenditure on both government consumption and capital

formation, together with the high level of remittances abroad, meant

that, for much of the colonial era, private consumption expenditures

grew less rapidly on average than GDP’. Booth continues: ‘But, in

addition, there is evidence that such growth as occurred in average

consumption expenditures did not benefit all classes of society

equally. There were gainers and losers, and the gainers were often

concentrated in particular ethnic groups and regional locations’ (p. 89).

This development is typical for both the colonial and the independent

period, and also forms an essential element of today’s problems in

Indonesia. To quote Booth again: ‘As in other colonial societies, economic

stratification along ethnic lines was pronounced in Indonesia in the early

twentieth century, and in spite of the egalitarian rhetoric of the

independence struggle, this stratification persisted in the post-1950

period. The growth which has occurred since the 1950s has in turn produced

new patterns of differentiation by ethnic group, social class and region’

(p. 89).

In Chapter 4, ‘Government and the Economy in Indonesia in the Nineteenth

and Twentieth Centuries’, the economic role of the government in Indonesia

is studied. Conforming to the central argument of the book (which can be

rephrased as: to develop a long-term view on economic development and

economic policy in Indonesia), it is argued that for a deeper understanding

of Indonesian economic performance, we must also develop a better

understanding of the domestic factors which promoted or inhibited economic

growth. The actions of the successive governments, in both the colonial

and the post-colonial periods, are crucial in such an understanding (p. 135).

Strangely, a different set of phases is applied in this chapter (p. 137),

distinguishing six phases in the role of government which almost, but not

completely, cover (combinations of) the ten phases of growth distinguished

in Chapter 2 (p. 85-87). Although the six phases make sense and clearly

order the main policy tendencies, some more explicit comment could have

been made on their coinciding or not coinciding with phases of economic

growth (linking the effects of government intervention to the world

economic situation). I must add that in the further elaboration on the

individual phases, the context of economic performance is of course

often included, since government policy is usually designed in reaction to

economic conditions.

It is emphasized that ‘colonial Indonesia, at least in the twentieth

century, was far more than just a nightwatchman state, concerned purely

with law and order and the collection of taxes’ (p. 155). There was a

lot of reform and general enthusiasm for modernization, as

characterized by the Ethical Policy but also by the large number of

projects that were constructed in the physical infrastructure. This is

reflected in the large share of government in GDP. It is remarkable that

in the early independent period, from 1950 to 1965, real growth in public

expenditure was much lower than in the first three decades of the twentieth

century. Increase of the share of public expenditure relative to GDP

occurred not earlier than the latter part of the 1970s (p. 201).

Chapter 5 is entitled ‘The Impact of International Trade’, and deals with

the (important) role of trade in the Indonesian economy, the terms of

trade, the changes in the trade regime (“Rise and decline of free trade

liberalism in the colonial era”), the regulated trade regime since 1950,

and the post-colonial experience in trade. On the whole, Booth’s view

on the “colonial drain” seems to be pessimistic. This is obvious from

her evaluation of the oil boom period (1973-1981), where Booth writes:

‘Certainly, there is plenty of evidence that government investment over the

oil boom years was far from optimal. But at least the rents were retained

in the domestic economy. Had budgetary policy been used for investment

in human and physical capital at earlier periods in Indonesia’s economic

history, per capita output and living standards could have gr

own faster than in fact was the case’ (p. 243).

Further elaborating on the record of investment in the colonial economy,

Chapter 6 treats ‘Investment and Technological Change’, while Chapter 7

focuses on ‘Markets and Entrepreneurs’. The latter chapter

deals with the indigenous sector of the colonial economy, the development of

the labor

market, and the economic role of the Chinese, but also evaluates the role

of socialism and government planning in the period 1950-1965, and the

role of the state and the market during the New Order. This chapter

particularly should attract the attention of economists who will plan the

economic course of Indonesia after 2000. These themes clearly connect with

the problems of present-day Indonesia, concerning the powerful

conglomerates and the ethnic division of affluence. Booth explicitly states

that the rise of powerful conglomerates who were able to exploit political

connections preceded the deregulation and liberalization if the economy

over the 1980s. The rise of these conglomerates was a symptom of the

limitations of the deregulation process and not, as is sometimes argued,

a consequence of this process (p. 322).

A text book for advanced learners and a challenging monograph

As a textbook, this study has an interpretative character. In each chapter,

individual data and events are treated in the context of the theme of the

chapter. For example, if I want to know something about the Sugar Law of

1870, the index refers to pages 30 and 253. On page 30, the S

ugar Law is mentioned in the context of structural change in the economy.

Together with

the so-called Agrarian Law, the Sugar Law signaled the demise of the

Cultivation System in Java, but some scholars have argued that this

legislation did not produce a dramatic change in Java’s economy (it did

not form a watershed), even though it had an impact on export growth over

the longer term. On page 253 the Sugar Law is mentioned in the context of

investment and technological change, since it allowed for private

investment in the sugar sector, permitting free contracts between sugar

refineries and peasant cultivators, which allowed the government to

withdraw from the sugar cultivation (because the high failure rate of sugar

companies had caused the government substantial losses). The Agrarian

Law, closely connected with the Sugar Law, is also mentioned on page

298 in the context of land shortage in Java. There is no introductory

explanation in a chronological context of what the Sugar Law and the

Agrarian Law actually stated or implied.

This example shows that the book is not so much a beginners’ textbook, but

rather an interpretative study based on an exhaustive survey of the recent

literature and extensive analysis of quantitative data. In an elegant andc

ompact style, Booth manages to inform the reader continuously of the

debates on issues mentioned, on the various views held in the

historiography, or the need for further exploration on some themes. Of

course, as a macro-economist, she relies heavily on the (rich) Dutch

colonial source data for the colonial period (since there are no other

quantitative data for the colonial period). But by studying the long-term

development of a first colonized, then independent country, she avoids

placing too much emphasis on the colonizer’s presence and manages to

analyze the economy as such, integrating the domestic or indigenous

economy and the internationally oriented ‘predatory’ economy, and

developing a fairly ‘autonomous’ (non-eurocentric) view.

One criticism that could be made is that the thematic, non-chronological

structure of the contents of this book may not be very helpful in a survey

that covers two centuries. The various chapters, in their dealing with

structural change, distribution of income, government policy, the role of

international trade, investment, and entrepreneurship, each attempt to

cover the entire period 1800-1990. An introductory scholar will

continuously feel the need to browse back and forth, in order to piece

together a complete picture of each historical sub-period. On the other

hand, one may argue, this organisational structure allows for reading

one chapter at a time and puts an explicit emphasis on the long-term

continuity within each aspect of Indonesian history. This is indeed one of the

aims of the book. For example, Booth states that she wants to

‘highlight the underlying continuities in policy-making and the

implications of these continuities for Indonesian economic

development in the longer term’ (p. 12). She also argues that ‘

there were, and continue to be, more similarities in the economic goals of the

Dutch colonialists and the Indonesian nationalists than has yet been

acknowledged. These similarities are due to the persistence of many

underlying problems’ (p. 12). Thus, a thematic organization of the

contents of the book forces the reader to observe chronological

continuities within each theme. This is indeed one of the strong

arguments of the book.

Applying a long-term perspective, Booth distinguishes clearly between thep

eriods of expansion and stagnation. It is very instructive that these are

placed in the context of government economic policy and the world economic

situation. In an accessible style, she provides a balanced picture of

growth and decline, giving thoughtfully phrased judgements in matters

which have raised a lot of discussion. On the whole she meticulously

reviews and quotes the recent historiography, including many Indonesian

scholars.

Missed chances?

Now, which are the missed opportunities referred to in the title? Such

counterfactual meditation is, of course, a hazardous exercise, but it may

be able to throw light on the long-term lessons that can be drawn from

the past two centuries. As Booth says, it is ‘useful to ask if a different

type of colonialism could have produced better economic results’

(p. 329-330).

First, one can think of the effects of the Cultivation System, which

thwarted the development of market institutions in rural Java (p. 334), and

on the whole was merely oriented towards remitting a large annual sum to

the Dutch budget (p. 327).

Secondly, the late colonial Dutch regime was busy ‘developing’ the colony

in the material sense, but it largely ignored the need for higher education

or developing a skilled Indonesian work force. The colonizers constructed

a lot of infrastructure and social overhead capital. But the economic gains

from these efforts were largely lost after independence, mainly because

the educational system had failed to train a higher or middle class of

officials who could take over the economy after independence. Booth even

states that the ‘failure to accelerate access to education was probably the

greatest of sins of omission of Dutch colonialism’ (p. 328).

To perceive this as a missed chance for the Indonesian economy is feasible

from the point of view of the Indonesian society itself, which was hindered

by this imbalance. But it makes little sense when analyzing colonial

policy: the Dutch simply did not plan to leave very soon, and therefore did not

integrate the formation of an indigenous elite into their official

policies. Of course, the colonizer can always be blamed for colonizing

the country, but should it also be blamed for consistency within its own

system? I think it is more important that there was a system of ethnic

inequality or racial prejudice at the core of this Dutch colonial

consistency. It is this legacy of colonial rule which certainly can be

viewed as a “missed chance,” because it shows us, amongst others,

the roots of the strong economic position of Chinese entrepreneurs,

and the relatively weak indigenous entrepreneurial class. It also, in

part, explains the discontinuity in economic development after

independence. Booth draws attention to these matters and points at

the crucial fact that the Indonesian nationalist leaders were essentially

isolated from the economy or from specific economic ideas of how

to rule the country: ‘the weakness of the indigenous business

class in the late colonial era, together with the very small numbers of

indigenous Indonesians in the upper echelons of the administrative

service, or in the professions, meant that these groups had far less

influence on the leaders of the independence struggle than in, for

example, British India.’ (p. 330).

These reflections show that the historiography has progressed from making

simple-minded or emotional accusations to the colonial regime, and now

attempts to adopt a more objective perspective which allows for lessons to

be drawn. There have been many crossroads at which another direction could

have been taken, leading to different outcomes of economic development.

Needless to say that there were also favourable effects of certain

important events of Indonesia’s past.

Do the parallels drawn between Suharto’s new order and the late colonial

government policies also imply the suggestion that other roads could and

should have been taken by post-independence governments, or in other words

opportunities were missed? In Chapter 4, we find a positive evaluation oft

he progress made by the Suharto government during 1983-1990, making the

non-oil sectors (agriculture, manufacturing, tourism) more internationally

competitive and the economy less reliant on the exports of oil and gas

(p. 199). At the same time, it is stressed that the role of the government

in the economy was not in any way significantly reduced in the 1980s,

and that very little attempt was made to privatise the state-owned

enterprises, which had a very low rate of return. ‘Regulatory control over

parts of the state-owned enterprise sector remains weak: the so-called

“strategic enterprises,” controlled by the influential Minister of

Research, Dr. Habibie, enjoy access to extra-budgetory sources of

finance which are outside the control of the Ministry of

Finance, or any other government regulatory agency …. This recurrence of the

“Pertamina syndrome” indicates that the problem of controlling the state

enterprise sector is far from resolved in New Order Indonesia’

(pp. 200-201). Recalling the airplane factory on the cover, probably

Booth does view the Suharto/Habibie emphasis on prestigious,

high-tech state enterprises such as an airplane industry as a missed

chance. . .

As already mentioned, Booth is fairly positive about the investments of the

government using the oil boom rents, at the same time warning that the

economic reforms of the 1980s did not recreate the type of open trading

regime that prevailed in the colonial economy from the 1870s to the early

1930s (p. 242). She also states that investment in education and human

capital has, as it was in colonial times, in fact been neglected by the

Indonesian government since 1950.

In the last pages of Chapter 8, ‘Conclusions’, Booth describes the role and

the shape of the type of “market capitalism” that is encountered in

Indonesia (p. 334-336). Without referring to slogan type phrases such as

‘Asian values,’ she explains why free market capitalism is looked at with

ambivalence in Indonesia. This deep ambivalence about liberal market

capitalism persists in contemporary Indonesia at many different levels of

society and this ambivalence has not exactly strengthened Indonesia’s

economic performance. In part, the hesitation to accept free market

capitalism is rooted in nationalist, anti-imperialist views of the

pernicious colonial past. (This might have been different had the Dutch not

been in Indonesia, but without the colonial state formation process there

probably would not have been an Indonesian state as we know it today at

all.) Senior policy-makers, including Suharto himself, saw free market

capitalism as a good opportunity to favor their immediate families and

close business associates. But more broadly, economic growth was viewed as

necessary because the neighbouring countries around Indones

ia realized rapid economic growth. Should Indonesia fall behind, then this

would

make it vulnerable to external threats and internal insurrections.

