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Maffeo Pantaleoni: At the Origin of the Italian School of Economics and Finance

Author(s):Baldassarri, Mario
Reviewer(s):Bruni, Luigino

EH.NET BOOK REVIEW

Published by EH.NET (February 1998)

Mario Baldassarri, editor, Maffeo Pantaleoni: At the Origin of the Italian School of Economics and Finance. New York: St. Martin’s Press and London: Macmillan Press (in Association with Rivista di Politica Economica, Sipi, Roma), 1997. v + 209 pp. $79.95 (cloth), ISBN: 031217358X.

Reviewed by EH.NET by Luigino Bruni, School of Economic and Social Studies, University of East Anglia, Norwich (UK).

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Maffeo Pantaleoni (1857-1924) is one the most original and complex figures in the history of Italian economics. One of the founders of pure economics, his Principii di Economia pura (Barbera, 1889) [English Translation Pure Economics (Macmillan, 1898)] introduced Vilfredo Pareto to the “new economics,” and brought marginalism to Italy.

“We do not know,” wrote Irving Fisher reviewing Pure Economics in 1898, “where else in English can be found so compact and excellent an epitome of modern economic theory”. The Principii di Economia pura was Pantaleoni’s “gem” (Edgeworth), a book characterised by the hedonist hypothesis on which economic science is based, and from which every theorem has been derived. In Pantaleoni’s system, hedonism was linked to Spencerian evolutionary philosophy (it functions to conserve the organism), and gave a strong normative connotation to economic theory. For him, economics should provide a criterion to distinguish economic (rational) from non-economic (irrational) behavior.

In his obituary for Pareto, published in the Giornale degli economisti (1924), Pantaleoni restated his argument that psychological hedonism is more scientific than other hypotheses upon which choice theory can be based (including Pareto’s theory of choice). His reasons were that: a) the history of economics, from Bentham to Jevons and Edgeworth has shown the efficacy of the hedonistic economics; b) the approach is based on the observation of concrete reality, on psychological and biological studies; c) and since people reveal their preferences, economists can know much more about mankind’s behavior than natural scientists. Spencer, Sidgwick, Marshall, Edgeworth, but also Beccaria, Verri, and Ferrara in the Italian tradition, were the sources of his original and still relevant vision of economics (in the contemporary debate over rational choice, Kahneman, Tversky, Sugden and the cognitivist movement would find Pantaleoni a good ally).

However, the “pure economics” season of Pantaleoni’s career did not last long. Near the end of the last century he started analysing “impure economics”; the relations between economics and statistics, history, and institutions. These issues occupied his attention for the remainder of his career.

Is it possible to form a coherent interpretation of Pantaleoni from the Principii to Erotemi (the title of the volumes collecting his papers)? This question, linked to the significance and originality of Pantaleoni’s work, arose soon after his death. The International Congress “Maffeo Pantaleoni. Dal Paese’ al Villaggio Globale”, held in Macerata, Italy in December 1994, tried to take the question seriously, examining a variety of answers. Now the proceedings of the congress have become a book, edited by Mario Baldassarri, with contributions by congress attendees Piero Bini, Italo Magnani, Nicolo Bellanca, Luis Chauvel and Jean-Paul Fitoussi, Pierluigi Ciocca, Marcello de Cecco and Paolo Sylos Labini. The book is a welcome initiative that can contribute to our knowledge of an economist largely forgotten (unfairly) in contemporary international economic debates (and also often overlooked in the history of economic thought).

Paolo Sylos Labini provides the argument for the position that “there are at least two Pantaleoni.” The first is the author of the Principii; the other authored the Erotemi. He focuses on the analysis of the economic dynamics of the “second Pantaleoni.” On the other side of the issue, Piero Bini, Nicolo Bellanca and Italo Magnani attempt an unitarian interpretation of the thought of Pantaleoni.

Searching for the originality of Pantaleoni’s work, Bini argues that it must be somewhere other than in his marginalist framework because, as B”hm Bawerk, Pareto, Gide, and Schumpeter have pointed out, “the marginalist framework of the work cannot be considered original” (p. 15). Bini argues that Pantaleoni’s originality lies in his attempt to overcome marginalism by including elements of historical and sociological investigation as well as applied economics, into economic analysis. A Pantaleoni closer to Marshall than to Pareto. Where does Bini find the thread which links together the whole Pantaleonian work? It is in the hedonistic approach, the pillar of the Principii, which according to Bini is the central hermeneutic category of Pantaleoni’s reflections on economics and society from the first essays to his obituary of Pareto, published near the time of his death. This is the same common thread spotted by Italo Magnani, in his interesting paper dedicated to marginalism and role of the state in Pantaleoni’s work.

Bellanca’s interpretation of Pantaleoni, the most original and ambitious paper of the book, is built upon two ideal type categories. The first is Panteleoni’s attempt to place side by side the “perfection” of marginalist theory and the “imperfection” of its starting points, or of power relations. Only by keeping together the two sides of analysis it is possible, in Pantaleoni’s view, to understand the complexity of the economic phenomenon. The second category is dynamic analysis, which proved to be the most important and original aspect of Pantaleoni’s latter work. Pareto in his first works tried to extend his analysis of equilibrium from static to dynamics, by means of the analogy with mechanics (D’Alambert’s principle). However Pareto himself found out that this approach to dynamics did not work, and, after 1901, he gave up the attempt to dynamize his economic system, devoting himself instead to sociological study. Pantaleoni, who knew well the intellectual evolution of his genial friend, tried, on the contrary, to develop a dynamic analysis based on a non-mechanical (or non-physical) paradigm. His paper “Alcuni problemi di dinamica economica” (1909) opened the most interesting Italian research program between the two wars, when such economists as Bresciani Turroni, Demaria, Del Vecchio, Fanno, and Einaudi attempted to go beyond “static” Paretian equilibrium theory by introducing “dynamic” analysis into economics. This tradition still continues in the works of contemporary Italian economists like Pasinetti or Sylos Labini.

Marcello De Cecco provides a link between Pantaleoni and contemporary economic research by highlighting “the importance of the analysis contained in [his] works for research on the relationship between economics and institutions” (p. 189).

I would like to finish this review, in which only a few aspects of the importance of Pantaleoni’s work have been mentioned, by encouraging readers to see Sraffa’s obituary of Pantaleoni (originally published in the Economic Journal, 1924), which opens the volume and reveals another way in which Pantaleoni has influenced modern economics.

Luigino Bruni,, PhD in History of economic thought from the Univeristy of Firenze (Italy), is visiting fellow in economics at the school of Economic and Social Studies, University of East Anglia, Norwich (UK). His doctoral thesis was on Pareto’s theory of choice.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):19th Century

The Allure of the Foreign: Imported Goods in Postcolonial Latin America

Author(s):Orlove, Benjamin
Reviewer(s):McCants, Anne E. C.

EH.NET BOOK REVIEW

Published by EH.NET (February 1998)

Benjamin Orlove, editor, The Allure of the Foreign: Imported Goods in Postcolonial Latin America. Ann Arbor: University of Michigan Press, 1997. viii + 226 pp. $42.50 (cloth), ISBN: 0472106643.

Reviewed for EH.NET by Anne E.C. McCants, Department of History, Massachusetts Institute of Technology.

One of the drawbacks of the standard geographical organization of the historical discipline (broadly defined to include economic history and historical anthropology and sociology) is that scholarship about those regions considered peripheral to Europe and the United States is little read outside of its own subfield. This isolation occurs despite the fact that such scholarship is often heavily influenced by the themes and concerns (and even the methodologies) of the dominant fields in the discipline. Not surprisingly, this unbalanced relationship impacts even the narrative content of regional studies, with primacy often automatically accorded to those historical events which specifically connect the periphery to the “center.”

This volume edited by Benjamin Orlove, on a topic- the import of European goods into Latin America during the nineteenth and early twentieth centuries- which lends itself easily to a Eurocentric analytical focus, works hard to avoid this pitfall. Moreover, this volume offers all scholars interested in the political and domestic economies of consumption an innovative methodological model to follow, one which seamlessly interweaves the work of historians and anthropologists as well as the standard economic history narrative of the postcolonial Latin American economy with a theoretically informed cultural analysis. The introduction to the volume, written by Orlove (an anthropologist) and Arnold Bauer (an historian) begins with the explicit claim that their project is committed to paying “attention to internal social factors” in explaining the “varied responses to European goods” in Latin America and other parts of the pre-industrial world (p. 1). Their goal is not to reject outright the old export-centered interpretation of Latin American development, but rather to balance it with an understanding of the “partially autonomous” nature of imports and consumption (p. 7). In particular, they want to highlight the important role played by consumption (whether of imports, domestic imitations, or “native” products) in the shaping of new national identities and the establishment and legitimation of social hierarchies within that national experience.