Recent events in the spring and summer of 1998, after this book had been

published, confirm these suspicions. But Anne Booth goes one step further

and compares the authoritarian growth-oriented state with other

autoritarian developmental states such as Meiji Japan, Franco’s Spain,

and South Korea under Park Chung Hee. The history of these three

countries ‘would suggest that the forces of economic growth, once

unleashed, will inevitably lead to demands for a stronger legal and

constitutional framework which guarantees a broad range of civil liberties,

including a stronger regime of property rights. In Indonesia, too, it is

inevitable that economic growth will create such demands, which the

political system will then have to accomodate.’ … How the government

responds to these challenges will determine not just Indonesia’s

economic future in the new millenium, but its very survival as a

nation’ (p. 336).

These ominous words aptly describe a process that has been underway,

gaining speed after the KRISMON (monetary crisis in its Indonesian

acronym) and Suharto’s stepping down, and which will draw the world’s

attention to Indonesia for the next few years. It seems that a new

‘decolonization’ has just begun, and anyone who wants to put it in

perspective is recommended to read this book.

Jeroen Touwen

L. Jeroen Touwen is post-doc research fellow at the Historical Institute of

Leiden University. He is the author of Extremes in the Archipelago. Trade

and Economic Development in the Outer Islands of Indonesia, 1900-1942

(Leiden: KITLV Press, forthcoming in 1999).

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):Asia
Time Period(s):General or Comparative

Taxing Ourselves: A Citizen’s Guide to the Great Debate Over Tax Reform

Author(s):Selmrod, Joel
Bakija, Jon
Reviewer(s):Self, James K.

Published by H-Business and EH.Net (October, 1998)

Joel Slemrod and Jon Bakija. Taxing Ourselves: A Citizen’s Guide to the

Great Debate Over Tax Reform. Cambridge, Mass.:

MIT Press, 1996. ix + 299 pp. Tables, notes, bibliography, and index. $27.50

(cloth), 0-262-193 75-2; $17.50 (paper), ISBN 0-262-69208-2.

Reviewed for H-Business and EH.Net by James K. Self

, Southern Illinois University (Carbondale)

This book is written as an overview and at times a detailed survey of the

United States income

tax system, and its proposed alternatives. The authors use concepts primarily

from economics and supported by references, and statistics consistent with the

intended depth of the subject matter. Statistical information is presented in

a basic and non-rigorous manner.

It is necessary to add a note of caution on the authors’

interpretations of the literature and of statistical data. The resulting

conclusions are somewhat biased due to their selective use of data and

references. For example, the authors

demonstrate a negative relationship between savings and the rate of return for

a period of time adjusted for certain conditions

(pp. 109-12). However, they selected a time series showing the relationship

between net private saving as a percentage of disposable income, and interest

rates on Baa corporate bonds,

adjusted for expected inflation, and the average marginal tax rate on personal

interest income, plus a fixed equity premium.

The main statistical problem is that interest rates on Baa corporate bonds are

not necessarily representative of the rates on different savings options nor is

there any consideration given to the other factors that lead to savings

decisions that may have directional offsetting magnitudes–for example,

performance of other major financial instruments, fluctuations in the economy

and its impact on the economic variables etc.

The target audience is given the impression that the studies presented are the

generally accepted ones amongst the experts which is not necessarily the case.

Some mention of the differences of opinions and conflicting studies were made

but there was little explanation of the bias the authors brought to the

discussion by their econometric selections.

Chapters one, and two give a brief general history of

the personal, and business income tax, and identify the perceived problems with

each; the exclusions and deductions from the tax base resulting in higher

percentage of tax on remaining revenue;

tax incidence, and the implications of resource allocation.

The earlier history is comparatively brief and used only to justify the

introduction of statistical data. The authors then proceed to discuss the

historical tax assessment in terms of which group pays and a discussion of what

percentage of Gross Domestic

Product these taxes represent. They highlight the shift in tax incidence over

the years and the relative stability of aggregated percent of tax paid to the

federal government for personal income taxes since the second world war. The

reader is made to appreciate how today’s tax system is the product of politics

and how tax legislation has changed continuously through the years, primarily

in response to questions of perceived fairness by the voting public.

Chapters three through five discuss the criteria commonly used to compare tax

systems. The elements of comparison are fairness, economic prosperity,

simplicity, and enforceability.

The authors neglect to acknowledge that these are the same requirements set

forth in Adam Smith’s The Wealth of Nations

(1776). Smith called them his four maxims on taxation. These maxims are

widely accepted and basing the criteria on them ensures that the comparison is

made on a sound theoretical foundation. Slemrod and Bakija then relate the

maxims to practical examples, with a useful discussion of the controversies

surrounding tax reform.

Chapters six through eight discuss proposals to replace the current tax system.

In these chapters, the authors incorporate historical international

experiences with various tax

systems.

They identify the proposed system and how it stands with reference to the four

maxims. Slemrod and Bakija identify two categories of tax reform proposals:

“those that accept the current income tax structure; and those that want to

abandon the income tax entirely for something quite different” (p. 161).

They look closely at the flat tax and identify three distinct dimensions of

flat taxes: a single rate, consumption base, and clean tax base. Single rate

refers to one tax rate for all taxpayers

. Consumption base refers to taxing the value of what people consume. Clean

tax base refers to removing exempt items

>from the tax code. Using these three dimensions, they discuss each reform

proposal, to what degree it applies the three flatness dimensions of

fundamental reform, and how it would expect to rate with the earlier developed

tax criteria. Slemrod and Bakija raise the issue of transition from one system

to another and describe the likely winners and losers. They also discuss

consumption tax plans such as the retail sales tax, Value Added Tax (VAT), and

Personal Consumption Tax. They do a very good job of discussing how VAT is

implemented in different nations. Lastly, they examine the income tax for

possible improvements and discuss hybrid systems

combining both income and consumption taxes. Chapter nine gives a checklist

for the concerned taxpayer interested in deciphering how he or she would fare

under each system.

This book is accessible to the general public and it offers a starting point

for those interested in the current debate over income tax reform in the United

States. For the tax historian,

it is useful as a collection of concepts related to the development of the

United States income tax system, and to a lesser degree, the

various alternatives to the income tax. Due to the scope of the book it will

not be of much use to those well-versed in taxation or for an in-depth

historical perspective. It does accomplish what the book’s stated goal is,

to be A Citizen’s Guide to the Great Debate Over Tax Reform. I enjoyed

the reading.

Subject(s):Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):General or Comparative

How America Got On-Line: Politics, Markets, and the Revolution in Telecommunications

Author(s):Stone, Alan
Reviewer(s):Tympas, Aristotle

Published by H-Business@eh.net and EH.Net (September, 1998)

Alan Stone. How America Got On-Line: Politics, Markets, and the Revolution

in Telecommunications. Armonk, N.Y.: M.E.

Sharpe, 1997. xiii + 241 pp. Bibliographical references and index. $62.95

(cloth), ISBN 1-56324-576

-0; $23.95 (paper), ISBN 1-56324-577-9.

Reviewed for H-Business and EH.Net by Aristotle Tympas, Georgia Institute of

Technology Gt9896a@prism.gatech.edu

Accommodating more than a century of telecommunications history in a little

over two hundred pages represents a formidable challenge. Aware of the fact

that an adequate response to this challenge involves more than one historical

subdiscipline, Alan Stone introduces his work as an interdisciplinary account,

one that seeks to incorporate technological,

social, business,

legal, and political history. For the author of How America Got

On-Line, the Archimedean point of social interpretation in this

interdisciplinary endeavor is to be retrieved by considering the state of

technology at any time. Yet, as

he himself acknowledges, the technological and the social are

“intermixed,” shaping each other through their interaction (p.

12). Perhaps in order to break this interpretative circle, the author relies

so heavily on the concept of “public philosophy,”

a concept borrowed by Walter Lippman in order to represent the most central

features of a society. A public philosophy is for society what a Kuhnian

paradigm is for science: normally invisible in politics, it becomes visible

when it is “frontally challenged” (p. 11). Changes in telecommunications came

along with changes in public philosophy. Accordingly, as explained in the

introductory chapter, the book follows a historical scheme formed by three

events: the placement of a natural monopoly in U.S. telecommunications, the

displacement of this monopoly through a gradual challenge to the public

philosophy that supported it, and, finally, the replacement of this natural

monopoly on the grounds of a new public philosophy, one that emphasizes

regulated com petition.

A great part of the book follows this placement/displacement/replacement scheme

by considering changes in the configuration of two interacting institutional

fronts.

Standing on the one front of this institutional configuration,

representing the private, the market, and the business firm, was the

telecommunications firm AT&T. The book includes chapters about AT&T’s

placement in the position of a natural monopoly through the absorption of most

other telephony firms, its gradual displacement from this position, and its

replacement by a number of telecommunications firms which are now frantically

engaged in forming international institutional alliances. On the other front

of this institutional configuration,

representing the public, the state, and the government, stands the regulatory,

the judicial, and the legislative apparatuses of the state. In this part of

his book, Stone focuses on telephony. Other telecommunications technologies,

most notably radio and television, are discussed only from

the perspective of how they challenged telephony to defend its boundaries, thus

presenting telephony with what Stone calls “boundary issues.”

The rest of the book portrays a more complicated historical scheme. Radios and

televisions, and, more recently,

the networks of massively produced personal computers linked to form the

Internet) are no longer treated as merely presenting us with boundary issues.

In Stone’s view, the previously fragmented telecommunications markets, formed

as they were around distinguishable telecommunications technologies, have

recently converged. He moves on to endorse the term “hypercommunication”

in order to grasp what he perceives to be the disappearance of boundaries

between telecommunication technologies and, in addition, between national

telecommunications markets. The concluding chapter reads more like a

historically informed policy analysis than history. The author here

concentrates on two policy prescriptions. First, given the added complexity

brought about by hypercommunication, any generalization is even riskier.

Second, there is no good reason to find that the transition from communication

to hypercommunication means that the intervening role of the state is now

dispensable.

Alan Stone seems to be at his best when

he retrieves and interprets the crucial conceptions contained in the

regulatory,

judicial, and legislative decisions that shaped the course of U.S.

telecommunications. He convinces you that in the context of telecommunications

policy, private or public,

“niceties of definitional hairsplitting” were indeed “potentionally worth

billion of dollars” (p. 157). How America Got On-Line could be of

specific educational value to telecommunications policy makers, regardless of

whether they come from a public or from a private perspective. Alan Stone has

given us an insightful historical account of the state-market and

government-firm interactions that were indispensable for capitalist success in

American telecommunications. As such, it could also be of considerable

educational value to those generally interested in knowing the specific

institutional configurations that sustained capitalism as the dominant social

relationship of organizing private interests into a public interest.

Perhaps the professional historian would have liked the author to be clearer

as to what is the revolution in telecommunications under consideration. Was

there a revolution in the transition from some unnamed telecommunications

technique to telephony? Was there a revolution in the

transition from natural monopoly in telephony to regulated competition? Was

there a revolution in the transition from communication to hypercommunication?

This points to the more general issue of proper historical periodization, a

prerequisite for historical specificity. Even if we follow Stone in ignoring

the issue of the distinction between ancient and modern telecommunications, we

cannot assume that modern telecommunications starts with telephony. Stone

documents well how radio and television broad casting accounted for a

conception of telecommunications that contrasted to the point-to-point

conception of telecommunications by telephone.

Necessary as it is to retrieve this contrast, it is hardly sufficient to

interpret it in isolation from other, antecedent and more lasting, similar

contrasts in telecommunications.

Historians of technology have pointed out that the telegraph and the telephone

are not the first technology of modern telecommunications (See, e.g., Steven

Lubar, Infoculture: The Smithsonian Book of Information Age Inventions,

Houghton Mifflin Company, New York, 1993). For example, we can observe that

the radio-television vs. telephone contrast in telecommunications was

structurally similar to the contrast between telecommunications as provided by

the newspaper and telecommunications by a letter which was carried by the

post-office from one point to another. Intellectual historians have suggested

that the various technologies of transportation,

from the canal to the railway were also

perceived as bringing about revolutions in telecommunication (Armand

Mattelart, The Invention of Communication, University of Minnesota

Press,

Minneapolis, Minnesota, 1996). Stone neglects them, even though he mentions in

passim that in its battle against AT&T, MCI employed conceptions of

telecommunications that were reminiscent of arguments employed in the context

of the regulation of the railways. Finally, one is unclear as to whether the

history of telecommunications was the historical rule or the

historical exception. Could it be that the transition from a natural

telecommunications monopoly to regulated telecommunications competition (from

communication to hypercommunication) was one particular instance of the more

general transition from fordism to post-fordism (from mass production to

flexible production as a mode of capitalist accumulation)?

The professional political theorist would perhaps be more pleased with some

additional emphasis on conceptual precision.

Stone assumes that the terms

public, state, and government can be employed interchangeably. He assumes the

same for the terms private, market, and business firm. On the grounds of these

assumptions, he frequently feels entitled to contrast any of the terms of the

first set with any

of the concepts of the second set. His argument could be clearer by

respecting the hierarchy of concepts: the public, the state, and the government

(or the private, the market, and the business firm) refer to three different

orders of abstraction (from

the social). By disrespecting this hierarchy, Stone risks contradicting his

major argument by misrepresenting antagonistic private perspectives on what

constitutes a public perspective (a private vs. public issue) as if they had to

do with an a priori antagonism between the state and the private (a private

vs.

state issue).

Subject(s):History of Technology, including Technological Change
Geographic Area(s):North America
Time Period(s):General or Comparative

The Defining Moment: The Great Depression and the American Economy in the Twentieth Century

Author(s):Bordo, Michael D.
Goldin, Claudia
White, Eugene N.
Reviewer(s):Cain, Louis P.

Published by EH.NET (September 1998)

Michael D. Bordo, Claudia Goldin, and Eugene N. White, editors, The Defining

Moment: The Great Depression and the American Economy in the Twentieth

Century. An NBER Project Report. Chicago: The University of Chicago

Press, 1998. xvi + 474 pp. $60.00 (cloth). ISBN: 0-226-06589-8

(cloth), 0-226-06589-8 (paper).

Reviewed

for EH.NET by Louis P. Cain, Departments of Economics, Loyola University of

Chicago and Northwestern University.

The “moment” is the Great Depression; what is being “defined” is public policy.

The editors have assembled twelve papers from a distinguished cast of authors

who are closely associated with their subject. The papers discuss almost all

of the programs that persisted from the First and,

particularly, the Second New Deals, but few of those that did not. In their

introduction,

the editors discuss that this is potentially a controversial hypothesis, but

most of the papers simply explain why they agree or disagree with the

proposition, and some do find this was NOT a

“defining moment.” Whether each reader ultimately accepts or

rejects the hypothesis may be little more than a matter of definition.

In any event, each of the papers makes a substantial contribution to our

understanding of the depression. Most will be widely cited. Many readers,

including undergraduates, will want to consult the volume for more than one

paper. Thus, in the interest of disclosure, a thumbnail sketch of each of the

papers is appropriate. These brief synopses emphasize the relation of each

paper to the volume’s general theme. Each contains much more.

The

collection is divided into four sections of three papers each. The first is

entitled “The Birth of Activist Macroeconomic Policy.” Charles Calomiris

and David Wheelock ask whether the substantial changes in the monetary

environment of the 1930s had lasting effects? Those familiar with Wheelock’s

work will not be surprised to note they find little change in the thinking of

the Federal Reserve System. One effect of the New Deal banking laws was to

shift power from the Fed toward the Treasury,

a shift they feel imparted an inflationary bias, especially when conjoined with

the more activist approach to policy that was undertaken concurrently. The

most important legacy of the depression was the departure from gold creating

“the permanent absence

of a ‘nominal anchor’ for the dollar” (63).

The Bretton Woods dollar system allowed the Fed to “stumble” into the inflation

of the 1960s, and the continued absence of something like the gold standard

“provides an enduring legacy of uncertainty” (63) as to monetary policy in the

long run.

Brad De Long notes that the U.S. did not have a fiscal policy

in the

contemporary sense of the term before the Great Depression. It borrowed

heavily during periods of war and tried to redeem the debt as quickly as

possible during periods of peace. Government deficits in peacetime were rare

until

the 1930s, when they proved unavoidable despite the fiscal conservatism of both

Hoover and FDR. Yet, even before Keynes, there was an understanding that

“deficits in time of

recession helped alleviate the downturn” (83). After the second World War, a

fiscal policy consensus emerged that De Long characterizes as: “set tax rates

and expenditure plans so that the high-employment budget would be in surplus,

but do not take any steps to neutralize automatic stabilizers set in motion by

recession” (84).

That consensus proved hard to maintain: “The U.S. government simply lacks the

knowledge to design and the institutional capacity to exercise discretionary

fiscal policy in response

to any macroeconomic cycle of shorter duration that the Great Depression

itself” (82). What has persisted is the willingness to adopt a fiscal policy

stance that imposes a cost — perhaps higher than necessary (higher inflation,

lower saving and productivity) — to insure that there is no return to

Depression-era conditions.

Deposit insurance, the topic of Eugene White’s essay, was a result of the

Depression and is generally considered to be one of its great successes.

Banks became a scapegoat, and the

restrictions placed on the banking business diverted part of what they once

did to other parts of the financial sector. Banking became smaller than it

might have been. Deposit insurance was an attempt to insure the banking system

did not fail again.

White attempts to estimate bank failures under the assumption that deposit

insurance was not adopted. He finds that a stronger, larger banking system

would have resulted in lower failure rates and higher recovery rates.

Thus, it is possible the FDIC increased bank losses. A more important outcome

is that the FDIC changed the distribution of losses. The cost of those losses

is now “distributed to all depositors and hidden in the premialevied on banks”

(119). Thus, even if losses increased, they were unseen by individual

depositors, with the result that a marginal institution remains extremely

popular.

The second part, “Expanding Government,” begins with a paper by Hugh Rockoff on

the expansion of the government sector, largely as a result of a large number

of new federal programs. As Rockoff notes,

“it is easy to see that there was an ideological shift … it is harder to see

what produced it” (125). This ingenious article looks back at the publications

of economists in the 1920s and earlier and finds there were champions for

almost all of the New Deal programs. Curiously, one of the programs economists

did not endorse, one measure that FDR did not champion, was deposit insurance.

When the Depression came and the economic doctors were called, microeconomists

had what they considered successful prescriptions. Some part of that must have

been conditioned by the role of the government in World War I. But another

part is something that Rockoff does not discuss, and it surely is one of the

factors producing an ideological change within the profession.

Even before the Great Depression, the competitive paradigm was under attack.

The merger movement at the turn of the century called into question the

assumptions of constant returns to scale and easy entry and exit. The

emergence of a consumer society called into question the assumption of

homogeneous products. Robinson and Chamberlin’s models are independent of the

Depression, and what impact they would have had in the absence of the

Depression is unclear. It is clear that FDR came into the White House with a

mandate to do something, and the economic doctors had a long list of things to

try, things that had been used successfully elsewhere.

John Wallis and Wallace Oates argue persuasively that the New Deal had a

profound effect on the nature of American federalism through its use of a

little used fiscal instrument — intergovernmental grants. Before the

Depression, different levels of government operated with a much greater degree

of independence than they would thereafter. Intergovernmental grants created

the necessity for cooperation that has characterized the fiscal federalism ever

since; “fiscal centralization and administrative decentralization” (170). They

argue that the new structure was conducive to the growth of government. Like

Rockoff, they note the growth of the federal government did not come at the

expense of state and local governments; both grew. They show how this new

pattern was “the result of the struggle between state and national

governments, and also between the president and Congress, for control over

these programs” (178). How much of this has to do with a states rights’ bias

in the legislative and judicial branches, and how much with the depression

itself, is uncertain.

Gary Libecap examines the regulatory laws effecting agriculture between 1884

and 1970 and the budgetary expenditures that were derived from those laws

between 1905 and 1970. His contention is that “the New Deal increased the

amount and breadth of agricultural regulation in the economy and …

shifted it from providing public goods and transfers to controlling supplies

and directing government purchases to raise prices” (182).

Acreage restrictions and government purchases were the most apparent of what

he terms, “unprecedented, peacetime government intervention into agricultural

markets” (216). Abstracting from those policies, Libecap asks what

agricultural policy might have been in the absence of the Depression.

He believes it would have been more like it had been, but that is the result

of an exercise in which he subtracts laws passed after 1939 with a direct link

to “key New Deal statutes.” One wonders how many any of those statutes would

have been passed in any event; some represent ideas that pre date the

depression.

In the first paper of Section III, “Insuring Households and Workers,”

Katherine Baicker, Claudia Goldin, and Lawrence Katz note that there are three

differences between the system of unemployment compensation in the U.S. and

elsewhere: experience rating, a federal-state structure, and limitations on

benefit duration. The question they address is how that system would have been

different had it not been created during the New Deal. There is an implicit

assumption the U.S. ultimately would have adopted some form of unemployment

compensation in the absence of the Depression. To how many other New Deal

programs is this assumption relevant? The authors point to the federal-state

structure as the key difference. Their counterfactual

system is strictly a federal system with no experience rating, a system

consistent with the administration’s recommendation. We got the system we did

because, “The federal-state structure and the manner in which the states were

induced to adopt their own

UI legislation assured passage of the act and guaranteed its

constitutionality” (261). They criticize the system for not having

“changed with the times,” but that is no surprise after reading Wallis and

Oates.

While most people look to the labor legislation of the 1930s as “a defining

moment,” Richard Freeman argues that to be defining an event must “lock in

certain outcomes that persist … when, given a blank slate, society could have

developed something very different” (287). This test creates two interesting

dichotomies in Freeman’s story. The first concerns the framework versus the

results. The legal framework for private sector labor relations has persisted,

and Freeman considers that framework to be

“outmoded.” On the other hand, the unionization attendant to the adoption of

that framework “looks more like a diversion from American

‘exceptionalism’ … than a critical turning point in labor relations”

(287). The density of private sector unions today is similar to what it was

just after the

turn of this century; the voice of those unions in national political discourse

is barely audible. The second dichotomy concerns private versus public unions.

State regulation of the latter has resulted in a relatively stable environment

in which collective bargaining proceeds with less confrontation, but that may

be because public sector managers are not as accountable to the taxpayers as

private sector managers are to the company’s profits. In sum, Freeman

acknowledges that the framework in which lab or relations takes places was

defined during the Depression, but that was not a “defining moment” for labor

relations.

In their study of the creation and evolution of social security, Jeffrey Miron

and David Weil do not examine the role the Great Depress ion might have played

in the program’s adoption. Their emphasis is on the evolution of the program

since its inception. They find that “in a mechanical sense,

there has been a surprising degree of continuity in social security since the

end of the Great

Depression” (320). That is, there has been little change in what each of the

parts does; it is clear the balance between them has changed and that change

has had an impact on the economy. As the population has aged, the balance

between the old-age assistance component,

the basic response to the depression, and the old-age and survivors insurance

component has transformed what was an insurance program benefiting few to a

transfer program benefiting many.

Doug Irwin’s paper on trade policy begins the final section, “International

Perspectives.” Irwin shows that, during the 1930s, the locus of control of

trade policy passed from the legislative to the executive branch of government

largely as a result of “the depression as an

international phenomenon”

(326). Smoot-Hawley marked the end of the old approach. By the end of the

1930s, the average tariff rate had decreased from over 50% to less than 40%.