While not all of the individual contributions to this volume live up to the high standards set in the introduction, several are particularly interesting and worth highlighting here. Not surprisingly, the substantive chapter by Orlove and Bauer on the consumption of foreign wine, hot beverages, and houses (in fact building materials and architectural design) in Chile during the Belle Epoque nicely demonstrates the principles they set forth at the outset. They do not discount the importance of macroeconomic forces in their account of the spread (and ultimate imitation) of these foreign goods. Nonetheless, they focus their discussion on the twin issues of European goods as “status markers” and as signs of “modernity” (pp. 116 and 118). They employ both quantitative and qualitative data to tease out what they call the “contradictory pressures to use goods to demonstrate national distinctiveness and global commonality- a contradiction that expressed itself in a tension between national and cosmopolitan styles” (p. 116).

The chapter by Erick Langer on the distribution and meaning of foreign cloth imports among the Chiriguanos in the Lowland Frontier of Bolivia uses very limited source materials in an impressively creative way. His work challenges many of the standard assumptions regarding the interaction between Western goods and indigenous peoples, most notably that the latter are slow to adapt and change, and that consumption of the former will evolve in a linear (progressive) way from little use to greater dependence. He documents convincingly that in the initial period of frontier contact between the Chiriguanos and mestizo ranchers power resided disproportionately with the former; and moreover, that that power was parlayed into significant consumption of highly desired European textiles. It was only with the development of the encroaching cattle economy, the rise of a functioning labor market for nearby Argentine sugar plantations, and the mining boom which put financial resources into the hands of the Bolivian state, that the Chiriguanos lost their command over imports and saw serious reductions in their standard of living. Langer’s analysis of this development in reverse is equally sensitive to issues of ethnography, political power, and neoclassical economics.

Finally, the chapter by Josiah Heyman on the changing meaning of import consumption along the Mexico-United States border between the Porfirian 1880s and 1890s and the present is worth noting separately. Using government import statistics, household inventories, and extensive field interviews, Heyman develops a richly nuanced description of the cultural meanings attached to a variety of US-made goods, as well as to the retail sources for those goods. Most importantly, he documents the changing nature of those meanings over time, even in some cases among the same individuals. This leads him to the provocative conclusion that “neither the meaning of nationhood nor of import is constant” (p. 180); followed by the suggestion that the meanings of standards of living may also vary greatly across different political contexts. This is certainly rich food for thought for economic historians, many of whom are deeply committed to the enterprise of assessing past standards of living.

In short, this is a book worth reading beyond the immediate circle of scholars whose work focuses on the development of the Latin American economy and polity. Much of the source material, and the strong commitment to cultural analysis found in this volume will not be overly familiar to economic historians. But many of the questions raised, and the evidence presented to answer them, make an important contribution to areas of inquiry of long-standing interest to economic historians.

Anne E.C. McCants Department of History MIT

Anne McCants is the author of Civic Charity in a Golden Age: Orphan Care in Early Modern Amsterdam (University of Illinois Press, 1997). She is currently working on a project dealing with the emergence of consumer culture in the Dutch Republic.

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Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

Industrial Constructions: The Sources of German Industrial Power

Author(s):Herrigel, Gary
Reviewer(s):Shearer, Ronald A.

EH-NET BOOK REVIEW

Published by H-Business@eh.net (January, 1998)

Gary Herrigel. Industrial Constructions: The Sources of German Industrial Power. Structural Analysis in the Social Sciences Series, 9. Cambridge: Cambridge University Press, 1996. x + 480 pp. Tables, notes, bibliography, maps, and index. $54.95 (cloth), ISBN 0-521-46273-8.

Reviewed for H-Business by Ronald A. Shearer , University of British Columbia

The question, addressed in this book is: does the literature on German industrialization accurately describe the process that occurred? Alternatively, considering the long sweep of history, how did one of the most successful examples of industrialization in modern times come to pass? Readers may want to extrapolate the analysis to address a broader question: how does any economy industrialize? While Herrigel does not explicitly answer this broader question, his analysis may nonetheless be very relevant in various other contexts.

For economists, Herrigel’s analysis is at once informative and frustrating. Two aspects of this book are important for economists interested in the process of industrialization and economic development. First is the forceful demonstration of the interaction between the social environment, governmental structures, and politics on the one hand and profit seeking decisions of business firms and the supporting activities of business associations on the other. In the German case, the interaction partially shaped the course of industrialization and was partially shaped by it. Second, but equally important, is Herrigel’s careful exploration of the nature and role of regional diversity in German industrial development, an aspect of economic development that has important echoes in many countries. What economists will find frustrating is what is missing in the analysis and the exaggerated assertions made or implied regarding the relevance of “traditional” social and economic analysis. Both are reflected in the virtual neglect (perhaps better, the rejection) of very basic economics in the exploration of the behaviour of firms and industries in the various episodes considered in the book. The problem is most acute in the sections dealing with long run industrialization up to 1945 but is not absent in the post World War II material. Economists will also be concerned about the lack of verifiable quantitative evidence on the importance of the regional industrialization process so clearly described in the book for the long run growth of the German economy. If we grant the story of the development of a “decentralized industrial order,” what difference did it make, not only for the growth of regional economies but also for the growth of the national economy?

The book is well researched and carefully documented. The author’s research included an impressive number of interviews with significant people in industrial firms and associations, universities and governments, and the analysis and conclusions are carefully related to the existing literature. Indeed, some 40 percent of the pages are devoted to notes and bibliography, a rich treasure for students and researchers. The index is short but adequate. Several maps help elucidate the geographical dimensions of the analysis. Many readers will find the writing style of the opening, quasi theoretical chapter overly laden with dense, unrelenting, unfamiliar jargon and may be annoyed by the excessive repetition of some theoretical propositions. By contrast, the historical material and illustrative case studies are presented clearly and effectively. The book has the added merit of being as up-to-date as can be expected. Herrigel pursues his analysis of German industrialization into the 1990s with interesting interpretations of the problems that began to haunt German industry at the beginning of this decade.

While I find aspects of the book less than satisfactory in terms both of content and presentation, on balance, the strengths of the book vastly outweigh its defects. It is a rewarding work for anyone interested in German industrialization and the development of the German state and for anyone interested in the process of industrialization in general. It is a book that merits careful study.

The theoretical approach is presented in an Introduction (Chapter One), and the main theoretical propositions are restated at various places in other chapters. Herrigel’s bete noire is an explanation of German industrialization that focuses almost single mindedly on large, complex, largely self contained conglomerate firms (with strong links to associated banks) what he calls “autarkic firms.” He argues that an interpretation of German industrialization of which the primacy of such firms was the fundamental pillar dominated the “post World War II research agenda” on German industrial development, to the detriment of a deeper understanding of German industrialization. He attributes this agenda to Gershenkron and his disciples, building on the shoulders of Schumpeter and augmented by various later analysts of business management, industrial organization and technological invention, innovation and diffusion in capitalist economies. In this agenda, the smaller industrial enterprises, if considered at all, were seen as an appendage of the central autarkic firm sector or a minor enclave in the aggregate economy. The autarkic sector was the driver; the small business sector a passenger. To the contrary, Herrigel argues, what he calls the “decentralized industrial order” had a vibrant, independent development based in the states of western and southwestern Germany. It played an important role in German industrialization, although Herrigel is deficient in not presenting convincing quantitative indices of how important.

As befits a political scientist, Herrigel’s focus is on governance, namely on what he calls “industrial governance.” While the precise meaning of governance in this context is a bit vague, it is the emphasis on more or less independent regional industrial networks that leads to his depiction of this sector of the economy as an “industrial order.” The decentralized industrial sector is not seen as a part of a larger “industrial structure,” but as something separate in organization, ethos and production characteristics, with its own historical roots, social coherence and governance institutions. Herrigel’s analysis of the development of this sector is evolutionary, reflecting his rejection not only of the language (“which I dislike”, p. 23) but also the substance of neo classical economics. As a result, we have a picture of the development of an industrial sector without reference to underlying production economics.