In another ten years it would be below 15%. While part of this change is

attributable to trade policy,

part should be attributable to fiscal policy (a return to the days of the

Underwood tariff) as the federal income tax came to play a much larger role,

especially in the 1940s. Similarly, the Reciprocal Trade Agreements Act was

passed during the depression, but it was not “institutionalized”

until after World War II. When, during the war, Republicans moved to seek

congressional approval and to protect domestic firms competing with imports, it

was clear that the policy changes of the 1930s would persist. Then, after the

war, “the new economic and political position of the United States in the world

… made a return to Smoot-Hawley virtually unthinkable” (350).

The paper by Maurice Obstfeld and Alan Taylor is in many ways the most

expansive in the volume. They begin by investigating more than a century of

data on capital mobility, then propose a framework in which both the downtrend

initiated by the Great Depression and the uptrend of recent years can be

understood. The framework is a policy “trilemma” faced by all national

policymakers: “the chosen macroeconomic policy regime can include at most two

elements of the ‘inconsistent trinity’ of (i) full freedom of cross-border

capital movements, (ii) a fixed exchange rate, and (iii) an independent

monetary policy oriented toward domestic objectives” (354). To the authors,

the

Great Depression was caused by subordinating the third element to the second.

Under the classic gold standard, monetary policy was concerned with exchange

rate stability, not

domestic employment, and capital mobility was facilitated. The abandonment of

gold led to a system

“based on capital account restrictions and pegged but adjustable exchange

rates, one whose very success ultimately led to increasingly unmanageable

speculative flows and floating dollar exchange rates….” (397).

The gold standard plays an equally prominent role in the paper by Michael Bordo

and Barry Eichengreen. To address the question of what the Great Depression

meant for the international monetary sy stem, they examine a counterfactual

world without the Great Depression — but with World War II and the Cold War.

They assume the gold standard would have persisted through the 1930s, been

suspended during the war, and resumed in the early 1950s. Under

these assumptions, “the depression interrupted but did not permanently alter

the development of international monetary arrangements”

(446). The system that did develop in the U.S. was very different than the

hypothesized one, but the factors that ultimately led to the collapse of the

Bretton Woods arrangements would have caused the collapse of the gold standard

— and possibly at an earlier date. Those factors include “the failure of the

flow supply of gold to match the buoyant growth of the world economy and hence

of government’s demand for international reserves” (447).

This, in turn, led to questions about U.S. official foreign liabilities and the

gold convertibility of the dollar. Bordo and Eichengreen believe that,

in these circumstances, a floating system would have resulted leaving us with

more or less what we have today. If one accepts the “ifs” in their argument,

the institutional structure that emerged in the wake of the Great Depression

postponed the transition.

This is a remarkable thought on which to end this volume. Calomiris and

Wheelock discuss the Fed’s recent emphasis on price stability as a short-run

policy concern as a “throwback.” Obstfeld and Taylor discuss the deregulation

and recent growth of the financial sector as creating

a barrier to the reimposition of capital controls. Both discussions concern

long-run adjustments the economy has made as a result of the abandonment of

gold, but both would have taken place had there been no Great Depression if

Bordo and Eichengreen are

correct.

The editors point to four common themes supporting the “defining moment”

hypothesis (6). “First, skepticism about the efficacy of government

intervention withered as the public adopted the attitude that the government

could ‘get the job done’

if the free market did not.” It is unquestionably the case that there was a

loss of faith in the tenets of the competitive model. While this faith was

wavering among social scientists well before the depression, the general

bewilderment of the 1930s created a search for someone who was willing to try

anything. To paraphrase the late John Hughes, before the Great Depression the

federal government only knew how to spend money on rivers, harbors, and post

offices. As Rockoff documents, there were a number of other projects waiting

in the wings.

“Second, many innovations introduced by the New Deal were forms of social

insurance.” While much of the First New Deal took the form of World War I

programs modified for peacetime use, many of the Second New Deal programs were

aimed at ameliorating specific types of suffering, particularly those where

successful experiments had been tried elsewhere. Some undoubtedly would have

been adopted eventually; the depression meant they started earlier than

otherwise would have been the case.

“Third, the character of federalism moved from ‘coordinate’ to

‘cooperative’ with extensive intergovernmental grants, giving greater influence

to centralized government.” This change in form, it is argued,

was necessary to get them through Congress and the Supreme Court, but that is

not necessarily a result of the Great Depression; the states rights’ bias was

present much earlier.

“Last, the conduct of economic policy … changed to give more weight to

employment targets and less

to a stable price level and exchange rate.”

These changes in turn imparted what several authors refer to as a bias in favor

of inflation, but, in a simple Phillips curve world, what developed was a bias

against a return to the conditions of the 1930s. To put it as simply as

possible, those who lived through the Great Depression defined for

policy-makers then and for their grandchildren today that all possible steps

should be taken to avoid repeating the trauma.

Louis P. Cain Departments of Economics Loyola University of Chicago and

Northwestern University

Louis Cain and the late Jonathan Hughes are the authors of American Economic

History published by Addison Wesley. Cain’s article with Dennis Meritt,

Jr., “The Growing Commercialization of Zoos and

Aquariums,”

appeared in the Journal of Policy Analysis and Management, Spring 1998.

His article with Elyce Rotella, “Urbanization, Sanitation, and Mortality in the

Progressive Era, 1899-1929,” will appear in Gerard Kearns, W.

Robert Lee, Marie C. Nels on, and John Rogers, editors, Improving the

Public Health: Essays in Medical History.

Subject(s):Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Age of Mass Migration: Causes and Economic Impact

Author(s):Hatton, Timothy J.
Williamson, Jeffrey G.
Reviewer(s):Rosenbloom, Joshua L.

Published by EH.NET (September 1998)

Timothy J

. Hatton and Jeffrey G. Williamson, The Age of Mass Migration:

Causes and Economic Impact. New York and Oxford: Oxford University Press,

1998. ix + 301 pp. $49.95, ISBN: 0-19-511651-8.

Reviewed for EH.NET by Joshua L. Rosenbloom, Department of Economics,

University of Kansas, and National Bureau of Economic Research.

Between 1850 and 1914 about 55 million Europeans left home for the Americas or

Australasia. This unprecedented voluntary redistribution of population was the

subject of extensive study at the time, and remains of interest to historians

and other social scientists today. In this book Timothy Hatton,

Professor of Economics at the University of Essex, and Jeffrey Williamson,

Professor of Economics at Harvard University, present the results of their

reexamination of the causes and consequences of migration in the late

nineteenth and early twentieth centuries. Their approach is quantitative and

social scientific, eschewing micro-detail in pursuit of systematic patterns

and central tendencies.

Drawing on a broad array of quantitative evidence Hatton and Williamson provide

new support for many hypotheses while overturning quite a few more.

The work they report here is important and will be necessary reading for anyone

interested in historical or contemporary migration topics or the historical

development of labor markets. Although the authors suggest that a better

understanding of the era of mass migration will shed new light on contemporary

immigration controversies, it is less clearly successful in achieving this

goal. An accurate understanding of historical context is almost always

valuable, but I doubt that anything in this book would directly alter one’s

analysis or understanding of contemporary migration phenomena.

After two introductory chapters that lay out the major issues and summarize the

key findings, the rest of the book divides into two parts. The first

part–chapters 3 through 6–examines the causes of migration. The second

part–chapters 7 through 11–focuses on the effects of migration on both

receiving and sending regions.

The analysis of the causes of migration opens with an examination of the

determinants of variation in long-run gross emigration rates from 12 European

countries between 1850

and 1913. A variety of hypotheses about the determinants of migration are

first laid-out, and then tested using a panel-regression framework. In a major

advance over previous work, the regressions make use of internationally

comparable real-wage data for sending and receiving regions constructed by

Williamson. The strong positive effect of relative real wages provides a

compelling confirmation of the importance of economic incentives in encouraging

migration. But the regressions also demonstrate that

a number of other non-wage factors were important. In particular, they reveal

that demographic shocks, the assistance of friends and relatives living

overseas, the progress of industrialization at home, and the rate of migration

in the recent past all had a significant effect on the rate of emigration.

Overall the model does a good job of accounting for inter-country variations in

emigration rates. It appears that differences in the explanatory variables are

sufficient to account for both the very high rates of emigration from Ireland

and Scandinavia and the very low rates of emigration from France. Only four

countries–Italy, Spain,

Portugal, and Belgium–require the addition of separate intercept terms to

account for their level of emigration. The

estimates also illuminate the sources of the characteristic inverted-U shape

pattern of emigration rates found for most countries, which appears to have

arisen from the systematic evolution of several of the explanatory variables as

each country passed through the process of industrialization.

In chapters 4 through 6 the authors extend their model of emigration to account

for short-run variations in the timing of migration and apply it to the

experience of a range of different countries. Chapter 4 elaborates a

short-run model incorporating the effects of employment conditions at home and

abroad into the general framework developed earlier, and estimates it using

data from the United Kingdom and three Scandinavian countries.

Chapter 5 explores Irish emigration after the famine, while Chapter 6

considers the case of Italian emigration. The results in each case are

consistent with those obtained from the panel regressions reported in Chapter

3, while confirming that short-run fluctuations in the timing of emigration

were influenced by variations in relative unemployment levels.

Because adequate data on unemployment are not readily available in all cases,

however, estimation of these models leans heavily on the use of proxies, some

more adequate than others. In the case of Ireland, for example, it is

necessary to use deviations of agricultural output from its trend. It is not

obvious that this measure should be closely related to unemployment rates,

however, and no support for this substitution is offered in the text.

Despite the broad similarity in approach for these different country studies,

there is no explicit attempt to compare or contrast them in the text.

Annoyingly, the regression results in each chapter are reported in slightly

different for mats, and there is no attempt to assemble the results in a

coherent fashion. While the results for the different countries are similar in

many respects I was struck by some of the differences in coefficient estimates.

For example, it would appear that the stock of migrants living abroad had an

effect on emigration from the United Kingdom and Ireland several orders of

magnitude larger than it did for Italy or the Scandinavian countries. Why this

should be true is not immediately apparent.

The second half of the book shifts the focus from the causes of migration to

its consequences on receiving and sending regions. Two chapters (7 and 8)

examine the United States, one of the chief destination countries.

Chapter 7 explores the progress of immigrant assimilation, a topic that

attracted considerable contemporary concern, and has also generated a large

historical literature. While a number of recent studies have found little

evidence of immigrant assimilation (as measured by the gap in earnings relative

to the native born), Hatton and Williamson reach a more optimistic conclusion

on this subject. Arguing that the quadratic age-earnings profiles estimated in

earlier studies are misspecified, Hatton and Williamson show that once a more

realistic specification is adopted wage gaps appear to have closed relatively

quickly for older immigrant groups.

Although the newer immigrant groups who predominated after 1890 did start at a

significant wage disadvantage relative to the native born,

Hatton and Williamson conclude that this was due largely to their lower skill

levels, and find that there is nonetheless evidence that wage gaps closed over

time.

Chapter 8 considers the impact of immigration on Americans. Here Hatton and

Williamson argue that immigrants competed directly with less skilled

native-born workers, and although migration was sensitive to short-run economic

fluctuations it did little to moderate variations in unemployment rates over

the business cycle. These facts suggest that immigration should have tended

to lower American wage levels. Using a partial equilibrium framework, they

suggest that by 1910 American wages would have been 5 to 6 percent higher in

the absence of immigration after 1890, or 11 to 14 percent higher if there had

been no immigration after 1870.

Chapters 9 and 10 introduce a general equilibrium framework to analyze the

impact on sending regions, and the contribution of migration to the substantial

wage convergence which occurred during the late nineteenth century. The

general

equilibrium framework allows the authors to assess the relative contributions

of factor price equalization and labor mobility in producing wage convergence.

Both trade and migration emerge as important factors in explaining the

narrowing of international wage gaps, although their relative importance

varies from country to country. The general equilibrium framework also helps

to highlight the extent to which the impact of migration depends on the

counterfactual world against which events are to be compared. In particular,

the late nineteenth century was characterized by considerable capital as well

as labor mobility, and the fact that capital

“chased” labor from the Old to the New World substantially offset the extent of

wage convergence. Had capital

not been mobile, migration would have produced even more dramatic convergence

than it actually did. These findings suggest that, at least for this period,

forces of globalization may have been more important than technological

convergence, which has figured so prominently in recent discussions of the

sources of international differences in real incomes.

On the face of it, these results seem plausible. But it is difficult to

adequately assess them, both because of the complexity of the general

equilibrium

models on which they rest, and the fact that many of the details needed to

evaluate the models are not explicitly discussed in the book. Rather, curious

or skeptical readers will be obliged to refer to a series of other articles to

track down these facts.

In chapter 11, the authors consider the impact of population redistribution on

inequality. The chapter makes an important conceptual point: that discussions

of migration’s effects on inequality have generally taken too narrow a view by

focussing on a single country. Much more light can in principle be shed on

the question by considering the simultaneous effects on both sending and

receiving countries. The chapter is less successful,

however, at resolving the empirical question of how migration affected

inequality trends in different countries. A priori we might expect that

immigration would tend to reduce inequality in labor-abundant Old World

countries while raising it in labor-scarce New World countries. Hatton and

Williamson argue that this

is the case, based on the behavior of wage-land value and wage-GDP per worker

hour ratios–both of which tended to fall in destination countries and rise in

source countries. But this evidence is not entirely convincing given the large

volume of international capital flows. Since Old World capitalists were able

to benefit from high rates of return on New World investments it is not obvious

what these ratios reveal about income inequality trends within countries.

As an analysis of the causes and consequences of migration in the late

nineteenth and early twentieth centuries, this book is an important

contribution to the literature. It offers a comprehensive quantitative

analysis that substantially extends and modifies our understanding of this

important historical epoch. The conclusions and conjectures here should

provide much food for thought and subsequent study.

Joshua L. Rosenbloom Department of Economics University of Kansas and National

Bureau of Economic Research

Joshua L. Rosenbloom is author of “Strikebreaking and the Labor Market in the

United States, 1881-1894,” Journal of Economic History 58 (Mar.

1998), and “Was There a National Labor Market at the End of the Nineteenth

Century? New Evidence on Earnings in Manufacturing,”

Journal of

Economic History 56 (Sept. 1996); as well as numerous other articles on the

history of U.S. labor markets.

Subject(s):Historical Demography, including Migration
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century

The Confusions of Pleasure: Commerce and Culture in Ming China

Author(s):Brook, Timothy
Reviewer(s):Lufrano, Richard

Published by H-Business@eh.net and EH.Net (August, 1998)

Timothy Brook. The Confusions of Pleasure: Commerce and Culture in Ming

China. Berkeley: University of California, 1998. xxv + 320 pp.

Illustrations, maps, notes, bibliography, glossary, and index. $40.00 (cloth),

ISBN 0-520-21091-3.

Reviewed for H-Business and EH.Net by Richard Lufrano

, College of Staten Island

Timothy Brook’s The Confusions of Pleasure began as a chapter for the

Cambridge History of China surveying communication and commerce in Ming

China (1368-1644). As the author writes, this straight-forward task appears

to have expanded to examine the influence of economic change on social and

cultural life.

Instead of a chapter, the project became an independent book that now serves

two related purposes. It provides an eloquently written and comprehensive

account of commerce and communication in Ming China especially valuable for

scholars working on related questions in other geographical areas. For the

specialist, as well as others, the book makes a fundamental contribution by

offering a more balanced view of how money and the market economy affected

social hierarchy, elite status, and social mobility. Brook is careful to

inform the reader at the beginning that he is not writing an economic history

of the Ming, something he believes

impossible at this stage of research. (The reader will nevertheless find much

here that he/she would expect in an economic history.) Instead, he supplies an

overview of the development of communications systems and commerce (thereby

fulfilling his original assignment for the Cambridge History of China,

although the publisher here is different) and its influence over the course of

the dynasty. Many previous chapters in the Cambridge volumes emphasized facts

and statistics over style; Brook provides the kind of comprehensive coverage

that characterizes the Cambridge histories but also brings the period to life

by

viewing it through the eyes of contemporaries–visiting envoys from Persia,

ship-wrecked travelers from Korea, and particularly members of the

Chinese elite.

Brook, with the help of a gentry guide, divides the book into four parts–the

first century, the middle century, the last century, and the dynasty’s

fall–while tracing “a coherent arc of change from ordered rural

self-sufficiency in the

early Ming to the decadence of urban-based commerce in the late” (pp.

xvii). The account relies on an abundance of primary sources,

the author’s previous work, and the prominent work of scholars such as Craig

Clunas, Valerie Hansen, Tanaka Masatoshi, Wei Qingyuan and Wu Chengming. The

survey however is far from a cut and paste job. Brook, for example, challenges

convention by showing that despite the efforts of the founding emperor early

Ming China was not the agrarian paradise the emperor sought.

State polices themselves, by providing for stability (leading to increased

agricultural production) and ignoring commerce in the countryside, actually

stimulated and encouraged the growth of commerce. The author periodically

throughout the survey indicates

areas where the development of commerce in China, so similar in many ways to

that of Europe, also differed. His overall position is that European-style

capitalism did not develop in China by the end of the Ming and he defines what

did develop.

This is

not to say that China ‘failed’ to generate capitalism. Rather, it created

something else: an extensive market economy that used state communication

networks to open links to local economies, organized rural and urban labor into

consecutive production processes in certain regions without disrupting the

rural household as the basic unit of production,

reorganized patterns of consumption without entirely severing consumption from

production, and knit itself slowly but surely to gentry society in ways that

would erode the Confucian disdain for commerce and result in a powerful

condominium of elite interests in the Qing (p. 201).

On a more micro-level, the survey supplies the nuts and bolts of communication

and commerce—state communication networks, modes

of transport, merchant routes, mail delivery, markets,

monopolies and so on. The only surprise for the non-specialist is the lack of

any discussion of banking during the Ming. The specialist will know that

significant developments in Chinese banking came during the next dynasty but

there should be some indication here that the banking system was relatively

undeveloped.

Beyond the survey, Brook shows how these economic, commercial,

and structural developments affected the cultural and social world. The

accepted belief is that the increasing influence of commerce facilitated

social mobility, weakened social ties based on deference and paternalism,

blurred distinctions between the elite and others, and challenged gentry

efforts to maintain social dominance. Indeed, our gentry guide, Zhang Tao,

who lived near the end of the dynasty, lamented commerce’s influence and its

effect on social hierarchy. Brook, while not necessarily rejecting this

understanding, suggests we are only looking at part of the picture; by the end

of the dynasty, elite attitudes toward commerce had changed, an accommodation

was reached between gentry and merchants, and social hierarchy and elite status

after the mid-seventeenth chaos not only survived but was actually

reconstructed and strengthened in the new dynasty, the Qing (1644-1912).

Rather than reading the history of the Ming in the way Zhang Tao did–as

commerce bringing on irreversible decline and dynastic collapse–the author

urges us to examine how the burgeoning commercial economy provided material

that was then incorporated into a more complex construction of elite status.

By telling the stories of two gentry members during the Ming/Qing transition,

he also shows that practical skills related to the commercial economy

helped individual members of the gentry survive and shore up their own

positions and as well as that of the elite itself. There is an implicit

contrast here with the Yuan/Ming transition of the fourteenth century when few

elite families were able to make

the transition.

We already knew that gentry families in the late Ming turned to commercial

activities to maintain their economic position.

Brook, relying in part on Clunas as well as his own earlier work, shows us the

range of more subtle ways gentry families used social capital related to the

commercial economy to re-configure elite status and maintain their social

position.

In so doing he connects the two parts of the book. Commercial networks and

printing, for example, made knowledge of varieties of rare plants and

vegetables more widely available, and this knowledge was subsequently

incorporated into the social capital needed to join the ranks of the elite: “To

know which plants to appreciate was not neutral knowledge but part of what

someone needed to command in order to share in the cultural world of elite

life, where such things mattered. To discriminate between plums as better or

worse was also a way of discriminating between social betters and everyone

else” (p. 136). In another example, knowledge of commercial networks changed

attitudes toward travel, previously thought morally dubious, into another

“gentry project of cultural refinement” where a “craving for travel set the

gentry traveler apart from the laboring merchant and the common sightseer”

(pp. 181,182) In another case, Zhang Tao may have regretted the restless

changing of sartorial fashion induced by the market economy but members of the

elite used it to maintain social dominance. As soon as the lower orders

mastered one style

of dress the elite were on to the next.

Thus, at the same time most gentry were bemoaning the effects of the market

economy, the bulk of them were eagerly accommodating themselves to the new

situation, (hence the confusions of pleasure). This reconfigured elite status

was more variegated and elusive than the elite status of the early Ming.

If the market economy provided so many beneficial and pleasurable

opportunities, why did the gentry continue to decry it? Brook explains that

the mid-Ming gentry in

particular used this as a rhetorical strategy to escape from a predicament.

They were [the emperor’s] obedient servants whose conduct conformed to

Confucian principles. But with reference to the local context, they held no

formal franchise. Their social mobility gave them an informal power, but that

was hard to justify in terms of Confucian ideals of deference and obligation to

the imperial order that the magistrate represented. At the same, the social

forces that had propelled them into prominence we re throwing up more

competitors from below (p. 140).

The rhetorical strategy was to “bewail the decay of the age and portray

themselves as civilization’s last great hope”(p. 140).

These laments also signaled “a desire to identify and control anxieties a

rising from a social nexus in which they have the most to gain, if perhaps

potentially the most to lose” (p. 151).

Timothy Brook’s argument about changing elite status is convincing and provides

us with a more fine-tuned picture of late imperial culture

and society. The establishment benefited from the market economy in complex

ways; social capital and practical skills derived from the market economy

allowed for greater continuity during the Ming/Qing transition than during the

Yuan/Ming transition and

helped reconstruct elite status and strengthen social hierarchy and the

position of individual elite families. The author reinforces our long-held

view of the great continuity between the Ming and Qing dynasties.

The older view of the influence of the market economy however must not be

forgotten. Despite the greater complexity and elusiveness of elite status

during the Qing, people below the elite still used wealth to struggle mightily

to achieve that status; they did not give up hope of social mobility and

tensions did not dissolve. Brook suggests that the gentry became more

accepting of commerce from the middle century to the end of the Ming, indeed

that the social personality of the gentry had changed. In many respects this

acceptance of the realities of the commercial world is true of the Qing as

well;

even some anti-commerce conservatives accepted the premises of a market

economy. Yet we can still hear laments on the ill effects of commerce every

bit as severe as Zhang Tao’s,

especially during

times of economic downturn in the mid-seventeenth and mid-nineteenth

centuries, and some elite writings still show “anxiety about the moral

degeneracy of trade” throughout the dynasty. The causes that created the

rhetorical strategy in the Ming after all had not disappeared, despite the

gentry/merchant fusion and Gu Yanwu’s and Feng Guifen’s calls for

constitutional changes in the role of the elite in local government.

Furthermore, we can wonder if the reconstruction of elite status continued

under the

peace and prosperity of the “long”

eighteenth century, when commercial practices evolved, new commercial

institutions appeared, the population exploded, and respectable careers outside

the bureaucracy proliferated. In a related way, we can also ask how

representative the two gentry members who managed successfully the Ming/Qing

transition were.

The author here is suggestive albeit perceptive and persuasive.

Will broader studies show that other families survived in the same way? Or

were more traditional

strategies still central to survival?

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Time Period(s):Medieval

The Great Depression: An International Disaster of Perverse Economic Policies

Author(s):Hall, Thomas E.
Ferguson, David J.
Reviewer(s):Wicker, Elmus

Published by EH.NET (November 1998)

Thomas E. Hall and J. David Ferguson, The Great Depression: An International

Disaster of Perverse Economic Policies, Ann Arbor:

University of Michigan Press. 1998, Pp. xvii + 194, pp. $42.50 (cloth),

ISBN: 0-472-09667-2.

Reviewed for EH NET by Elmus Wicker, Dept. of Economics, Indiana University.

The authors assert that they wrote this book for two reasons:

disillusionment with how macroeconomics is taught at the college level and a

commitment to the Friedman and Schwartz interpretation of the Great

Depression that the Federal Reserve was an “incredible source of policy

errors.” From the first assertion, I infer that the audience for this book is

primarily college students, though I think it deserves a wider

readership among the economically literate. From the second assertion, I

infer that they believe that policymakers had the knowledge to have acted

differently. However, at no point do the authors make a serious effort to

defend that presumption. I will illustrate their neglect with several

crucial examples further on.