In three chapters (Chapters Two through Four), Herrigel explores the history of the decentralized and autarkic sectors up to World War II, including an important chapter on the interaction between the firms and business organizations in these sectors and the political system. He finds the roots of the divergent development of the two sectors in the systems of land inheritance in different sections of Germany. Where impartible land inheritance was the rule, a landless proletariat was created, providing the necessary labor force for large scale enterprises. Where partible land inheritance was the rule, the division of the land into smaller and smaller units resulted in a population of land owners for whom cultivation of the land could not be a full time occupation. They engaged in “rural industry” while retaining their land, developing specialized skills and social traditions. The result, the substance of Chapter Two, was the development of regional concentrations of specialized, small scale, mutually supporting factories producing for domestic and eventually world markets. They cooperated in various ways, including farming out production to each other and to home producers and in the development of common services. In the process they developed a distinctive social ethos and an appropriate set of industrial institutions that became the basis for subsequent evolution of the sector.

The emphasis on the long run consequences of impartible land inheritance is interesting. It is surprising, however, that in this context Herrigel does not devote attention to the possibilities for market transactions in land which could have led to consolidation of holdings and the creation of the landless labor force that he sees as so important in the other regions. Similarly, it is surprising that he does not devote considerable space to the analysis of patterns of interregional migration (or limitations thereon) which would seem to be an important adjunct to his analysis.

Underlying it all, no attention is devoted to the economics of production of the products in question. Economic considerations intrude only so far as market conditions affected the performance of the firms and led to adjustments in products and institutions. However, there must have been more than just the ethos of the industries that made industrial production viable in these regions. I looked in vain for some consideration of traditional (“neoclassical”) location of industry considerations, including careful consideration of the nature of the products and available production techniques, including questions of potential scale economies and the optimal scale of production. Nor is there any consideration of relative factor prices in the different regions. Herrigel’s use of the concept of governance in this context is also puzzling. It is clear from his discussion that the firms were autonomous units; they made the production and investment decisions in their own self interest. The role of regional associations in facilitating production as described by Herrigel seems far from the rule making and enforcement that I associate with governance. In part, these associations provided various kinds of support for the firms (in the jargon of neoclassical economics, their activities created “external economies,” services whose benefits could not be fully captured by any individual firm but which lowered the costs or improved the competitive position of the industry as a whole). In part they were cartels, attempting to protect the firms from adverse developments in the market or to take advantage of a strong collective position in the market. As with any cartel of independent firms, when the individual firms saw a strategic advantage in diverging from cartel policy, the cartel became unstable and tended to break down. That is all familiar to economists who study industrial organization. From Herrigel’s discussion, I think the governance concept is stretched very thin in this context. The analysis would be helped immensely by incorporating relevant economics. The analysis of the autarkic sector (Chapter Three) is built around a case study of the Ruhr iron and steel industry with a shorter but still important study of the machinery industry. The analysis has the same character as the analysis of the decentralized sector; the same strength and what I see as the same weaknesses. Heavy emphasis is placed on the evolution of the institutions of the sector and the interaction among firms within the institutions and between the institutions and government, with minimum consideration for locational and production economics. About the only non institutional locational factor noted is passing mention of the availability of abundant iron and steel in the Ruhr Valley. Careful attention is given to the interaction between industry and banks, and the impulse to cartelization is carefully documented. As in the case of the decentralized sector, the analysis of the instability of the cartels could benefit from incorporation of relevant economics, but the analysis on the social and political levels is well developed and persuasive.

The third chapter in this group (Chapter Four) is a stimulating analysis of the interaction between the industrial structure and the political system. Careful attention is given to the role of industries in affecting public policies and the effects of the structure of government on industrial development in Imperial Germany, the Weimar Republic and the Nazi era. The strong message emerging from the analysis is the importance of a federal system of government in promoting the development of the decentralized industrial order and the prevention of its domination by the autarkic industrial order. There are also interesting conclusions about the inconsistency of the centralized Weimar Republic with the established pattern of decentralized industrialization and the roots of the attraction of members of the decentralized sector to the Nazi movement. The period since World War II is the substance for the third part of the book (Chapters Five through Seven). The organization is the same as in the second part: a chapter on the decentralized sector (Chapter Five), one on the autarkic sector (Chapter Six), and one on the interrelations between business and government in the process of industrialization (Chapter Seven). The latter includes the unduly brief conclusion to the book. The analysis of the decentralized and autarkic sectors is in three phases, the period of the economic miracle from 1945 to the mid 1970s, the struggle for restructuring through the 1980s, and finally some relatively brief but nonetheless insightful observations on the pressures that appear to be emerging in the 1990s.

Given the longer run argument developed earlier in the book, the central issue in the analysis of the early part of the post war period is the apostasy of a number of firms in the decentralized sector. Penetration of the autarkic form of organization into the regional domain of the decentralized industrial order occurred as some producers “adopted mass production strategies … by breaking out of the institutional and practical framework that governed production and administration” in the decentralized industries (p. 148). The informative case study is of the Daimler Benz AG automobile manufacturing firm, but it is said to be representative of a number of firms in the decentralized regions. The Daimler Benz process of conversion from specialized production of luxury vehicles to mass production of standardized vehicles is carefully documented. A strong measure of vertical integration of production relationship replaced what Helliger refers to as the horizontal relationships among firms in the decentralized order. The lesson is clear: technology and markets changed and the reality of the production economics of the modern automobile industry intruded. Once again, a healthy dose of economic analysis is called for. While hinted at, it is never adequately developed.

The 1980s brought another major shift in German industrial behaviour. Through cases studies of steel, machinery and automobile manufacturing, Herrigel traces the renewed development of the large scale industrial conglomerates in the postwar period and their amazing production performance during the economic miracle. Intensified international competition in the 1980s induced a reconsideration of the merits of centralization. A search for flexibility and reduced costs led to some decentralization with positive effects on the decentralized industrial sector. However, in this instance, decentralization created dependency in the sense that it involved the use of decentralized firms as sources of supply. As Herrigel argues, the organizational problems of large scale industry seemed to intensify in the early 1990s.

The final chapter (Seven) returns to the themes of Chapter Four, the interaction between industry and government in the postwar period. Not surprisingly, the influences flow both ways as pragmatic adjustments in government fostered and accommodated necessary adjustments in the industrial structure. In the early postwar period, the federal structure of government imposed by the allies provided support for both the decentralized industrial system and autarkic firms. Both sectors flourished. As centralization of industry spread through the economy, greater centralization of economic policy also occurred, particularly in labor relations and in the management of aggregate demand. The reversal of the centralization movement in the 1980s also saw some relaxation in the centralizing governmental arrangements. The mutual adjustment and adaptation of government and industry was not always smooth and trouble free, but it occurred and is an essential element in the Herrigel story. What are the broader lessons that can be abstracted from this analysis? It would be interesting to have an extended discussion of this question by Herrigel, but I carry away three points from his work. First is the proposition that regional diversity is likely to be a basic element in any industrialization process and that radically different forms and scales of industrialization are likely to be appropriate in different regions. It follows that industrialization policies should not pursue as a single-minded objective the creation of large scale, vertically integrated manufacturing firms. A mixture of types of firms and industries is more likely to be appropriate. Second, over time, the relative balance among types of industries is likely to change as technology, external competition and market conditions change. Flexibility and the capacity to adapt to fundamental changes are vitally important if crises are to be avoided. But perhaps the most basic lesson of all is the third one. To be successful, industries have to be compatible with the social and economic characteristics of the regions in which they are located. They are best cultivated by a governmental structure that is sensitive to regional aspirations, possibilities and concerns. I read Herrigel’s work as an argument for a decentralized federal structure of government that adapts pragmatically to changes in fundamental economic conditions. I have criticized Herrigel for the lack of economics in his analysis of German industrialization. Perhaps I am unfair. Within its own terms of reference, Herrigel has written a remarkably good book. He explicitly disavows any intention of presenting a general theory of German industrialization, and he does not present himself as an economist. Indeed, he abruptly rejects the approach of the economist. However, in an age that values interdisciplinary studies, there has to be a happy medium somewhere. What I would like see as the ideal is a Herrigel paired up with an equally well prepared and research-minded economist to produce a definitive work on German industrialization which carefully integrates the political and social institutional analysis with appropriate production, locational and organizational economics (probably in a game theoretic context).

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Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):General or Comparative

Creating a National Home: Building the Veterans’ Welfare State 1860-1900

Author(s):Kelly, Patrick J.
Reviewer(s):Costa, Dora L.