The book makes no pretence at being a contribution to our knowledge of the

Great Depression and can not be judged by such a narrow criterion. It must be

appraised by a different standard; that is, how well the authors pose the

major questions that must be answered and the skill and judiciousness with

which they evaluate the current state of our

knowledge of the Great Depression, given the audience to which the book

is addressed. Lester Chandler’s America’s Greatest Depression,

1929-1941 (New York: Harper and Row, 1970) is the only competitor

that immediately comes to mind, but Chandler’s purpose was not to assess the

current state of our knowledge of the Great Depression but to describe

what happened. Nevertheless, the audience is apparently the same.

Although the authors stress that the Great Depression was a global event

and not simply a U.S. debacle, the emphasis remains on what happened in the

United States. For example, output and unemployment in the

rest-of-the-world, excluding the U.S. and two European countries, is not

described. Hall and

Ferguson follow the current fad of placing the gold standard as the central

focal point. But what they and others have not done is to show specifically

how the gold standard was causally significant for the Great Depression in the

U.S.. Gold standard considerations played a very minor role, if they played

any role at all, in the decision of the New York Fed to advance the

discount rate in 1931; moreover, the bank failure rate had accelerated two

and one-half weeks before the discount rate was advanced. Only three of

the thirteen chapters address foreign country issues. France, Germany, and

Great Britain are treated in chapter 4, economic recovery in Germany in

chapter 10, and the world financial crisis in chapter 7. The

reader can easily come away with the view that what was truly significant

occurred in the U.S. and a few European countries and not in the

rest-of-the-world.

The Friedman and Schwartz influence is apparent in at least two important

respects:

the overarching significance accorded the behavior of the money stock and

the negative assessment of the behavior of the policymakers,

neither of which is critically evaluated. If the jury is still out on the

money-income causal nexus, the burden of the historical evidence is too

great to warrant any conclusion about the Fed’s ineptness.

What is absolutely crucial to appraising the performance of Fed officials is

to know the extent of their knowledge of the determinants

of the money stock. Whether or not they could have offset the increase in the

currency-deposit ratio turns on what they knew or did not know about the

role of the C/D and R/D ratios as determinants of the money stock. The authors

set out the modern textbook version of the determinants of M:

M = {(1 + cd)/(cd + rd)}B but they say nothing

about the origins of that equation. The currency-deposit ratio was

not fully modeled until 1933 in a pair of articles

by James Harvey Rogers (“The Absorption of Bank Credit.”

Econometrica, 1933, Vol. l, 63-70) and by James Angell and Karel

Ficek

(“The Expansion of Bank Credit,” Journal of Political Economy, 1933,

Vol.

41, 1-31 and 152-93). Rogers’ formal

framework had appeared in an earlier book, Stock Speculation and the

Money Market, (Lucas Brothers: Columbia,

Missouri, 1927, pp. 53-62) which was completely ignored by the economics

profession. Less formally, Benjamin Strong, Governor of

the Federal Reserve Bank of New York, introduced the currency-deposit

ratio in the Stabilization Hearings in 1926 (Benjamin Strong, Hearings

Before the Committee of Banking and Currency, House of Representatives,

1926, 69th Congress, parts 1-2, 334-5 and 422) and even earlier in The Report

of the Joint Committee of Agricultural Inquiry in 1922 (Agricultural

Inquiry: Hearings Before the Joint Commission of Agricultural Inquiry, 1922,

64th

Congress. 1st Session). Although Strong’s testimony includes a simple

expansion process with a C/D ratio, this is by itself a mighty thin reed on

which to hold the Federal Reserve System accountable for not forestalling a

decline in the money stock between 1929 and 1933. Neither Friedman and

Schwartz nor Hall and Ferguson have demonstrated that knowledge of the

determinants of the money stock was available to Fed officials. In its

absence the case for the Fed’s ineptness collapses.

Friedman and Schwartz have made a distinguished contribution to our

understanding of the Great Depression, but Hall and Ferguson’s uncritical

acceptance of some of their historical interpretations of particular

episodes reveals a lack of acquaintance with more recent contributions

. For example, the authors repeat and apparently accept the Friedman and

Schwartz view that had Benjamin Strong lived Fed policy would have been

better. But that is no longer a defensible hypothesis. The Fed did in 1930

exactly what it had done in

1924 and 1927–that is reduce the indebtedness of the New York Fed to $50

million. It worked in 1924 and 1927; it did not work in 1930! Moreover,

there are no defensible grounds for criticizing the Fed’s behavior for

ignoring the demand for excess reserves when raising reserve requirements in

1936 and 1937. I know of no American economist who had any knowledge of a

demand for excess reserves.

In attempting to explain the slow recovery from the Great Depression, the

authors pay no attention at all to Michael Darby’s unemployment estimates

(“Three and a Half Million Employees Have Been Mislaid: An Explanation of

Unemployment, 1934-1941,” Journal of Political Economy, Vol. 84,

1-16).

He maintained that the slow recovery from 1934 to

1941 was a fiction–there was a strong movement toward the natural rate after

1935. There are good reasons to question Darby’s estimates, but no good

reasons for completely ignoring them.

Hall and Ferguson appear to be carried away with their negative assessment of

Fed policymakers. At one point they refer to the camps of the

unemployed and destitute peoples as “Federalreservevilles” instead of

“Hoovervilles”. Neither appellation is apt. It is obvious that both go far

beyond what either the historical of statistical evidence warrants. The tone

is stridently judgmental.

The book may very well succeed in

rejuvenating moribund students who are

trying to master macroeconomics, but the authors fail to present a

convincing case that Fed policy was an “incredible sequence of policy

errors.”

Elmus Wicker Department of Economics Indiana University

Elmus Wicker is Professor of Economics, Emeritus at Indiana University. He is

the author of Banking Panics of

the Great Depression, Cambridge University Press. 1996, and has

recently completed a manuscript titled

Banking Panics of the National Banking Era.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Central Europe in the Twentieth Century. An Economic History Perspective

Author(s):Teichova, Alice
Reviewer(s):Palairet, Michael

EH.NET BOOK REVIEW

Published by EH.NET (Au gust 1998)

Alice Teichova, editor, Central Europe in the Twentieth Century. An

Economic History Perspective. Aldershot: Ashgate Publishing, 1997. 192

pp. $68.95 (cloth), ISBN: 1-85928-105-2.

Reviewed for EH.NET by Michael Palairet, Department of Economic History,

University of Edinburgh.

The contributors to this collection of essays were set the task of

critically assessing the post-Communist transitions in Central Europe

within their historical

context. Most of the authors are practicing

economists and economic historians in senior positions in east European

institutions. It is the transitions themselves which mainly preoccupy

them; their sense of economic history is in the majority of cases weakly

developed.

If there is a consistent theme running through the collection, it is

about resistance to change, both by observation and by the inclination

of the authors themselves. One of the (unintended) uses of the book is,

therefore, what it tells us of the attitudes to economic transition, and

policy inclinations of east European academic elites. None of the

contributors want to turn the clock back, but the tone of the book is

set by Teichova’s introductory essay,

an outline of the economic history

of Central Europe, which hankers for an elusive middle way, eschews the

Thatcherist “victory of enterprise culture,” and seeks to discredit

“shock therapy,” while all see the re-building of the social safety net

as prerequisite to successful transition.

The most extreme of these views emanates from Jorg Roesler who provides

no historical retrospect, and extends his sympathies for the “anger”

felt by the east Germans (despite the most generous regional aid

programme in history) and warns of the deepening gulf in attitudes

between the west and east of the country. His ideal for the east would

seem to be west German standards of prosperity linked with perpetuation

of the right to rent-gua ranteed inefficiency.

The other central European contributors are aware of the absence of a

comparably bountiful feeding hand to bite, but form a consensus around

the proposition that reform can only progress at a speed compatible with

the inclinations and comprehension of the political elites.

Pruca describes economic development in pre-war and Communist

Czechoslovakia in terms which differ little from the analyses put out by

the country’s “liberal” establishment in the 1970s and

’80s. He admits

that “discontinuity was needed in many areas,” but proceeds to condemn

the abrupt changes (under Vaclav Klaus) which would “undermine the

consensus of society.” (For “society” read entrenched opinion formers.)

Returning to ”

shock therapy:” All excoriate it, yet none bother to

explain what the term was intended to mean, by its originator (or

populariser) Jeffrey Sachs. They seem to understand “shock therapy” as

implying a regime of ruthless cut-backs, but Sachs was more concerned to

engineer reversals of inflation expectations, and to use mainly

macro-economic tools to impose business discipline on enterprise

decision making, and in the widest sense, to foster the norms of civil

society.

This task was undoubtedly ambitious, but nevertheless urgent, if the

modest wealth of these countries was no longer to be dissipated in

supporting failure, and reallocated to meeting human needs. In Henryk

Szlajfer’s short institutional survey of Poland’s de velopment, he notes

that in 1988, 24 percent of Polish manufacturing industry subtracted

value (if its outputs were measured in world prices). Value subtraction

was probably an even greater problem for the still more ossified

Romanian economy

according to Daniel Daianu, who advocates the outright

closure of the value-subtractors, and the restructuring of unprofitable

enterprises which nevertheless add value. Fine – but this surely is the

crux of the matter – organized, entrenched opinion is in eastern Europe

closely linked with the value subtractor interest, and Daianu comes

close to explaining why. The system promoted the over-expansion of

“soft” sectors, (steel, chemicals, machine building) whose outputs were

near-unsale able, because it was easier to expand them than the “hard”

sectors (agriculture, consumers goods, energy). So these “soft”

leviathans became the leading sectors, politically, as well as

economically. Therefore they and their political allies became the

bastions of resistance to change, and continued to impose an

insupportable rent charge on the rest of the economy.

The economic history of Yugoslavia is described from a Slovenian

viewpoint by Franjo Stiblar, but in rather wooden terms. Retaining a

nostalgic affection for workers self management, despite its admitted

inefficiency, he tells us how many theatres, doctors, and convicted

criminals operated in 1938 and 1989 (why?) but little about the causes

of Yugoslavia’s precipitate economic decline in the 1980s. His essay

contains the usual criticism of Markovic’s “shock-therapy” reform of

December 1989.

The only contribution to address the problem thematically rather than in

a national context is Michael Kaser’s study of property rights and

international indebtedness. He points out that most of these countries

have been structural debtors throughout the century. If borrowing had

been channelled into useful capital formation, this would not have been

unjustified. Czechoslovakia, for example, could have benefited from more

borrowing, not less, but unhappily investment under Communism was apt to

create net negative property, because of the environmental damage

associated with it.

Probably the most interesting study in this book is Fritz Weber’s essay

on the Austrian economy after World War II. Its experience of

reconstruction differed from Germany’s, with state control,

egalitarianism and employment maximization given priority above price

stability (which is why today’s schilling is worth only about a seventh

of a deutschmark). Planning was used as a tool (says Weber) for the

restoration of the market economy.

The analogy held out for transitional central Europe seems clear. All

had elaborate total planning systems. As enterprises consequently had no

experience of marketing, and were accustomed to orienting production and

the allocation of supplies and deliveries around plan directives, these

systems could have provided a transitional tool for re-pricing and

reallocating resources, to simulate to some degree the behaviour of a

market, yet they do not seem to have been accorded this role.

(Alice Teichova (editor) is Emeritus Professor of Econo mic History at

the University of East Anglia, and Honorary Fellow of Girton College,

Cambridge University.)

Michael Palairet is author of The Balkan Economies c.1800-1914

(Cambridge University Press, 1997), and specialist in the micro-e conomic

history of former Yugoslavia.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Politics and Property Rights: The Closing of the Open Range in the Postbellum South

Author(s):Kantor, Shawn Everett
Reviewer(s):Halcoussis, Dennis

EH.NET BOOK REVIEW

Published by EH.NET (August 1998)

Shawn Everett Kantor, Politics and Property Rights: The Closing of the Open Range in the Postbellum South. Chicago, University of Chicago Press, 1998. x + 187 pp. $18.00 (paper), ISBN 0-226-42377-8

Reviewed for EH.NET by Dennis Halcoussis, Department of Economics, California State University, Northridge.

Shawn Kantor, an economist at the University of Arizona, provides us with an in-depth look at the closure of the open range in postbellum Georgia. At first glance, one might think this detailed study of two Georgia counties would only be of interest to those studying the history of Southern agriculture, but Kantor covers a lot of interesting territory in less than 200 pages. Kantor considers the closing of the range as a means to study changes in institutions, and unlike some journal articles addressing the subject, the book format allows Kantor to study the transition from all possible angles, rather than just testing one particular hypothesis. This makes it easier for the reader to focus on the “big picture.” Kantor looks at the transition by discussing institutions, the economics and ideology of property rights, the politics of postbellum Georgia, and the effect of closing the range on the development of Southern agriculture.

Some economic historians have felt that after the civil war, institutions in the South were stagnant. Kantor puts forth a different point of view, studying the transition in Georgia from a fence law to a stock law regime. A fence law regime means there are open ranges, those who own animals can let them run freely, and those growing crops must build fences to keep the animals out. A stock law regime means a closed range, those with animals must fence them in to keep them off of others’ land. Previous writers thought the choice between these two regimes was a class issue. The stock law would minimize fencing costs, but it could hurt those who might end up paying more wealthy farmers for the right to let their cattle graze. However, the fence law (open range) caused an overinvestment in animals, since one didn’t have to pay the cost of feeding them, and those growing crops had to bear the cost of building fences. Kantor uses regression analysis to estimate the discounted value of net expected profitability from enacting stock laws (closed range) in Georgia, and finds that although some counties would suffer, overall the state would gain. From 1880 to 1900, farm property values increased by an estimated 30.6% in counties that enacted the stock laws compared to those that did not.

The most efficient institutions may not prevail because of politics. In Chapter 3, Kantor looks at Jackson and Carroll counties. Both voted down stock laws in the 1880s, even though each county’s income would have increased by passing the law. Using regression analysis, Kantor provides evidence that stock laws were defeated in these two counties because they were not in the financial interest of a majority of voters, although each county would have benefited in the aggregate. The minority who would gain could not “buy out” enough of the majority who would lose, because any such contract would have been poorly enforced. Thus, the stock law was defeated in these two counties even though aggregate income would have increased.

The regressions in this chapter also provide strong evidence to support Kantor’s contention that the voting was not divided along simple class lines. Other scholars have assumed that wealthy farmers favored closing the range, and the poor wanted to keep open ranges. However, wealthy farmers might want to keep the range open if they owned a lot of livestock, and poorer farmers without much livestock would favor a closed range. Kantor’s point is that voting behavior can not be predicted by the size of the farm alone.

In Chapter 4, Kantor discusses how the contract problem discussed in Chapter 3 was resolved. A new provision was added to proposed stock laws, whereby tenants would be guaranteed rights to pasture their animals on their landlord’s property. This “bribe” was often sufficient to win over enough votes to pass the stock law. In some cases, the stock law was forced on a region by the state legislature, rather than by county (or even militia dis trict) election. Kantor found that in these cases, yeoman farmers who did not benefit from the new pasture clause were able to block the stock law, and owners of larger farms would appeal to the state legislature to get the stock law through.

In discussing the politics of property rights, Kantor looks at three hypothesis of voting behavior as applied to Georgia legislators: capture theory (legislators voted to further the interests of the most wealthy landholders), political self-interest (they voted to maximize the probability of re-election) and economic self-interest (they voted for laws that would maximize their wealth from their “regular” profession; many of the legislators were farmers themselves). Using logit regressions with the vote for or against a stock law as a dependent variable, Kantor finds the empirical evidence most strongly supports the political self-interest hypothesis, with the economic self-interest hypothesis “coming in second.”

Next, an interesting but tangential question is addressed: Were game laws restricting hunting and fishing on unfenced property established for the purpose of conservation or for “social control”–to force blacks to work on farms, instead of “living off the land?” Laws restricting hunting on the unenclosed land of one’s neighbors were in effect for 22 counties, so it seems like the laws were for conservation. Labor was mobile, so the law would have to apply to the whole state if landowners wanted to make it more effective for controlling black labor. Kantor runs regressions concerning the characteristics of counties that passed such laws, and finds evidence to support the hypothesis that the laws were passed for conservation purposes, and to strengthen private property rights, not to control black labor. In fact, counties with more tenant-farmers were less likely to pass laws restricting access to hunting and fishing areas because these laws might cause the tenants to leave the area.

In the last chapter, Kantor explores the possibility of a connection between the stock law controversy and support for Southern Populism, and does not find a clear conclusion. Kantor realizes that expanding the sample to include more than two counties would lead to more definitive results.

By following a multi-faceted approach, Kantor has given us an insightful look at how institutions change, and how the closed range affected the development of southern agriculture. I look forward to incorporating the lessons of this book into my lectures.

Dennis Halcoussis Depart ment of Economics California State University- Northridge

?

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Geographic Area(s):North America
Time Period(s):19th Century

Socializing Capital: The Rise of the Large Industrial Corporation in America

Author(s):Roy, William G.
Reviewer(s):Levenstein, Margaret

H-NET BOOK REVIEW Published by H-Business@eh-net.muohio.edu (August, 1998)

William G. Roy. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, N.J.: Princeton University Press, 1997. xv + 338 pp. Figures, tables, notes, bibliography, and index. $35.00 (cloth), ISBN 0-69-104353- 1.

Reviewed for H-Business by Margaret Levenstein , University of Michigan

This book is extraordinarily ambitious and wide-ranging in its treatment of a very significant topic. At times Roy focuses specifically on the merger wave of the 1890s during which many large firms turned to public capital markets to facilitate mergers. But much of the book, and, from my perspective, the most interesting parts, take a much longer term view, examining changes in property rights and the use of those rights by railroads and then manufacturing firms over the course of the century. Most of the central points of the book I think are correct and many of Roy’s methodological points provide useful correctives to tendencies in business and economic hi story. There were sections of the book that I found insightful bordering on brilliant. There were also sections of the book that I thought were unconvincing, and others that were simply wrong.

The central points of the book can be summarized as follows :

1. The large, widely-held manufacturing corporation is a social creation, not a natural entity.

2. The corporation as it exists today is historically contingent and developed from pre-existing forms. In particular, it evolved from the public corporation, used by the state to accomplish public purposes and was given special privileges (monopoly, eminent domain, limited liability) in order to do so. The happenstance convergence of the economic crisis of 1837, the emergence of the railroad, and the po wer of the “anti-monopoly, anti-state” version of Jacksonian anti-corporatism privatized and democratized the corporation. Thus the corporate form retained many of its privileges (limited liability, alienability of ownership) but made those privileges available to all through general incorporation laws. In doing so, the corporation lost its public purpose and its public accountability (as well as its claim to monopoly).

3. There existed historical alternatives. Manufacturing could have continued to be conducted in firms that were not corporations. The corporate form could have retained its public purpose and its public accountability. The state could have remained a more active economic player in its own right — owning railroads or banks or manufacturing as today the state owns highways. It could have developed a stronger regulatory apparatus, developing the capability to administer public enterprises and assure that those who received the privilege of incorporation fulfilled a public responsibility. In other words, the boundaries between public and private could have been drawn quite differently in many dimensions.

4. Manufacturing firms followed the incorporation practices of railroads because that was required by investment banking firms to get access to large pools of capital, not because the corporate form was demanded by manufacturers to coordinate increasingly complex, large-scale, high-throughput technology.

5. Manufacturing firms (the “trusts”) turned to New Jersey’s incorporation law in order to legalize collusive activities, not to coordinate increasingly complex, large- scale, high-throughput technology.

6. The corporation was privatized – lost its public use and public accountability – and the corporation was socialized – its securities widely owned but no longer controlled by owners – not because this organizational form was the most “efficient” way to organize manufacturing production. Rather, manufacturing firms embrace and continuing use of the corporate form was the result of a “logic of power.”

Roy uses several methods to make his case. He first presents a theoretical argument that a “social logic based on institutional arrangements, including power” (p. 6) is more useful for understanding the dimensions and dynamics of the economy than is an analysis based on “the logic of efficiency.” The latter position he identifies with Chandler, and much of the book is cast as a polemic against Chandler. While I am very sympathetic to his historicizing and “de-naturalizing” of the corporation, I thought this framing of the issue was largely counter- productive. His presentation of Chandler sometimes bordered on caricature. Chandler’s point is not that managers are concerned only with efficiency or that clever managers always pi ck the most efficient organizational design. His point is that it was only in firms where managers made choices that gave the firm a competitive advantage that the firm survived. But Roy ignores the role of competition. He argues that “efficiency theorists” are functionalists, simply providing an ex post rationalization of whatever happened to emerge. While he is certainly correct that some business history is functionalist, and neo-classical economic historians are apt to fall back on “best of all possible worlds” descriptions of whatever institutions exist, the competitive model does provide a story of why it is that we should think that those that survive are different from those that didn’t; their survival is taken as an indication that they are better at competing. Thus it would have been useful to explain how power influenced who survived the competitive process and how power determined the rules of the competitive process. That is, it would have been useful to explain why the firms that survive the competitive process are not necessarily the most efficient. Instead, for the most part, Roy simply ignores competition as a significant force in capitalist economies, arguing that “the social arrangement that governed American industry could only vaguely be described as a market. American businessmen have always been aware that they share common interests at least as much as they compete over conflicting interests” (pp. 176-7). Roy is absolutely correct that American businessmen have often cooperated. But that does not mean that there is no market; it means that those who have been able to cooperate, and better yet, dominate cooperative agreements, are the firms that have survived and prospered. I would dispense with the word “efficiency” altogether. A more useful question is whether firms survived because they were good at inventing new, lower cost technology, good at getting workers to work harder, good at getting tax breaks from local governments, good at increasing demand for their product, good at getting access to others’ property through eminent domain, good at getting cheap capital because of connections to investment bankers. Whether or not any of these particular attributes improves efficiency or is a Good Thing for society as a whole (as if there is such a thing) is an altogether separate question.

Roy then turns to an econometric test of the “power” and “efficiency” explanations. He asks which industries were more likely to adopt the corporate form during the 1890s merger wave (which he measures by their use of publicly-traded securities, thus excluding incorporated firms that were not traded on public exchanges). He finds that average size of the firm and capital intensity are significantly and positively related to an industry’s use of publicly-traded securities. He also finds that labor productivity was negatively related to the use of such securities and that industry growth rates were insignificant. He concludes from this that Chandler and “the efficiency theorists” are wrong. Size matters even when controlling for other things. Labor productivity is lower in “incorporated” industries, so it must not be that incorporation makes firms more efficient. There are several problems with this analysis: he looks only at the 1890s and therefore conflates where the merger wave took place with where the corporate form endured. He groups “Chandlerian” causes of incorporation (growth and capital intensity) with effects (i.e. labor productivity); perhaps the negative relations hip between productivity and incorporation reflects the need for organizational change in low-productivity industries? His unit of analysis is the industry, which groups together large and small firms, and he treats large industries and small industries equivalently. Are we surprised that there are no large firms in the hammock or lapidary works industries despite a faster rate of growth than electrical machinery (p. 30)? Chapter two, which presents this econometric analysis, should be skipped entirely by anyone who has read Naomi Lamoreaux’s The Great Merger Movement (and if you haven’t read it you should). Lamoreaux presents a much more convincing and complete econometric rejection of the Chandlerian contention that the merger wave of the 1890s was motivated by the need for vertical coordination of inherently high-throughput technology. Save your time for the more edifying chapters to come.

In Chapters 3 and 6, Roy compares the history of public enterprise, the legal rights of corporations, and the emerging dominance of “socialized capital” in three states: New Jersey, Pennsylvania, and Ohio. He examines the evolution of the corporation from a tool used by states to encourage economic development and raise revenues to its emergence as a private agent, available to all through general incorporation statutes with no public responsibility or accountability. Roy argues that the differences in the experience of public investment during the canal and early railroad period, as well as the political interpretations placed on that experience, determined the rules under which corporations operated in each state at the end of the century. New Jersey had the most limited experience with public corporations, both quantitatively and qualitatively. It participated as an investor in the Camden and Amboy, and was able to keeps its taxes low as a result, but the railroad controlled the state rather than the other way around. Pennsylvania had both mixed corporations in which it invested and public corporations. Ohio had the most activist policy, both the most successful- the Ohio canal system developed the region and integrated it into the national economy – and the most spectacular failure when logrolling resulted in the expansion of public subsidization of canals and railroads and nearly bankrupted the state. Roy examines the implications of these different experiences for three aspects of corporate law: the permissibility of corporations owning other corporations, the powers of boards of directors (relative to shareholders), and the extent of limited liability. Roy finds that in all three aspects of corporate law, the experience with public and mixed corporations during the canal era shaped state attitudes such that New Jersey’s corporate law was the most “privatized,” allowing corporations broad flexibility in owning other corporations, giving power to corporate boards, and extending unlimited liability through both a general incorporation statute and special charters. Ohioans were at the other end of the spectrum, suspicious of the corporate form, retaining double liability and strictly limiting the activities of corporations to those for which they were chartered. Roy finds that these differences in corporate law led to differences in the importance of corporate capital in the three states. While some of this difference in corporate capital obviously reflects capital mobility – corporations with operations elsewhere chartered in New Jersey to take advantage of its lax laws – Roy’s fundamental point is that business in Ohio was simply less likely to be organized within a corporation. Thus, he suggests, economic activity need not have taken place within the socialized corporation, or at least not within a corporation with no social responsibility . Where the state legislature was unwilling to confer such generous benefits on the corporation, businesses made do with other forms of organization.

This empirical conclusion supports Roy’s argument that there were actually two distinct political responses to the canal crisis within the Jacksonian anti-corporate movement. One demanded more accountability on the part of the quasi-public corporation (i.e. more government) while the other demanded privatization (less government). Roy makes the interesting argument that the privatization ideology won out because it was self-fulfilling. Suspicion of the state led to weak oversight. With no oversight, projects were corrupt or failed; that failure was then interpreted as the failure of public investment (p. 74). But it is not clear from his comparison of the three states that strong state oversight was ever really in consideration. As he shows elsewhere in the book, the choices considered were either democratization of access to corporate privileges through general incorporation statutes or limitation of those privileges by statutes such as Ohio’s requiring double liability and strictly limiting the activities of corporations to those for which they were chartered.

Here and elsewhere, Roy compares the choices made in the United States to those made in France where a strong and competent state apparatus was created. This comparative perspective, though presented more casually than those between the U.S. states, is often very helpful. Unlike the U. S. case where states competed with one another and were, therefore, forced into a prisoner’s dilemma race to the bottom in terms of the social responsibilities of private actors, France was able to chart a very different course. Whether the “strong state ” approach was one that could ever have emerged in the United States will, of course, be debated by many. But that is not Roy’s point. The point is that there is nothing natural or inevitable about the present configuration of rights and responsibilities that constitute the corporation.

Chapters 4 and 5 examine the way that the railroad and investment banking influenced the construction of the corporation. Many of the generalizations he makes in his history of the railroads will not sit well with most economic and business historians. One could read these chapters and think that the railroads were a failure, both privately and publicly. For the most part, neither was the case. And the reader might understandably be confused when he presents Rockefeller’s demand for railroad rebates as an example of how the railroads exercised power. But try to ignore that and focus on the his fundamental point. The financing of railroads was not simply corrupt, or political, or determined by power games among the major players (though all that was certainly the case). The development of institutions to finance railroads determined the set of institutions that industrial corporations could choose from when they needed to finance growth and short term operations. The structure of those inherited institutions favored concentrated over unconcentrated industries, favored incorporation and management-owner separation, perhaps favored some technologies, organizations of work, and regions over others. This point is important and profound. The evidence he gives in its support is not always well organized to make his point. But the challenge that he lays out is clear. The observed choices of corporations are not necessarily the optimal ones in a global sense. They are the choices corporations made given the incentives created by institutions created for a different purpose and as part of deeply politicized process.

Chapters 7 and 8 return to the merger movement of the 1890s. He correctly argues that it is wrong to see this period as one of a shift from a competitive market to an administered or monopolized one. U.S. firms had been cooperating to control prices in many industries throughout the nineteenth century. In fact, he argues, it is only with the emerging dominance of a “free market” ideology that the state makes the strong distinction, now taken for granted in anti-trust law, between contracts promoting trade and those in restraint of trade. Others will argue that there was a long-standing tradition in common law not to enforce contracts in restraint of trade. But there is also a long-standing tradition of allowing quasi- public organizations, such as guilds and corporations, to engage in behavior that we would today think of as monopolistic. Roy perhaps takes this argument too far when he says, “If governments did not enforce contracts between buyers and sellers, markets would collapse by the same sort of opportunism that wrecked the pools” (p. 190). While the current state of the economy in Russia reflects the underlying truth of this statement, we should also recognize that there is not the same inherent incentive to deviate from a mutually beneficial contract to exchange that there is with a contract to restrict output or fix prices. It is true that the state creates and enforces markets, but there is a difference between a self-enforcing contract and one that is inherently a prisoners’ dilemma.

This chapter includes a very interesting section examining the interaction between the first use of the New Jersey incorporation statute and the terms of the statute. He not only shows that the writing of the statute was the result of a complex political process. He also shows that the way that it was used differed substantially even from the purposes of the first corporations for which it was written.

In these chapters he presents the histories of particular industries, arguing that their use of the corporate form cannot be explained by changes in their technology (i.e. by managerial demand). The histories of the sugar and tobacco industries, familiar to business historians, are re-told in a new light. Rather, he argues, the desire for monopoly control and the expectation of financiers that the corporate form would be used, led firms to incorporate. He also makes the interesting argument that the merger wave of the 1890s changed the expectations of investors so that “when a group of entrepreneurs wanted to establish a large-scale industrial enterprise, henceforth the standard procedure would be to mobilize the resources of the corporate institutions by recruiting investment bankers, brokerage houses, and the investment press in order to attract sufficient capital” p. 254. Prior to the 1890s it was deemed acceptable for Andrew Carnegie to operate his steel business as a limited partnership; after the merger wave of the 1890s investors perceived non- corporate firms as higher risk. Trying to operate outside the corporate sphere was now a more costly choice, but only because the prior history had changed investors’ (and investment bankers’ in particular) ideas about how business had to be organized.

The comparison of the three states is intended to suggest that there were various paths that the development of the corporation could have taken. But sin ce the corporation is now firmly ensconced in all three a more overarching point is that competition between the three states limited the power of any individual state to determine the structure of the corporation. The three states are also relatively similar in terms of their level of economic development, industrialization, and integration into the national economy. A slightly different story might have been told, and Roy’s argument made stronger, if he had looked at states that were less developed and continued to have more active state economic development policies throughout the century, including state investment in banks, railroads, and corporations. Did those states making post bellum public investments in corporations demand public accountability? Or had the prevailing ideology of the private corporation so come to dominate by the second half of the century that even where there was substantial and direct state investment the corporation was seen as an autonomous and privately responsible agent?

Roy makes several important methodological points that economic and business historians should heed. First, he emphasizes that actors can exercise power without power being the motivation for their actions. Individuals and groups exercise power when their actions determine the choice set or the constraints faced by others. I think this broad definition of power is very useful and would help economic and business historians to understand and analyze political movements, from late 19th century populism to late 20th century resistance to free trade. But defined this broadly we also have to recognize that the exercise of power is not inherently a bad thing. For example, in a capitalist economy with strong patent protection technological innovation gives the innovator power. Users of older technologies cannot simply continue to operate as they have in the past. This is the creative destruction that Schumpeter celebrated- and it is really does destroy something that someone values. That’s why the technocratic distinction between efficiency and distribution that economists cling to is silly. Any policy choice that has a significant impact on the “efficiency” of the economy will also have distributional consequences. That doesn’t mean that we don’t want technological change. Much of the time we probably do. But this perspective forces us to acknowledge that there are social decisions to be made, not simply private actors doing whatever they please, and that those social decisions require tradeoffs. Second, this book will serve as an enormously useful corrective to the tendency among economists studying the firm, property rights, and institutions generally (a growing trend that is very healthy in and of itself) to follow Oliver Williamson’s “In the beginning, there were markets” approach. Roy argues forcefully, and correctly, that both the market and the firm are social constructions. That does not mean that they are arbitrary or unreal. It means that their structure and their existence are the result of past political decisions and the outcome of social and political conflict. This is also a useful corrective to an approach that conflates the notion of the existence of a market with “rational” behavior by individuals. The existence of a market changes how rational individuals behave. Competitive pressure forces rational individuals to calculate more, and it increases the weight of monetary factors in those calculations relative to very real concerns for community and the quality of human inter action. Economic historians recognize this effect of the market on individual behavior when they can cast it in a positive light (see Sokoloff’s 1992 work on the spread of markets and the rate of patenting, for example), but tend to downplay it otherwise (see Rothenberg 1992, for example).

Third, Roy makes an interesting case for an interplay between contingency and determinacy in the book. He argues for contingency in order to make the case that there is nothing natural or inevitable about the current institution of the corporation. The current configuration of rights and responsibilities that constitute the corporation is the result of highly contingent events in the past. But he does not accept the standard version of path dependence and raises questions that I have long thought were problematic with that approach. He makes clear that while the current construction of the corporation is contingent and path dependent in the sense that it would and could have been different if different events had occurred at key turning points (particularly during the 1830s canal crises), he does not see this as simply the result of chance. The key events were themselves the result of who had power at the time. This approach opens up a whole line of fruitful research in this area. Why was it that the response to the canal crisis was privatization rather than increased regulation? Why was it that some state constitutions were modified to limit direct involvement in economic activity and others weren’t? These were explicitly political decisions that had long term economic ramifications. Understanding the political forces behind these decisions would be very useful. Roy also makes the point, applicable quite generally to the path dependence approach, that what matters is not simply the cost of shifting from one path to another (e.g. from one keyboard to another) but who bears that cost. If those who have the power to make the decisions about whether to switch paths do not bear the costs, then the switch will appear “costless” (see McGuire, Granovetter, and Schwartz, forthcoming).

In making the argument for the contingency of the corporation Roy plays down some forces – powerful forces I am sure he would agree – that led to its current incarnation. On a mundane level he downplays competition among states allowed by the federal structure that led to a spiraling down of public responsibilities for private actors. But on a more basic level, the transformation of assets from things that natural individuals own, use, and are responsible for, to capital personified in the corporation, responsible no longer to the state and barely to its nominal owners, seems to me not a happenstance, contingent event. The corporation gives agency to capital. It’s not for nothing that we call it a capitalist economy.

Finally, Roy’s “de-naturalizing” of the corporation is a giant step forward for business history. So is his problematizing of the boundaries between private and public, the economy and the state, and the rejection of the dichotomy of an “interventionist state” and a “natural market.” As Roy makes clear, the state creates the market, so it is meaningless to talk of it intervening in it. That language simply serves to de-legitimize some actions of the state relative to others. Finally, acknowledging that there are social choices to be made that influence how the economy will function in the future is important, and not simply for academics. Post-cold war ideology presents the corporation not only as natural but all- powerful. It is good to remind people that they can, through social and political action, make choices about how such social creations operate.

Bibliography

Lamoreaux, Naomi R. The Great Merger Movement in American Business, 1895-1904. Cambridge, England: Cambridge University Press, 1985.

McGuire, Patrick, Mark Granovetter, and Michael Schwartz. Forthcoming. The Social Construction of Industry: Human Agency in the Development, Diffusion, and Institutionalization of the Electric Utility Industry. New York, N.Y. and Cambridge, England: Cambridge University Press.

Rothenberg, Winifred (1992). From Market Places to a Market Economy: The Transformation of Rural Massachusetts . Chicago, Ill.: University of Chicago Press.

Sokoloff, Kenneth (1992). “Invention, Innovation, and Manufacturing Productivity Growth in the Antebellum Northeast” in Robert Gallman and John Wallis American Economic Growth and Standards of Living before the Civil War (Chicago, Ill.: University of Chicago Press), pp. 345-378 .

Williamson, Oliver E. (1985). The Economic Institutions of Capitalism. New York, N.Y.: The Free Press.

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Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):19th Century