EH.NET BOOK REVIEW Published by EH.NET (January 1998) Patrick J. Kelly, Creating a National Home: Building the Veterans’ Welfare State 1860-1900. Cambridge, MA: Harvard University Press. viii + 250 pp. $37.50 (cloth), ISBN: 0-674-17560-3. Reviewed for EH.NET by Dora L. Costa, Department of Economics, MIT.

Union Army veterans and the programs that benefited them have received considerable attention of late. This reviewer has used the wealth of records generated by the Union Army pension program to study the evolution of retirement, taking advantage of the peculiarities of the program for statistical identification. The most common focus, however, has been not on the veterans as data, but on why veterans’ programs developed in the first place and the ramifications of this development for the twentieth century welfare state. Thus, Theda Skocpol, among others, has argued that disgust with veterans’ pensions delayed the development of state provided old age pensions.

In this book Patrick Kelly (Department of History, University of Texas at San Antonio) traces the development of veterans’ homes from their origins in the efforts of local women’s philanthropic organizations to a federal system consisting of four regional branches by the 1870s and eight by the end of the nineteenth century. He documents the initial resistance to veterans’ institutions arising from the fear that these would foster dependency and from the conviction that pensions were a better (and cheaper) way to compensate veterans. When it became clear that there would always be some veterans unable to take care of themselves even with generous pensions, he describes how the political alliance between Republicans and veterans led to the creation of a National Asylum. This National Asylum then turned into a National Home, as managers of the veterans’ Homes sought to avoid the stigma of the poorhouse and the asylum by using the rhetoric of domesticity. But, they avoided the stigma of the poorhouse not just through their choice of rhetoric. The sites for homes were chosen for the beauty of their grounds (the first site was a bankrupt resort) and the architectural plan of the most successful branch (the Central) combined the characteristics of military installations with those of Utopian communities and included workshops, libraries, and chapels. The kitchen provided generous portions of the artery clogging food of the era. The homes, although located outside of cities, were easily accessible via rail and were integrated into the public life of the neighboring community.

Veterans spent their pensions in town (often, much to the managers’ chagrin, in saloons, gambling establishments, and brothels); passing theater groups provided entertainment; city residents used the grounds of the home as a public park; and the homes organized entertainment for the entire city for Decoration Day (now known as Memorial Day) and the Fourth of July. Although veterans’ homes did not have the stigma of the poorhouse, they were institutions nonetheless. The men wore uniforms resembling their Union Army uniforms, slept in barracks with 40 or even 100 other men, needed a pass to leave the home, and were awakened by a bugle call, called to mess by a bugle call, and sent to bed by a bugle call. The veterans who entered the homes were too sick to support themselves, too poor to pay for care within their own homes, and had no family members who were able to support them. For anyone working with Civil War veterans as data or for anyone working on nineteenth century institutional care, Kelly’s book will be a useful reference. However, Kelly is not content to tell a straight history. He argues that his study of veterans’ homes has much wider significance because the National Home prepared the way for the later expansion of both the United States welfare and warfare states. Because the National Homes were highly visible tourist attractions, Kelly claims that they helped insinuate the state into the common life experience of post-Civil War Americans. Given the paucity of evidence, I found these claims excessive. Kelly presents no evidence that the attitude of Americans toward the federal government underwent a profound change. Even if it did, could we attribute this to veterans’ homes? Although Kelly points out that the homes had assisted 100,000 Union veterans by 1900, this sum pales in comparison to the number of pension beneficiaries. In 1900 alone almost ten times as many pensioners were on the Union Army pension rolls. Even more striking, until the advent of the New Deal the basic welfare institutions of the United States remained unchanged and until World War II the small peacetime army could hardly lead anyone to talk of a “warfare” state. Dora L. Costa Department of Economics Massachusetts Institute of Technology Dora Costa is the Ford Career Development Associate Professor of Economics at MIT and a faculty research fellow at the National Bureau of Economic Research. Her book, The Evolution of Retirement: An American Economic History, 1880-1990, uses Union Army veterans as data and will be forthcoming in April from the University of Chicago Press.

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

The Greatest Nation on Earth: Republican Economic Policies During the Civil War

Author(s):Richardson, Heather Cox
Reviewer(s):Wright, Gavin

EH.NET BOOK REVIEW

Published by EH.NET (January 1998)

Heather Cox Richardson, The Greatest Nation on Earth: Republican Economic Policies During the Civil War. Cambridge, Massachusetts: Harvard University Press, 1997. viii + 342 pp. $35.00 (cloth), ISBN: 0-674-36213-6.

Reviewed for EH.NET by Gavin Wright, Department of Economics, Stanford University.

American economic historians do not pay enough attention to the history of economic policymaking, and when they do take up one of the usual policy suspects — tariffs, banks, transportation — these are often treated as specialty topics in isolation from each other and from the political context of the times. We generally leave to political historians questions about contending economic philosophies and ideologies, especially for the nineteenth century and especially for the federal government. Perhaps we are implicitly committed to a view that American policies were driven by interest group pressures and pure politics, so that the whole concept of implementing an economic program seems out of place.

There is at least one glaring exception to this image, the insurgency of the Republican Party during the 1850s and its abrupt ascension to political power in the 1860s. To be sure, wartime conditions were exceptional in ways that had little to do with ideology. But even in the midst of war — to some extent because of these extraordinary circumstances — Republicans were able to push through sweeping changes in national policy in any number of areas, with a minimum of political opposition. Many of these are standards in the economic history curriculum — tariffs, banking, the Homestead Act, railroad land grants — but rarely are these treated as a cohesive policy package enacted by a party in power. This quasi-neglected topic is the subject Heather Cox Richardson’s new book, growing out of a Ph.D. thesis from the Harvard history department.

According to Cox, the story has the structure of classical tragedy. In the “self-righteous optimism” of their celebration of individual labor and private property, the Republicans enacted policies that “unwittingly lay the groundwork for the turmoil of the late nineteenth century” (255). Believers in active government support for economic development, party members thought they were opening opportunities for family farmers and ordinary workers. But because they underestimated greed, corruption, racism, and the exercise of economic power, what they gave the country instead was the Gilded Age: “their vision contained the seeds of its own destruction” (vii). This interpretation is not entirely novel — this version is more-or-less what I remember learning in my undergraduate American history class — but to map this transformation in historically specific detail would be no small achievement.

Unfortunately, the book’s individual chapters are not up to the task of carrying such an ambitious historical structure. In her focus on legislative histories, Cox rarely gets close enough to the substance of the issues to be able to compare intentions and reality in any depth. Her command is stretched to the breaking point in the second and third chapters, which deal with war bonds and monetary legislation. These subjects are certainly important, and wartime financial policies had lasting consequences; but they hardly fit the framework of a fresh political opportunity to implement a pre-existing economic philosophy. What Lincoln said about his entire administration– “I claim not to have controlled events, but confess plainly that events have controlled me” — applies as well to Chase’s desperate struggle to pay the wartime bills, and to William Pitt Fessenden’s reluctant support for greenbacks. In general, Cox does not make enough room in her narrative for the possibility that in many areas, Republicans were pressured by events into policies they would otherwise not have dreamed of adopting.

Her best cases are in the next four chapters: taxes and tariffs, support for agriculture — not just the Homestead Act, but the founding of the Department of Agriculture, and the Morrill Act establishing land grant colleges — transcontinental railroads, and, of course, slavery. On many of these one can make the case that a naive enthusiasm for positive action gave birth to something quite different in practice. On the other hand, one can also argue that many of these measures had positive long-run benefits, whatever the calculations and intentions behind them. To pursue these sorts of evaluations rigorously would require a different kind of book, one with more of an empirical base and more follow-up study into the postwar implementation of legislation that originated during the war. To expect such material in a relatively conventional political history is doubtless unfair. What Cox might have provided within her own frame of reference, however, is a better-developed sense of the political context behind each of these measures — not just the Republican ideology, but the lineup of interest groups and the evolution of the debate over time. It would be extremely helpful to know whether the party really functioned as a legislative unit on economic issues, drawing up strategies, choosing leaders, imposing discipline. But organizational matters like these are almost entirely neglected by Cox, and one is led to infer by its absence that by and large the party did not operate in these ways.

With her interest in ideology, Cox is often too ready to take political rhetoric at face value, as in the arguments of Justin Smith Morrill (influenced by Francis Wayland and Henry Carey) that his tariff legislation was not traditional special-interest protectionism, but instead would benefit all members of society (105). Morrill may have been sincere in this belief, but how much of the political support for his tariff bill was attributable to his sincerity?

One particularly interesting shift in the Republican position is noted but not really explained. Although the party had some of its roots in the nativism of the 1850s, by the end of the war it was a champion of immigration (160-168). Cox attributes the change to wartime shortages of farm labor. But was it a permanent change, and did it correspond to a change in the party’s political constituency? To answer these questions one would have to trace political developments beyond the wartime period, which Cox is not generally inclined to do.

Whatever the book’s shortcomings, Cox has formulated or at least revived an extremely interesting set of issues that deserve further attention from economic historians and others. Reading her concluding chapter, however, reminded me that there are still some fairly strong differences between political and economic historians in working assumptions about American history. Cox takes it as axiomatic that the Gilded Age was a disaster. Republican policies, she says, “paved the way for the eventual demise of the small farm” (256). “The standard of living for city workers, especially immigrants, fell to appalling levels” (257). None of these statements are footnoted, and the author seems unaware that documenting them would be a real challenge. The deeper problem is that the entire construction of a disastrous Gilded Age is unexamined. This willingness to accept contemporary rhetorical formulations at face value seems oddly out of date nowadays — which is not to say that on closer examination these conceptions would be entirely wrong. This promising subject area seems ripe for re-examination.

Gavin Wright Department of Economics Stanford University

Gavin Wright is this year’s president of the Economic History Association. He is now revising for publication his 1997 Fleming Lectures on “Slavery and American Economic Development.”

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century

Health and Welfare During the Industrial Revolution

Author(s):Steckel, Richard
Floud, Roderick
Reviewer(s):Craig, Lee A.

EH.NET BOOK REVIEW

Published by EH.NET (January 1998)

Richard Steckel and Roderick Floud, editors, Health and Welfare during Industrialization. National Bureau of Economic Research Policy Report. Chicago: University of Chicago Press, 1997. ix + 465 pp. $72.00 (cloth), ISBN: 0-226-77156-3.

Reviewed for EH.NET by Lee A. Craig, Department of Economics, North Carolina State University.

One of the oldest and most persistent debates in economic history concerns the “standard of living” during the “Industrial Revolution”. Indeed, it is one of the few debates that both ante-date the Cliometric Revolution and has survived it more or less in tact; furthermore, the meaning of the terms themselves is not immune from controversy. In the past two decades a growing body of research focusing on biological indicators of Homo sapiens’ well being- a biological standard of living, if you will – since the eighteenth century has emerged. Two pioneers of that research, Richard Steckel and Roderick Floud, have put together a collection of essays entitled Health and Welfare during Industrialization, and as these things go in academic publishing it is probably as close as one can get to one-stop shopping on the subject.

The volume begins with an editors’ introduction to the various biological measures employed in the essays, and for the uninitiated this is a good place to start. That piece is followed by an excellent essay by Stan Engerman, who reviews the conceptual and practical issues involved in defining and measuring the “standard of living”. Depending on one’s pain threshold, one might recommend the essay to colleagues who uncritically employ components of the national income and product accounts in time series analysis.

The body of the volume contains nine essays covering various indicators, biological and otherwise, of well-being among eight countries: The United States (Dora Costa and Steckel), Britain (Floud and Bernard Harris) and the United Kingdom (Paul Johnson and Stephen Nicholas), Sweden (Lars G. Sandberg and Steckel), France (David Weir), Japan (Gail Honda), Germany (Sophia Twarog), the Netherlands (J.W. Drukker and Vincent Tassenaar), and Australia (Greg Whitwell, Christine de Souza, and Nicholas). The biological indicators, which are calculated for one or more countries, include mortality rates, life expectancy, and the body mass index (BMI), but perhaps the most useful measure, because of the information it conveys and because of its considerable availability over time and space, is human stature.

As the first industrial country, Great Britain is a particularly interesting case. While the British were tall by European standards in 1800, from the late eighteenth century to the middle of the nineteenth century the trend in average height was downward, suggesting a biological counterpart to the Kuznets’ curve. At least some groups in the United States, Australia, and Germany also experienced declines in mean stature. Although the timing and explanations vary dramatically across countries, they each correspond roughly with a period that might arguably be labeled as one of “industrialization”. Interestingly, Human Development Indices (HDI) series for Britain, the United States, and Germany do not show the same pronounced downturns as the heights. Since HDI generally includes some combination of literacy, per capita output, and life expectancy, this finding suggests some divergence between these measures and stature.

The other countries studied do not reveal the same trend in heights however, the way in which they avoided the externalities associated with industrialization varies from country to country. In France, for example, Weir argues that the relatively slow pace of urbanization and an increase in parents’ investment in their children’s health contributed to the steady rise in stature. In the Netherlands, Sweden, and Japan a combination of slow urbanization, high literacy, and late industrialization- that is after the germ theory of disease had motivated improvements in public health- ameliorated the externalities experienced by the early industrializers.

The volume concludes with a very useful summary by the editors. Specifically, Steckel and Floud compare levels and trends of five “socioeconomic indicators” (per capita GNP, stature, life expectancy, literacy, urbanization) between c. 1800 and c. 1950 for the eight countries analyzed in the other essays. Although some of the figures are, to put it generously, the product of creative calculations, the authors are careful to qualify their conclusions accordingly.

When offering an overall review of the essays in this volume it is difficult to separate them from the broader research agenda from which they were generated. I would say the essays (and the agenda) offer at least two major contributions and raise a set of related questions. The first contribution is simply that they offer more data. The second is that they offer a different approach to the standard of living question. While the former may not be controversial, the latter surely is, and there are those who might not welcome a new approach, or at least not this particular approach. Since Marshall, the principles of economics have rested on the foundation of individual optimization based on relative prices and subject to an income constraint. In these essay one must ask, What is being optimized? What are the relative prices? What is the income constraint? Of course the anthropometricians only need to address these questions if they see their research as a product of those principles. A sense of that need will no doubt vary from researcher to researcher, and to be sure, neo-classical control of the field is not carved in stone. One might argue that the anthropometricians have stated their case, and the intellectual marketplace will decide if that case is to become part of the canon. It is worth noting that in the introduction Steckel and Floud address these issues indirectly by referring to related neo-classical research in the health and development fields.

Whatever one’s views on the relative weights of the contributions versus the questions, it is safe to say that henceforth no one will be able to claim cliometric literacy or write knowingly on the “standard of living debate” without reference to the issues addressed in and raised by this volume. In that sense we are all anthropometricians now.

Lee A. Craig Department of Economics North Carolina State University

Lee Craig is Associate Professor of Economics at North Carolina State University. His paper, “Nutritional Status and Agricultural Surpluses in the Antebellum United States,” with Tom Weiss, is forthcoming in Studies on the Biological Standard of Living in Comparative Perspective, J. Komlos and J. Baten, editors, Stuttgart, Franz Steiner Verlag.

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Subject(s):Income and Wealth
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century

Mr. Kaiser Goes to Washington: The Rise of a Government Entrepreneur

Author(s):Adams, Stephen B.
Reviewer(s):Foster, Mark S.

EH-NET BOOK REVIEW

Published by H-Business@eh.net (January 1998)

Stephen B. Adams. Mr. Kaiser Goes to Washington: the Rise of a Government Entrepreneur. The Luther Hartwell Hodges Series on Business, Society, and the State. Chapel Hill: University of North Carolina Press, 1997. xii + 239 pp. Notes, illustrations, index and bibliographical references. $39.95 (cloth), ISBN 0-8078-2358-9.

Reviewed by Mark S. Foster , University of Colorado at Denver

In the summer of 1942 a burly, blustering 60-year-old West Coast entrepreneur, Henry J. Kaiser, suddenly burst upon the national scene with the intensity of a hurricane. Before then, he had worked for decades in road and dam construction and was widely known and respected in those circles. In the eighteen months preceding the summer of 1942 he had entered the shipbuilding business, providing critical tonnage for desperate Allied buyers. Still, Kaiser had labored in comparative obscurity. That all changed in July, 1942 when he publicly offered a plan to counter the devastating toll Axis submarines were exacting from Allied shipping. He would build a fleet of 5,000 cargo planes which would remove much of the critically needed supplies from danger. In the weeks after he made his unprecedented splash, the nation’s opinion-makers introduced Kaiser to fascinated readers as a swashbuckling individualist, a self-made entrepreneur who boldly challenged convention and bureaucratic red tape. Ironically, the “Paul Bunyan” of shipbuilding was allegedly shy and self-effacing, scrupulously avoiding publicity whenever possible.

Stephen B. Adams challenges this portrayal at almost every point. Kaiser was no iconoclast. “As the federal government grew in the 1930s and 1940s he was a regular visitor to the nation’s capital. Kaiser’s organization provided his generation’s most telling case study in the role of governmental relations in American entrepreneurial success. Henry Kaiser, then, looms large as a significant figure in American business history because of the extent of his involvement with the federal government at a time when distinctions between the public and private economic sectors were rapidly diminishing” (2). “Despite the public image he cultivated during World War II, Kaiser certainly did not fit the Progressive model of businessmen fighting against government. Instead, Kaiser learned to compromise with the desires of executive branch officials at the same time he was attempting to influence them through the skilled use of the media. The Kaiser story was of neither battle nor capture, but rather a process of continuous negotiation” (11).

Adams further argues that although the media presented Kaiser as an “outsider” when he attempted to enter steel, aircraft production and other industries, he had for several decades been an insider in the construction business. Kaiser relished the media’s portrait of him as an iconoclast, but in fact he had been an organizational conformist at least through the 1920s. He had spent many fruitful years as the Six Companies’ (his partners on the Hoover Dam construction project) chief negotiator in Washington, and he studied carefully the stormy relationship between the New Deal and corporate America. The key to Kaiser’s success was that he anticipated the course of the government’s dealings with private enterprise and astutely positioned his companies to meet those needs. “His choice of established industries with such daunting barriers to entry made Kaiser appear bold to most, reckless to many. Yet he carefully chose his battles, usually going ahead only after performing extensive feasibility studies and when assured that he had the weight of the government behind him” (45). Ironically, Kaiser’s cargo plane proposal in the summer of 1942, which thrust him into the national spotlight, resulted in no large contracts, and a virtual dead end in the field of aircraft production. Adams argues that it was largely because this was one of the few times Kaiser announced his desire to enter an industry before lining up support from government insiders (124). As Adams notes, however, the eastern media, particularly Henry Luce’s publications, made Kaiser a national hero after he presented his cargo plane proposal. New Deal policy makers took considerable political risks in thwarting Kaiser’s initiative.

Even as Kaiser’s industrial empire expanded after World War II, he was losing his position as the government’s favorite entrepreneur. He had grown closer personally to President Roosevelt than any other businessman. The two men were psychologically in tune with one another; Kaiser’s loose managerial style mirrored Roosevelt’s “impatience with bureaucratic channels” (94). However, Kaiser did not enjoy any such relationship with Truman. In addition, by 1946, government contractors were ripe for investigation. “In Kaiser’s case, behavior that had endeared him to the public in wartime–breaking bureaucratic rules, spending public money freely to meet wartime demand–provided fodder for government scrutiny” (175). His New Deal defenders were gone, the Republicans were ascendant, and Kaiser “made a good target” (176).

Adams has written an important book. Having written the first full-length scholarly biography of Kaiser, I am not reluctant to observe that Adams probed in depth issues over which I passed lightly. He presented his arguments clearly, and in convincing fashion. Adams’ research is impressive; he has consulted the important manuscript collections, and he interviewed virtually every key player who is still living. Equally important, he has consulted all of the relevant secondary source literature, which permitted him to create a useful, sophisticated conceptual framework for his findings. Finally, the book is logically organized and well-written. Adams’ prose is mercifully free of jargon.

There are a few flaws. Adams suggests that in building a “visitor’s cottage” at Hoover Dam, Kaiser introduced “a (public relations) approach contractors had not tried before” (39). In fact, contractors and other businessmen performing government work had bent over backward to make sponsors visiting job sites comfortable for decades, if not centuries. This included contractors at the Panama Canal, builders of the transcontinental railroad, and any number of other businessmen depending on good will in Washington and the continuing flow of government appropriations. Although Adams does an admirable job of analyzing Kaiser’s relationship with government officials during World War II, his study would have been even more valuable had he analyzed how Kaiser fared compared to other entrepreneurs. He mentions rival ship builder Andrew Jackson Higgins. Kaiser may have been Roosevelt’s “favorite” entrepreneur, but did the President essentially ignore other moguls? This is one area in which Adams might have provided broader context. On page 77, Adams assesses Kaiser’s decision to seek a temporary alliance with Tom Girdler of Republic Steel. Girdler had a well-earned reputation as a reactionary, particularly on labor issues. While Adams explains why Kaiser and his organization sought a temporary partnership with Girdler, he avoided explaining what Girdler and Republic Steel might gain from such an association. Was Republic attempting to get back in the good graces of government officials after the notorious Memorial Day massacre in 1937?

These are minor caveats, since Adams succeeds in every important respect. By analyzing critical years in the career of one of America’s most dynamic entrepreneurs and his dealings with key government decision-makers when the military/industrial complex was rapidly assuming its modern form, Adams has provided a riveting and revealing picture of an important moment in American entrepreneurial history. Therefore, Mr. Kaiser Goes to Washington will be of interest not just to business historians but to students of government and public policy. The author is a well-trained, accomplished young historian who has established a high standard of achievement with his first book.

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

The Rise of Big Government in the United States

Author(s):Walker, John F.
Vatter, Harold G.
Reviewer(s):Troesken, Werner

EH.NET BOOK REVIEW

Published by EH.NET (January 1998)

John F. Walker and Harold G. Vatter, The Rise of Big Government in the United States. Armonk, NY: M.E. Sharpe, 1997. 256 pp. $64.95 (cloth), ISBN: 0765600668 . $24.95 (paper), ISBN 0765600676.

Reviewed for EH.NET by Werner Troesken, Department of History, University of Pittsburgh,

In The Rise of Big Government in the United States, John F. Walker and Harold G. Vatter argue that government growth is response to the evolution of the market, shifts in ideology, and changes in international relations. Although Walker and Vatter document the growth of local and state governments, they focus mainly on the growth of the federal government. Their story begins in 1890 and extends through the present. Walker and Vatter take issue with two common explanations for the rise big government. First, they claim that economic and political crises have not caused the size of government to ratchet upward, as Robert Higgs argued in Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York, 1987). Second, they claim that government bureaucrats seeking to maximize their own power and wealth have not prompted the rise of big government, as William Niskanen argued in Bureaucracy and Representative Government (Chicago, 1971).

For Walker and Vatter, government growth is primarily a response to the vagaries and failures of the market. In a nutshell, when the market generates outcomes that society does not like, society demands that the government intervene and make things better. The government’s ability to solve the problems wrought by the market depends critically on the larger culture’s ideological make-up. In eras dominated by a laissez-faire ideology, the government grows less, and is less successful in dealing with the problems generated by the market.

Although Walker and Vatter are both economic historians, they chose not to consider much recent work in economic history. Consider two examples. The authors argue that federal deposit insurance has stabilized the banking industry and protected small depositors. In making this argument, Walker and Vatter do not refer to numerous articles by Charles Calomiris, David Wheelock, and Eugene White. The works of Calomiris, Wheelock, White, and others, highlight the moral hazard and adverse selection problems that have plagued deposit insurance schemes throughout history. Walker and Vatter also argue that since World War II, fiscal policy has stabilized the macroeconomy and prevented severe downturns. Their discussion would have been better had they addressed Christina Romer’s work on pre- and post-war business cycles.

Overall, Walker and Vatter tell a plausible story, though I would have preferred a more balanced analysis, one that identified the costs, as well as the benefits, of big government. Readers wanting an introduction to the rise of big government, or those wanting an account that emphasizes the benefits of big government, will probably find this a useful book. Those wanting a more thorough or balanced account should look elsewhere.

Werner Troesken Department of History University of Pittsburgh

Werner Troesken is author of Why Regulate Utilities? The New Institutional Economics and the Chicago Gas Industry, 1849-1924 (University of Michigan Press, 1996).

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Black Business in the Black Metropolis: The Chicago Metropolitan Assurance Company, 1925-1985

Author(s):Weems Jr., Robert E.
Reviewer(s):Adkins, Brian

EH.NET BOOK REVIEW

Published by EH.NET (December 1997)

Robert E. Weems, Jr., Black Business in the Black Metropolis: The Chicago Metropolitan Assurance Company, 1925-1985. Bloomington, IN: Indiana University Press, 1996. xvii + 158 pp. Includes preface, tables, biographical references, photos, and general index. $35.00 (cloth), ISBN: 0-253-33025-4.

Reviewed for EH.Net by Brian Adkins, Department of History, Rutgers University.

For more than half a century, researchers have chronicled the ascendancy and decline of African-American insurance companies. Most studies focused on the racial, social, and economic climate which necessitated black enterprises of this nature, or examined the internal operations of the firms themselves. Robert L. Weems, Jr’s Black Business in the Black Metropolis: The Chicago Metropolitan Assurance Company, 1925-1985 attempts to combine the conceptual framework of previous black insurance studies while chronicling changes occurring in Chicago’s African-American community during the twentieth century. This volume is part of Indiana University Press’s lauded “Blacks in the Diaspora” series; featuring more than forty titles examining race, gender, class, and broader issues in Atlantic history.

The core research and organizational synthesis for Black Business is gleaned from Weems’s doctoral dissertation written at the University at Wisconsin. The numerous acknowledgments Weems (an Assistant Professor in the Department of History at the University of Missouri-Columbia) gives to mentors, fellow scholars, helpful archivists, and many others is indicative of how he approached his subject. Weems’s inquiry is written from a personal analytical perspective. He conducted more than fifty oral interviews with people affiliated with the Chicago Metropolitan Assurance Company during its long history, and was granted access to the firm’s financial and meeting records. Not surprisingly, because of the wide preponderance of available resources, Weems’s chronicle of Chicago Met’s corporate history is his book’s major strength. However, instead of closely integrating twentieth-century socio-political, economic, and cultural forces within his strong business narrative; Weems’s compartmentalization of these events, and other structural problems prevent him from achieving his larger objectives.

Weaknesses aside, Weems’s first three chapters serve as the benchmark of his work. Chapter One chronicles the embryonic history of the Metropolitan Funeral Home Association (MFSA). Begun in 1925 as the precursor to what eventually became Chicago Met, the firm dedicated its efforts to serving the burial needs of working-class black Chicagoans. Although providing a necessary societal function, MFSA struggled to survive during its early years. Similar to many early African-American business ventures, MFSA was unable to obtain capital from white lending institutions. However, the unusual external activities of the firm’s first two patriarchs provided the financial catalyst for the fledgling enterprise to eventually become profitable.

Daniel Jackson and Robert A. Cole supervised MFSA and Chicago Met’s operations for more than three decades. Besides being a prominent black businessman, Jackson also had close ties to Chicago’s Republican political machine. However, his major source of power stemmed from controlling gambling activities in the city’s racially-segregated African-American community (nicknamed “Bronzeville” by its black residents). Evidence suggests that Jackson underwrote MFSA’s initial capitalization and subsidized its operating losses until Cole, his gambling lieutenant and protege, purchased the firm from him in 1927. While MFSA was only a side activity for Jackson, it became an important part of Cole’s professional identity for the rest of his life. Born in Kentucky, Cole migrated to Chicago in 1905 after finding his prospects limited in the South. Soon after arriving in the city, he obtained employment as a Pullman porter. It was during his fruitful twenty year tenure with Pullman, where Cole mastered the interpersonal skills he deftly used later in his business career.

Under Cole’s vigorous leadership, MFSA professionalized its insurance sales force and reorganized company operations. The firm earned praise from policy holders because it paid claims promptly, and permitted burial within a 1,000 mile radius of Chicago. Since many black Chicagoans were recent southern migrants, the aforementioned option was an attractive sales tool. However, despite gaining the confidence of its working-class customers and African-American city leaders, the operation continued to lose money. Between 1927 and 1931 alone, Cole personally loaned MFSA more than $18,000 to help stem the tide. Nevertheless, even with Cole’s gambling subsidies, the firm survived the Great Depression largely because of its ambitious sales force. Throughout the 1930’s, MFSA salesmen were paid strictly by commission, and the necessity of securing new clients prevented a full-scale erosion of its customer base. Having weathered a difficult storm, by the end of the World War Two, the firm’s financial problems became a distant memory as MFSA gained new customers and significantly increased its revenue.

Chapters Two and Three examine the firm’s most prosperous period. The early postwar era brought renewed hopes for African-American social and economic advancement, and MFSA’s leaders were not immune. Implementing expansion plans conceived shortly after the war, MFSA management decided to enter the life insurance business, expand its sales territory outside of Bronzeville, and provide additional benefits and dividends for their burial customers. The firm also changed its name to the Metropolitan Mutual Assurance Company of Chicago (finally becoming the Chicago Metropolitan Assurance Company in 1952). Not surprisingly, because of the prosperous temper of the times, Chicago Met increased its policy base, weekly premium income, and total admitted assets between 1947 and 1957.

However, Cole’s death in 1956 served as a demarcation point for Chicago Met’s postwar ascendancy and decline. Although he distanced himself from day-to-day management in his later years, the firm’s long-time patriarch still influenced its operational philosophy. The real impact of his death became apparent as Cole’s successors were unable to maintain friendly relations with its vaunted salesforce, culminating in a divisive agents strike during the summer of 1957. The origins of the labor dispute stemmed from an initiative to increase policy sales in downstate Illinois, Indiana, and Missouri. As a financial incentive, company officials paid salespeople in the target markets a higher commission rate than agents servicing Chicago-area customers (more than four-fifths of Chicago Met policies were sold in Bronzeville). Although the labor-management conflict was eventually settled, company morale never returned to its previous level, and exacerbated other looming problems.

Flaws in Weems’s organizational focus become readily apparent in Chapters Four and Five. Moving out of chronological sequence, the scholar examines Chicago Met’s impact as an community institution and the legacy of Cole’s paternalistic management style. While offering some important insights, these chapters often repeat material interspersed throughout his narrative. A prime example is Weems’s discussion of the socio-cultural impact of opening the firm’s new corporate headquarters. Completed in 1940, the complex also boasted a formal ballroom, (an eating facility was added in 1948) and became an important Bronzeville social center. While the genesis and overall impact of the firm’s headquarters is prescient earlier, the author’s continued discussion of it undermines its significance.

Weems’s work is further hampered by an unbalanced historical and chronological focus. Eighty percent of Black Business records the first half of Chicago Met’s history. The final two chapters (examining a period from 1958 to the early 1990’s) span only twenty-four pages, and don’t have the same analytical depth as earlier material. Furthermore, while ably chronicling Chicago Met’s losing battle to remain viable and independent, Weems misses a golden opportunity to tie the firm’s postwar woes to changes in black consumer and socio-economic fortunes.

Noted labor scholar Lizabeth Cohen in Making A New Deal, (New York, 1990), her prize-winning social history of post-World War One Chicago industrial workers, suggests that African-Americans were more likely than any other racial group to embrace brand-identified consumer products and services. Besides failing to refute or defend monolithic theories such as Cohen’s, Weems only provides a cursory examination of Chicago Met’s postwar marketing and advertising strategy in reaction to increased competition from white-owned insurance firms and aggressive black-controlled companies. The management style of the Atlanta Life Insurance Company (the African-American firm which purchased Chicago Met in 1991) represented a marked contrast to initiatives undertaken by the central figures in Weems’s narrative. While Chicago Met foundered during the 1980’s, Atlanta Life merged with, or purchased several struggling (but still valuable) black insurance companies in an effort to keep pace with overall industry consolidation.

The recent closing and liquidation of the once-hallowed Woolworth variety chain, underscores the harsh realities of American consumer society. Throughout its history, Chicago Met’s fortunes mirrored those of the community it valiantly served for more than six decades. While the forces of integration and post-industrialization wreaked havoc on the lives of their loyal working-class customers; Chicago Met ultimately lost its autonomy because unlike firms such as Atlanta Life, the organization could not effectively expand beyond its Bronzeville base. Unfortunately, Weems’s reluctance to delve further into larger structural issues such as this, mars what could have been an important and path-breaking inquiry. Nevertheless, because of Chicago Met’s unusual origins and history, Black Business is still a durable treatise for scholars and researchers of African-American entrepreneurship.

Brian Adkins Department of History Rutgers University

Brian Adkins is a doctoral candidate and Ford Foundation Fellow. He is currently completing his dissertation examining race, gender, and class relations in post-World War Two Chicago.

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Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Funding American State, 1941-1995: The Rise and Fall of the Era of Easy Finance

Author(s):Brownlee, W. Elliot
Reviewer(s):Vedder, Richard K.

EH.NET BOOK REVIEW

Published by EH.NET (December 1997)

W. Elliot Brownlee, Editor. Funding the Modern American State, 1941-1995: The Rise and Fall of the Era of Easy Finance. Cambridge: Woodrow Wilson International Center for Scholars and Cambridge University Press, 1996. ix + 467 pp. $59.95 (cloth), ISBN: 0521552400.

Reviewed for EH.NET by Richard Vedder, Department of Economics, Ohio University.

The good news is that seven scholars from a variety of disciplines (economics, history, political science, law) have given us an engaging narrative on various aspects of the contemporary history of American federal taxation in a volume that should be oft-cited. The bad news is, as is typically the case in edited volumes, the quality of the analysis is uneven and in a few places even historically inaccurate.

The book was probably largely written in 1994 or at the beginning of 1995. I was a little turned off by the very first sentence of text in the book, in a promotional blurb preceding the title page: “The fiscal crisis faced by the American federal government represents the end of a fiscal regime that began with the financing of World War II.” My reaction was: what fiscal crisis? At the time I read the book, President Clinton had just announced that the 1997 fiscal year budget deficit was about $22 billion, the smallest deficit in relation to total output in a generation. Moreover, the tax changes implemented in the 1997 budget deal merely extended the fiscal regime arising out of World War II.

Yet the claim is probably not so wrong after all. Americans are extremely unhappy with the administration of the tax system, and with its complexity. The public mood is ripe for reform, perhaps radical change that involves the replacement or profound modification of the progressive marginal rate income tax. The booming economy has given some temporary respite in dealing with the entitlement problem, but in the long run the existing fiscal equilibrium is clearly untenable given what C. Eugene Steuerle appropriately calls (p. 428) “the yoke of prior commitments.” It looks increasingly likely that major fiscal changes will occur at some time in the next decade.

Two of the essays (totaling more than one hundred pages) are by Elliot Brownlee. One summarizes the volume and the second provides a historical overview of the tax system since the beginning of the Republic. Brownlee correctly notes that new tax regimes implemented during four national emergencies (Civil War, World War I, the Great Depression, and World War II) facilitated the enormous growth of the federal government. High wartime taxes were only modestly lowered after those conflicts, which, combined with reduced defense spending, allowed for expanded social programs without incurring large political costs.

Brownlee emphasizes the tensions between the Republican emphasis on consumption and tariff taxation and the Democratic yearning for progressive income taxation in the late nineteenth century. Indeed, one can argue that the entire fiscal history of the country since 1860 is one of the changing political importance of two impulses: the progressive impulse to use the tax system to bring about income redistribution, and the conservative impulse to reduce the inefficiencies, resource distortions, and growth drag associated with high rates, particularly with regards to income.

A point that gets occasional mention but little emphasis in the book (possibly excepting Steuerle) is that progressive taxation gave political incentives to encourage price inflation, as bracket creep provided a politically clever way to raise taxes in a stealth fashion to finance social programs. I do not think it is entirely an accident that inflation in the United States was low or non-existent in the era before sharply progressive taxation, was high in the era of high progressive rates, and has moderated since tax indexation reduced (although not eliminated) the bracket creep dimensions of the progressive income tax. Did fiscal policy drive monetary policy?

Brownlee makes its abundantly clear that progressives in both the Wilson and Roosevelt administrations used war emergencies as an opportunity to impose their redistributionist ideas. As he hints, a case can be made that the notion of progressive income taxation was saved, by all people, Secretary of the Treasury Andrew Mellon, who in the 1920s defused Republican efforts to replace the progressive income tax with a national sales tax, an effort that has had a renaissance of sorts today.

Brownlee’s account of tax history emphasizes the progressive impulses at redistribution, and pays little attention to the efficiency difficulties that extremely high marginal rates pose. Few economists today would claim that sharply raising marginal tax rates in 1932 was an intelligent move from either a demand or supply side perspective, yet Brownlee does not discuss whether this viewpoint was articulated at the time. Had equity concerns completely silenced the traditional efficiency arguments that arise in tax debates? The emphasis throughout the Brownlee article is on tax changes that provided fiscal support for an increased state: he gives very little attention to the important Kennedy and Reagan tax cuts, and completely ignores several moderately important changes in the tax system, such as in 1954, 1990, and 1993.

Turning from the general to the specific, Carolyn C. Jones competently explores how the government used public relations techniques to convince Americans to comply with high income taxation in the 1940s, when most Americans first became payers of the tax. Edward D. Berkowitz nicely summarizes the history of social security taxation, showing how liberals associated with the administration of the program (such as Wilbur Cohen) played an influential role in crafting Social Security expansion. They convinced legislators that large increases in benefits were possible with only moderate tax increases. In time, of course, political leaders learned this lesson too well, increasing benefits in the 1970s in an actuarially untenable fashion. The modern troubles of Social Security are less extensively explored than the program expansion, although Berkowitz perceptively notes that “Americans have historically tolerated taxes reflecting shared social purpose but that even these taxes can reach a threshold that threatens to undermine the enterprise the tax supports” (p. 183).

In a long and important essay, Herbert Stein updates his Fiscal Revolution in America (Chicago: University of Chicago Press, 1969). The era before the 1960s was dominated by tensions between three alternative budget philosophies (old-fashioned Keynesian “functional finance”, a more conservative or “domesticated” Keynesianism advocated by Stein, and a traditional Republican balanced budget rule). By contrast, Stein correctly tells us that fiscal policy in the post-1964 era was not governed by any specific budget philosophy. The problem was “the unwillingness of policy-makers to subordinate their desires for specific tax and expenditure programs to any aggregate goal” ( p. 200).

Stein then goes into a long discussion of the specifics of fiscal policy, emphasizing the era when he was a player, namely the Nixon Administration. The fact is that, for all the policy angst and debate, federal taxation absorbed about 20 percent of the national output throughout the period. Whenever taxes started to rise above that amount from bracket creep, a tax revolt would ensue, culminating in what Stein (p. 266) terms the “Big Budget Bang” of 1981. Whenever taxes fell much lower than one-fifth of the nation’s output, tax increases ensued (1982, 1990 and 1993 come especially to mind). The increasing contempt for aggregate fiscal rules of any kind reflected growing tensions posed by the growth of entitlement programs and, on occasion, other spending needs. The marginal political benefits to politicians of spending money exceeded the marginal political costs. The “automatic” nature of entitlement spending increases was aggravated by new programs in the 1960s and 1970s. Deficits were a politically less painful way to finance government constrained by a tax threshold imposed by popular sentiment. Like inflation- induced tax increases, deficits are a stealth form of taxation. As Stein concludes, in the early 1960s it was true that “economic science had provided commands that politics would and should obey. That belief has now disappeared.” (p. 286)

Julian E. Zelizer’s account of Wilbur Mill’s role in the fiscal policy changes is well crafted. Mills shrewdly used experts to help him make important changes in the fiscal system, and to stand up to Administration and congressional pressures. At the same time, he was a creature of Congress and knew how to win votes and maintain power. In a less successful essay, Cathie Jo Martin looks at the role that business played in the tax changes of the postwar era. The paper is marred with significant factual errors. Speaking of the Reagan era, we learn (p. 382) that “neoclassical economists concentrated in the CEA under Murray Weidenbaum and then Alan Greenspan.” Alan Greenspan did serve as Chairman of the Council of Economic Advisers – but in the Ford administration several years earlier. I read (p. 394) that administration official Richard Darman was a “supply-side economist.” First of all, Darman was (and is) not an economist (his most recent Who’s Who in America bio refers to him as a “former investment banker” and “former educator” and earlier biographies as “business consultant.”). Secondly, most of the prominent supply siders I know from that era viewed Darman as their enemy, the very antithesis of a “supply side economist.” The essay makes several assertions based on interviews with anonymous committee staffers. As a congressional staffer myself in this era, I would suggest that staff interpretations of major congressional events varied widely, and too many assertions are made that at the very least should be qualified.

The book ends on a more solid scholarly note. Steuerle nicely uses fact and logic to suggest that the era of “easy finance” ended in 1981. Up to that date, economic growth, defense cuts, social security tax increases and the impact of inflation in raising taxes and lowering the real burden of the debt made it possible to expand social programs without dire budgetary consequences. After 1981, “the yoke of prior commitments”, the productivity growth slowdown, tax indexation and other factors brought about “the fiscal straitjacket era.” On the spending side, the growth in entitlements set the stage for a future fiscal crisis that will force some change in the nation’s fiscal (and probably tax) regime.

Taken as a whole, this volume advances our understanding of the historical trends in tax policy in important ways. While not pretending to be a balanced or comprehensive survey of history of modern taxation, it is a nonetheless a welcomed addition to the literature that scholars will utilize for years to come.

Richard Vedder Department of Economics Ohio University

Richard Vedder is Distinguished Professor of Economics at Ohio University, where he does research on labor and fiscal policy issues. His latest book, with Lowell Gallaway, is Out of Work: Unemployment and Government in Twentieth-Century America, updated edition (New York: New York University Press, 1997).

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII