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Economic History of Malaysia

John H. Drabble, University of Sydney, Australia

General Background

The Federation of Malaysia (see map), formed in 1963, originally consisted of Malaya, Singapore, Sarawak and Sabah. Due to internal political tensions Singapore was obliged to leave in 1965. Malaya is now known as Peninsular Malaysia, and the two other territories on the island of Borneo as East Malaysia. Prior to 1963 these territories were under British rule for varying periods from the late eighteenth century. Malaya gained independence in 1957, Sarawak and Sabah (the latter known previously as British North Borneo) in 1963, and Singapore full independence in 1965. These territories lie between 2 and 6 degrees north of the equator. The terrain consists of extensive coastal plains backed by mountainous interiors. The soils are not naturally fertile but the humid tropical climate subject to monsoonal weather patterns creates good conditions for plant growth. Historically much of the region was covered in dense rainforest (jungle), though much of this has been removed for commercial purposes over the last century leading to extensive soil erosion and silting of the rivers which run from the interiors to the coast.

SINGAPORE

The present government is a parliamentary system at the federal level (located in Kuala Lumpur, Peninsular Malaysia) and at the state level, based on periodic general elections. Each Peninsular state (except Penang and Melaka) has a traditional Malay ruler, the Sultan, one of whom is elected as paramount ruler of Malaysia (Yang dipertuan Agung) for a five-year term.

The population at the end of the twentieth century approximated 22 million and is ethnically diverse, consisting of 57 percent Malays and other indigenous peoples (collectively known as bumiputera), 24 percent Chinese, 7 percent Indians and the balance “others” (including a high proportion of non-citizen Asians, e.g., Indonesians, Bangladeshis, Filipinos) (Andaya and Andaya, 2001, 3-4)

Significance as a Case Study in Economic Development

Malaysia is generally regarded as one of the most successful non-western countries to have achieved a relatively smooth transition to modern economic growth over the last century or so. Since the late nineteenth century it has been a major supplier of primary products to the industrialized countries; tin, rubber, palm oil, timber, oil, liquified natural gas, etc.

However, since about 1970 the leading sector in development has been a range of export-oriented manufacturing industries such as textiles, electrical and electronic goods, rubber products etc. Government policy has generally accorded a central role to foreign capital, while at the same time working towards more substantial participation for domestic, especially bumiputera, capital and enterprise. By 1990 the country had largely met the criteria for a Newly-Industrialized Country (NIC) status (30 percent of exports to consist of manufactured goods). While the Asian economic crisis of 1997-98 slowed growth temporarily, the current plan, titled Vision 2020, aims to achieve “a fully developed industrialized economy by that date. This will require an annual growth rate in real GDP of 7 percent” (Far Eastern Economic Review, Nov. 6, 2003). Malaysia is perhaps the best example of a country in which the economic roles and interests of various racial groups have been pragmatically managed in the long-term without significant loss of growth momentum, despite the ongoing presence of inter-ethnic tensions which have occasionally manifested in violence, notably in 1969 (see below).

The Premodern Economy

Malaysia has a long history of internationally valued exports, being known from the early centuries A.D. as a source of gold, tin and exotics such as birds’ feathers, edible birds’ nests, aromatic woods, tree resins etc. The commercial importance of the area was enhanced by its strategic position athwart the seaborne trade routes from the Indian Ocean to East Asia. Merchants from both these regions, Arabs, Indians and Chinese regularly visited. Some became domiciled in ports such as Melaka [formerly Malacca], the location of one of the earliest local sultanates (c.1402 A.D.) and a focal point for both local and international trade.

From the early sixteenth century the area was increasingly penetrated by European trading interests, first the Portuguese (from 1511), then the Dutch East India Company [VOC](1602) in competition with the English East India Company [EIC] (1600) for the trade in pepper and various spices. By the late eighteenth century the VOC was dominant in the Indonesian region while the EIC acquired bases in Malaysia, beginning with Penang (1786), Singapore (1819) and Melaka (1824). These were major staging posts in the growing trade with China and also served as footholds from which to expand British control into the Malay Peninsula (from 1870), and northwest Borneo (Sarawak from 1841 and North Borneo from 1882). Over these centuries there was an increasing inflow of migrants from China attracted by the opportunities in trade and as a wage labor force for the burgeoning production of export commodities such as gold and tin. The indigenous people also engaged in commercial production (rice, tin), but remained basically within a subsistence economy and were reluctant to offer themselves as permanent wage labor. Overall, production in the premodern economy was relatively small in volume and technologically undeveloped. The capitalist sector, already foreign dominated, was still in its infancy (Drabble, 2000).

The Transition to Capitalist Production

The nineteenth century witnessed an enormous expansion in world trade which, between 1815 and 1914, grew on average at 4-5 percent a year compared to 1 percent in the preceding hundred years. The driving force came from the Industrial Revolution in the West which saw the innovation of large scale factory production of manufactured goods made possible by technological advances, accompanied by more efficient communications (e.g., railways, cars, trucks, steamships, international canals [Suez 1869, Panama 1914], telegraphs) which speeded up and greatly lowered the cost of long distance trade. Industrializing countries required ever-larger supplies of raw materials as well as foodstuffs for their growing populations. Regions such as Malaysia with ample supplies of virgin land and relative proximity to trade routes were well placed to respond to this demand. What was lacking was an adequate supply of capital and wage labor. In both aspects, the deficiency was supplied largely from foreign sources.

As expanding British power brought stability to the region, Chinese migrants started to arrive in large numbers with Singapore quickly becoming the major point of entry. Most arrived with few funds but those able to amass profits from trade (including opium) used these to finance ventures in agriculture and mining, especially in the neighboring Malay Peninsula. Crops such as pepper, gambier, tapioca, sugar and coffee were produced for export to markets in Asia (e.g. China), and later to the West after 1850 when Britain moved toward a policy of free trade. These crops were labor, not capital, intensive and in some cases quickly exhausted soil fertility and required periodic movement to virgin land (Jackson, 1968).

Tin

Besides ample land, the Malay Peninsula also contained substantial deposits of tin. International demand for tin rose progressively in the nineteenth century due to the discovery of a more efficient method for producing tinplate (for canned food). At the same time deposits in major suppliers such as Cornwall (England) had been largely worked out, thus opening an opportunity for new producers. Traditionally tin had been mined by Malays from ore deposits close to the surface. Difficulties with flooding limited the depth of mining; furthermore their activity was seasonal. From the 1840s the discovery of large deposits in the Peninsula states of Perak and Selangor attracted large numbers of Chinese migrants who dominated the industry in the nineteenth century bringing new technology which improved ore recovery and water control, facilitating mining to greater depths. By the end of the century Malayan tin exports (at approximately 52,000 metric tons) supplied just over half the world output. Singapore was a major center for smelting (refining) the ore into ingots. Tin mining also attracted attention from European, mainly British, investors who again introduced new technology – such as high-pressure hoses to wash out the ore, the steam pump and, from 1912, the bucket dredge floating in its own pond, which could operate to even deeper levels. These innovations required substantial capital for which the chosen vehicle was the public joint stock company, usually registered in Britain. Since no major new ore deposits were found, the emphasis was on increased efficiency in production. European operators, again employing mostly Chinese wage labor, enjoyed a technical advantage here and by 1929 accounted for 61 percent of Malayan output (Wong Lin Ken, 1965; Yip Yat Hoong, 1969).

Rubber

While tin mining brought considerable prosperity, it was a non-renewable resource. In the early twentieth century it was the agricultural sector which came to the forefront. The crops mentioned previously had boomed briefly but were hard pressed to survive severe price swings and the pests and diseases that were endemic in tropical agriculture. The cultivation of rubber-yielding trees became commercially attractive as a raw material for new industries in the West, notably for tires for the booming automobile industry especially in the U.S. Previously rubber had come from scattered trees growing wild in the jungles of South America with production only expandable at rising marginal costs. Cultivation on estates generated economies of scale. In the 1870s the British government organized the transport of specimens of the tree Hevea Brasiliensis from Brazil to colonies in the East, notably Ceylon and Singapore. There the trees flourished and after initial hesitancy over the five years needed for the trees to reach productive age, planters Chinese and European rushed to invest. The boom reached vast proportions as the rubber price reached record heights in 1910 (see Fig.1). Average values fell thereafter but investors were heavily committed and planting continued (also in the neighboring Netherlands Indies [Indonesia]). By 1921 the rubber acreage in Malaysia (mostly in the Peninsula) had reached 935 000 hectares (about 1.34 million acres) or some 55 percent of the total in South and Southeast Asia while output stood at 50 percent of world production.

Fig.1. Average London Rubber Prices, 1905-41 (current values)

As a result of this boom, rubber quickly surpassed tin as Malaysia’s main export product, a position that it was to hold until 1980. A distinctive feature of the industry was that the technology of extracting the rubber latex from the trees (called tapping) by an incision with a special knife, and its manufacture into various grades of sheet known as raw or plantation rubber, was easily adopted by a wide range of producers. The larger estates, mainly British-owned, were financed (as in the case of tin mining) through British-registered public joint stock companies. For example, between 1903 and 1912 some 260 companies were registered to operate in Malaya. Chinese planters for the most part preferred to form private partnerships to operate estates which were on average smaller. Finally, there were the smallholdings (under 40 hectares or 100 acres) of which those at the lower end of the range (2 hectares/5 acres or less) were predominantly owned by indigenous Malays who found growing and selling rubber more profitable than subsistence (rice) farming. These smallholders did not need much capital since their equipment was rudimentary and labor came either from within their family or in the form of share-tappers who received a proportion (say 50 percent) of the output. In Malaya in 1921 roughly 60 percent of the planted area was estates (75 percent European-owned) and 40 percent smallholdings (Drabble, 1991, 1).

The workforce for the estates consisted of migrants. British estates depended mainly on migrants from India, brought in under government auspices with fares paid and accommodation provided. Chinese business looked to the “coolie trade” from South China, with expenses advanced that migrants had subsequently to pay off. The flow of immigration was directly related to economic conditions in Malaysia. For example arrivals of Indians averaged 61 000 a year between 1900 and 1920. Substantial numbers also came from the Netherlands Indies.

Thus far, most capitalist enterprise was located in Malaya. Sarawak and British North Borneo had a similar range of mining and agricultural industries in the 19th century. However, their geographical location slightly away from the main trade route (see map) and the rugged internal terrain costly for transport made them less attractive to foreign investment. However, the discovery of oil by a subsidiary of Royal Dutch-Shell starting production from 1907 put Sarawak more prominently in the business of exports. As in Malaya, the labor force came largely from immigrants from China and to a lesser extent Java.

The growth in production for export in Malaysia was facilitated by development of an infrastructure of roads, railways, ports (e.g. Penang, Singapore) and telecommunications under the auspices of the colonial governments, though again this was considerably more advanced in Malaya (Amarjit Kaur, 1985, 1998)

The Creation of a Plural Society

By the 1920s the large inflows of migrants had created a multi-ethnic population of the type which the British scholar, J.S. Furnivall (1948) described as a plural society in which the different racial groups live side by side under a single political administration but, apart from economic transactions, do not interact with each other either socially or culturally. Though the original intention of many migrants was to come for only a limited period (say 3-5 years), save money and then return home, a growing number were staying longer, having children and becoming permanently domiciled in Malaysia. The economic developments described in the previous section were unevenly located, for example, in Malaya the bulk of the tin mines and rubber estates were located along the west coast of the Peninsula. In the boom-times, such was the size of the immigrant inflows that in certain areas they far outnumbered the indigenous Malays. In social and cultural terms Indians and Chinese recreated the institutions, hierarchies and linguistic usage of their countries of origin. This was particularly so in the case of the Chinese. Not only did they predominate in major commercial centers such as Penang, Singapore, and Kuching, but they controlled local trade in the smaller towns and villages through a network of small shops (kedai) and dealerships that served as a pipeline along which export goods like rubber went out and in return imported manufactured goods were brought in for sale. In addition Chinese owned considerable mining and agricultural land. This created a distribution of wealth and division of labor in which economic power and function were directly related to race. In this situation lay the seeds of growing discontent among bumiputera that they were losing their ancestral inheritance (land) and becoming economically marginalized. As long as British colonial rule continued the various ethnic groups looked primarily to government to protect their interests and maintain peaceable relations. An example of colonial paternalism was the designation from 1913 of certain lands in Malaya as Malay Reservations in which only indigenous people could own and deal in property (Lim Teck Ghee, 1977).

Benefits and Drawbacks of an Export Economy

Prior to World War II the international economy was divided very broadly into the northern and southern hemispheres. The former contained most of the industrialized manufacturing countries and the latter the principal sources of foodstuffs and raw materials. The commodity exchange between the spheres was known as the Old International Division of Labor (OIDL). Malaysia’s place in this system was as a leading exporter of raw materials (tin, rubber, timber, oil, etc.) and an importer of manufactures. Since relatively little processing was done on the former prior to export, most of the value-added component in the final product accrued to foreign manufacturers, e.g. rubber tire manufacturers in the U.S.

It is clear from this situation that Malaysia depended heavily on earnings from exports of primary commodities to maintain the standard of living. Rice had to be imported (mainly from Burma and Thailand) because domestic production supplied on average only 40 percent of total needs. As long as export prices were high (for example during the rubber boom previously mentioned), the volume of imports remained ample. Profits to capital and good smallholder incomes supported an expanding economy. There are no official data for Malaysian national income prior to World War II, but some comparative estimates are given in Table 1 which indicate that Malayan Gross Domestic Product (GDP) per person was easily the leader in the Southeast and East Asian region by the late 1920s.

Table 1
GDP per Capita: Selected Asian Countries, 1900-1990
(in 1985 international dollars)

1900 1929 1950 1973 1990
Malaya/Malaysia1 6002 1910 1828 3088 5775
Singapore 22763 5372 14441
Burma 523 651 304 446 562
Thailand 594 623 652 1559 3694
Indonesia 617 1009 727 1253 2118
Philippines 735 1106 943 1629 1934
South Korea 568 945 565 1782 6012
Japan 724 1192 1208 7133 13197

Notes: Malaya to 19731; Guesstimate2; 19603

Source: van der Eng (1994).

However, the international economy was subject to strong fluctuations. The levels of activity in the industrialized countries, especially the U.S., were the determining factors here. Almost immediately following World War I there was a depression from 1919-22. Strong growth in the mid and late-1920s was followed by the Great Depression (1929-32). As industrial output slumped, primary product prices fell even more heavily. For example, in 1932 rubber sold on the London market for about one one-hundredth of the peak price in 1910 (Fig.1). The effects on export earnings were very severe; in Malaysia’s case between 1929 and 1932 these dropped by 73 percent (Malaya), 60 percent (Sarawak) and 50 percent (North Borneo). The aggregate value of imports fell on average by 60 percent. Estates dismissed labor and since there was no social security, many workers had to return to their country of origin. Smallholder incomes dropped heavily and many who had taken out high-interest secured loans in more prosperous times were unable to service these and faced the loss of their land.

The colonial government attempted to counteract this vulnerability to economic swings by instituting schemes to restore commodity prices to profitable levels. For the rubber industry this involved two periods of mandatory restriction of exports to reduce world stocks and thus exert upward pressure on market prices. The first of these (named the Stevenson scheme after its originator) lasted from 1 October 1922- 1 November 1928, and the second (the International Rubber Regulation Agreement) from 1 June 1934-1941. Tin exports were similarly restricted from 1931-41. While these measures did succeed in raising world prices, the inequitable treatment of Asian as against European producers in both industries has been debated. The protective policy has also been blamed for “freezing” the structure of the Malaysian economy and hindering further development, for instance into manufacturing industry (Lim Teck Ghee, 1977; Drabble, 1991).

Why No Industrialization?

Malaysia had very few secondary industries before World War II. The little that did appear was connected mainly with the processing of the primary exports, rubber and tin, together with limited production of manufactured goods for the domestic market (e.g. bread, biscuits, beverages, cigarettes and various building materials). Much of this activity was Chinese-owned and located in Singapore (Huff, 1994). Among the reasons advanced are; the small size of the domestic market, the relatively high wage levels in Singapore which made products uncompetitive as exports, and a culture dominated by British trading firms which favored commerce over industry. Overshadowing all these was the dominance of primary production. When commodity prices were high, there was little incentive for investors, European or Asian, to move into other sectors. Conversely, when these prices fell capital and credit dried up, while incomes contracted, thus lessening effective demand for manufactures. W.G. Huff (2002) has argued that, prior to World War II, “there was, in fact, never a good time to embark on industrialization in Malaya.”

War Time 1942-45: The Japanese Occupation

During the Japanese occupation years of World War II, the export of primary products was limited to the relatively small amounts required for the Japanese economy. This led to the abandonment of large areas of rubber and the closure of many mines, the latter progressively affected by a shortage of spare parts for machinery. Businesses, especially those Chinese-owned, were taken over and reassigned to Japanese interests. Rice imports fell heavily and thus the population devoted a large part of their efforts to producing enough food to stay alive. Large numbers of laborers (many of whom died) were conscripted to work on military projects such as construction of the Thai-Burma railroad. Overall the war period saw the dislocation of the export economy, widespread destruction of the infrastructure (roads, bridges etc.) and a decline in standards of public health. It also saw a rise in inter-ethnic tensions due to the harsh treatment meted out by the Japanese to some groups, notably the Chinese, compared to a more favorable attitude towards the indigenous peoples among whom (Malays particularly) there was a growing sense of ethnic nationalism (Drabble, 2000).

Postwar Reconstruction and Independence

The returning British colonial rulers had two priorities after 1945; to rebuild the export economy as it had been under the OIDL (see above), and to rationalize the fragmented administrative structure (see General Background). The first was accomplished by the late 1940s with estates and mines refurbished, production restarted once the labor force had been brought back and adequate rice imports regained. The second was a complex and delicate political process which resulted in the formation of the Federation of Malaya (1948) from which Singapore, with its predominantly Chinese population (about 75%), was kept separate. In Borneo in 1946 the state of Sarawak, which had been a private kingdom of the English Brooke family (so-called “White Rajas”) since 1841, and North Borneo, administered by the British North Borneo Company from 1881, were both transferred to direct rule from Britain. However, independence was clearly on the horizon and in Malaya tensions continued with the guerrilla campaign (called the “Emergency”) waged by the Malayan Communist Party (membership largely Chinese) from 1948-60 to force out the British and set up a Malayan Peoples’ Republic. This failed and in 1957 the Malayan Federation gained independence (Merdeka) under a “bargain” by which the Malays would hold political paramountcy while others, notably Chinese and Indians, were given citizenship and the freedom to pursue their economic interests. The bargain was institutionalized as the Alliance, later renamed the National Front (Barisan Nasional) which remains the dominant political grouping. In 1963 the Federation of Malaysia was formed in which the bumiputera population was sufficient in total to offset the high proportion of Chinese arising from the short-lived inclusion of Singapore (Andaya and Andaya, 2001).

Towards the Formation of a National Economy

Postwar two long-term problems came to the forefront. These were (a) the political fragmentation (see above) which had long prevented a centralized approach to economic development, coupled with control from Britain which gave primacy to imperial as opposed to local interests and (b) excessive dependence on a small range of primary products (notably rubber and tin) which prewar experience had shown to be an unstable basis for the economy.

The first of these was addressed partly through the political rearrangements outlined in the previous section, with the economic aspects buttressed by a report from a mission to Malaya from the International Bank for Reconstruction and Development (IBRD) in 1954. The report argued that Malaya “is now a distinct national economy.” A further mission in 1963 urged “closer economic cooperation between the prospective Malaysia[n] territories” (cited in Drabble, 2000, 161, 176). The rationale for the Federation was that Singapore would serve as the initial center of industrialization, with Malaya, Sabah and Sarawak following at a pace determined by local conditions.

The second problem centered on economic diversification. The IBRD reports just noted advocated building up a range of secondary industries to meet a larger portion of the domestic demand for manufactures, i.e. import-substitution industrialization (ISI). In the interim dependence on primary products would perforce continue.

The Adoption of Planning

In the postwar world the development plan (usually a Five-Year Plan) was widely adopted by Less-Developed Countries (LDCs) to set directions, targets and estimated costs. Each of the Malaysian territories had plans during the 1950s. Malaya was the first to get industrialization of the ISI type under way. The Pioneer Industries Ordinance (1958) offered inducements such as five-year tax holidays, guarantees (to foreign investors) of freedom to repatriate profits and capital etc. A modest degree of tariff protection was granted. The main types of goods produced were consumer items such as batteries, paints, tires, and pharmaceuticals. Just over half the capital invested came from abroad, with neighboring Singapore in the lead. When Singapore exited the federation in 1965, Malaysia’s fledgling industrialization plans assumed greater significance although foreign investors complained of stifling bureaucracy retarding their projects.

Primary production, however, was still the major economic activity and here the problem was rejuvenation of the leading industries, rubber in particular. New capital investment in rubber had slowed since the 1920s, and the bulk of the existing trees were nearing the end of their economic life. The best prospect for rejuvenation lay in cutting down the old trees and replanting the land with new varieties capable of raising output per acre/hectare by a factor of three or four. However, the new trees required seven years to mature. Corporately owned estates could replant progressively, but smallholders could not face such a prolonged loss of income without support. To encourage replanting, the government offered grants to owners, financed by a special duty on rubber exports. The process was a lengthy one and it was the 1980s before replanting was substantially complete. Moreover, many estates elected to switch over to a new crop, oil palms (a product used primarily in foodstuffs), which offered quicker returns. Progress was swift and by the 1960s Malaysia was supplying 20 percent of world demand for this commodity.

Another priority at this time consisted of programs to improve the standard of living of the indigenous peoples, most of whom lived in the rural areas. The main instrument was land development, with schemes to open up large areas (say 100,000 acres or 40 000 hectares) which were then subdivided into 10 acre/4 hectare blocks for distribution to small farmers from overcrowded regions who were either short of land or had none at all. Financial assistance (repayable) was provided to cover housing and living costs until the holdings became productive. Rubber and oil palms were the main commercial crops planted. Steps were also taken to increase the domestic production of rice to lessen the historical dependence on imports.

In the primary sector Malaysia’s range of products was increased from the 1960s by a rapid increase in the export of hardwood timber, mostly in the form of (unprocessed) saw-logs. The markets were mainly in East Asia and Australasia. Here the largely untapped resources of Sabah and Sarawak came to the fore, but the rapid rate of exploitation led by the late twentieth century to damaging effects on both the environment (extensive deforestation, soil-loss, silting, changed weather patterns), and the traditional hunter-gatherer way of life of forest-dwellers (decrease in wild-life, fish, etc.). Other development projects such as the building of dams for hydroelectric power also had adverse consequences in all these respects (Amarjit Kaur, 1998; Drabble, 2000; Hong, 1987).

A further major addition to primary exports came from the discovery of large deposits of oil and natural gas in East Malaysia, and off the east coast of the Peninsula from the 1970s. Gas was exported in liquified form (LNG), and was also used domestically as a substitute for oil. At peak values in 1982, petroleum and LNG provided around 29 percent of Malaysian export earnings but had declined to 18 percent by 1988.

Industrialization and the New Economic Policy 1970-90

The program of industrialization aimed primarily at the domestic market (ISI) lost impetus in the late 1960s as foreign investors, particularly from Britain switched attention elsewhere. An important factor here was the outbreak of civil disturbances in May 1969, following a federal election in which political parties in the Peninsula (largely non-bumiputera in membership) opposed to the Alliance did unexpectedly well. This brought to a head tensions, which had been rising during the 1960s over issues such as the use of the national language, Malay (Bahasa Malaysia) as the main instructional medium in education. There was also discontent among Peninsular Malays that the economic fruits since independence had gone mostly to non-Malays, notably the Chinese. The outcome was severe inter-ethnic rioting centered in the federal capital, Kuala Lumpur, which led to the suspension of parliamentary government for two years and the implementation of the New Economic Policy (NEP).

The main aim of the NEP was a restructuring of the Malaysian economy over two decades, 1970-90 with the following aims:

  1. to redistribute corporate equity so that the bumiputera share would rise from around 2 percent to 30 percent. The share of other Malaysians would increase marginally from 35 to 40 percent, while that of foreigners would fall from 63 percent to 30 percent.
  2. to eliminate the close link between race and economic function (a legacy of the colonial era) and restructure employment so that that the bumiputera share in each sector would reflect more accurately their proportion of the total population (roughly 55 percent). In 1970 this group had about two-thirds of jobs in the primary sector where incomes were generally lowest, but only 30 percent in the secondary sector. In high-income middle class occupations (e.g. professions, management) the share was only 13 percent.
  3. To eradicate poverty irrespective of race. In 1970 just under half of all households in Peninsular Malaysia had incomes below the official poverty line. Malays accounted for about 75 percent of these.

The principle underlying these aims was that the redistribution would not result in any one group losing in absolute terms. Rather it would be achieved through the process of economic growth, i.e. the economy would get bigger (more investment, more jobs, etc.). While the primary sector would continue to receive developmental aid under the successive Five Year Plans, the main emphasis was a switch to export-oriented industrialization (EOI) with Malaysia seeking a share in global markets for manufactured goods. Free Trade Zones (FTZs) were set up in places such as Penang where production was carried on with the undertaking that the output would be exported. Firms locating there received concessions such as duty-free imports of raw materials and capital goods, and tax concessions, aimed at primarily at foreign investors who were also attracted by Malaysia’s good facilities, relatively low wages and docile trade unions. A range of industries grew up; textiles, rubber and food products, chemicals, telecommunications equipment, electrical and electronic machinery/appliances, car assembly and some heavy industries, iron and steel. As with ISI, much of the capital and technology was foreign, for example the Japanese firm Mitsubishi was a partner in a venture to set up a plant to assemble a Malaysian national car, the Proton, from mostly imported components (Drabble, 2000).

Results of the NEP

Table 2 below shows the outcome of the NEP in the categories outlined above.

Table 2
Restructuring under the NEP, 1970-90

1970 1990
Wealth Ownership (%) Bumiputera 2.0 20.3
Other Malaysians 34.6 54.6
Foreigners 63.4 25.1
Employment
(%) of total
workers
in each
sector
Primary sector (agriculture, mineral
extraction, forest products and fishing)
Bumiputera 67.6 [61.0]* 71.2 [36.7]*
Others 32.4 28.8
Secondary sector
(manufacturing and construction)
Bumiputera 30.8 [14.6]* 48.0 [26.3]*
Others 69.2 52.0
Tertiary sector (services) Bumiputera 37.9 [24.4]* 51.0 [36.9]*
Others 62.1 49.0

Note: [ ]* is the proportion of the ethnic group thus employed. The “others” category has not been disaggregated by race to avoid undue complexity.
Source: Drabble, 2000, Table 10.9.

Section (a) shows that, overall, foreign ownership fell substantially more than planned, while that of “Other Malaysians” rose well above the target. Bumiputera ownership appears to have stopped well short of the 30 percent mark. However, other evidence suggests that in certain sectors such as agriculture/mining (35.7%) and banking/insurance (49.7%) bumiputera ownership of shares in publicly listed companies had already attained a level well beyond the target. Section (b) indicates that while bumiputera employment share in primary production increased slightly (due mainly to the land schemes), as a proportion of that ethnic group it declined sharply, while rising markedly in both the secondary and tertiary sectors. In middle class employment the share rose to 27 percent.

As regards the proportion of households below the poverty line, in broad terms the incidence in Malaysia fell from approximately 49 percent in 1970 to 17 percent in 1990, but with large regional variations between the Peninsula (15%), Sarawak (21 %) and Sabah (34%) (Drabble, 2000, Table 13.5). All ethnic groups registered big falls, but on average the non-bumiputera still enjoyed the lowest incidence of poverty. By 2002 the overall level had fallen to only 4 percent.

The restructuring of the Malaysian economy under the NEP is very clear when we look at the changes in composition of the Gross Domestic Product (GDP) in Table 3 below.

Table 3
Structural Change in GDP 1970-90 (% shares)

Year Primary Secondary Tertiary
1970 44.3 18.3 37.4
1990 28.1 30.2 41.7

Source: Malaysian Government, 1991, Table 3-2.

Over these three decades Malaysia accomplished a transition from a primary product-dependent economy to one in which manufacturing industry had emerged as the leading growth sector. Rubber and tin, which accounted for 54.3 percent of Malaysian export value in 1970, declined sharply in relative terms to a mere 4.9 percent in 1990 (Crouch, 1996, 222).

Factors in the structural shift

The post-independence state played a leading role in the transformation. The transition from British rule was smooth. Apart from the disturbances in 1969 government maintained a firm control over the administrative machinery. Malaysia’s Five Year Development plans were a model for the developing world. Foreign capital was accorded a central role, though subject to the requirements of the NEP. At the same time these requirements discouraged domestic investors, the Chinese especially, to some extent (Jesudason, 1989).

Development was helped by major improvements in education and health. Enrolments at the primary school level reached approximately 90 percent by the 1970s, and at the secondary level 59 percent of potential by 1987. Increased female enrolments, up from 39 percent to 58 percent of potential from 1975 to 1991, were a notable feature, as was the participation of women in the workforce which rose to just over 45 percent of total employment by 1986/7. In the tertiary sector the number of universities increased from one to seven between 1969 and 1990 and numerous technical and vocational colleges opened. Bumiputera enrolments soared as a result of the NEP policy of redistribution (which included ethnic quotas and government scholarships). However, tertiary enrolments totaled only 7 percent of the age group by 1987. There was an “educational-occupation mismatch,” with graduates (bumiputera especially) preferring jobs in government, and consequent shortfalls against strong demand for engineers, research scientists, technicians and the like. Better living conditions (more homes with piped water and more rural clinics, for example) led to substantial falls in infant mortality, improved public health and longer life-expectancy, especially in Peninsular Malaysia (Drabble, 2000, 248, 284-6).

The quality of national leadership was a crucial factor. This was particularly so during the NEP. The leading figure here was Dr Mahathir Mohamad, Malaysian Prime Minister from 1981-2003. While supporting the NEP aim through positive discrimination to give bumiputera an economic stake in the country commensurate with their indigenous status and share in the population, he nevertheless emphasized that this should ultimately lead them to a more modern outlook and ability to compete with the other races in the country, the Chinese especially (see Khoo Boo Teik, 1995). There were, however, some paradoxes here. Mahathir was a meritocrat in principle, but in practice this period saw the spread of “money politics” (another expression for patronage) in Malaysia. In common with many other countries Malaysia embarked on a policy of privatization of public assets, notably in transportation (e.g. Malaysian Airlines), utilities (e.g. electricity supply) and communications (e.g. television). This was done not through an open process of competitive tendering but rather by a “nebulous ‘first come, first served’ principle” (Jomo, 1995, 8) which saw ownership pass directly to politically well-connected businessmen, mainly bumiputera, at relatively low valuations.

The New Development Policy

Positive action to promote bumiputera interests did not end with the NEP in 1990, this was followed in 1991 by the New Development Policy (NDP), which emphasized assistance only to “Bumiputera with potential, commitment and good track records” (Malaysian Government, 1991, 17) rather than the previous blanket measures to redistribute wealth and employment. In turn the NDP was part of a longer-term program known as Vision 2020. The aim here is to turn Malaysia into a fully industrialized country and to quadruple per capita income by the year 2020. This will require the country to continue ascending the technological “ladder” from low- to high-tech types of industrial production, with a corresponding increase in the intensity of capital investment and greater retention of value-added (i.e. the value added to raw materials in the production process) by Malaysian producers.

The Malaysian economy continued to boom at historically unprecedented rates of 8-9 percent a year for much of the 1990s (see next section). There was heavy expenditure on infrastructure, for example extensive building in Kuala Lumpur such as the Twin Towers (currently the highest buildings in the world). The volume of manufactured exports, notably electronic goods and electronic components increased rapidly.

Asian Financial Crisis, 1997-98

The Asian financial crisis originated in heavy international currency speculation leading to major slumps in exchange rates beginning with the Thai baht in May 1997, spreading rapidly throughout East and Southeast Asia and severely affecting the banking and finance sectors. The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998. There was a heavy outflow of foreign capital. To counter the crisis the International Monetary Fund (IMF) recommended austerity changes to fiscal and monetary policies. Some countries (Thailand, South Korea, and Indonesia) reluctantly adopted these. The Malaysian government refused and implemented independent measures; the ringgitbecame non-convertible externally and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at least twelve months was subject to substantial levies. Despite international criticism these actions stabilized the domestic situation quite effectively, restoring net growth (see next section) especially compared to neighboring Indonesia.

Rates of Economic Growth

Malaysia’s economic growth in comparative perspective from 1960-90 is set out in Table 4 below.

Table 4
Asia-Pacific Region: Growth of Real GDP (annual average percent)

1960-69 1971-80 1981-89
Japan 10.9 5.0 4.0
Asian “Tigers”
Hong Kong 10.0 9.5 7.2
South Korea 8.5 8.7 9.3
Singapore 8.9 9.0 6.9
Taiwan 11.6 9.7 8.1
ASEAN-4
Indonesia 3.5 7.9 5.2
Malaysia 6.5 8.0 5.4
Philippines 4.9 6.2 1.7
Thailand 8.3 9.9 7.1

Source: Drabble, 2000, Table 10.2; figures for Japan are for 1960-70, 1971-80, and 1981-90.

The data show that Japan, the dominant Asian economy for much of this period, progressively slowed by the 1990s (see below). The four leading Newly Industrialized Countries (Asian “Tigers” as they were called) followed EOF strategies and achieved very high rates of growth. Among the four ASEAN (Association of Southeast Asian Nations formed 1967) members, again all adopting EOI policies, Thailand stood out followed closely by Malaysia. Reference to Table 1 above shows that by 1990 Malaysia, while still among the leaders in GDP per head, had slipped relative to the “Tigers.”

These economies, joined by China, continued growth into the 1990s at such high rates (Malaysia averaged around 8 percent a year) that the term “Asian miracle” became a common method of description. The exception was Japan which encountered major problems with structural change and an over-extended banking system. Post-crisis the countries of the region have started recovery but at differing rates. The Malaysian economy contracted by nearly 7 percent in 1998, recovered to 8 percent growth in 2000, slipped again to under 1 percent in 2001 and has since stabilized at between 4 and 5 percent growth in 2002-04.

The new Malaysian Prime Minister (since October 2003), Abdullah Ahmad Badawi, plans to shift the emphasis in development to smaller, less-costly infrastructure projects and to break the previous dominance of “money politics.” Foreign direct investment will still be sought but priority will be given to nurturing the domestic manufacturing sector.

Further improvements in education will remain a key factor (Far Eastern Economic Review, Nov.6, 2003).

Overview

Malaysia owes its successful historical economic record to a number of factors. Geographically it lies close to major world trade routes bringing early exposure to the international economy. The sparse indigenous population and labor force has been supplemented by immigrants, mainly from neighboring Asian countries with many becoming permanently domiciled. The economy has always been exceptionally open to external influences such as globalization. Foreign capital has played a major role throughout. Governments, colonial and national, have aimed at managing the structure of the economy while maintaining inter-ethnic stability. Since about 1960 the economy has benefited from extensive restructuring with sustained growth of exports from both the primary and secondary sectors, thus gaining a double impetus.

However, on a less positive assessment, the country has so far exchanged dependence on a limited range of primary products (e.g. tin and rubber) for dependence on an equally limited range of manufactured goods, notably electronics and electronic components (59 percent of exports in 2002). These industries are facing increasing competition from lower-wage countries, especially India and China. Within Malaysia the distribution of secondary industry is unbalanced, currently heavily favoring the Peninsula. Sabah and Sarawak are still heavily dependent on primary products (timber, oil, LNG). There is an urgent need to continue the search for new industries in which Malaysia can enjoy a comparative advantage in world markets, not least because inter-ethnic harmony depends heavily on the continuance of economic prosperity.

Select Bibliography

General Studies

Amarjit Kaur. Economic Change in East Malaysia: Sabah and Sarawak since 1850. London: Macmillan, 1998.

Andaya, L.Y. and Andaya, B.W. A History of Malaysia, second edition. Basingstoke: Palgrave, 2001.

Crouch, Harold. Government and Society in Malaysia. Sydney: Allen and Unwin, 1996.

Drabble, J.H. An Economic History of Malaysia, c.1800-1990: The Transition to Modern Economic Growth. Basingstoke: Macmillan and New York: St. Martin’s Press, 2000.

Furnivall, J.S. Colonial Policy and Practice: A Comparative Study of Burma and Netherlands India. Cambridge (UK), 1948.

Huff, W.G. The Economic Growth of Singapore: Trade and Development in the Twentieth Century. Cambridge: Cambridge University Press, 1994.

Jomo, K.S. Growth and Structural Change in the Malaysian Economy. London: Macmillan, 1990.

Industries/Transport

Alavi, Rokiah. Industrialization in Malaysia: Import Substitution and Infant Industry Performance. London: Routledge, 1966.

Amarjit Kaur. Bridge and Barrier: Transport and Communications in Colonial Malaya 1870-1957. Kuala Lumpur: Oxford University Press, 1985.

Drabble, J.H. Rubber in Malaya 1876-1922: The Genesis of the Industry. Kuala Lumpur: Oxford University Press, 1973.

Drabble, J.H. Malayan Rubber: The Interwar Years. London: Macmillan, 1991.

Huff, W.G. “Boom or Bust Commodities and Industrialization in Pre-World War II Malaya.” Journal of Economic History 62, no. 4 (2002): 1074-1115.

Jackson, J.C. Planters and Speculators: European and Chinese Agricultural Enterprise in Malaya 1786-1921. Kuala Lumpur: University of Malaya Press, 1968.

Lim Teck Ghee. Peasants and Their Agricultural Economy in Colonial Malaya, 1874-1941. Kuala Lumpur: Oxford University Press, 1977.

Wong Lin Ken. The Malayan Tin Industry to 1914. Tucson: University of Arizona Press, 1965.

Yip Yat Hoong. The Development of the Tin Mining Industry of Malaya. Kuala Lumpur: University of Malaya Press, 1969.

New Economic Policy

Jesudason, J.V. Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia. Kuala Lumpur: Oxford University Press, 1989.

Jomo, K.S., editor. Privatizing Malaysia: Rents, Rhetoric, Realities. Boulder, CO: Westview Press, 1995.

Khoo Boo Teik. Paradoxes of Mahathirism: An Intellectual Biography of Mahathir Mohamad. Kuala Lumpur: Oxford University Press, 1995.

Vincent, J.R., R.M. Ali and Associates. Environment and Development in a Resource-Rich Economy: Malaysia under the New Economic Policy. Cambridge, MA: Harvard University Press, 1997

Ethnic Communities

Chew, Daniel. Chinese Pioneers on the Sarawak Frontier, 1841-1941. Kuala Lumpur: Oxford University Press, 1990.

Gullick, J.M. Malay Society in the Late Nineteenth Century. Kuala Lumpur: Oxford University Press, 1989.

Hong, Evelyne. Natives of Sarawak: Survival in Borneo’s Vanishing Forests. Penang: Institut Masyarakat Malaysia, 1987.

Shamsul, A.B. From British to Bumiputera Rule. Singapore: Institute of Southeast Asian Studies, 1986.

Economic Growth

Far Eastern Economic Review. Hong Kong. An excellent weekly overview of current regional affairs.

Malaysian Government. The Second Outline Perspective Plan, 1991-2000. Kuala Lumpur: Government Printer, 1991.

Van der Eng, Pierre. “Assessing Economic Growth and the Standard of Living in Asia 1870-1990.” Milan, Eleventh International Economic History Congress, 1994.

Citation: Drabble, John. “The Economic History of Malaysia”. EH.Net Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/economic-history-of-malaysia/

The History of American Labor Market Institutions and Outcomes

Joshua Rosenbloom, University of Kansas

One of the most important implications of modern microeconomic theory is that perfectly competitive markets produce an efficient allocation of resources. Historically, however, most markets have not approached the level of organization of this theoretical ideal. Instead of the costless and instantaneous communication envisioned in theory, market participants must rely on a set of incomplete and often costly channels of communication to learn about conditions of supply and demand; and they may face significant transaction costs to act on the information that they have acquired through these channels.

The economic history of labor market institutions is concerned with identifying the mechanisms that have facilitated the allocation of labor effort in the economy at different times, tracing the historical processes by which they have responded to shifting circumstances, and understanding how these mechanisms affected the allocation of labor as well as the distribution of labor’s products in different epochs.

Labor market institutions include both formal organizations (such as union hiring halls, government labor exchanges, and third party intermediaries such as employment agents), and informal mechanisms of communication such as word-of-mouth about employment opportunities passed between family and friends. The impact of these institutions is broad ranging. It includes the geographic allocation of labor (migration and urbanization), decisions about education and training of workers (investment in human capital), inequality (relative wages), the allocation of time between paid work and other activities such as household production, education, and leisure, and fertility (the allocation of time between production and reproduction).

Because each worker possesses a unique bundle of skills and attributes and each job is different, labor market transactions require the communication of a relatively large amount of information. In other words, the transactions costs involved in the exchange of labor are relatively high. The result is that the barriers separating different labor markets have sometimes been quite high, and these markets are relatively poorly integrated with one another.

The frictions inherent in the labor market mean that even during macroeconomic expansions there may be both a significant number of unemployed workers and a large number of unfilled vacancies. When viewed from some distance and looked at in the long-run, however, what is most striking is how effective labor market institutions have been in adapting to the shifting patterns of supply and demand in the economy. Over the past two centuries American labor markets have accomplished a massive redistribution of labor out of agriculture into manufacturing, and then from manufacturing into services. At the same time they have accomplished a huge geographic reallocation of labor between the United States and other parts of the world as well as within the United States itself, both across states and regions and from rural locations to urban areas.

This essay is organized topically, beginning with a discussion of the evolution of institutions involved in the allocation of labor across space and then taking up the development of institutions that fostered the allocation of labor across industries and sectors. The third section considers issues related to labor market performance.

The Geographic Distribution of Labor

One of the dominant themes of American history is the process of European settlement (and the concomitant displacement of the native population). This movement of population is in essence a labor market phenomenon. From the beginning of European settlement in what became the United States, labor markets were characterized by the scarcity of labor in relation to abundant land and natural resources. Labor scarcity raised labor productivity and enabled ordinary Americans to enjoy a higher standard of living than comparable Europeans. Counterbalancing these inducements to migration, however, were the high costs of travel across the Atlantic and the significant risks posed by settlement in frontier regions. Over time, technological changes lowered the costs of communication and transportation. But exploiting these advantages required the parallel development of new labor market institutions.

Trans-Atlantic Migration in the Colonial Period

During the seventeenth and eighteenth centuries a variety of labor market institutions developed to facilitate the movement of labor in response to the opportunities created by American factor proportions. While some immigrants migrated on their own, the majority of immigrants were either indentured servants or African slaves.

Because of the cost of passage—which exceeded half a year’s income for a typical British immigrant and a full year’s income for a typical German immigrant—only a small portion of European migrants could afford to pay for their passage to the Americas (Grubb 1985a). They did so by signing contracts, or “indentures,” committing themselves to work for a fixed number of years in the future—their labor being their only viable asset—with British merchants, who then sold these contracts to colonists after their ship reached America. Indentured servitude was introduced by the Virginia Company in 1619 and appears to have arisen from a combination of the terms of two other types of labor contract widely used in England at the time: service in husbandry and apprenticeship (Galenson 1981). In other cases, migrants borrowed money for their passage and committed to repay merchants by pledging to sell themselves as servants in America, a practice known as “redemptioner servitude (Grubb 1986). Redemptioners bore increased risk because they could not predict in advance what terms they might be able to negotiate for their labor, but presumably they did so because of other benefits, such as the opportunity to choose their own master, and to select where they would be employed.

Although data on immigration for the colonial period are scattered and incomplete a number of scholars have estimated that between half and three quarters of European immigrants arriving in the colonies came as indentured or redemptioner servants. Using data for the end of the colonial period Grubb (1985b) found that close to three-quarters of English immigrants to Pennsylvania and nearly 60 percent of German immigrants arrived as servants.

A number of scholars have examined the terms of indenture and redemptioner contracts in some detail (see, e.g., Galenson 1981; Grubb 1985a). They find that consistent with the existence of a well-functioning market, the terms of service varied in response to differences in individual productivity, employment conditions, and the balance of supply and demand in different locations.

The other major source of labor for the colonies was the forced migration of African slaves. Slavery had been introduced in the West Indies at an early date, but it was not until the late seventeenth century that significant numbers of slaves began to be imported into the mainland colonies. From 1700 to 1780 the proportion of blacks in the Chesapeake region grew from 13 percent to around 40 percent. In South Carolina and Georgia, the black share of the population climbed from 18 percent to 41 percent in the same period (McCusker and Menard, 1985, p. 222). Galenson (1984) explains the transition from indentured European to enslaved African labor as the result of shifts in supply and demand conditions in England and the trans-Atlantic slave market. Conditions in Europe improved after 1650, reducing the supply of indentured servants, while at the same time increased competition in the slave trade was lowering the price of slaves (Dunn 1984). In some sense the colonies’ early experience with indentured servants paved the way for the transition to slavery. Like slaves, indentured servants were unfree, and ownership of their labor could be freely transferred from one owner to another. Unlike slaves, however, they could look forward to eventually becoming free (Morgan 1971).

Over time a marked regional division in labor market institutions emerged in colonial America. The use of slaves was concentrated in the Chesapeake and Lower South, where the presence of staple export crops (rice, indigo and tobacco) provided economic rewards for expanding the scale of cultivation beyond the size achievable with family labor. European immigrants (primarily indentured servants) tended to concentrate in the Chesapeake and Middle Colonies, where servants could expect to find the greatest opportunities to enter agriculture once they had completed their term of service. While New England was able to support self-sufficient farmers, its climate and soil were not conducive to the expansion of commercial agriculture, with the result that it attracted relatively few slaves, indentured servants, or free immigrants. These patterns are illustrated in Table 1, which summarizes the composition and destinations of English emigrants in the years 1773 to 1776.

Table 1

English Emigration to the American Colonies, by Destination and Type, 1773-76

Total Emigration
Destination Number Percentage Percent listed as servants
New England 54 1.20 1.85
Middle Colonies 1,162 25.78 61.27
New York 303 6.72 11.55
Pennsylvania 859 19.06 78.81
Chesapeake 2,984 66.21 96.28
Maryland 2,217 49.19 98.33
Virginia 767 17.02 90.35
Lower South 307 6.81 19.54
Carolinas 106 2.35 23.58
Georgia 196 4.35 17.86
Florida 5 0.11 0.00
Total 4,507 80.90

Source: Grubb (1985b, p. 334).

International Migration in the Nineteenth and Twentieth Centuries

American independence marks a turning point in the development of labor market institutions. In 1808 Congress prohibited the importation of slaves. Meanwhile, the use of indentured servitude to finance the migration of European immigrants fell into disuse. As a result, most subsequent migration was at least nominally free migration.

The high cost of migration and the economic uncertainties of the new nation help to explain the relatively low level of immigration in the early years of the nineteenth century. But as the costs of transportation fell, the volume of immigration rose dramatically over the course of the century. Transportation costs were of course only one of the obstacles to international population movements. At least as important were problems of communication. Potential migrants might know in a general way that the United States offered greater economic opportunities than were available at home, but acting on this information required the development of labor market institutions that could effectively link job-seekers with employers.

For the most part, the labor market institutions that emerged in the nineteenth century to direct international migration were “informal” and thus difficult to document. As Rosenbloom (2002, ch. 2) describes, however, word-of-mouth played an important role in labor markets at this time. Many immigrants were following in the footsteps of friends or relatives already in the United States. Often these initial pioneers provided material assistance—helping to purchase ship and train tickets, providing housing—as well as information. The consequences of this so-called “chain migration” are readily reflected in a variety of kinds of evidence. Numerous studies of specific migration streams have documented the role of a small group of initial migrants in facilitating subsequent migration (for example, Barton 1975; Kamphoefner 1987; Gjerde 1985). At a more aggregate level, settlement patterns confirm the tendency of immigrants from different countries to concentrate in different cities (Ward 1971, p. 77; Galloway, Vedder and Shukla 1974).

Informal word-of-mouth communication was an effective labor market institution because it served both employers and job-seekers. For job-seekers the recommendations of friends and relatives were more reliable than those of third parties and often came with additional assistance. For employers the recommendations of current employees served as a kind of screening mechanism, since their employees were unlikely to encourage the immigration of unreliable workers.

While chain migration can explain a quantitatively large part of the redistribution of labor in the nineteenth century it is still necessary to explain how these chains came into existence in the first place. Chain migration always coexisted with another set of more formal labor market institutions that grew up largely to serve employers who could not rely on their existing labor force to recruit new hires (such as railroad construction companies). Labor agents, often themselves immigrants, acted as intermediaries between these employers and job-seekers, providing labor market information and frequently acting as translators for immigrants who could not speak English. Steamship companies operating between Europe and the United States also employed agents to help recruit potential migrants (Rosenbloom 2002, ch. 3).

By the 1840s networks of labor agents along with boarding houses serving immigrants and other similar support networks were well established in New York, Boston, and other major immigrant destinations. The services of these agents were well documented in published guides and most Europeans considering immigration must have known that they could turn to these commercial intermediaries if they lacked friends and family to guide them. After some time working in America these immigrants, if they were successful, would find steadier employment and begin to direct subsequent migration, thus establishing a new link in the stream of chain migration.

The economic impacts of immigration are theoretically ambiguous. Increased labor supply, by itself, would tend to lower wages—benefiting employers and hurting workers. But because immigrants are also consumers, the resulting increase in demand for goods and services will increase the demand for labor, partially offsetting the depressing effect of immigration on wages. As long as the labor to capital ratio rises, however, immigration will necessarily lower wages. But if, as was true in the late nineteenth century, foreign lending follows foreign labor, then there may be no negative impact on wages (Carter and Sutch 1999). Whatever the theoretical considerations, however, immigration became an increasingly controversial political issue during the late nineteenth and early twentieth centuries. While employers and some immigrant groups supported continued immigration, there was a growing nativist sentiment among other segments of the population. Anti-immigrant sentiments appear to have arisen out of a mix of perceived economic effects and concern about the implications of the ethnic, religious and cultural differences between immigrants and the native born.

In 1882, Congress passed the Chinese Exclusion Act. Subsequent legislative efforts to impose further restrictions on immigration passed Congress but foundered on presidential vetoes. The balance of political forces shifted, however, in the wake of World War I. In 1917 a literacy requirement was imposed for the first time, and in 1921 an Emergency Quota Act was passed (Goldin 1994).

With the passage of the Emergency Quota Act in 1921 and subsequent legislation culminating in the National Origins Act, the volume of immigration dropped sharply. Since this time international migration into the United States has been controlled to varying degrees by legal restrictions. Variations in the rules have produced variations in the volume of legal immigration. Meanwhile the persistence of large wage gaps between the United States and Mexico and other developing countries has encouraged a substantial volume of illegal immigration. It remains the case, however, that most of this migration—both legal and illegal—continues to be directed by chains of friends and relatives.

Recent trends in outsourcing and off-shoring have begun to create a new channel by which lower-wage workers outside the United States can respond to the country’s high wages without physically relocating. Workers in India, China, and elsewhere possessing technical skills can now provide services such as data entry or technical support by phone and over the internet. While the novelty of this phenomenon has attracted considerable attention, the actual volume of jobs moved off-shore remains limited, and there are important obstacles to overcome before more jobs can be carried out remotely (Edwards 2004).

Internal Migration in the Nineteenth and Twentieth Centuries

At the same time that American economic development created international imbalances between labor supply and demand it also created internal disequilibrium. Fertile land and abundant natural resources drew population toward less densely settled regions in the West. Over the course of the century, advances in transportation technologies lowered the cost of shipping goods from interior regions, vastly expanding the area available for settlement. Meanwhile transportation advances and technological innovations encouraged the growth of manufacturing and fueled increased urbanization. The movement of population and economic activity from the Eastern Seaboard into the interior of the continent and from rural to urban areas in response to these incentives is an important element of U.S. economic history in the nineteenth century.

In the pre-Civil War era, the labor market response to frontier expansion differed substantially between North and South, with profound effects on patterns of settlement and regional development. Much of the cost of migration is a result of the need to gather information about opportunities in potential destinations. In the South, plantation owners could spread these costs over a relatively large number of potential migrants—i.e., their slaves. Plantations were also relatively self-sufficient, requiring little urban or commercial infrastructure to make them economically viable. Moreover, the existence of well-established markets for slaves allowed western planters to expand their labor force by purchasing additional labor from eastern plantations.

In the North, on the other hand, migration took place through the relocation of small, family farms. Fixed costs of gathering information and the risks of migration loomed larger in these farmers’ calculations than they did for slaveholders, and they were more dependent on the presence of urban merchants to supply them with inputs and market their products. Consequently the task of mobilizing labor fell to promoters who bought up large tracts of land at low prices and then subdivided them into individual lots. To increase the value of these lands promoters offered loans, actively encourage the development of urban services such as blacksmith shops, grain merchants, wagon builders and general stores, and recruited settlers. With the spread of railroads, railroad construction companies also played a role in encouraging settlement along their routes to speed the development of traffic.

The differences in processes of westward migration in the North and South were reflected in the divergence of rates of urbanization, transportation infrastructure investment, manufacturing employment, and population density, all of which were higher in the North than in the South in 1860 (Wright 1986, pp. 19-29).

The Distribution of Labor among Economic Activities

Over the course of U.S. economic development technological changes and shifting consumption patterns have caused the demand for labor to increase in manufacturing and services and decline in agriculture and other extractive activities. These broad changes are illustrated in Table 2. As technological changes have increased the advantages of specialization and the division of labor, more and more economic activity has moved outside the scope of the household, and the boundaries of the labor market have been enlarged. As a result more and more women have moved into the paid labor force. On the other hand, with the increasing importance of formal education, there has been a decline in the number of children in the labor force (Whaples 2005).

Table 2

Sectoral Distribution of the Labor Force, 1800-1999

Share in
Non-Agriculture
Year Total Labor Force (1000s) Agriculture Total Manufacturing Services
1800 1,658 76.2 23.8
1850 8,199 53.6 46.4
1900 29,031 37.5 59.4 35.8 23.6
1950 57,860 11.9 88.1 41.0 47.1
1999 133,489 2.3 97.7 24.7 73.0

Notes and Sources: 1800 and 1850 from Weiss (1986), pp. 646-49; remaining years from Hughes and Cain (2003), 547-48. For 1900-1999 Forestry and Fishing are included in the Agricultural labor force.

As these changes have taken place they have placed strains on existing labor market institutions and encouraged the development of new mechanisms to facilitate the distribution of labor. Over the course of the last century and a half the tendency has been a movement away from something approximating a “spot” market characterized by short-term employment relationships in which wages are equated to the marginal product of labor, and toward a much more complex and rule-bound set of long-term transactions (Goldin 2000, p. 586) While certain segments of the labor market still involve relatively anonymous and short-lived transactions, workers and employers are much more likely today to enter into long-term employment relationships that are expected to last for many years.

The evolution of labor market institutions in response to these shifting demands has been anything but smooth. During the late nineteenth century the expansion of organized labor was accompanied by often violent labor-management conflict (Friedman 2002). Not until the New Deal did unions gain widespread acceptance and a legal right to bargain. Yet even today, union organizing efforts are often met with considerable hostility.

Conflicts over union organizing efforts inevitably involved state and federal governments because the legal environment directly affected the bargaining power of both sides, and shifting legal opinions and legislative changes played an important part in determining the outcome of these contests. State and federal governments were also drawn into labor markets as various groups sought to limit hours of work, set minimum wages, provide support for disabled workers, and respond to other perceived shortcomings of existing arrangements. It would be wrong, however, to see the growth of government regulation as simply a movement from freer to more regulated markets. The ability to exchange goods and services rests ultimately on the legal system, and to this extent there has never been an entirely unregulated market. In addition, labor market transactions are never as simple as the anonymous exchange of other goods or services. Because the identities of individual buyers and sellers matter and the long-term nature of many employment relationships, adjustments can occur along other margins besides wages, and many of these dimensions involve externalities that affect all workers at a particular establishment, or possibly workers in an entire industry or sector.

Government regulations have responded in many cases to needs voiced by participants on both sides of the labor market for assistance to achieve desired ends. That has not, of course, prevented both workers and employers from seeking to use government to alter the way in which the gains from trade are distributed within the market.

The Agricultural Labor Market

At the beginning of the nineteenth century most labor was employed in agriculture, and, with the exception of large slave plantations, most agricultural labor was performed on small, family-run farms. There were markets for temporary and seasonal agricultural laborers to supplement family labor supply, but in most parts of the country outside the South, families remained the dominant institution directing the allocation of farm labor. Reliable estimates of the number of farm workers are not readily available before 1860, when the federal Census first enumerated “farm laborers.” At this time census enumerators found about 800 thousand such workers, implying an average of less than one-half farm worker per farm. Interpretation of this figure is complicated, however, and it may either overstate the amount of hired help—since farm laborers included unpaid family workers—or understate it—since it excluded those who reported their occupation simply as “laborer” and may have spent some of their time working in agriculture (Wright 1988, p. 193). A possibly more reliable indicator is provided by the percentage of gross value of farm output spent on wage labor. This figure fell from 11.4 percent in 1870 to around 8 percent by 1900, indicating that hired labor was on average becoming even less important (Wright 1988, pp. 194-95).

In the South, after the Civil War, arrangements were more complicated. Former plantation owners continued to own large tracts of land that required labor if they were to be made productive. Meanwhile former slaves needed access to land and capital if they were to support themselves. While some land owners turned to wage labor to work their land, most relied heavily on institutions like sharecropping. On the supply side, croppers viewed this form of employment as a rung on the “agricultural ladder” that would lead eventually to tenancy and possibly ownership. Because climbing the agricultural ladder meant establishing one’s credit-worthiness with local lenders, southern farm laborers tended to sort themselves into two categories: locally established (mostly older, married men) croppers and renters on the one hand, and mobile wage laborers (mostly younger and unmarried) on the other. While the labor market for each of these types of workers appears to have been relatively competitive, the barriers between the two markets remained relatively high (Wright 1987, p. 111).

While the predominant pattern in agriculture then was one of small, family-operated units, there was an important countervailing trend toward specialization that both depended on, and encouraged the emergence of a more specialized market for farm labor. Because specialization in a single crop increased the seasonality of labor demand, farmers could not afford to employ labor year-round, but had to depend on migrant workers. The use of seasonal gangs of migrant wage laborers developed earliest in California in the 1870s and 1880s, where employers relied heavily on Chinese immigrants. Following restrictions on Chinese entry, they were replaced first by Japanese, and later by Mexican workers (Wright 1988, pp. 201-204).

The Emergence of Internal Labor Markets

Outside of agriculture, at the beginning of the nineteenth century most manufacturing took place in small establishments. Hired labor might consist of a small number of apprentices, or, as in the early New England textile mills, a few child laborers hired from nearby farms (Ware 1931). As a result labor market institutions remained small-scale and informal, and institutions for training and skill acquisition remained correspondingly limited. Workers learned on the job as apprentices or helpers; advancement came through establishing themselves as independent producers rather than through internal promotion.

With the growth of manufacturing, and the spread of factory methods of production, especially in the years after the end of the Civil War, an increasing number of people could expect to spend their working-lives as employees. One reflection of this change was the emergence in the 1870s of the problem of unemployment. During the depression of 1873 for the first time cities throughout the country had to contend with large masses of industrial workers thrown out of work and unable to support themselves through, in the language of the time, “no fault of their own” (Keyssar 1986, ch. 2).

The growth of large factories and the creation of new kinds of labor skills specific to a particular employer created returns to sustaining long-term employment relationships. As workers acquired job- and employer-specific skills their productivity increased giving rise to gains that were available only so long as the employment relationship persisted. Employers did little, however, to encourage long-term employment relationships. Instead authority over hiring, promotion and retention was commonly delegated to foremen or inside contractors (Nelson 1975, pp. 34-54). In the latter case, skilled craftsmen operated in effect as their own bosses contracting with the firm to supply components or finished products for an agreed price, and taking responsibility for hiring and managing their own assistants.

These arrangements were well suited to promoting external mobility. Foremen were often drawn from the immigrant community and could easily tap into word-of-mouth channels of recruitment. But these benefits came increasingly into conflict with rising costs of hiring and training workers.

The informality of personnel policies prior to World War I seems likely to have discouraged lasting employment relationships, and it is true that rates of labor turnover at the beginning of the twentieth century were considerably higher than they were to be later (Owen, 2004). Scattered evidence on the duration of employment relationships gathered by various state labor bureaus at the end of the century suggests, however, at least some workers did establish lasting employment relationship (Carter 1988; Carter and Savocca 1990; Jacoby and Sharma 1992; James 1994).

The growing awareness of the costs of labor-turnover and informal, casual labor relations led reformers to advocate the establishment of more centralized and formal processes of hiring, firing and promotion, along with the establishment of internal job-ladders, and deferred payment plans to help bind workers and employers. The implementation of these reforms did not make significant headway, however, until the 1920s (Slichter 1929). Why employers began to establish internal labor markets in the 1920s remains in dispute. While some scholars emphasize pressure from workers (Jacoby 1984; 1985) others have stressed that it was largely a response to the rising costs of labor turnover (Edwards 1979).

The Government and the Labor Market

The growth of large factories contributed to rising labor tensions in the late nineteenth- and early twentieth-centuries. Issues like hours of work, safety, and working conditions all have a significant public goods aspect. While market forces of entry and exit will force employers to adopt policies that are sufficient to attract the marginal worker (the one just indifferent between staying and leaving), less mobile workers may find that their interests are not adequately represented (Freeman and Medoff 1984). One solution is to establish mechanisms for collective bargaining, and the years after the American Civil War were characterized by significant progress in the growth of organized labor (Friedman 2002). Unionization efforts, however, met strong opposition from employers, and suffered from the obstacles created by the American legal system’s bias toward protecting property and the freedom of contract. Under prevailing legal interpretation, strikes were often found by the courts to be conspiracies in restraint of trade with the result that the apparatus of government was often arrayed against labor.

Although efforts to win significant improvements in working conditions were rarely successful, there were still areas where there was room for mutually beneficial change. One such area involved the provision of disability insurance for workers injured on the job. Traditionally, injured workers had turned to the courts to adjudicate liability for industrial accidents. Legal proceedings were costly and their outcome unpredictable. By the early 1910s it became clear to all sides that a system of disability insurance was preferable to reliance on the courts. Resolution of this problem, however, required the intervention of state legislatures to establish mandatory state workers compensation insurance schemes and remove the issue from the courts. Once introduced workers compensation schemes spread quickly: nine states passed legislation in 1911; 13 more had joined the bandwagon by 1913, and by 1920 44 states had such legislation (Fishback 2001).

Along with workers compensation state legislatures in the late nineteenth century also considered legislation restricting hours of work. Prevailing legal interpretations limited the effectiveness of such efforts for adult males. But rules restricting hours for women and children were found to be acceptable. The federal government passed legislation restricting the employment of children under 14 in 1916, but this law was found unconstitutional in 1916 (Goldin 2000, p. 612-13).

The economic crisis of the 1930s triggered a new wave of government interventions in the labor market. During the 1930s the federal government granted unions the right to organize legally, established a system of unemployment, disability and old age insurance, and established minimum wage and overtime pay provisions.

In 1933 the National Industrial Recovery Act included provisions legalizing unions’ right to bargain collectively. Although the NIRA was eventually ruled to be unconstitutional, the key labor provisions of the Act were reinstated in the Wagner Act of 1935. While some of the provisions of the Wagner Act were modified in 1947 by the Taft-Hartley Act, its passage marks the beginning of the golden age of organized labor. Union membership jumped very quickly after 1935 from around 12 percent of the non-agricultural labor force to nearly 30 percent, and by the late 1940s had attained a peak of 35 percent, where it stabilized. Since the 1960s, however, union membership has declined steadily, to the point where it is now back at pre-Wagner Act levels.

The Social Security Act of 1935 introduced a federal unemployment insurance scheme that was operated in partnership with state governments and financed through a tax on employers. It also created government old age and disability insurance. In 1938, the federal Fair Labor Standards Act provided for minimum wages and for overtime pay. At first the coverage of these provisions was limited, but it has been steadily increased in subsequent years to cover most industries today.

In the post-war era, the federal government has expanded its role in managing labor markets both directly—through the establishment of occupational safety regulations, and anti-discrimination laws, for example—and indirectly—through its efforts to manage the macroeconomy to insure maximum employment.

A further expansion of federal involvement in labor markets began in 1964 with passage of the Civil Rights Act, which prohibited employment discrimination against both minorities and women. In 1967 the Age Discrimination and Employment Act was passed prohibiting discrimination against people aged 40 to 70 in regard to hiring, firing, working conditions and pay. The Family and Medical Leave Act of 1994 allows for unpaid leave to care for infants, children and other sick relatives (Goldin 2000, p. 614).

Whether state and federal legislation has significantly affected labor market outcomes remains unclear. Most economists would argue that the majority of labor’s gains in the past century would have occurred even in the absence of government intervention. Rather than shaping market outcomes, many legislative initiatives emerged as a result of underlying changes that were making advances possible. According to Claudia Goldin (2000, p. 553) “government intervention often reinforced existing trends, as in the decline of child labor, the narrowing of the wage structure, and the decrease in hours of work.” In other cases, such as Workers Compensation and pensions, legislation helped to establish the basis for markets.

The Changing Boundaries of the Labor Market

The rise of factories and urban employment had implications that went far beyond the labor market itself. On farms women and children had found ready employment (Craig 1993, ch. 4). But when the male household head worked for wages, employment opportunities for other family members were more limited. Late nineteenth-century convention largely dictated that married women did not work outside the home unless their husband was dead or incapacitated (Goldin 1990, p. 119-20). Children, on the other hand, were often viewed as supplementary earners in blue-collar households at this time.

Since 1900 changes in relative earnings power related to shifts in technology have encouraged women to enter the paid labor market while purchasing more of the goods and services that were previously produced within the home. At the same time, the rising value of formal education has lead to the withdrawal of child labor from the market and increased investment in formal education (Whaples 2005). During the first half of the twentieth century high school education became nearly universal. And since World War II, there has been a rapid increase in the number of college educated workers in the U.S. economy (Goldin 2000, p. 609-12).

Assessing the Efficiency of Labor Market Institutions

The function of labor markets is to match workers and jobs. As this essay has described the mechanisms by which labor markets have accomplished this task have changed considerably as the American economy has developed. A central issue for economic historians is to assess how changing labor market institutions have affected the efficiency of labor markets. This leads to three sets of questions. The first concerns the long-run efficiency of market processes in allocating labor across space and economic activities. The second involves the response of labor markets to short-run macroeconomic fluctuations. The third deals with wage determination and the distribution of income.

Long-Run Efficiency and Wage Gaps

Efforts to evaluate the efficiency of market allocation begin with what is commonly know as the “law of one price,” which states that within an efficient market the wage of similar workers doing similar work under similar circumstances should be equalized. The ideal of complete equalization is, of course, unlikely to be achieved given the high information and transactions costs that characterize labor markets. Thus, conclusions are usually couched in relative terms, comparing the efficiency of one market at one point in time with those of some other markets at other points in time. A further complication in measuring wage equalization is the need to compare homogeneous workers and to control for other differences (such as cost of living and non-pecuniary amenities).

Falling transportation and communications costs have encouraged a trend toward diminishing wage gaps over time, but this trend has not always been consistent over time, nor has it applied to all markets in equal measure. That said, what stands out is in fact the relative strength of forces of market arbitrage that have operated in many contexts to promote wage convergence.

At the beginning of the nineteenth century, the costs of trans-Atlantic migration were still quite high and international wage gaps large. By the 1840s, however, vast improvements in shipping cut the costs of migration, and gave rise to an era of dramatic international wage equalization (O’Rourke and Williamson 1999, ch. 2; Williamson 1995). Figure 1 shows the movement of real wages relative to the United States in a selection of European countries. After the beginning of mass immigration wage differentials began to fall substantially in one country after another. International wage convergence continued up until the 1880s, when it appears that the accelerating growth of the American economy outstripped European labor supply responses and reversed wage convergence briefly. World War I and subsequent immigration restrictions caused a sharper break, and contributed to widening international wage differences during the middle portion of the twentieth century. From World War II until about 1980, European wage levels once again began to converge toward the U.S., but this convergence reflected largely internally-generated improvements in European living standards rather then labor market pressures.

Figure 1

Relative Real Wages of Selected European Countries, 1830-1980 (US = 100)

Source: Williamson (1995), Tables A2.1-A2.3.

Wage convergence also took place within some parts of the United States during the nineteenth century. Figure 2 traces wages in the North Central and Southern regions of the U.S relative to those in the Northeast across the period from 1820 to the early twentieth century. Within the United States, wages in the North Central region of the country were 30 to 40 percent higher than in the East in the 1820s (Margo 2000a, ch. 5). Thereafter, wage gaps declined substantially, falling to the 10-20 percent range before the Civil War. Despite some temporary divergence during the war, wage gaps had fallen to 5 to 10 percent by the 1880s and 1890s. Much of this decline was made possible by faster and less expensive means of transportation, but it was also dependent on the development of labor market institutions linking the two regions, for while transportation improvements helped to link East and West, there was no corresponding North-South integration. While southern wages hovered near levels in the Northeast prior to the Civil War, they fell substantially below northern levels after the Civil War, as Figure 2 illustrates.

Figure 2

Relative Regional Real Wage Rates in the United States, 1825-1984

(Northeast = 100 in each year)

Notes and sources: Rosenbloom (2002, p. 133); Montgomery (1992). It is not possible to assemble entirely consistent data on regional wage variations over such an extended period. The nature of the wage data, the precise geographic coverage of the data, and the estimates of regional cost-of-living indices are all different. The earliest wage data—Margo (2000); Sundstrom and Rosenbloom (1993) and Coelho and Shepherd (1976) are all based on occupational wage rates from payroll records for specific occupations; Rosenbloom (1996) uses average earnings across all manufacturing workers; while Montgomery (1992) uses individual level wage data drawn from the Current Population Survey, and calculates geographic variations using a regression technique to control for individual differences in human capital and industry of employment. I used the relative real wages that Montgomery (1992) reported for workers in manufacturing, and used an unweighted average of wages across the cities in each region to arrive at relative regional real wages. Interested readers should consult the various underlying sources for further details.

Despite the large North-South wage gap Table 3 shows there was relatively little migration out of the South until large-scale foreign immigration came to an end. Migration from the South during World War I and the 1920s created a basis for future chain migration, but the Great Depression of the 1930s interrupted this process of adjustment. Not until the 1940s did the North-South wage gap begin to decline substantially (Wright 1986, pp. 71-80). By the 1970s the southern wage disadvantage had largely disappeared, and because of the decline fortunes of older manufacturing districts and the rise of Sunbelt cities, wages in the South now exceed those in the Northeast (Coelho and Ghali 1971; Bellante 1979; Sahling and Smith 1983; Montgomery 1992). Despite these shocks, however, the overall variation in wages appears comparable to levels attained by the end of the nineteenth century. Montgomery (1992), for example finds that from 1974 to 1984 the standard deviation of wages across SMSAs was only about 10 percent of the average wage.

Table 3

Net Migration by Region, and Race, 1870-1950

South Northeast North Central West
Period White Black White Black White Black White Black
Number (in 1,000s)
1870-80 91 -68 -374 26 26 42 257 0
1880-90 -271 -88 -240 61 -43 28 554 0
1890-00 -30 -185 101 136 -445 49 374 0
1900-10 -69 -194 -196 109 -1,110 63 1,375 22
1910-20 -663 -555 -74 242 -145 281 880 32
1920-30 -704 -903 -177 435 -464 426 1,345 42
1930-40 -558 -480 55 273 -747 152 1,250 55
1940-50 -866 -1581 -659 599 -1,296 626 2,822 356
Rate (migrants/1,000 Population)
1870-80 11 -14 -33 55 2 124 274 0
1880-90 -26 -15 -18 107 -3 65 325 0
1890-00 -2 -26 6 200 -23 104 141 0
1900-10 -4 -24 -11 137 -48 122 329 542
1910-20 -33 -66 -3 254 -5 421 143 491
1920-30 -30 -103 -7 328 -15 415 160 421
1930-40 -20 -52 2 157 -22 113 116 378
1940-50 -28 -167 -20 259 -35 344 195 964

Note: Net migration is calculated as the difference between the actual increase in population over each decade and the predicted increase based on age and sex specific mortality rates and the demographic structure of the region’s population at the beginning of the decade. If the actual increase exceeds the predicted increase this implies a net migration into the region; if the actual increase is less than predicted this implies net migration out of the region. The states included in the Southern region are Oklahoma, Texas, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida.

Source: Eldridge and Thomas (1964, pp. 90, 99).

In addition to geographic wage gaps economists have considered gaps between farm and city, between black and white workers, between men and women, and between different industries. The literature on these topics is quite extensive and this essay can only touch on a few of the more general themes raised here as they relate to U.S. economic history.

Studies of farm-city wage gaps are a variant of the broader literature on geographic wage variation, related to the general movement of labor from farms to urban manufacturing and services. Here comparisons are complicated by the need to adjust for the non-wage perquisites that farm laborers typically received, which could be almost as large as cash wages. The issue of whether such gaps existed in the nineteenth century has important implications for whether the pace of industrialization was impeded by the lack of adequate labor supply responses. By the second half of the nineteenth century at least, it appears that farm-manufacturing wage gaps were small and markets were relatively integrated (Wright 1988, pp. 204-5). Margo (2000, ch. 4) offers evidence of a high degree of equalization within local labor markets between farm and urban wages as early as 1860. Making comparisons within counties and states, he reports that farm wages were within 10 percent of urban wages in eight states. Analyzing data from the late nineteenth century through the 1930s, Hatton and Williamson (1991) find that farm and city wages were nearly equal within U.S. regions by the 1890s. It appears, however that during the Great Depression farm wages were much more flexible than urban wages causing a large gap to emerge at this time (Alston and Williamson 1991).

Much attention has been focused on trends in wage gaps by race and sex. The twentieth century has seen a substantial convergence in both of these differentials. Table 4 displays comparisons of earnings of black males relative to white males for full time workers. In 1940, full-time black male workers earned only about 43 percent of what white male full-time workers did. By 1980 the racial pay ratio had risen to nearly 73 percent, but there has been little subsequent progress. Until the mid-1960s these gains can be attributed primarily to migration from the low-wage South to higher paying areas in the North, and to increases in the quantity and quality of black education over time (Margo 1995; Smith and Welch 1990). Since then, however, most gains have been due to shifts in relative pay within regions. Although it is clear that discrimination was a key factor in limiting access to education, the role of discrimination within the labor market in contributing to these differentials has been a more controversial topic (see Wright 1986, pp. 127-34). But the episodic nature of black wage gains, especially after 1964 is compelling evidence that discrimination has played a role historically in earnings differences and that federal anti-discrimination legislation was a crucial factor in reducing its effects (Donohue and Heckman 1991).

Table 4

Black Male Wages as a Percentage of White Male Wages, 1940-2004

Date Black Relative Wage
1940 43.4
1950 55.2
1960 57.5
1970 64.4
1980 72.6
1990 70.0
2004 77.0

Notes and Sources: Data for 1940 through 1980 are based on Census data as reported in Smith and Welch (1989, Table 8). Data for 1990 are from Ehrenberg and Smith (2000, Table 12.4) and refer to earnings of full time, full year workers. Data from 2004 are for median weekly earnings of full-time wage and salary workers derived from data in the Current Population Survey accessed on-line from the Bureau of Labor Statistic on 13 December 2005; URL ftp://ftp.bls.gov/pub/special.requests/lf/aat37.txt.

Male-Female wage gaps have also narrowed substantially over time. In the 1820s women’s earnings in manufacturing were a little less than 40 percent of those of men, but this ratio rose over time reaching about 55 percent by the 1920s. Across all sectors women’s relative pay rose during the first half of the twentieth century, but gains in female wages stalled during the 1950s and 1960s at the time when female labor force participation began to increase rapidly. Beginning in the late 1970s or early 1980s, relative female pay began to rise again, and today women earn about 80 percent what men do (Goldin 1990, table 3.2; Goldin 2000, pp. 606-8). Part of this remaining difference is explained by differences in the occupational distribution of men and women, with women tending to be concentrated in lower paying jobs. Whether these differences are the result of persistent discrimination or arise because of differences in productivity or a choice by women to trade off greater flexibility in terms of labor market commitment for lower pay remains controversial.

In addition to locational, sectoral, racial and gender wage differentials, economists have also documented and analyzed differences by industry. Krueger and Summers (1987) find that there are pronounced differences in wages by industry within well-specified occupational classes, and that these differentials have remained relatively stable over several decades. One interpretation of this phenomenon is that in industries with substantial market power workers are able to extract some of the monopoly rents as higher pay. An alternative view is that workers are in fact heterogeneous, and differences in wages reflect a process of sorting in which higher paying industries attract more able workers.

The Response to Short-run Macroeconomic Fluctuations

The existence of unemployment is one of the clearest indications of the persistent frictions that characterize labor markets. As described earlier, the concept of unemployment first entered common discussion with the growth of the factory labor force in the 1870s. Unemployment was not a visible social phenomenon in an agricultural economy, although there was undoubtedly a great deal of hidden underemployment.

Although one might have expected that the shift from spot toward more contractual labor markets would have increased rigidities in the employment relationship that would result in higher levels of unemployment there is in fact no evidence of any long-run increase in the level of unemployment.

Contemporaneous measurements of the rate of unemployment only began in 1940. Prior to this date, economic historians have had to estimate unemployment levels from a variety of other sources. Decennial censuses provide benchmark levels, but it is necessary to interpolate between these benchmarks based on other series. Conclusions about long-run changes in unemployment behavior depend to a large extent on the method used to interpolate between benchmark dates. Estimates prepared by Stanley Lebergott (1964) suggest that the average level of unemployment and its volatility have declined between the pre-1930 and post-World War II periods. Christina Romer (1986a, 1986b), however, has argued that there was no decline in volatility. Rather, she argues that the apparent change in behavior is the result of Lebergott’s interpolation procedure.

While the aggregate behavior of unemployment has changed surprisingly little over the past century, the changing nature of employment relationships has been reflected much more clearly in changes in the distribution of the burden of unemployment (Goldin 2000, pp. 591-97). At the beginning of the twentieth century, unemployment was relatively widespread, and largely unrelated to personal characteristics. Thus many employees faced great uncertainty about the permanence of their employment relationship. Today, on the other hand, unemployment is highly concentrated: falling heavily on the least skilled, the youngest, and the non-white segments of the labor force. Thus, the movement away from spot markets has tended to create a two-tier labor market in which some workers are highly vulnerable to economic fluctuations, while others remain largely insulated from economic shocks.

Wage Determination and Distributional Issues

American economic growth has generated vast increases in the material standard of living. Real gross domestic product per capita, for example, has increased more than twenty-fold since 1820 (Steckel 2002). This growth in total output has in large part been passed on to labor in the form of higher wages. Although labor’s share of national output has fluctuated somewhat, in the long-run it has remained surprisingly stable. According to Abramovitz and David (2000, p. 20), labor received 65 percent of national income in the years 1800-1855. Labor’s share dropped in the late nineteenth and early twentieth centuries, falling to a low of 54 percent of national income between 1890 and 1927, but has since risen, reaching 65 percent again in 1966-1989. Thus, over the long term, labor income has grown at the same rate as total output in the economy.

The distribution of labor’s gains across different groups in the labor force has also varied over time. I have already discussed patterns of wage variation by race and gender, but another important issue revolves around the overall level of inequality of pay, and differences in pay between groups of skilled and unskilled workers. Careful research by Picketty and Saez (2003) using individual income tax returns has documented changes in the overall distribution of income in the United States since 1913. They find that inequality has followed a U-shaped pattern over the course of the twentieth century. Inequality was relatively high at the beginning of the period they consider, fell sharply during World War II, held steady until the early 1970s and then began to increase, reaching levels comparable to those in the early twentieth century by the 1990s.

An important factor in the rising inequality of income since 1970 has been growing dispersion in wage rates. The wage differential between workers in the 90th percentile of the wage distribution and those in the 10th percentile increased by 49 percent between 1969 and 1995 (Plotnick et al 2000, pp. 357-58). These shifts are mirrored in increased premiums earned by college graduates relative to high school graduates. Two primary explanations have been advanced for these trends. First, there is evidence that technological changes—especially those associated with the increased use of information technology—has increased relative demand for more educated workers (Murnane, Willett and Levy (1995). Second, increased global integration has allowed low-wage manufacturing industries overseas to compete more effectively with U.S. manufacturers, thus depressing wages in what have traditionally been high-paying blue collar jobs.

Efforts to expand the scope of analysis over a longer-run encounter problems with more limited data. Based on selected wage ratios of skilled and unskilled workers Willamson and Lindert (1980) have argued that there was an increase in wage inequality over the course of the nineteenth century. But other scholars have argued that the wage series that Williamson and Lindert used are unreliable (Margo 2000b, pp. 224-28).

Conclusions

The history of labor market institutions in the United States illustrates the point that real world economies are substantially more complex than the simplest textbook models. Instead of a disinterested and omniscient auctioneer, the process of matching buyers and sellers takes place through the actions of self-interested market participants. The resulting labor market institutions do not respond immediately and precisely to shifting patterns of incentives. Rather they are subject to historical forces of increasing-returns and lock-in that cause them to change gradually and along path-dependent trajectories.

For all of these departures from the theoretically ideal market, however, the history of labor markets in the United States can also be seen as a confirmation of the remarkable power of market processes of allocation. From the beginning of European settlement in mainland North America, labor markets have done a remarkable job of responding to shifting patterns of demand and supply. Not only have they accomplished the massive geographic shifts associated with the settlement of the United States, but they have also dealt with huge structural changes induced by the sustained pace of technological change.

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Citation: Rosenbloom, Joshua. “The History of American Labor Market Institutions and Outcomes”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-history-of-american-labor-market-institutions-and-outcomes/

The Economic History of Korea

The Economic History of Korea

Myung Soo Cha, Yeungnam University

Three Periods

Two regime shifts divide the economic history of Korea during the past six centuries into three distinct periods: 1) the period of Malthusian stagnation up to 1910, when Japan annexed Korea; 2) the colonial period from 1910-45, when the country embarked upon modern economic growth; and 3) the post colonial decades, when living standards improved rapidly in South Korea, while North Korea returned to the world of disease and starvation. The dramatic history of living standards in Korea presents one of the most convincing pieces of evidence to show that institutions — particularly the government — matter for economic growth.

Dynastic Degeneration

The founders of the Chosôn dynasty (1392-1910) imposed a tribute system on a little-commercialized peasant economy, collecting taxes in the form of a wide variety of products and mobilizing labor to obtain the handicrafts and services it needed. From the late sixteenth to the early seventeenth century, invading armies from Japan and China shattered the command system and forced a transition to a market economy. The damaged bureaucracy started to receive taxes in money commodities — rice and cotton textiles — and eventually began to mint copper coins and lifted restrictions on trade. The wars also dealt a serious blow to slavery and the pre-war system of forced labor, allowing labor markets to emerge.

Markets were slow to develop: grain markets in agricultural regions of Korea appeared less integrated than those in comparable parts of China and Japan. Population and acreage, however, recovered quickly from the adverse impact of the wars. Population growth came to a halt around 1800, and a century of demographic stagnation followed due to a higher level of mortality. During the nineteenth century, living standards appeared to deteriorate. Both wages and rents fell, tax receipts shrank, and budget deficits expanded, forcing the government to resort to debasement. Peasant rebellions occurred more frequently, and poor peasants left Korea for northern China.

Given that both acreage and population remained stable during the nineteenth century, the worsening living standards imply that the aggregate output contracted, because land and labor were being used in an ever more inefficient way. The decline in efficiency appeared to have much to do with disintegrating system of water control, which included flood control and irrigation.

The water control problem had institutional roots, as in Q’ing China. Population growth caused rapid deforestation, as peasants were able to readily obtain farmlands by burning off forests, where property rights usually remained ill-defined. (This contrasts with Tokugawa Japan, where conflicts and litigation following competitive exploitation of forests led to forest regulation.) While the deforestation wrought havoc on reservoirs by increasing the incidence and intensity of flooding, private individuals had little incentives to repair the damages, as they expected others to free-ride on the benefits of their efforts. Keeping the system of water control in good condition required public initiatives, which the dynastic government could not undertake. During the nineteenth century, powerful landowning families took turns controlling minor or ailing kings, reducing the state to an instrument serving private interests. Failing to take measures to maintain irrigation, provincial officials accelerated its decay by taking bribes in return for conniving at the practice of farming on the rich soil alongside reservoirs. Peasants responded to the decaying irrigation by developing new rice seed varieties, which could better resist droughts but yielded less. They also tried to counter the increasingly unstable water supply by building waterways linking farmlands with rivers, which frequently met opposition from people farming further downstream. Not only did provincial administrators fail to settle the water disputes, but also some of them became central causes of clashes. In 1894 peasants protested against a local administrator’s attempts to generate private income by collecting fees for using waterways, which had been built by peasants. The uprising quickly developed into a nationwide peasant rebellion, which the crumbling government could suppress only by calling in military forces from China and Japan. An unforeseen consequence of the rebellion was the Sino-Japanese war fought on the Korean soil, where Japan defeated China, tipping the balance of power in Korea critically in her favor.

The water control problem affected primarily rice farming productivity: during the nineteenth century paddy land prices (as measured by the amount of rice) fell, while dry farm prices (as measured by the amount of dry farm products) rose. Peasants and landlords converted paddy lands into dry farms during the nineteenth century, and there occurred an exodus of workers out of agriculture into handicraft and commerce. Despite the proto-industrialization, late dynastic Korea remained less urbanized than Q’ing China, not to mention Tokugawa Japan. Seasonal fluctuations in rice prices in the main agricultural regions of Korea were far wider than those observed in Japan during the nineteenth century, implying a significantly higher interest rate, a lower level of capital per person, and therefore lower living standards for Korea. In the mid-nineteenth century paddy land productivity in Korea was about half of that in Japan.

Colonial Transition to Modern Economic Growth

Less than two decades after having been opened by Commodore Perry, Japan first made its ambitions about Korea known by forcing the country open to trade in 1876. Defeating Russia in the war of 1905, Japan virtually annexed Korea, which was made official five years later. What replaced the feeble and predatory bureaucracy of the ChosǑn dynasty was a developmental state. Drawing on the Meiji government’s experience, the colonial state introduced a set of expensive policy measures to modernize Korea. One important project was to improve infrastructure: railway lines were extended, and roads and harbors and communication networks were improved, which rapidly integrated goods and factor markets both nationally and internationally. Another project was a vigorous health campaign: the colonial government improved public hygiene, introduced modern medicine, and built hospitals, significantly accelerating the mortality decline set in motion around 1890, apparently by the introduction of the smallpox vaccination. The mortality transition resulted in a population expanding 1.4% per year during the colonial period. The third project was to revamp education. As modern teaching institutions quickly replaced traditional schools teaching Chinese classics, primary school enrollment ration rose from 1 percent in 1910 to 47 percent in 1943. Finally, the cadastral survey (1910-18) modernized and legalized property rights to land, which boosted not only the efficiency in land use, but also tax revenue from landowners. These modernization efforts generated sizable public deficits, which the colonial government could finance partly by floating bonds in Japan and partly by unilateral transfers from the Japanese government.

The colonial government implemented industrial policy as well. The Rice Production Development Program (1920-1933), a policy response to the Rice Riots in Japan in 1918, was aimed at increasing rice supply within the Japanese empire. In colonial Korea, the program placed particular emphasis upon reversing the decay in water control. The colonial government provided subsidies for irrigation projects, and set up institutions to lower information, negotiation, and enforcement costs in building new waterways and reservoirs. Improved irrigation made it possible for peasants to grow high yielding rice seed varieties. Completion of a chemical fertilizer factory in 1927 increased the use of fertilizer, further boosting the yields from the new type of rice seeds. Rice prices fell rapidly in the late 1920s and early 1930s in the wake of the world agricultural depression, leading to the suspension of the program in 1933.

Despite the Rice Program, the structure of the colonial economy has been shifting away from agriculture towards manufacturing ever since the beginning of the colonial rule at a consistent pace. From 1911-40 the share of manufacturing in GDP increased from 6 percent to 28 percent, and the share of agriculture fell from 76 percent to 41 percent. Major causes of the structural change included diffusion of modern manufacturing technology, the world agricultural depression shifting the terms of trade in favor of manufacturing, and Japan’s early recovery from the Great Depression generating an investment boom in the colony. Also Korea’s cheap labor and natural resources and the introduction of controls on output and investment in Japan to mitigate the impact of the Depression helped attract direct investment in the colony. Finally, subjugating party politicians and pushing Japan into the Second World War with the invasion of China in 1937, the Japanese military began to develop northern parts of Korea peninsula as an industrial base producing munitions.

The institutional modernization, technological diffusion, and the inflow of Japanese capital put an end to the Malthusian degeneration and pushed Korea onto the path of modern economic growth. Both rents and wages stopped falling and started to rise from the early twentieth century. As the population explosion made labor increasingly abundant vis-a-vis land, rents increased more rapidly than wages, suggesting that income distribution became less equal during the colonial period. Per capita output rose faster than one percent per year from 1911-38.

Per capita grain consumption declined during the colonial period, providing grounds for traditional criticism of the Japanese colonialism exploiting Korea. However, per capita real consumption increased, due to rising non-grain and non-good consumption, and Koreans were also getting better education and living longer. In the late 1920s, life expectancy at birth was 37 years, an estimate several years longer than in China and almost ten years shorter than in Japan. Life expectancy increased to 43 years at the end of the colonial period. Male mean stature was slightly higher than 160 centimeters at the end of the 1920s, a number not significantly different from the Chinese or Japanese height, and appeared to become shorter during the latter half of the colonial period.

South Korean Prosperity

With the end of the Second World War in 1945, two separate regimes emerged on the Korean peninsula to replace the colonial government. The U.S. military government took over the southern half, while communist Russia set up a Korean leadership in the northern half. The de-colonization and political division meant sudden disruption of trade both with Japan and within Korea, causing serious economic turmoil. Dealing with the post-colonial chaos with economic aid, the U.S. military government privatized properties previously owned by the Japanese government and civilians. The first South Korean government, established in 1948, carried out a land reform, making land distribution more egalitarian. Then the Korean War broke out in 1950, killing one and half million people and destroying about a quarter of capital stock during its three year duration.

After the war, South Korean policymakers set upon stimulating economic growth by promoting indigenous industrial firms, following the example of many other post-World War II developing countries. The government selected firms in targeted industries and gave them privileges to buy foreign currencies and to borrow funds from banks at preferential rates. It also erected tariff barriers and imposed a prohibition on manufacturing imports, hoping that the protection would give domestic firms a chance to improve productivity through learning-by-doing and importing advanced technologies. Under the policy, known as import-substitution industrialization (ISI), entrepreneurs seemed more interested in maximizing and perpetuating favors by bribing bureaucrats and politicians, however. This behavior, dubbed as directly unproductive profit-seeking activities (DUP), caused efficiency to falter and living standards to stagnate, providing a background to the collapse of the First Republic in April 1960.

The military coup led by General Park Chung Hee overthrew the short-lived Second Republic in May 1961, making a shift to a strategy of stimulating growth through export promotion (EP hereafter), although ISI was not altogether abandoned. Under EP, policymakers gave various types of favors — low interest loans being the most important — to exporting firms according to their export performance. As the qualification for the special treatment was quantifiable and objective, the room for DUP became significantly smaller. Another advantage of EP over ISI was that it accelerated productivity advances by placing firms under the discipline of export markets and by widening the contact with the developed world: efficiency growth was significantly faster in export industries than in the rest of the economy. In the decade following the shift to EP, per capita output doubled, and South Korea became an industrialized country: from 1960/62 to 1973/75 the share of agriculture in GDP fell from 45 percent to 25 percent, while the share of manufacturing rose from 9 percent to 27 percent. One important factor contributing to the achievement was that the authoritarian government could enjoy relative independence from and avoid capture by special interests.

The withdrawal of U.S. troops from Vietnam in the early 1970s and the subsequent conquest of the region by the communist regime alarmed the South Korean leadership, which has been coping with the threat of North Korea with the help of the U.S. military presence. Park Chung Hee’s reaction was to reduce the level of reliance on the U.S. armed support by expanding capability to produce munitions, which required returning to ISI to build heavy and chemical industries (HCI). The government intervened heavily in the financial markets, directing banks to provide low interest loans to chaebols — conglomerates of businesses owned by a single family — selected for the task of developing different sectors of HCI. Successfully expanding the capital-intensive industries more rapidly than the rest of the economy, the HCI drive generated multiple symptoms of distortion, including rapidly slowing growth, worsening inflation and accumulation of non-performing loans.

Again the ISI ended with a regime shift, triggered by Park Chung Hee’s assassination in 1979. In the 1980s, the succeeding leadership made systematic attempts to sort out the unwelcome legacy of the HCI drive by de-regulating trade and financial sectors. In the 1990s, liberalization of capital account followed, causing rapid accumulation of short-term external debts. This, together with a highly leveraged corporate sector and the banking sector destabilized by the financial repression, provided the background to the contagion of financial crisis from Southeast Asia in 1997. The crisis provided a strong momentum for corporate and financial sector reform.

In the quarter century following the policy shift in the early 1960s, the South Korean per capita output grew at an unusually rapid rate of 7 percent per year, a growth performance paralleled only by Taiwan and two city-states, Hong Kong and Singapore. The portion of South Koreans enjoying the benefits of the growth increased more rapidly from the end of 1970s, when the rising trend in the Gini coefficient (which measures the inequality of income distribution) since the colonial period was reversed. The growth was attributable far more to increased use of productive inputs — physical capital in particular — than to productivity advances. The rapid capital accumulation was driven by an increasingly high savings rate due to a falling dependency ratio, a lagged outcome of rapidly falling mortality during the colonial period. The high growth was also aided by accumulation of human capital, which started with the introduction of modern education under the Japanese rule. Finally, the South Korean developmental state, as symbolized by Park Chung Hee, a former officer of the Japanese Imperial army serving in wartime Manchuria, was closely modeled upon the colonial system of government. In short, South Korea grew on the shoulders of the colonial achievement, rather than emerging out of the ashes left by the Korean War, as is sometimes asserted.

North Korean Starvation

Neither did the North Korean economy emerge out of a void. Founders of the regime took over the system of command set up by the Japanese rulers to invade China. They also benefited from the colonial industrialization concentrated in the north, which had raised the standard of living in the north above that in the south at the end of the colonial rule. While the economic advantage led the North Korean leadership to feel confident enough to invade the South in 1950, it could not sustain the lead: North Korea started to lag behind the fast growing South from the late 1960s, and then suffered a tragic decline in living standards in the 1990s.

After the conclusion of the Korean War, the North Korean power elites adopted a strategy of driving growth through forced saving, which went quickly to the wall for several reasons. First, managers and workers in collective farms and state enterprises had little incentive to improve productivity to counter the falling marginal productivity of capital. Second, the country’s self-imposed isolation made it difficult for it to benefit from the advanced technologies of the developed world through trade and foreign investment. Finally, the despotic and militaristic rule diverted resources to unproductive purposes and disturbed the consistency of planning.

The economic stalemate forced the ruling elites to experiment with the introduction of material incentives and independent accounting of state enterprises. However, they could not push the institutional reform far enough, for fear that it might destabilize their totalitarian rule. Efforts were also made to attract foreign capital, which ended in failure too. Having spent the funds lent by western banks in the early 1970s largely for military purposes, North Korea defaulted on the loans. Laws introduced in the 1980s to draw foreign direct investment had little effect.

The collapse of centrally planned economies in the late 1980s virtually ended energy and capital goods imports at subsidized prices, dealing a serious blow to the wobbly regime. Desperate efforts to resolve chronic food shortages by expanding acreage through deforestation made the country vulnerable to climatic shocks in the 1990s. The end result was a disastrous subsistence crisis, to which the militarist regime responded by extorting concessions from the rest of the world through brinkmanship diplomacy.

Further Reading

Amsden, Alice. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press, 1989.

Ban, Sung Hwan. “Agricultural Growth in Korea.” In Agricultural Growth in Japan, Taiwan, Korea, and the Philippines, edited by Yujiro Hayami, Vernon W. Ruttan, and Herman M. Southworth, 96-116. Honolulu: University Press of Hawaii, 1979.

Cha, Myung Soo. “Imperial Policy or World Price Shocks? Explaining Interwar Korean Consumption Trend.” Journal of Economic History 58, no. 3 (1998): 731-754.

Cha, Myung Soo. “The Colonial Origins of Korea’s Market Economy.” In Asia-Pacific Dynamism, 1550-2000, edited by A.J.H. Latham and H. Kawakatsu, 86-103. London: Routledge, 2000.

Cha, Myung Soo. “Facts and Myths about Korea’s Economic Past.” Forthcoming in Australian Review of Economic History 44 (2004).

Cole, David C. and Yung Chul Park. Financial Development in Korea, 1945-1978. Cambridge: Harvard University Press, 1983.

Dollar, David and Kenneth Sokoloff. “Patterns of Productivity Growth in South Korean Manufacturing Industries, 1963-1979.” Journal of Development Economics 33, no. 2 (1990): 390-27.

Eckert, Carter J. Offspring of Empire: The Koch’ang Kims and the Colonial Origins of Korean Capitalism, 1876-1945. Seattle: Washington University Press, 1991.

Gill, Insong. “Stature, Consumption, and the Standard of Living in Colonial Korea.” In The Biological Standard of Living in Comparative Perspective, edited by John Komlos and Joerg Baten, 122-138. Stuttgart: Franz Steiner Verlag, 1998.

Gragert, Edwin H. Landownership under Colonial Rule: Korea’s Japanese Experience, 1900-1935. Honolulu: University Press of Hawaii, 1994.

Haggard, Stephan. The Political Economy of the Asian Financial Crisis. Washington: Institute of International Economics, 2000.

Haggard, Stephan, D. Kang and C. Moon. “Japanese Colonialism and Korean Development: A Critique.” World Development 25 (1997): 867-81.

Haggard, Stephan, Byung-kook Kim and Chung-in Moon. “The Transition to Export-led Growth in South Korea: 1954-1966.” Journal of Asian Studies 50, no. 4 (1991): 850-73.

Kang, Kenneth H. “Why Did Koreans Save So Little and Why Do They Now Save So Much?” International Economic Journal 8 (1994): 99-111.

Kang, Kenneth H, and Vijaya Ramachandran. “Economic Transformation in Korea: Rapid Growth without an Agricultural Revolution?” Economic Development and Cultural Change 47, no. 4 (1999): 783-801.

Kim, Kwang Suk and Michael Roemer. Growth and Structural Transformation. Cambridge, MA: Harvard University Press, 1979.

Kimura, Mitsuhiko. “From Fascism to Communism: Continuity and Development of Collectivist Economic Policy in North Korea.” Economic History Review 52, no.1 (1999): 69-86.

Kimura, Mitsuhiko. “Standards of Living in Colonial Korea: Did the Masses Become Worse Off or Better Off under Japanese Rule?” Journal of Economic History 53, no. 3 (1993): 629-652.

Kohli, Atul. “Where Do High Growth Political Economies Come From? The Japanese Lineage of Korea’s ‘Developmental State’.” World Development 9: 1269-93.

Krueger, Anne. The Developmental Role of the Foreign Sector and Aid. Cambridge: Harvard University Press, 1982.

Kwon, Tai Hwan. Demography of Korea: Population Change and Its Components, 1925-66. Seoul: Seoul National University Press, 1977.

Noland, Marcus. Avoiding the Apocalypse: The Future of the Two Koreas. Washington: Institute for International Economics, 2000.

Palais, James B. Politics and Policy in Traditional Korea. Cambridge: Harvard University Press, 1975.

Stern, Joseph J, Ji-hong Kim, Dwight H. Perkins and Jung-ho Yoo, editors. Industrialization and the State: The Korean Heavy and Chemical Industry Drive. Cambridge: Harvard University Press, 1995.

Woo, Jung-en. Race to the Swift: State and Finance in Korean Industrialization. New York: Columbia University Press, 1991.

Young, Alwyn. “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience.” Quarterly Journal of Economics 110, no. 3 (1995): 641-80.

Citation: Cha, Myung. “The Economic History of Korea”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-korea/

Japanese Industrialization and Economic Growth

Carl Mosk, University of Victoria

Japan achieved sustained growth in per capita income between the 1880s and 1970 through industrialization. Moving along an income growth trajectory through expansion of manufacturing is hardly unique. Indeed Western Europe, Canada, Australia and the United States all attained high levels of income per capita by shifting from agrarian-based production to manufacturing and technologically sophisticated service sector activity.

Still, there are four distinctive features of Japan’s development through industrialization that merit discussion:

The proto-industrial base

Japan’s agricultural productivity was high enough to sustain substantial craft (proto-industrial) production in both rural and urban areas of the country prior to industrialization.

Investment-led growth

Domestic investment in industry and infrastructure was the driving force behind growth in Japanese output. Both private and public sectors invested in infrastructure, national and local governments serving as coordinating agents for infrastructure build-up.

  • Investment in manufacturing capacity was largely left to the private sector.
  • Rising domestic savings made increasing capital accumulation possible.
  • Japanese growth was investment-led, not export-led.

Total factor productivity growth — achieving more output per unit of input — was rapid.

On the supply side, total factor productivity growth was extremely important. Scale economies — the reduction in per unit costs due to increased levels of output — contributed to total factor productivity growth. Scale economies existed due to geographic concentration, to growth of the national economy, and to growth in the output of individual companies. In addition, companies moved down the “learning curve,” reducing unit costs as their cumulative output rose and demand for their product soared.

The social capacity for importing and adapting foreign technology improved and this contributed to total factor productivity growth:

  • At the household level, investing in education of children improved social capability.
  • At the firm level, creating internalized labor markets that bound firms to workers and workers to firms, thereby giving workers a strong incentive to flexibly adapt to new technology, improved social capability.
  • At the government level, industrial policy that reduced the cost to private firms of securing foreign technology enhanced social capacity.

Shifting out of low-productivity agriculture into high productivity manufacturing, mining, and construction contributed to total factor productivity growth.

Dualism

Sharply segmented labor and capital markets emerged in Japan after the 1910s. The capital intensive sector enjoying high ratios of capital to labor paid relatively high wages, and the labor intensive sector paid relatively low wages.

Dualism contributed to income inequality and therefore to domestic social unrest. After 1945 a series of public policy reforms addressed inequality and erased much of the social bitterness around dualism that ravaged Japan prior to World War II.

The remainder of this article will expand on a number of the themes mentioned above. The appendix reviews quantitative evidence concerning these points. The conclusion of the article lists references that provide a wealth of detailed evidence supporting the points above, which this article can only begin to explore.

The Legacy of Autarky and the Proto-Industrial Economy: Achievements of Tokugawa Japan (1600-1868)

Why Japan?

Given the relatively poor record of countries outside the European cultural area — few achieving the kind of “catch-up” growth Japan managed between 1880 and 1970 – the question naturally arises: why Japan? After all, when the United States forcibly “opened Japan” in the 1850s and Japan was forced to cede extra-territorial rights to a number of Western nations as had China earlier in the 1840s, many Westerners and Japanese alike thought Japan’s prospects seemed dim indeed.

Tokugawa achievements: urbanization, road networks, rice cultivation, craft production

In answering this question, Mosk (2001), Minami (1994) and Ohkawa and Rosovsky (1973) emphasize the achievements of Tokugawa Japan (1600-1868) during a long period of “closed country” autarky between the mid-seventeenth century and the 1850s: a high level of urbanization; well developed road networks; the channeling of river water flow with embankments and the extensive elaboration of irrigation ditches that supported and encouraged the refinement of rice cultivation based upon improving seed varieties, fertilizers and planting methods especially in the Southwest with its relatively long growing season; the development of proto-industrial (craft) production by merchant houses in the major cities like Osaka and Edo (now called Tokyo) and its diffusion to rural areas after 1700; and the promotion of education and population control among both the military elite (the samurai) and the well-to-do peasantry in the eighteenth and early nineteenth centuries.

Tokugawa political economy: daimyo and shogun

These developments were inseparable from the political economy of Japan. The system of confederation government introduced at the end of the fifteenth century placed certain powers in the hands of feudal warlords, daimyo, and certain powers in the hands of the shogun, the most powerful of the warlords. Each daimyo — and the shogun — was assigned a geographic region, a domain, being given taxation authority over the peasants residing in the villages of the domain. Intercourse with foreign powers was monopolized by the shogun, thereby preventing daimyo from cementing alliances with other countries in an effort to overthrow the central government. The samurai military retainers of the daimyo were forced to abandon rice farming and reside in the castle town headquarters of their daimyo overlord. In exchange, samurai received rice stipends from the rice taxes collected from the villages of their domain. By removing samurai from the countryside — by demilitarizing rural areas — conflicts over local water rights were largely made a thing of the past. As a result irrigation ditches were extended throughout the valleys, and riverbanks were shored up with stone embankments, facilitating transport and preventing flooding.

The sustained growth of proto-industrialization in urban Japan, and its widespread diffusion to villages after 1700 was also inseparable from the productivity growth in paddy rice production and the growing of industrial crops like tea, fruit, mulberry plant growing (that sustained the raising of silk cocoons) and cotton. Indeed, Smith (1988) has given pride of place to these “domestic sources” of Japan’s future industrial success.

Readiness to emulate the West

As a result of these domestic advances, Japan was well positioned to take up the Western challenge. It harnessed its infrastructure, its high level of literacy, and its proto-industrial distribution networks to the task of emulating Western organizational forms and Western techniques in energy production, first and foremost enlisting inorganic energy sources like coal and the other fossil fuels to generate steam power. Having intensively developed the organic economy depending upon natural energy flows like wind, water and fire, Japanese were quite prepared to master inorganic production after the Black Ships of the Americans forced Japan to jettison its long-standing autarky.

From Balanced to Dualistic Growth, 1887-1938: Infrastructure and Manufacturing Expand

Fukoku Kyohei

After the Tokugawa government collapsed in 1868, a new Meiji government committed to the twin policies of fukoku kyohei (wealthy country/strong military) took up the challenge of renegotiating its treaties with the Western powers. It created infrastructure that facilitated industrialization. It built a modern navy and army that could keep the Western powers at bay and establish a protective buffer zone in North East Asia that eventually formed the basis for a burgeoning Japanese empire in Asia and the Pacific.

Central government reforms in education, finance and transportation

Jettisoning the confederation style government of the Tokugawa era, the new leaders of the new Meiji government fashioned a unitary state with powerful ministries consolidating authority in the capital, Tokyo. The freshly minted Ministry of Education promoted compulsory primary schooling for the masses and elite university education aimed at deepening engineering and scientific knowledge. The Ministry of Finance created the Bank of Japan in 1882, laying the foundations for a private banking system backed up a lender of last resort. The government began building a steam railroad trunk line girding the four major islands, encouraging private companies to participate in the project. In particular, the national government committed itself to constructing a Tokaido line connecting the Tokyo/Yokohama region to the Osaka/Kobe conurbation along the Pacific coastline of the main island of Honshu, and to creating deepwater harbors at Yokohama and Kobe that could accommodate deep-hulled steamships.

Not surprisingly, the merchants in Osaka, the merchant capital of Tokugawa Japan, already well versed in proto-industrial production, turned to harnessing steam and coal, investing heavily in integrated spinning and weaving steam-driven textile mills during the 1880s.

Diffusion of best-practice agriculture

At the same time, the abolition of the three hundred or so feudal fiefs that were the backbone of confederation style-Tokugawa rule and their consolidation into politically weak prefectures, under a strong national government that virtually monopolized taxation authority, gave a strong push to the diffusion of best practice agricultural technique. The nationwide diffusion of seed varieties developed in the Southwest fiefs of Tokugawa Japan spearheaded a substantial improvement in agricultural productivity especially in the Northeast. Simultaneously, expansion of agriculture using traditional Japanese technology agriculture and manufacturing using imported Western technology resulted.

Balanced growth

Growth at the close of the nineteenth century was balanced in the sense that traditional and modern technology using sectors grew at roughly equal rates, and labor — especially young girls recruited out of farm households to labor in the steam using textile mills — flowed back and forth between rural and urban Japan at wages that were roughly equal in industrial and agricultural pursuits.

Geographic economies of scale in the Tokaido belt

Concentration of industrial production first in Osaka and subsequently throughout the Tokaido belt fostered powerful geographic scale economies (the ability to reduce per unit costs as output levels increase), reducing the costs of securing energy, raw materials and access to global markets for enterprises located in the great harbor metropolises stretching from the massive Osaka/Kobe complex northward to the teeming Tokyo/Yokohama conurbation. Between 1904 and 1911, electrification mainly due to the proliferation of intercity electrical railroads created economies of scale in the nascent industrial belt facing outward onto the Pacific. The consolidation of two huge hydroelectric power grids during the 1920s — one servicing Tokyo/Yokohama, the other Osaka and Kobe — further solidified the comparative advantage of the Tokaido industrial belt in factory production. Finally, the widening and paving during the 1920s of roads that could handle buses and trucks was also pioneered by the great metropolises of the Tokaido, which further bolstered their relative advantage in per capita infrastructure.

Organizational economies of scale — zaibatsu

In addition to geographic scale economies, organizational scale economies also became increasingly important in the late nineteenth centuries. The formation of the zaibatsu (“financial cliques”), which gradually evolved into diversified industrial combines tied together through central holding companies, is a case in point. By the 1910s these had evolved into highly diversified combines, binding together enterprises in banking and insurance, trading companies, mining concerns, textiles, iron and steel plants, and machinery manufactures. By channeling profits from older industries into new lines of activity like electrical machinery manufacturing, the zaibatsu form of organization generated scale economies in finance, trade and manufacturing, drastically reducing information-gathering and transactions costs. By attracting relatively scare managerial and entrepreneurial talent, the zaibatsu format economized on human resources.

Electrification

The push into electrical machinery production during the 1920s had a revolutionary impact on manufacturing. Effective exploitation of steam power required the use of large central steam engines simultaneously driving a large number of machines — power looms and mules in a spinning/weaving plant for instance – throughout a factory. Small enterprises did not mechanize in the steam era. But with electrification the “unit drive” system of mechanization spread. Each machine could be powered up independently of one another. Mechanization spread rapidly to the smallest factory.

Emergence of the dualistic economy

With the drive into heavy industries — chemicals, iron and steel, machinery — the demand for skilled labor that would flexibly respond to rapid changes in technique soared. Large firms in these industries began offering premium wages and guarantees of employment in good times and bad as a way of motivating and holding onto valuable workers. A dualistic economy emerged during the 1910s. Small firms, light industry and agriculture offered relatively low wages. Large enterprises in the heavy industries offered much more favorable remuneration, extending paternalistic benefits like company housing and company welfare programs to their “internal labor markets.” As a result a widening gulf opened up between the great metropolitan centers of the Tokaido and rural Japan. Income per head was far higher in the great industrial centers than in the hinterland.

Clashing urban/rural and landlord/tenant interests

The economic strains of emergent dualism were amplified by the slowing down of technological progress in the agricultural sector, which had exhaustively reaped the benefits due to regional diffusion from the Southwest to the Northeast of best practice Tokugawa rice cultivation. Landlords — around 45% of the cultivable rice paddy land in Japan was held in some form of tenancy at the beginning of the twentieth century — who had played a crucial role in promoting the diffusion of traditional best practice techniques now lost interest in rural affairs and turned their attention to industrial activities. Tenants also found their interests disregarded by the national authorities in Tokyo, who were increasingly focused on supplying cheap foodstuffs to the burgeoning industrial belt by promoting agricultural production within the empire that it was assembling through military victories. Japan secured Taiwan from China in 1895, and formally brought Korea under its imperial rule in 1910 upon the heels of its successful war against Russia in 1904-05. Tenant unions reacted to this callous disrespect of their needs through violence. Landlord/tenant disputes broke out in the early 1920s, and continued to plague Japan politically throughout the 1930s, calls for land reform and bureaucratic proposals for reform being rejected by a Diet (Japan’s legislature) politically dominated by landlords.

Japan’s military expansion

Japan’s thrust to imperial expansion was inflamed by the growing instability of the geopolitical and international trade regime of the later 1920s and early 1930s. The relative decline of the United Kingdom as an economic power doomed a gold standard regime tied to the British pound. The United States was becoming a potential contender to the United Kingdom as the backer of a gold standard regime but its long history of high tariffs and isolationism deterred it from taking over leadership in promoting global trade openness. Germany and the Soviet Union were increasingly becoming industrial and military giants on the Eurasian land mass committed to ideologies hostile to the liberal democracy championed by the United Kingdom and the United States. It was against this international backdrop that Japan began aggressively staking out its claim to being the dominant military power in East Asia and the Pacific, thereby bringing it into conflict with the United States and the United Kingdom in the Asian and Pacific theaters after the world slipped into global warfare in 1939.

Reform and Reconstruction in a New International Economic Order, Japan after World War II

Postwar occupation: economic and institutional restructuring

Surrendering to the United States and its allies in 1945, Japan’s economy and infrastructure was revamped under the S.C.A.P (Supreme Commander of the Allied Powers) Occupation lasting through 1951. As Nakamura (1995) points out, a variety of Occupation-sponsored reforms transformed the institutional environment conditioning economic performance in Japan. The major zaibatsu were liquidated by the Holding Company Liquidation Commission set up under the Occupation (they were revamped as keiretsu corporate groups mainly tied together through cross-shareholding of stock in the aftermath of the Occupation); land reform wiped out landlordism and gave a strong push to agricultural productivity through mechanization of rice cultivation; and collective bargaining, largely illegal under the Peace Preservation Act that was used to suppress union organizing during the interwar period, was given the imprimatur of constitutional legality. Finally, education was opened up, partly through making middle school compulsory, partly through the creation of national universities in each of Japan’s forty-six prefectures.

Improvement in the social capability for economic growth

In short, from a domestic point of view, the social capability for importing and adapting foreign technology was improved with the reforms in education and the fillip to competition given by the dissolution of the zaibatsu. Resolving tension between rural and urban Japan through land reform and the establishment of a rice price support program — that guaranteed farmers incomes comparable to blue collar industrial workers — also contributed to the social capacity to absorb foreign technology by suppressing the political divisions between metropolitan and hinterland Japan that plagued the nation during the interwar years.

Japan and the postwar international order

The revamped international economic order contributed to the social capability of importing and adapting foreign technology. The instability of the 1920s and 1930s was replaced with a relatively predictable bipolar world in which the United States and the Soviet Union opposed each other in both geopolitical and ideological arenas. The United States became an architect of multilateral architecture designed to encourage trade through its sponsorship of the United Nations, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (the predecessor to the World Trade Organization). Under the logic of building military alliances to contain Eurasian Communism, the United States brought Japan under its “nuclear umbrella” with a bilateral security treaty. American companies were encouraged to license technology to Japanese companies in the new international environment. Japan redirected its trade away from the areas that had been incorporated into the Japanese Empire before 1945, and towards the huge and expanding American market.

Miracle Growth: Soaring Domestic Investment and Export Growth, 1953-1970

Its infrastructure revitalized through the Occupation period reforms, its capacity to import and export enhanced by the new international economic order, and its access to American technology bolstered through its security pact with the United States, Japan experienced the dramatic “Miracle Growth” between 1953 and the early 1970s whose sources have been cogently analyzed by Denison and Chung (1976). Especially striking in the Miracle Growth period was the remarkable increase in the rate of domestic fixed capital formation, the rise in the investment proportion being matched by a rising savings rate whose secular increase — especially that of private household savings – has been well documented and analyzed by Horioka (1991). While Japan continued to close the gap in income per capita between itself and the United States after the early 1970s, most scholars believe that large Japanese manufacturing enterprises had by and large become internationally competitive by the early 1970s. In this sense it can be said that Japan had completed its nine decade long convergence to international competitiveness through industrialization by the early 1970s.

MITI

There is little doubt that the social capacity to import and adapt foreign technology was vastly improved in the aftermath of the Pacific War. Creating social consensus with Land Reform and agricultural subsidies reduced political divisiveness, extending compulsory education and breaking up the zaibatsu had a positive impact. Fashioning the Ministry of International Trade and Industry (M.I.T.I.) that took responsibility for overseeing industrial policy is also viewed as facilitating Japan’s social capability. There is no doubt that M.I.T.I. drove down the cost of securing foreign technology. By intervening between Japanese firms and foreign companies, it acted as a single buyer of technology, playing off competing American and European enterprises in order to reduce the royalties Japanese concerns had to pay on technology licenses. By keeping domestic patent periods short, M.I.T.I. encouraged rapid diffusion of technology. And in some cases — the experience of International Business Machines (I.B.M.), enjoying a virtual monopoly in global mainframe computer markets during the 1950s and early 1960s, is a classical case — M.I.T.I. made it a condition of entry into the Japanese market (through the creation of a subsidiary Japan I.B.M. in the case of I.B.M.) that foreign companies share many of their technological secrets with potential Japanese competitors.

How important industrial policy was for Miracle Growth remains controversial, however. The view of Johnson (1982), who hails industrial policy as a pillar of the Japanese Development State (government promoting economic growth through state policies) has been criticized and revised by subsequent scholars. The book by Uriu (1996) is a case in point.

Internal labor markets, just-in-time inventory and quality control circles

Furthering the internalization of labor markets — the premium wages and long-term employment guarantees largely restricted to white collar workers were extended to blue collar workers with the legalization of unions and collective bargaining after 1945 — also raised the social capability of adapting foreign technology. Internalizing labor created a highly flexible labor force in post-1950 Japan. As a result, Japanese workers embraced many of the key ideas of Just-in-Time inventory control and Quality Control circles in assembly industries, learning how to do rapid machine setups as part and parcel of an effort to produce components “just-in-time” and without defect. Ironically, the concepts of just-in-time and quality control were originally developed in the United States, just-in-time methods being pioneered by supermarkets and quality control by efficiency experts like W. Edwards Deming. Yet it was in Japan that these concepts were relentlessly pursued to revolutionize assembly line industries during the 1950s and 1960s.

Ultimate causes of the Japanese economic “miracle”

Miracle Growth was the completion of a protracted historical process involving enhancing human capital, massive accumulation of physical capital including infrastructure and private manufacturing capacity, the importation and adaptation of foreign technology, and the creation of scale economies, which took decades and decades to realize. Dubbed a miracle, it is best seen as the reaping of a bountiful harvest whose seeds were painstakingly planted in the six decades between 1880 and 1938. In the course of the nine decades between the 1880s and 1970, Japan amassed and lost a sprawling empire, reorienting its trade and geopolitical stance through the twists and turns of history. While the ultimate sources of growth can be ferreted out through some form of statistical accounting, the specific way these sources were marshaled in practice is inseparable from the history of Japan itself and of the global environment within which it has realized its industrial destiny.

Appendix: Sources of Growth Accounting and Quantitative Aspects of Japan’s Modern Economic Development

One of the attractions of studying Japan’s post-1880 economic development is the abundance of quantitative data documenting Japan’s growth. Estimates of Japanese income and output by sector, capital stock and labor force extend back to the 1880s, a period when Japanese income per capita was low. Consequently statistical probing of Japan’s long-run growth from relative poverty to abundance is possible.

The remainder of this appendix is devoted to introducing the reader to the vast literature on quantitative analysis of Japan’s economic development from the 1880s until 1970, a nine decade period during which Japanese income per capita converged towards income per capita levels in Western Europe. As the reader will see, this discussion confirms the importance of factors discussed at the outset of this article.

Our initial touchstone is the excellent “sources of growth” accounting analysis carried out by Denison and Chung (1976) on Japan’s growth between 1953 and 1971. Attributing growth in national income in growth of inputs, the factors of production — capital and labor — and growth in output per unit of the two inputs combined (total factor productivity) along the following lines:

G(Y) = { a G(K) + [1-a] G(L) } + G (A)

where G(Y) is the (annual) growth of national output, g(K) is the growth rate of capital services, G(L) is the growth rate of labor services, a is capital’s share in national income (the share of income accruing to owners of capital), and G(A) is the growth of total factor productivity, is a standard approach used to approximate the sources of growth of income.

Using a variant of this type of decomposition that takes into account improvements in the quality of capital and labor, estimates of scale economies and adjustments for structural change (shifting labor out of agriculture helps explain why total factor productivity grows), Denison and Chung (1976) generate a useful set of estimates for Japan’s Miracle Growth era.

Operating with this “sources of growth” approach and proceeding under a variety of plausible assumptions, Denison and Chung (1976) estimate that of Japan’s average annual real national income growth of 8.77 % over 1953-71, input growth accounted for 3.95% (accounting for 45% of total growth) and growth in output per unit of input contributed 4.82% (accounting for 55% of total growth). To be sure, the precise assumptions and techniques they use can be criticized. The precise numerical results they arrive at can be argued over. Still, their general point — that Japan’s growth was the result of improvements in the quality of factor inputs — health and education for workers, for instance — and improvements in the way these inputs are utilized in production — due to technological and organizational change, reallocation of resources from agriculture to non-agriculture, and scale economies, is defensible.

With this in mind consider Table 1.

Table 1: Industrialization and Economic Growth in Japan, 1880-1970:
Selected Quantitative Characteristics

Panel A: Income and Structure of National Output

Real Income per Capita [a] Share of National Output (of Net Domestic Product) and Relative Labor Productivity (Ratio of Output per Worker in Agriculture to Output per Worker in the N Sector) [b]
Years Absolute Relative to U.S. level Year Agriculture Manufacturing & Mining

(Ma)

Manufacturing,

Construction & Facilitating Sectors [b]

Relative Labor Productivity

A/N

1881-90 893 26.7% 1887 42.5% 13.6% 20.0% 68.3
1891-1900 1,049 28.5 1904 37.8 17.4 25.8 44.3
1900-10 1,195 25.3 1911 35.5 20.3 31.1 37.6
1911-20 1,479 27.9 1919 29.9 26.2 38.3 32.5
1921-30 1,812 29.1 1930 20.0 25.8 43.3 27.4
1930-38 2,197 37.7 1938 18.5 35.3 51.7 20.8
1951-60 2,842 26.2 1953 22.0 26.3 39.7 22.6
1961-70 6,434 47.3 1969 8.7 30.5 45.9 19.1

Panel B: Domestic and External Sources of Aggregate Supply and Demand Growth: Manufacturing and Mining (Ma), Gross Domestic Fixed Capital Formation (GDFCF), and Trade (TR)

Percentage Contribution to Growth due to: Trade Openness and Trade Growth [c]
Years Ma to Output Growth GDFCF to Effective

Demand Growth

Years Openness Growth in Trade
1888-1900 19.3% 17.9% 1885-89 6.9% 11.4%
1900-10 29.2 30.5 1890-1913 16.4 8.0
1910-20 26.5 27.9 1919-29 32.4 4.6
1920-30 42.4 7.5 1930-38 43.3 8.1
1930-38 50.5 45.3 1954-59 19.3 12.0
1955-60 28.1 35.0 1960-69 18.5 10.3
1960-70 33.5 38.5

Panel C: Infrastructure and Human Development

Human Development Index (HDI) [d] Electricity Generation and National Broadcasting (NHK) per 100 Persons [e]
Year Educational Attainment Infant Mortality Rate (IMR) Overall HDI

Index

Year Electricity NHK Radio Subscribers
1900 0.57 155 0.57 1914 0.28 n.a.
1910 0.69 161 0.61 1920 0.68 n.a.
1920 0.71 166 0.64 1930 2.46 1.2
1930 0.73 124 0.65 1938 4.51 7.8
1950 0.81 63 0.69 1950 5.54 11.0
1960 0.87 34 0.75 1960 12.28 12.6
1970 0.95 14 0.83 1970 34.46 21.9

Notes: [a] Maddison (2000) provides estimates of real income that take into account the purchasing power of national currencies.

[b] Ohkawa (1979) gives estimates for the “N” sector that is defined as manufacturing and mining (Ma) plus construction plus facilitating industry (transport, communications and utilities). It should be noted that the concept of an “N” sector is not standard in the field of economics.

[c] The estimates of trade are obtained by adding merchandise imports to merchandise exports. Trade openness is estimated by taking the ratio of total (merchandise) trade to national output, the latter defined as Gross Domestic Product (G.D.P.). The trade figures include trade with Japan’s empire (Korea, Taiwan, Manchuria, etc.); the income figures for Japan exclude income generated in the empire.

[d] The Human Development Index is a composite variable formed by adding together indices for educational attainment, for health (using life expectancy that is inversely related to the level of the infant mortality rate, the IMR), and for real per capita income. For a detailed discussion of this index see United Nations Development Programme (2000).

[e] Electrical generation is measured in million kilowatts generated and supplied. For 1970, the figures on NHK subscribers are for television subscribers. The symbol n.a. = not available.

Sources: The figures in this table are taken from various pages and tables in Japan Statistical Association (1987), Maddison (2000), Minami (1994), and Ohkawa (1979).

Flowing from this table are a number of points that bear lessons of the Denison and Chung (1976) decomposition. One cluster of points bears upon the timing of Japan’s income per capita growth and the relationship of manufacturing expansion to income growth. Another highlights improvements in the quality of the labor input. Yet another points to the overriding importance of domestic investment in manufacturing and the lesser significance of trade demand. A fourth group suggests that infrastructure has been important to economic growth and industrial expansion in Japan, as exemplified by the figures on electricity generating capacity and the mass diffusion of communications in the form of radio and television broadcasting.

Several parts of Table 1 point to industrialization, defined as an increase in the proportion of output (and labor force) attributable to manufacturing and mining, as the driving force in explaining Japan’s income per capita growth. Notable in Panels A and B of the table is that the gap between Japanese and American income per capita closed most decisively during the 1910s, the 1930s, and the 1960s, precisely the periods when manufacturing expansion was the most vigorous.

Equally noteworthy of the spurts of the 1910s, 1930s and the 1960s is the overriding importance of gross domestic fixed capital formation, that is investment, for growth in demand. By contrast, trade seems much less important to growth in demand during these critical decades, a point emphasized by both Minami (1994) and by Ohkawa and Rosovsky (1973). The notion that Japanese growth was “export led” during the nine decades between 1880 and 1970 when Japan caught up technologically with the leading Western nations is not defensible. Rather, domestic capital investment seems to be the driving force behind aggregate demand expansion. The periods of especially intense capital formation were also the periods when manufacturing production soared. Capital formation in manufacturing, or in infrastructure supporting manufacturing expansion, is the main agent pushing long-run income per capita growth.

Why? As Ohkawa and Rosovsky (1973) argue, spurts in manufacturing capital formation were associated with the import and adaptation of foreign technology, especially from the United States These investment spurts were also associated with shifts of labor force out of agriculture and into manufacturing, construction and facilitating sectors where labor productivity was far higher than it was in labor-intensive farming centered around labor-intensive rice cultivation. The logic of productivity gain due to more efficient allocation of labor resources is apparent from the right hand column of Panel A in Table 1.

Finally, Panel C of Table 1 suggests that infrastructure investment that facilitated health and educational attainment (combined public and private expenditure on sanitation, schools and research laboratories), and public/private investment in physical infrastructure including dams and hydroelectric power grids helped fuel the expansion of manufacturing by improving human capital and by reducing the costs of transportation, communications and energy supply faced by private factories. Mosk (2001) argues that investments in human-capital-enhancing (medicine, public health and education), financial (banking) and physical infrastructure (harbors, roads, power grids, railroads and communications) laid the groundwork for industrial expansions. Indeed, the “social capability for importing and adapting foreign technology” emphasized by Ohkawa and Rosovsky (1973) can be largely explained by an infrastructure-driven growth hypothesis like that given by Mosk (2001).

In sum, Denison and Chung (1976) argue that a combination of input factor improvement and growth in output per combined factor inputs account for Japan’s most rapid spurt of economic growth. Table 1 suggests that labor quality improved because health was enhanced and educational attainment increased; that investment in manufacturing was important not only because it increased capital stock itself but also because it reduced dependence on agriculture and went hand in glove with improvements in knowledge; and that the social capacity to absorb and adapt Western technology that fueled improvements in knowledge was associated with infrastructure investment.

References

Denison, Edward and William Chung. “Economic Growth and Its Sources.” In Asia’s Next Giant: How the Japanese Economy Works, edited by Hugh Patrick and Henry Rosovsky, 63-151. Washington, DC: Brookings Institution, 1976.

Horioka, Charles Y. “Future Trends in Japan’s Savings Rate and the Implications Thereof for Japan’s External Imbalance.” Japan and the World Economy 3 (1991): 307-330.

Japan Statistical Association. Historical Statistics of Japan [Five Volumes]. Tokyo: Japan Statistical Association, 1987.

Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford: Stanford University Press, 1982.

Maddison, Angus. Monitoring the World Economy, 1820-1992. Paris: Organization for Economic Co-operation and Development, 2000.

Minami, Ryoshin. Economic Development of Japan: A Quantitative Study. [Second edition]. Houndmills, Basingstoke, Hampshire: Macmillan Press, 1994.

Mitchell, Brian. International Historical Statistics: Africa and Asia. New York: New York University Press, 1982.

Mosk, Carl. Japanese Industrial History: Technology, Urbanization, and Economic Growth. Armonk, New York: M.E. Sharpe, 2001.

Nakamura, Takafusa. The Postwar Japanese Economy: Its Development and Structure, 1937-1994. Tokyo: University of Tokyo Press, 1995.

Ohkawa, Kazushi. “Production Structure.” In Patterns of Japanese Economic Development: A Quantitative Appraisal, edited by Kazushi Ohkawa and Miyohei Shinohara with Larry Meissner, 34-58. New Haven: Yale University Press, 1979.

Ohkawa, Kazushi and Henry Rosovsky. Japanese Economic Growth: Trend Acceleration in the Twentieth Century. Stanford, CA: Stanford University Press, 1973.

Smith, Thomas. Native Sources of Japanese Industrialization, 1750-1920. Berkeley: University of California Press, 1988.

Uriu, Robert. Troubled Industries: Confronting Economic Challenge in Japan. Ithaca: Cornell University Press, 1996.

United Nations Development Programme. Human Development Report, 2000. New York: Oxford University Press, 2000.

Citation: Mosk, Carl. “Japan, Industrialization and Economic Growth”. EH.Net Encyclopedia, edited by Robert Whaples. January 18, 2004. URL http://eh.net/encyclopedia/japanese-industrialization-and-economic-growth/

The Economic History of Indonesia

Jeroen Touwen, Leiden University, Netherlands

Introduction

In recent decades, Indonesia has been viewed as one of Southeast Asia’s successful highly performing and newly industrializing economies, following the trail of the Asian tigers (Hong Kong, Singapore, South Korea, and Taiwan) (see Table 1). Although Indonesia’s economy grew with impressive speed during the 1980s and 1990s, it experienced considerable trouble after the financial crisis of 1997, which led to significant political reforms. Today Indonesia’s economy is recovering but it is difficult to say when all its problems will be solved. Even though Indonesia can still be considered part of the developing world, it has a rich and versatile past, in the economic as well as the cultural and political sense.

Basic Facts

Indonesia is situated in Southeastern Asia and consists of a large archipelago between the Indian Ocean and the Pacific Ocean, with more than 13.000 islands. The largest islands are Java, Kalimantan (the southern part of the island Borneo), Sumatra, Sulawesi, and Papua (formerly Irian Jaya, which is the western part of New Guinea). Indonesia’s total land area measures 1.9 million square kilometers (750,000 square miles). This is three times the area of Texas, almost eight times the area of the United Kingdom and roughly fifty times the area of the Netherlands. Indonesia has a tropical climate, but since there are large stretches of lowland and numerous mountainous areas, the climate varies from hot and humid to more moderate in the highlands. Apart from fertile land suitable for agriculture, Indonesia is rich in a range of natural resources, varying from petroleum, natural gas, and coal, to metals such as tin, bauxite, nickel, copper, gold, and silver. The size of Indonesia’s population is about 230 million (2002), of which the largest share (roughly 60%) live in Java.

Table 1

Indonesia’s Gross Domestic Product per Capita

Compared with Several Other Asian Countries (in 1990 dollars)

Indonesia Philippines Thailand Japan
1900 745 1 033 812 1 180
1913 904 1 066 835 1 385
1950 840 1 070 817 1 926
1973 1 504 1 959 1 874 11 439
1990 2 516 2 199 4 645 18 789
2000 3 041 2 385 6 335 20 084

Source: Angus Maddison, The World Economy: A Millennial Perspective, Paris: OECD Development Centre Studies 2001, 206, 214-215. For year 2000: University of Groningen and the Conference Board, GGDC Total Economy Database, 2003, http://www.eco.rug.nl/ggdc.

Important Aspects of Indonesian Economic History

“Missed Opportunities”

Anne Booth has characterized the economic history of Indonesia with the somewhat melancholy phrase “a history of missed opportunities” (Booth 1998). One may compare this with J. Pluvier’s history of Southeast Asia in the twentieth century, which is entitled A Century of Unfulfilled Expectations (Breda 1999). The missed opportunities refer to the fact that despite its rich natural resources and great variety of cultural traditions, the Indonesian economy has been underperforming for large periods of its history. A more cyclical view would lead one to speak of several ‘reversals of fortune.’ Several times the Indonesian economy seemed to promise a continuation of favorable economic development and ongoing modernization (for example, Java in the late nineteenth century, Indonesia in the late 1930s or in the early 1990s). But for various reasons Indonesia time and again suffered from severe incidents that prohibited further expansion. These incidents often originated in the internal institutional or political spheres (either after independence or in colonial times), although external influences such as the 1930s Depression also had their ill-fated impact on the vulnerable export-economy.

“Unity in Diversity”

In addition, one often reads about “unity in diversity.” This is not only a political slogan repeated at various times by the Indonesian government itself, but it also can be applied to the heterogeneity in the national features of this very large and diverse country. Logically, the political problems that arise from such a heterogeneous nation state have had their (negative) effects on the development of the national economy. The most striking difference is between densely populated Java, which has a long tradition of politically and economically dominating the sparsely populated Outer Islands. But also within Java and within the various Outer Islands, one encounters a rich cultural diversity. Economic differences between the islands persist. Nevertheless, for centuries, the flourishing and enterprising interregional trade has benefited regional integration within the archipelago.

Economic Development and State Formation

State formation can be viewed as a condition for an emerging national economy. This process essentially started in Indonesia in the nineteenth century, when the Dutch colonized an area largely similar to present-day Indonesia. Colonial Indonesia was called ‘the Netherlands Indies.’ The term ‘(Dutch) East Indies’ was mainly used in the seventeenth and eighteenth centuries and included trading posts outside the Indonesian archipelago.

Although Indonesian national historiography sometimes refers to a presumed 350 years of colonial domination, it is exaggerated to interpret the arrival of the Dutch in Bantam in 1596 as the starting point of Dutch colonization. It is more reasonable to say that colonization started in 1830, when the Java War (1825-1830) was ended and the Dutch initiated a bureaucratic, centralizing polity in Java without further restraint. From the mid-nineteenth century onward, Dutch colonization did shape the borders of the Indonesian nation state, even though it also incorporated weaknesses in the state: ethnic segmentation of economic roles, unequal spatial distribution of power, and a political system that was largely based on oppression and violence. This, among other things, repeatedly led to political trouble, before and after independence. Indonesia ceased being a colony on 17 August 1945 when Sukarno and Hatta proclaimed independence, although full independence was acknowledged by the Netherlands only after four years of violent conflict, on 27 December 1949.

The Evolution of Methodological Approaches to Indonesian Economic History

The economic history of Indonesia analyzes a range of topics, varying from the characteristics of the dynamic exports of raw materials, the dualist economy in which both Western and Indonesian entrepreneurs participated, and the strong measure of regional variation in the economy. While in the past Dutch historians traditionally focused on the colonial era (inspired by the rich colonial archives), from the 1960s and 1970s onward an increasing number of scholars (among which also many Indonesians, but also Australian and American scholars) started to study post-war Indonesian events in connection with the colonial past. In the course of the 1990s attention gradually shifted from the identification and exploration of new research themes towards synthesis and attempts to link economic development with broader historical issues. In 1998 the excellent first book-length survey of Indonesia’s modern economic history was published (Booth 1998). The stress on synthesis and lessons is also present in a new textbook on the modern economic history of Indonesia (Dick et al 2002). This highly recommended textbook aims at a juxtaposition of three themes: globalization, economic integration and state formation. Globalization affected the Indonesian archipelago even before the arrival of the Dutch. The period of the centralized, military-bureaucratic state of Soeharto’s New Order (1966-1998) was only the most recent wave of globalization. A national economy emerged gradually from the 1930s as the Outer Islands (a collective name which refers to all islands outside Java and Madura) reoriented towards industrializing Java.

Two research traditions have become especially important in the study of Indonesian economic history during the past decade. One is a highly quantitative approach, culminating in reconstructions of Indonesia’s national income and national accounts over a long period of time, from the late nineteenth century up to today (Van der Eng 1992, 2001). The other research tradition highlights the institutional framework of economic development in Indonesia, both as a colonial legacy and as it has evolved since independence. There is a growing appreciation among scholars that these two approaches complement each other.

A Chronological Survey of Indonesian Economic History

The precolonial economy

There were several influential kingdoms in the Indonesian archipelago during the pre-colonial era (e.g. Srivijaya, Mataram, Majapahit) (see further Reid 1988,1993; Ricklefs 1993). Much debate centers on whether this heyday of indigenous Asian trade was effectively disrupted by the arrival of western traders in the late fifteenth century

Sixteenth and seventeenth century

Present-day research by scholars in pre-colonial economic history focuses on the dynamics of early-modern trade and pays specific attention to the role of different ethnic groups such as the Arabs, the Chinese and the various indigenous groups of traders and entrepreneurs. During the sixteenth to the nineteenth century the western colonizers only had little grip on a limited number of spots in the Indonesian archipelago. As a consequence much of the economic history of these islands escapes the attention of the economic historian. Most data on economic matters is handed down by western observers with their limited view. A large part of the area remained engaged in its own economic activities, including subsistence agriculture (of which the results were not necessarily very meager) and local and regional trade.

An older research literature has extensively covered the role of the Dutch in the Indonesian archipelago, which began in 1596 when the first expedition of Dutch sailing ships arrived in Bantam. In the seventeenth and eighteenth centuries the Dutch overseas trade in the Far East, which focused on high-value goods, was in the hands of the powerful Dutch East India Company (in full: the United East Indies Trading Company, or Vereenigde Oost-Indische Compagnie [VOC], 1602-1795). However, the region was still fragmented and Dutch presence was only concentrated in a limited number of trading posts.

During the eighteenth century, coffee and sugar became the most important products and Java became the most important area. The VOC gradually took over power from the Javanese rulers and held a firm grip on the productive parts of Java. The VOC was also actively engaged in the intra-Asian trade. For example, cotton from Bengal was sold in the pepper growing areas. The VOC was a successful enterprise and made large dividend payments to its shareholders. Corruption, lack of investment capital, and increasing competition from England led to its demise and in 1799 the VOC came to an end (Gaastra 2002, Jacobs 2000).

The nineteenth century

In the nineteenth century a process of more intensive colonization started, predominantly in Java, where the Cultivation System (1830-1870) was based (Elson 1994; Fasseur 1975).

During the Napoleonic era the VOC trading posts in the archipelago had been under British rule, but in 1814 they came under Dutch authority again. During the Java War (1825-1830), Dutch rule on Java was challenged by an uprising led by Javanese prince Diponegoro. To repress this revolt and establish firm rule in Java, colonial expenses increased, which in turn led to a stronger emphasis on economic exploitation of the colony. The Cultivation System, initiated by Johannes van den Bosch, was a state-governed system for the production of agricultural products such as sugar and coffee. In return for a fixed compensation (planting wage), the Javanese were forced to cultivate export crops. Supervisors, such as civil servants and Javanese district heads, were paid generous ‘cultivation percentages’ in order to stimulate production. The exports of the products were consigned to a Dutch state-owned trading firm (the Nederlandsche Handel-Maatschappij, NHM, established in 1824) and sold profitably abroad.

Although the profits (‘batig slot’) for the Dutch state of the period 1830-1870 were considerable, various reasons can be mentioned for the change to a liberal system: (a) the emergence of new liberal political ideology; (b) the gradual demise of the Cultivation System during the 1840s and 1850s because internal reforms were necessary; and (c) growth of private (European) entrepreneurship with know-how and interest in the exploitation of natural resources, which took away the need for government management (Van Zanden and Van Riel 2000: 226).

Table 2

Financial Results of Government Cultivation, 1840-1849 (‘Cultivation System’) (in thousands of guilders in current values)

1840-1844 1845-1849
Coffee 40 278 24 549
Sugar 8 218 4 136
Indigo, 7 836 7 726
Pepper, Tea 647 1 725
Total net profits 39 341 35 057

Source: Fasseur 1975: 20.

Table 3

Estimates of Total Profits (‘batig slot’) during the Cultivation System,

1831/40 – 1861/70 (in millions of guilders)

1831/40 1841/50 1851/60 1861/70
Gross revenues of sale of colonial products 227.0 473.9 652.7 641.8
Costs of transport etc (NHM) 88.0 165.4 138.7 114.7
Sum of expenses 59.2 175.1 275.3 276.6
Total net profits* 150.6 215.6 289.4 276.7

Source: Van Zanden and Van Riel 2000: 223.

* Recalculated by Van Zanden and Van Riel to include subsidies for the NHM and other costs that in fact benefited the Dutch economy.

The heyday of the colonial export economy (1900-1942)

After 1870, private enterprise was promoted but the exports of raw materials gained decisive momentum after 1900. Sugar, coffee, pepper and tobacco, the old export products, were increasingly supplemented with highly profitable exports of petroleum, rubber, copra, palm oil and fibers. The Outer Islands supplied an increasing share in these foreign exports, which were accompanied by an intensifying internal trade within the archipelago and generated an increasing flow of foreign imports. Agricultural exports were cultivated both in large-scale European agricultural plantations (usually called agricultural estates) and by indigenous smallholders. When the exploitation of oil became profitable in the late nineteenth century, petroleum earned a respectable position in the total export package. In the early twentieth century, the production of oil was increasingly concentrated in the hands of the Koninklijke/Shell Group.


Figure 1

Foreign Exports from the Netherlands-Indies, 1870-1940

(in millions of guilders, current values)

Source: Trade statistics

The momentum of profitable exports led to a broad expansion of economic activity in the Indonesian archipelago. Integration with the world market also led to internal economic integration when the road system, railroad system (in Java and Sumatra) and port system were improved. In shipping lines, an important contribution was made by the KPM (Koninklijke Paketvaart-Maatschappij, Royal Packet boat Company) that served economic integration as well as imperialist expansion. Subsidized shipping lines into remote corners of the vast archipelago carried off export goods (forest products), supplied import goods and transported civil servants and military.

The Depression of the 1930s hit the export economy severely. The sugar industry in Java collapsed and could not really recover from the crisis. In some products, such as rubber and copra, production was stepped up to compensate for lower prices. In the rubber exports indigenous producers for this reason evaded the international restriction agreements. The Depression precipitated the introduction of protectionist measures, which ended the liberal period that had started in 1870. Various import restrictions were launched, making the economy more self-sufficient, as for example in the production of rice, and stimulating domestic integration. Due to the strong Dutch guilder (the Netherlands adhered to the gold standard until 1936), it took relatively long before economic recovery took place. The outbreak of World War II disrupted international trade, and the Japanese occupation (1942-1945) seriously disturbed and dislocated the economic order.

Table 4

Annual Average Growth in Economic Key Aggregates 1830-1990

GDP per capita Export volume Export

Prices

Government Expenditure
Cultivation System 1830-1840 n.a. 13.5 5.0 8.5
Cultivation System 1840-1848 n.a. 1.5 – 4.5 [very low]
Cultivation System 1849-1873 n.a. 1.5 1.5 2.6
Liberal Period 1874-1900 [very low] 3.1 – 1.9 2.3
Ethical Period 1901-1928 1.7 5.8 17.4 4.1
Great Depression 1929-1934 -3.4 -3.9 -19.7 0.4
Prewar Recovery 1934-1940 2.5 2.2 7.8 3.4
Old Order 1950-1965 1.0 0.8 – 2.1 1.8
New Order 1966-1990 4.4 5.4 11.6 10.6

Source: Booth 1998: 18.

Note: These average annual growth percentages were calculated by Booth by fitting an exponential curve to the data for the years indicated. Up to 1873 data refer only to Java.

The post-1945 period

After independence, the Indonesian economy had to recover from the hardships of the Japanese occupation and the war for independence (1945-1949), on top of the slow recovery from the 1930s Depression. During the period 1949-1965, there was little economic growth, predominantly in the years from 1950 to 1957. In 1958-1965, growth rates dwindled, largely due to political instability and inappropriate economic policy measures. The hesitant start of democracy was characterized by a power struggle between the president, the army, the communist party and other political groups. Exchange rate problems and absence of foreign capital were detrimental to economic development, after the government had eliminated all foreign economic control in the private sector in 1957/58. Sukarno aimed at self-sufficiency and import substitution and estranged the suppliers of western capital even more when he developed communist sympathies.

After 1966, the second president, general Soeharto, restored the inflow of western capital, brought back political stability with a strong role for the army, and led Indonesia into a period of economic expansion under his authoritarian New Order (Orde Baru) regime which lasted until 1997 (see below for the three phases in New Order). In this period industrial output quickly increased, including steel, aluminum, and cement but also products such as food, textiles and cigarettes. From the 1970s onward the increased oil price on the world market provided Indonesia with a massive income from oil and gas exports. Wood exports shifted from logs to plywood, pulp, and paper, at the price of large stretches of environmentally valuable rainforest.

Soeharto managed to apply part of these revenues to the development of technologically advanced manufacturing industry. Referring to this period of stable economic growth, the World Bank Report of 1993 speaks of an ‘East Asian Miracle’ emphasizing the macroeconomic stability and the investments in human capital (World Bank 1993: vi).

The financial crisis in 1997 revealed a number of hidden weaknesses in the economy such as a feeble financial system (with a lack of transparency), unprofitable investments in real estate, and shortcomings in the legal system. The burgeoning corruption at all levels of the government bureaucracy became widely known as KKN (korupsi, kolusi, nepotisme). These practices characterize the coming-of-age of the 32-year old, strongly centralized, autocratic Soeharto regime.

From 1998 until present

Today, the Indonesian economy still suffers from severe economic development problems following the financial crisis of 1997 and the subsequent political reforms after Soeharto stepped down in 1998. Secessionist movements and the low level of security in the provincial regions, as well as relatively unstable political policies, form some of its present-day problems. Additional problems include the lack of reliable legal recourse in contract disputes, corruption, weaknesses in the banking system, and strained relations with the International Monetary Fund. The confidence of investors remains low, and in order to achieve future growth, internal reform will be essential to build up confidence of international donors and investors.

An important issue on the reform agenda is regional autonomy, bringing a larger share of export profits to the areas of production instead of to metropolitan Java. However, decentralization policies do not necessarily improve national coherence or increase efficiency in governance.

A strong comeback in the global economy may be at hand, but has not as yet fully taken place by the summer of 2003 when this was written.

Additional Themes in the Indonesian Historiography

Indonesia is such a large and multi-faceted country that many different aspects have been the focus of research (for example, ethnic groups, trade networks, shipping, colonialism and imperialism). One can focus on smaller regions (provinces, islands), as well as on larger regions (the western archipelago, the eastern archipelago, the Outer Islands as a whole, or Indonesia within Southeast Asia). Without trying to be exhaustive, eleven themes which have been subject of debate in Indonesian economic history are examined here (on other debates see also Houben 2002: 53-55; Lindblad 2002b: 145-152; Dick 2002: 191-193; Thee 2002: 242-243).

The indigenous economy and the dualist economy

Although western entrepreneurs had an advantage in technological know-how and supply of investment capital during the late-colonial period, there has been a traditionally strong and dynamic class of entrepreneurs (traders and peasants) in many regions of Indonesia. Resilient in times of economic malaise, cunning in symbiosis with traders of other Asian nationalities (particularly Chinese), the Indonesian entrepreneur has been rehabilitated after the relatively disparaging manner in which he was often pictured in the pre-1945 literature. One of these early writers, J.H. Boeke, initiated a school of thought centering on the idea of ‘economic dualism’ (referring to a modern western and a stagnant eastern sector). As a consequence, the term ‘dualism’ was often used to indicate western superiority. From the 1960s onward such ideas have been replaced by a more objective analysis of the dualist economy that is not so judgmental about the characteristics of economic development in the Asian sector. Some focused on technological dualism (such as B. Higgins) others on ethnic specialization in different branches of production (see also Lindblad 2002b: 148, Touwen 2001: 316-317).

The characteristics of Dutch imperialism

Another vigorous debate concerns the character of and the motives for Dutch colonial expansion. Dutch imperialism can be viewed as having a rather complex mix of political, economic and military motives which influenced decisions about colonial borders, establishing political control in order to exploit oil and other natural resources, and preventing local uprisings. Three imperialist phases can be distinguished (Lindblad 2002a: 95-99). The first phase of imperialist expansion was from 1825-1870. During this phase interference with economic matters outside Java increased slowly but military intervention was occasional. The second phase started with the outbreak of the Aceh War in 1873 and lasted until 1896. During this phase initiatives in trade and foreign investment taken by the colonial government and by private businessmen were accompanied by extension of colonial (military) control in the regions concerned. The third and final phase was characterized by full-scale aggressive imperialism (often known as ‘pacification’) and lasted from 1896 until 1907.

The impact of the cultivation system on the indigenous economy

The thesis of ‘agricultural involution’ was advocated by Clifford Geertz (1963) and states that a process of stagnation characterized the rural economy of Java in the nineteenth century. After extensive research, this view has generally been discarded. Colonial economic growth was stimulated first by the Cultivation System, later by the promotion of private enterprise. Non-farm employment and purchasing power increased in the indigenous economy, although there was much regional inequality (Lindblad 2002a: 80; 2002b:149-150).

Regional diversity in export-led economic expansion

The contrast between densely populated Java, which had been dominant in economic and political regard for a long time, and the Outer Islands, which were a large, sparsely populated area, is obvious. Among the Outer Islands we can distinguish between areas which were propelled forward by export trade, either from Indonesian or European origin (examples are Palembang, East Sumatra, Southeast Kalimantan) and areas which stayed behind and only slowly picked the fruits of the modernization that took place elsewhere (as for example Benkulu, Timor, Maluku) (Touwen 2001).

The development of the colonial state and the role of Ethical Policy

Well into the second half of the nineteenth century, the official Dutch policy was to abstain from interference with local affairs. The scarce resources of the Dutch colonial administrators should be reserved for Java. When the Aceh War initiated a period of imperialist expansion and consolidation of colonial power, a call for more concern with indigenous affairs was heard in Dutch politics, which resulted in the official Ethical Policy which was launched in 1901 and had the threefold aim of improving indigenous welfare, expanding the educational system, and allowing for some indigenous participation in the government (resulting in the People’s Council (Volksraad) that was installed in 1918 but only had an advisory role). The results of the Ethical Policy, as for example measured in improvements in agricultural technology, education, or welfare services, are still subject to debate (Lindblad 2002b: 149).

Living conditions of coolies at the agricultural estates

The plantation economy, which developed in the sparsely populated Outer Islands (predominantly in Sumatra) between 1870 and 1942, was in bad need of labor. The labor shortage was solved by recruiting contract laborers (coolies) in China, and later in Java. The Coolie Ordinance was a government regulation that included the penal clause (which allowed for punishment by plantation owners). In response to reported abuse, the colonial government established the Labor Inspectorate (1908), which aimed at preventing abuse of coolies on the estates. The living circumstances and treatment of the coolies has been subject of debate, particularly regarding the question whether the government put enough effort in protecting the interests of the workers or allowed abuse to persist (Lindblad 2002b: 150).

Colonial drain

How large of a proportion of economic profits was drained away from the colony to the mother country? The detrimental effects of the drain of capital, in return for which European entrepreneurial initiatives were received, have been debated, as well as the exact methods of its measurement. There was also a second drain to the home countries of other immigrant ethnic groups, mainly to China (Van der Eng 1998; Lindblad 2002b: 151).

The position of the Chinese in the Indonesian economy

In the colonial economy, the Chinese intermediary trader or middleman played a vital role in supplying credit and stimulating the cultivation of export crops such as rattan, rubber and copra. The colonial legal system made an explicit distinction between Europeans, Chinese and Indonesians. This formed the roots of later ethnic problems, since the Chinese minority population in Indonesia has gained an important (and sometimes envied) position as capital owners and entrepreneurs. When threatened by political and social turmoil, Chinese business networks may have sometimes channel capital funds to overseas deposits.

Economic chaos during the ‘Old Order’

The ‘Old Order’-period, 1945-1965, was characterized by economic (and political) chaos although some economic growth undeniably did take place during these years. However, macroeconomic instability, lack of foreign investment and structural rigidity formed economic problems that were closely connected with the political power struggle. Sukarno, the first president of the Indonesian republic, had an outspoken dislike of colonialism. His efforts to eliminate foreign economic control were not always supportive of the struggling economy of the new sovereign state. The ‘Old Order’ has for long been a ‘lost area’ in Indonesian economic history, but the establishment of the unitary state and the settlement of major political issues, including some degree of territorial consolidation (as well as the consolidation of the role of the army) were essential for the development of a national economy (Dick 2002: 190; Mackie 1967).

Development policy and economic planning during the ‘New Order’ period

The ‘New Order’ (Orde Baru) of Soeharto rejected political mobilization and socialist ideology, and established a tightly controlled regime that discouraged intellectual enquiry, but did put Indonesia’s economy back on the rails. New flows of foreign investment and foreign aid programs were attracted, the unbridled population growth was reduced due to family planning programs, and a transformation took place from a predominantly agricultural economy to an industrializing economy. Thee Kian Wie distinguishes three phases within this period, each of which deserve further study:

(a) 1966-1973: stabilization, rehabilitation, partial liberalization and economic recovery;

(b) 1974-1982: oil booms, rapid economic growth, and increasing government intervention;

(c) 1983-1996: post-oil boom, deregulation, renewed liberalization (in reaction to falling oil-prices), and rapid export-led growth. During this last phase, commentators (including academic economists) were increasingly concerned about the thriving corruption at all levels of the government bureaucracy: KKN (korupsi, kolusi, nepotisme) practices, as they later became known (Thee 2002: 203-215).

Financial, economic and political crisis: KRISMON, KRISTAL

The financial crisis of 1997 started with a crisis of confidence following the depreciation of the Thai baht in July 1997. Core factors causing the ensuing economic crisis in Indonesia were the quasi-fixed exchange rate of the rupiah, quickly rising short-term foreign debt and the weak financial system. Its severity had to be attributed to political factors as well: the monetary crisis (KRISMON) led to a total crisis (KRISTAL) because of the failing policy response of the Soeharto regime. Soeharto had been in power for 32 years and his government had become heavily centralized and corrupt and was not able to cope with the crisis in a credible manner. The origins, economic consequences, and socio-economic impact of the crisis are still under discussion. (Thee 2003: 231-237; Arndt and Hill 1999).

(Note: I want to thank Dr. F. Colombijn and Dr. J.Th Lindblad at Leiden University for their useful comments on the draft version of this article.)

Selected Bibliography

In addition to the works cited in the text above, a small selection of recent books is mentioned here, which will allow the reader to quickly grasp the most recent insights and find useful further references.

General textbooks or periodicals on Indonesia’s (economic) history:

Booth, Anne. The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities. London: Macmillan, 1998.

Bulletin of Indonesian Economic Studies.

Dick, H.W., V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie. The Emergence of a National Economy in Indonesia, 1800-2000. Sydney: Allen & Unwin, 2002.

Itinerario “Economic Growth and Institutional Change in Indonesia in the 19th and 20th centuries” [special issue] 26 no. 3-4 (2002).

Reid, Anthony. Southeast Asia in the Age of Commerce, 1450-1680, Vol. I: The Lands below the Winds. New Haven: Yale University Press, 1988.

Reid, Anthony. Southeast Asia in the Age of Commerce, 1450-1680, Vol. II: Expansion and Crisis. New Haven: Yale University Press, 1993.

Ricklefs, M.C. A History of Modern Indonesia since ca. 1300. Basingstoke/Londen: Macmillan, 1993.

On the VOC:

Gaastra, F.S. De Geschiedenis van de VOC. Zutphen: Walburg Pers, 1991 (1st edition), 2002 (4th edition).

Jacobs, Els M. Koopman in Azië: de Handel van de Verenigde Oost-Indische Compagnie tijdens de 18de Eeuw. Zutphen: Walburg Pers, 2000.

Nagtegaal, Lucas. Riding the Dutch Tiger: The Dutch East Indies Company and the Northeast Coast of Java 1680-1743. Leiden: KITLV Press, 1996.

On the Cultivation System:

Elson, R.E. Village Java under the Cultivation System, 1830-1870. Sydney: Allen and Unwin, 1994.

Fasseur, C. Kultuurstelsel en Koloniale Baten. De Nederlandse Exploitatie van Java, 1840-1860. Leiden, Universitaire Pers, 1975. (Translated as: The Politics of Colonial Exploitation: Java, the Dutch and the Cultivation System. Ithaca, NY: Southeast Asia Program, Cornell University Press 1992.)

Geertz, Clifford. Agricultural Involution: The Processes of Ecological Change in Indonesia. Berkeley: University of California Press, 1963.

Houben, V.J.H. “Java in the Nineteenth Century: Consolidation of a Territorial State.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 56-81. Sydney: Allen & Unwin, 2002.

On the Late-Colonial Period:

Dick, H.W. “Formation of the Nation-state, 1930s-1966.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 153-193. Sydney: Allen & Unwin, 2002.

Lembaran Sejarah, “Crisis and Continuity: Indonesian Economy in the Twentieth Century” [special issue] 3 no. 1 (2000).

Lindblad, J.Th., editor. New Challenges in the Modern Economic History of Indonesia. Leiden: PRIS, 1993. Translated as: Sejarah Ekonomi Modern Indonesia. Berbagai Tantangan Baru. Jakarta: LP3ES, 2002.

Lindblad, J.Th., editor. The Historical Foundations of a National Economy in Indonesia, 1890s-1990s. Amsterdam: North-Holland, 1996.

Lindblad, J.Th. “The Outer Islands in the Nineteenthh Century: Contest for the Periphery.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 82-110. Sydney: Allen & Unwin, 2002a.

Lindblad, J.Th. “The Late Colonial State and Economic Expansion, 1900-1930s.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 111-152. Sydney: Allen & Unwin, 2002b.

Touwen, L.J. Extremes in the Archipelago: Trade and Economic Development in the Outer Islands of Indonesia, 1900‑1942. Leiden: KITLV Press, 2001.

Van der Eng, Pierre. “Exploring Exploitation: The Netherlands and Colonial Indonesia, 1870-1940.” Revista de Historia Económica 16 (1998): 291-321.

Zanden, J.L. van, and A. van Riel. Nederland, 1780-1914: Staat, instituties en economische ontwikkeling. Amsterdam: Balans, 2000. (On the Netherlands in the nineteenth century.)

Independent Indonesia:

Arndt, H.W. and Hal Hill, editors. Southeast Asia’s Economic Crisis: Origins, Lessons and the Way forward. Singapore: Institute of Southeast Asian Studies, 1999.

Cribb, R. and C. Brown. Modern Indonesia: A History since 1945. Londen/New York: Longman, 1995.

Feith, H. The Decline of Constitutional Democracy in Indonesia. Ithaca, New York: Cornell University Press, 1962.

Hill, Hal. The Indonesian Economy. Cambridge: Cambridge University Press, 2000. (This is the extended second edition of Hill, H., The Indonesian Economy since 1966. Southeast Asia’s Emerging Giant. Cambridge: Cambridge University Press, 1996.)

Hill, Hal, editor. Unity and Diversity: Regional Economic Development in Indonesia since 1970. Singapore: Oxford University Press, 1989.

Mackie, J.A.C. “The Indonesian Economy, 1950-1960.” In The Economy of Indonesia: Selected Readings, edited by B. Glassburner, 16-69. Ithaca NY: Cornell University Press 1967.

Robison, Richard. Indonesia: The Rise of Capital. Sydney: Allen and Unwin, 1986.

Thee Kian Wie. “The Soeharto Era and After: Stability, Development and Crisis, 1966-2000.” In The Emergence of a National Economy in Indonesia, 1800-2000, edited by H.W. Dick, V.J.H. Houben, J.Th. Lindblad and Thee Kian Wie, 194-243. Sydney: Allen & Unwin, 2002.

World Bank. The East Asian Miracle: Economic Growth and Public Policy. Oxford: World Bank /Oxford University Press, 1993.

On economic growth:

Booth, Anne. The Indonesian Economy in the Nineteenth and Twentieth Centuries. A History of Missed Opportunities. London: Macmillan, 1998.

Van der Eng, Pierre. “The Real Domestic Product of Indonesia, 1880-1989.” Explorations in Economic History 39 (1992): 343-373.

Van der Eng, Pierre. “Indonesia’s Growth Performance in the Twentieth Century.” In The Asian Economies in the Twentieth Century, edited by Angus Maddison, D.S. Prasada Rao and W. Shepherd, 143-179. Cheltenham: Edward Elgar, 2002.

Van der Eng, Pierre. “Indonesia’s Economy and Standard of Living in the Twentieth Century.” In Indonesia Today: Challenges of History, edited by G. Lloyd and S. Smith, 181-199. Singapore: Institute of Southeast Asian Studies, 2001.

Citation: Touwen, Jeroen. “The Economic History of Indonesia”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-indonesia/

Education and Economic Growth in Historical Perspective

David Mitch, University of Maryland Baltimore County

In his introduction to the Wealth of Nations, Adam Smith (1776, p. 1) states that the proportion between the annual produce of a nation and the number of people who are to consume that produce depends on “the skill, dexterity, and judgment with which its labour is generally applied.” In recent decades, analysts of economic productivity in the United States during the twentieth century have made allowance for Smith’s “skill, dexterity, and judgment” of the labor force under the rubric of labor force quality (Ho and Jorgenson 1999; Aaronson and Sullivan 2001; DeLong, Goldin, and Katz 2003). These studies have found that a variety of factors have influenced labor force quality in the U.S., including age structure and workforce experience, female labor force participation, and immigration. One of the most important determinants of labor force quality has been years of schooling completed by the labor force.

Data limitations complicate generalizing these findings to periods before the twentieth century and to geographical areas beyond the United States. However, the rise of modern economic growth over the last few centuries seems to roughly coincide with the rise of mass schooling throughout the world. The sustained growth in income per capita evidenced in much of the world over the past two to two and a half centuries is a marked divergence from previous tendencies. Kuznets (1966) used the phrase “modern economic growth” to describe this divergence and he placed its onset in the mid-eighteenth century. More recently, Maddison (2001) has placed the start of sustained economic growth in the early nineteenth century. Maddison (1995) estimates that per capita income between 1520 and 1992 increased some eight times for the world as a whole and up to seventeen times for certain regions. Popular schooling was not widespread anywhere in the world before 1600. By 1800, most of North America, Scandinavia, and Germany had achieved literacy rates well in excess of fifty percent. In France and England literacy rates were closer to fifty percent and school attendance before the age of ten was certainly widespread, if not yet the rule. It was not until later in the nineteenth century and the early twentieth century that Southern and Eastern Europe were to catch up with Western Europe and it was only the first half of the twentieth century that saw schooling become widespread through much of Asia and Latin America. Only later in the twentieth century did schooling begin to spread throughout Africa. The twentieth century has seen the spread of secondary and university education to much of the adult population in the United States and to a lesser extent in other developed countries.[2] However, correlation is not causation; rising income per capita may have contributed to rising levels of schooling, as well as schooling to income levels. Thus, the contribution of rising schooling to economic growth should be examined more directly.

Estimating the Contribution of the Rise of Mass Schooling to Economic Growth: A Growth Accounting Perspective

Growth accounting can be used to estimate the general bounds of the contribution the rise of schooling has made to economic growth over the past few centuries.[3] A key assumption of growth accounting is that factors of production are paid their social marginal products. Growth accounting starts with estimates of the growth of individual factors of production, as well as the shares of these factors in total output and estimates of the growth of total product. It then apportions the growth in output into that attributable to growth in each factor of production specified in the analysis and into that due to a residual that cannot otherwise be explained. Estimates of how much schooling has increased the productivity of individual workers, combined with estimates of the increase in schooling completed by the labor force, yield estimates of how much the increase in schooling has contributed to increasing output. A growth accounting approach offers the advantage that with basic estimates (or at least possible ranges) for trends in output, labor force, schooling attainment, and preferably capital stock and factor shares, it yields estimates of schooling’s contribution to economic growth. An important disadvantage is that it relies on indirect estimates at the micro level for how schooling influences productivity at the aggregate level, rather than on direct empirical evidence.[4]

Back-of-the-envelope estimates of increases in income per capita attributable to rising levels of education over a period of a few centuries can be obtained by considering possible ranges of levels of schooling increases as measured in average years of schooling along with possible ranges of rates of return per year of schooling, in terms of the percentage by which a year of schooling raises earnings and common ranges for labor’s share in national income. By using a Cobb-Douglas specification of the aggregate production function with two factors of production, labor and physical capital, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods:

1) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 – S0 )α

Where Y = output, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote the initial and final time period over which the schooling changes occur.[5] This formulation is a partial equilibrium one, holding constant the level of physical capital. However, the level of physical capital should be expected to increase in response to improved labor force quality due to more schooling. A common specification of a growth model that allows for such responses of physical capital implies the following ratio between final and initial national income per worker (see Lord 2001, 99-100):

2) (Y/L)1/ (Y/L)0 = ( (1 + r )S1 – S0 )

The bounds on increases in years of schooling can be placed at between zero and 16, that is, between a completely unschooled and presumably illiterate population to one in which a college education is universal. As bounds on returns to increasing earnings per year of schooling, one can employ Krueger and Lindahl’s (2001) survey of results from recent estimates of earnings functions, which finds that returns range from 5 percent to 15 percent. The implications of varying these two parameters are reported in Tables 1A and 1B. Table 1A reports estimates based on the partial equilibrium specification holding constant the level of physical capital in equation 1). Table 1B reports estimates allowing for a changing level of physical capital as in equation 2). Labor’s share of income has been set at a commonly used value of 0.7 (see DeLong, Goldin and Katz 2003, 29; Maddison 1995, 255).

Table 1A
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Holding the Physical Capital Stock Constant

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.035 1.07 1.10
3 1.11 1.22 1.34
6 – illiteracy to
universal grammar school
.23 1.49 1.80
12 – illiteracy to
universal high school
1.51 2.23 3.23
16 – illiteracy to
universal college
1.73 2.91 4.78

Table 1B
Increase in per Capita Income over a Base Level of 1 Attributable to Hypothetical Increases in Average Schooling Levels — Allowing for Steady-state Changes in the Physical Capital Stock

Percent Increase in Earnings per Extra Year of Schooling
Increase in Average
Years of Schooling
5% 10% 15%
1 1.05 1.10 1.15
3 1.16 1.33 1.52
6 – illiteracy to
universal grammar school
1.34 1.77 2.31
12 – illiteracy to
universal high school
1.79 3.14 5.35
16 – illiteracy to
universal college
2.18 4.59 9.36

The back-of-the-envelope calculations in Tables 1A and 1B make two simple points. First, schooling increases have the potential to explain a good deal of estimated long-term increases in per capita income. With the average member of an economy’s labor force embodying investments of twelve years of schooling and a moderate ten-percent rate of return per year of schooling and no increase in the capital stock, at least 17 percent of Maddison’s eight-fold increase in per capita income can be accounted for (i.e. 1.23/7) by rising schooling. Indeed, a 16 year schooling increase allowing for steady-state capital stock increases and at 15 percent per year return overexplains Maddison’s eight-fold increase (8.36/7). After all, if schooling has had substantial effects on the productivity of individual workers, if a sizable share of the labor force has experienced improvements in schooling completed and with labor’s share of output greater than half, then the contribution of rising schooling to increasing output should be large.

Second, the contribution of schooling increases that have actually occurred historically to per capita income increases is more modest accounting for at best about one fifth of Maddison’s one-fold increase. Thus an increase in average years of schooling completed by the labor force of 6 years, roughly that entailed by the spread of universal grammar schooling, would account for 19 percent (1.31/7) of an eight-fold per capita output increase at a high 15 percent rate of return allowing for steady state changes in the physical capital stock (Table 1B). And at a low 5 percent return per year of schooling, the contribution would be only 5 percent of the increase (0.34/7). Making lower-level elementary education universal would entail increasing average years of schooling completed by the labor force by 1 to 3 years; in most circumstances this is not a trivial accomplishment as measured by the societal resources required. However, even at a high 15 percent per year return and allowing for steady state changes in the capital stock (Table 1B), the contribution of a 3 year increase in average years of schooling would only account for 7 percent (0.52/7) of Maddison’s eight-fold increase.

How do the above proposed bounds on schooling increases compare with possible increases in the physical capital stock? Kendrick (1993, 143) finds a somewhat larger growth rate in his estimated human capital stock than in the stock of non-human capital for the U.S. between 1929 and 1969, though for the sub-period 1929-48, he estimates a slightly higher growth rate for the non-human capital stock. In contrast, Maddison (1995, 35-37) estimates larger increases in the value of non-residential structures per worker and in the value of machinery and equipment per worker than in years of schooling per adult for the U.S. and the U.K. between 1820 and 1992. For the U.S., he estimates that the value of non-residential structures per worker rose by 21 times and the value of machinery and equipment per worker rose by 141 times in comparison with a ten-fold increase in the years of schooling per adult between 1820 and 1992. For the U.K., his estimates indicate a 15 fold increase in the value of structures per worker and a 97 fold increase in value of machinery and equipment per worker in contrast with a seven-fold increase in average years of schooling between 1820 and 1992. It should be noted that these estimates are based on cumulated investments in schooling to estimate human capital; that is, they are based on the costs incurred to produce human capital. Davies and Whalley (1991, 188-189) argue that estimates based on the alternative approach of calculating the present value of future earnings premiums attributable to schooling and other forms of human capital yield substantially higher estimates of human capital due to capturing inframarginal returns above costs accruing to human capital investments. For the growth accounting approach employed here, the cumulated investment or cost approach would seem the appropriate one. Are there more inherent bounds on the accumulation of human capital over time than non-human capital? One limit on the accumulation of human capital is set by how much of one’s potential working life a worker is willing to sacrifice for purposes of improving education and future productivity. This can be compared with the corresponding limit on the willingness to sacrifice current consumption for wealth accumulation.

However, this discussion makes no explicit allowance for changes over time in the quality of schooling. Improvements in teacher training and teacher recruitment along with ongoing curriculum developments among other factors could lead to ongoing improvements over time in how much a year of school attendance would improve the underlying future productivity of the student. Woessmann (2002) and Hanushek and Kimcoe (2000) have recently argued for the importance of allowing for variation in school quality in estimating the impact of cross national variation in human capital levels on economic growth. Woessmann (2002) makes the suggestion that allowing for improvements in the quality of schooling can remove the upper bounds on schooling investment that would be present if this was simply a matter of increasing the percentage of the population enrolled in school at given levels of quality. While there would seem to be inherent bounds on the proportion of one’s life that one is willing to spend in school, such bounds would not apply to increases in expenditures and other means of improving school quality.

Expenditures per pupil appear to have risen markedly over long periods of time. Thus, in the United States, expenditure per pupil in public elementary and secondary schools in constant 1989-90 dollars rose by over 6 times between 1923-24 and 1973-74 (National Center for Educational Statistics, 60). And in Victorian England, nominal expenditures per pupil in state subsidized schools more than doubled between 1870 and 1900, despite falling prices (Mitch 1982, 204). These figures do not control for the rising percentage of students enrolled in higher grade levels (presumably at higher expenditure per student), general rises in living standards affecting teachers’ salaries and other factors influencing the abilities of those recruited into teaching. Nevertheless, they suggest the possibility of sizable improvements over time in school quality.

It can be argued that implicitly allowance is made for improvements in school quality in the rate of return imputed per year of schooling completed on average by the labor force. Insofar as schools became more effective over time in transmitting knowledge and skills, the economic return per year of schooling should have increased correspondingly. Thus any attempt to allow for school quality in a growth accounting analysis should be careful to avoid double counting school quality in both school inputs and in returns per year of schooling.

The benchmark for the impact of increases in average levels of schooling completed in Table 1 are Maddison’s estimates of changes in output per capita over the last two centuries. In fact, major increases in schooling levels have most commonly been compressed into intervals of several decades or less, rather than periods of a century or more. This would imply that the contribution to output growth of improvements in labor force quality due to increases in schooling levels would have been concentrated primarily in periods of marked improvement in schooling levels and would have been far more modest during periods of more sluggish increase in educational attainment. In order to gauge the impact of the time interval over which changes in schooling occur on growth rates of output, Table 2 provides the change in average years of schooling implied by some of the hypothetical changes in average levels of schooling attainment reported in Table 1 for various time periods.

Table 2

Annual Change in Average Years of Schooling per Adult per Year Implied by Hypothetical Figures in Table 1

Time period over which increase occurred
Total Increase in
Average Years of
Schooling per Adult
5 years 10 years 30 years 50 years 100 years
1 0.2 0.1 0.033 0.02 0.01
3 0.6 0.3 0.1 0.06 0.03
6 1.2 0.6 0.2 0.12 0.06
9 1.8 0.9 0.3 0.18 0.09

Table 3 translates these rates of schooling growth into output growth rates using the partial equilibrium framework of equation 1) using a value for the share of labor of 0.7 as above. The contribution of schooling to growth rates of output and output per capita can be calculated as labor’s share times the percentage return per year of schooling on earnings times the annual increase in average years of schooling.

Table 3A
Contribution of Schooling for Large Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 6 year rise in average years of schooling 6 year rise in average years of schooling 9 year rise in average years of schooling 9 year rise in average years of schooling
5% return 10 % return 5 % return 10% return
30 years 0.7% 1.4% 1.05% 2.1%
50 years 0.42% 0.84% 0.63% 1.26%

Table 3B
Contribution of Schooling for Small to Modest Increases in Schooling to Annual Growth Rates of Output

Length of time for schooling increase 1 year rise in average years of schooling 1 year rise in average years of schooling 3 year rise in average years of schooling 3 year rise in average years of schooling
5 % return 10 % return 5% return 10% return
5 years 0.7% 1.4% 2.1% 4.2%
10 years 0.35% 0.7% 1.05% 2.1%
20 years 0.175% 0.35% 0.525% 1.05%
30 years 0.12% 0.23% 0.35% 0.7%
50 years 0.07% 0.14% 0.21% 0.42%
100 years 0.035% 0.07% 0.105% 0.21%

The case of the U.S. in the twentieth century as analyzed in DeLong, Goldin and Katz (2003) offers an example of how apparent limits or at least resistance to ongoing expansion of schooling have lowered the contribution of schooling to growth. They find that between World War I and the end of the century, improvements in labor quality attributable to schooling can account for about a quarter of the growth of output per capita in the U.S. during this period; this is similar in magnitude to Denison’s (1962) estimates for the first part of this period. This era saw the mean years of schooling completed by age 35 increased from 7.4 years for an American born in 1875 to 14.1 years for an American born in 1975 (DeLong, Goldin and Katz 2003, 22). However, in the last two decades of the twentieth century the rate of increase of mean years of schooling completed leveled off and correspondingly the contribution of schooling to labor quality improvements fell almost in half.

Maddison (1995) has compiled estimates of the average years of schooling completed for a number of countries going back to 1820. It is indicative of the sparseness of schooling completed by adult population estimates that Maddison reports estimates for only 3 countries, the U.S., the U.K., and Japan, all the way back to 1820. Maddison’s figures come from other studies and their reliability warrants further critical scrutiny than can be accorded them here. Since systematic census evidence on adult educational attainment did not begin until the mid-twentieth century, estimates of labor force educational attainment prior to 1900 should be treated with some skepticism. Nevertheless, Maddison’s estimates can be used to give a sense of plausible changes in levels of schooling completed over the last century and a half. The average increases in years of schooling per year for various time periods implied by Maddison’s figures are reported in Table 4. Maddison constructed his figures by giving primary education a weight of 1, secondary education a weight of 1.4, and tertiary, a weight of 2 based on evidence on relative earnings for each level of education.

Table 4
Estimates of the Annual Change in Average Years of Schooling per Person aged 15-64 for Selected Countries and Time Periods

Country 1913-1973 1870-1973 1870-1913
U.S. 0 .112 0.107 0.092
France 0.0783
Germany 0.053
Netherlands 0.064
U.K. 0.0473 0.0722 0.102
Japan 0.112 0.106 0.090

Source: Maddison (1995), 37, Table 2-3

Table 5
Annual Growth Rates in GDP per Capita

Region 1820-70 1870-1913 1913-50 1950-73 1973-92
12 West European Countries 0.9 1.3 1.2 3.8 1.8
4 Western Offshoots 1.4 1.5 1.3 2.4 1.2
5 South European Countries n.a. 0.9 0.7 4.8 2.2
7 East European Countries n.a. 1.2 1.0 4.0 -0.8
7 Latin American Countries n.a. 1.5 1.9 2.4 0.4
11 Asian Countries 0.1 0.7 -0.2 3.1 3.5
10 African countries n.a. n.a. 1.0 1.8 -0.4

Source: Maddison (1995), 62-63, Table 3-2.

In comparing Tables 2 and 4 it can be observed that the estimated actual changes in years of schooling compiled by Maddison (as well as the average over 55 countries reported by Lichtenberg (1994) for the third quarter of the twentieth century) fall within a lower bound set in the hypothetical ranges of a 3 year increase in average schooling spread over a century and an upper bound set by a 6 year increase in average schooling spread over 50 years.

Equations 1) and 2) above assume that each year of schooling of a worker has the same impact on productivity. In fact it has been common to find that the impact of schooling on productivity varies according to level of education. While the rate of return as a percentage of costs tends to be higher for primary than secondary schooling, which is in turn higher than tertiary education, this reflects the far lower costs, especially lower foregone earnings, of primary schooling (Psacharopolous and Patrinos 2004). The earnings premium per year of schooling tends to be higher for higher levels of education and this earnings premium, rather than the rate of return as a percentage costs, is the appropriate measure for assessing the contribution of rising schooling to growth (OECD 2001). Accordingly growth accounting analyses commonly construct schooling indexes weighting years of schooling according to estimates of each year’s impact on earnings (see for example Maddison 1995; Denison 1962). DeLong, Goldin and Katz (2003) use chain weighted indexes of returns according to each level of schooling. A rough approximation of the effect of allowing for variation in economic impact by level of schooling in the analysis in Table 1 is simply to focus on the mid-range 10 percent rate of return as an approximate average of high, low, and medium level returns.[6]

The U.S. is notable for rapid expansion in schooling attainment over the twentieth century at both the secondary and tertiary level, while in Europe widespread expansion has tended to focus on the primary and lower secondary level. These differences are evident in Denison’s estimates of the actual differences in educational distribution between the United States and a number of Western European countries in the mid-twentieth century (see Table 6).

Table 6

Percentage Distributions of the Male Labor Force by Years of Schooling Completed

Years of School Completed United States 1957 France 1954 United Kingdom 1951 Italy 1961
0 1.4 0.3 0.2 13.7
1-4 5.7 2.4 0.2 26.1
5-6 6.3 19.2 0.8 38.0
7 5.8 21.1 4.0 4.2
8 17.2 27.8 27.2 8.1
9 6.3 4.6 45.1 0.7
10 7.3 4.1 8.4 0.7
11 6.0 6.5 7.3 0.6
12 26.2 5.4 2.5 1.8
13-15 8.3 5.4 2.2 3.0
16 or more 9.5 3.2 2.1 3.1

Source: Denison (1967), 80, Table 8-1.

Some segments of the population are likely to have much greater enhancements of productivity from additional years of schooling than others. Insofar as the more able benefit from schooling compared to the rest of the ability distribution, putting substantially greater relative emphasis on expansion of higher levels of schooling could considerably augment growth rates over a more egalitarian strategy. This result would follow from a substantially greater premium assigned to higher levels of education. However, some studies of education in developing countries have found that they allocate a disproportionate share of resources to tertiary schooling at the expense of primary schooling, reflecting efforts of elites to benefit their offspring. How this has impeded economic growth would depend on the disparity in rates of return among levels of education, a point of some controversy in the economics of education literature (Birdsall 1996; Psacharopoulos 1996).

While allocating schooling disproportionately towards the more able in a society may have promoted growth, there would have been corresponding losses stemming from groups that have been systematically excluded or at least restricted in their access to education due to discrimination by factors such as race, gender and religion (Margo 1990). These losses could be attributed in part to the presence of individuals of high ability in groups experiencing discrimination due to failure to provide them with sufficient education to properly utilize their talents. However, historians such as Ashton (1948, 15) have argued that the exclusion of non-Anglicans from English universities prior to the mid-nineteenth century resulted in the channeling of their talents into manufacturing and commerce.

Even if returns have been higher at some levels of education than others, a sustained and substantial increase in labor force quality would seem to entail an egalitarian strategy of widespread increase in access to schooling. The contrast between the rapid increase in access to secondary and tertiary schooling in the U.S. and the much more limited increase in access in Europe during the twentieth century with the correspondingly much greater role for schooling in accounting for economic growth in the U.S. than in Europe (see Denison 1967) points to the importance of an egalitarian strategy in sustaining ongoing increases in aggregate labor force quality.

One would expect on increase in the relative supply of more schooled labor to lead to a decline in the premium to schooling, other things equal. Some recent analyses of the contribution of schooling to growth have allowed for this by specifying a parametric relationship between the distribution of schooling in an economy’s labor force and its impact on output or on a hypothesized intermediary human capital factor (Bils and Klenow 2000).[7]

Direct empirical evidence on trends in the premium to schooling is helpful both to obviate reliance on a theoretical specification and to allow for factors such as technical change that may have offset the impact of the increasing supply of schooling. Goldin and Katz (2001) have developed evidence on trends in the premium to schooling over the twentieth century that have allowed them to adjust for these trends in estimating the contribution of schooling to economic growth (DeLong, Goldin and Katz 2003). They find a marked fall in the premium to schooling, roughly falling in half between 1910 and 1950. However, they also find that this decline in the schooling premium was more than offset by their estimated increase over this same period in years of schooling completed by the average worker of 2.9 years and hence that on net schooling increases contributed to improved productivity of the U.S. workforce. They estimate increases of 0.5 percent per year in labor productivity due to increased educational attainment between 1910 and 1950 relative to the average total annual increase in labor productivity of 1.62 percent over the entire period 1915 to 2000. For the period since 1960, DeLong, Goldin and Katz find that the premium to education has increased while the increase in educational attainment at first increased and then declined. During this latter period, the increase in labor force quality has declined, as noted above, despite a widening premium to education, due to the slowing down in the increase in educational attainment.

Classifying the Range of Possible Relationships between Schooling and Economic Growth

In generalizing beyond the twentieth-century U.S. experience, allowance should be made both for the role of influences other than education on economic growth and for the possibility that the impact of education on growth can vary considerably according to the historical situation. In fact to understand why and how education might contribute to economic growth over the range of historical experience, it is important to investigate the variation in the impact of education on growth that has occurred historically. In relating education to economic growth, one can distinguish four basic possibilities.

The first is one of stagnation in both educational attainment and in output per head. Arguably, this was the most common situation throughout the world until 1750 and even after that date characterized Southern and Eastern Europe through the late nineteenth century, as well as most of Africa, Asia, and Latin American through the mid-twentieth century. The qualifier “arguably” is inserted here, because this view of the matter almost surely makes inadequate allowance for the improvements in informal acquisition of skills through family transmission and direct experience as well as through more formal non-schooling channels such as guild-sponsored apprenticeships, an aspect to be taken up further below. It also makes no allowance for the possible long-term improvements in per capita income that took place prior to 1750 but have been inadequately documented. Still focusing on formal schooling as the source of improvement in labor force, there is reason to think that this may have been a pervasive situation throughout much of human history.

The second situation is one in which income per capita rose despite stagnating education levels; factors other than improvements in educational attainment were generating economic growth. England during its industrial revolution, 1750 to 1840 is a notable instance in which some historians have argued that this situation prevailed. During this period, English schooling and literacy rates rose only slightly if at all, while income per capita appears to have risen. Literacy and schooling appears to have been of little use in newly created manufacturing occupations such as in cotton spinning. Indeed, literacy rates and schooling actually appears to have declined in some of the most rapidly industrializing areas of England such as Lancashire (Sanderson 1972; Nicholas and Nicholas 1992). Not all have concurred with this interpretation of the role of education in the English industrial revolution and the result depends on how educational trends are measured and how education is specified as affecting output (see Laqueur; Crafts 1995; Mitch 1999). Moreover this makes no allowance for the role of informal acquisition of skills. Boot (1995) argues that in the case of cotton spinners, informal skill acquisition with experience was substantial.

The simplest interpretation of this situation is that other factors contributed to economic growth other than schooling or human capital more generally. The clearest non-human capital explanatory factor would perhaps be physical capital accumulation; another might be foreign trade. However, if one turns to technological advance as a driving force, then this gives rise to the possibility that human capital — at least broadly defined — was if not the underlying force at least a central contributing factor to the industrial revolution. The argument for this possibility is that the improvements in knowledge and skills associated with technological advance are embodied in human agents and hence are forms of human capital. Recent work by Mokyr (2002) would suggest this interpretation. Nevertheless, the British industrial revolution does remain as a prominent instance in which human capital conventionally defined as schooling stagnated in the presence of a notable upsurge in economic growth. A less extreme case is provided by the post-World War II European catch-up with the United States, as Denison’s (1967) growth accounting analysis indicates that this occurred despite slower European increases in educational attainment due to other factors offsetting this. Historical instances such as that of the British industrial revolution call into question the common assumption that education is a necessary prerequisite for economic growth (see Mitch 1990).

The third situation is one in which rising educational attainment corresponds with rising rates of economic growth. This is the situation one would expect to prevail if education contributes to economic productivity and if any negative factors are not sufficient to offset this influence. One sub-set of instances would be those in which very large and reasonably compressed increases in the educational attainment of the labor force occurred. One important example of this is the twentieth century U.S., with the high school movement followed by increases in college attendance, as noted above. Another would be those of certain East Asian economies since World War II, as documented in the growth accounting analysis by Young (1995) of the substantial contributions of their rising educational attainment to their rapid growth rates. Another sub-set of cases corresponding to more modest increases in schooling can be interpreted as applying either to countries experiencing schooling increases focussed at the elementary level, as in much of Western Europe over the nineteenth century. The so-called literacy campaigns, as in the Soviet Union and Cuba (see Arnove and Graff eds. 1987) in the early and mid-twentieth century with modest improvements in educational attainment over compressed time periods of just a few decades could also be viewed as fitting into this sub-category. However, whether there were increases in output per capita corresponding to these more modest increases in educational attainment remains to be established.

The fourth situation is one in which economic growth has stagnated despite the presence of marked improvements in educational attainment. Possible examples of this situation would include the early rise of literacy in some Northern European areas, such as Scotland and Scandinavia, in the seventeenth and eighteenth centuries (see Houston 1988; Sandberg 1979) and some regions of Africa and Asia in the later twentieth century (see Pritchett 2001). One explanation of this situation is that it reflects instances in which any positive impact of educational attainment is small relative to other influences having an adverse impact. But one can also interpret it as reflecting situations in which incentive structures direct educated people into destructive and transfer activities inimical to economic growth (see North 1990; Baumol 1990; Murphy, Shleifer, and Vishny 1991).

Cross-country studies of the relationship between changes in schooling and growth since 1960 have yielded conflicting results which in itself could be interpreted as supporting the presence of some mix of the four situations just surveyed. A number of studies have found at best a weak relationship between changes in schooling and growth (Pritchett 2001; Bils and Klenow 2000); others have found a stronger relationship (Topel 1999). Much seems to depend on issues of measurement and on how the relationship between schooling and output is specified (Temple 2001b; Woessmann 2002, 2003).

The Determinants of Schooling

Whether education contributes to economic growth can be seen as depending on two factors, the extent to which educational levels improve over time and the impact of education on economic productivity. The first factor is a topic for extended discussion in its own right and no attempt will be made to consider it in depth here. Factors commonly considered include rising income per capita, distribution of political power, and cultural influences (Goldin 2001, Lindert 2004, Mariscal and Sokoloff 2000, Easterlin 1981; Mitch 2004). The issue of endogeneity of determination has often been raised with respect to the determinants of schooling. Thus, it is plausible that rising income contributes to rising levels of schooling and that the spread of mass education can influence the distribution of political power as well as the reverse. While these are important considerations, they are sufficiently complex to warrant extended attention in their own right.[8]

Influences on the Economic Impact of Schooling

Insofar as schooling improves general human intellectual capacities, it could be seen as having a universal impact irrespective of context. However, Rosenzweig (1995; 1999) has noted that the even the general influence of education on individual productivity or adaptability depend on the complexity of the situation. He notes that for agricultural tasks primarily involving physical exertion, no difference in productivity is evident between workers according to education levels; however, in more complex allocative decisions, education does enhance performance. This could account for findings that literacy rates were low among cotton spinners in the British industrial revolution despite findings of substantial premiums to experience (Sanderson 1972; Boot 1995). However, other studies have found literacy to have a substantial positive impact on labor productivity in cotton textile manufacture in the U.S., Italy, and Japan (Bessen 2003; A’Hearn 1998, Saxonhouse 1977) and have suggested a connection between literacy and labor discipline.

A more macro influence is the changing sectoral composition of the economy. It is common to suggest that the service and manufacturing sector have more functional uses for educated labor than the agricultural sector and hence that the shift from agriculture to industry in particular will lead to greater use of educated labor and in turn to require more educated labor forces. However, there are no clear theoretical or empirical grounds for the claim that agriculture makes less use of educated labor than other sectors of the economy. In fact, farmers have often had relatively high literacy rates and there are more obvious functional uses for education in agriculture in keeping accounts and keeping up with technological developments than in manufacturing. Nilsson et al (1999) argue that the process of enclosure in nineteenth-century Sweden, with the increased demands for reading and writing land transfer documents that this entailed, increased the value of literacy in the Swedish agrarian economy. The findings noted above that those in cotton textile occupations associated with early industrialization in Britain had relatively low literacy rates is one indication of the lack of any clear cut ranking across broad economic sectors in the use of educated labor.

Changes in the organization of decision making within major sectors as well as changes in the composition of production within sectors are more likely to have had an impact on demands for educated labor. Thus, within agriculture the extent of centralization or decentralization of decision making, that is the extent to which farm work forces consisted of farmers and large numbers of hired workers or of large numbers of peasants each with scope for making allocative decisions, is likely to have affected the uses made of educated labor in agriculture. Within manufacturing, a given country’s endowment of skilled relative to unskilled labor has been seen as influencing the extent to which openness to trade increases skill premiums, though this entails endogenous determination (Wood 1995).

Technological advance would have tended to boost the demand for more skilled and educated labor if technological advance and skills are complementary, as is often asserted.

However, there is no theoretical reason why technology and skills need be complementary and indeed concepts of directed technological change or induced innovation would suggest that in the presence of relatively high skill premiums, technological advance would be skill saving rather than skill using. Goldin and Katz (1998) have argued that the shift from the factory to continuous processing and batch production associated with the shift of power sources from steam to electricity in the early twentieth century lead to rising technology skill complementarity in U.S. manufacturing. It remains to be established how general this trend has been. It could be related to the distinction made between the dominance in the United States of extensive growth in the nineteenth century due to the growth of factors of production such as labor and capital and the increasing importance of intensive growth in the twentieth century. Intensive growth is often associated with technological advance and a presumed enhanced value for education (Abramovitz and David 2000). Some analysts have emphasized the importance of capital-skill complementarity. For example, Galor and Moav (2003) point to the level of the physical capital stock as a key influence on the return to human capital investment; they suggest that once physical capital stock accumulation surpassed a certain level, the positive impact of human capital accumulation on the return to physical capital became large enough that owners of physical capital came to support the rise of mass schooling. They cite the case of schooling reform in early twentieth century Britain as an example.

Even sharp declines in the premiums to schooling do not preclude a significant impact of education on economic growth. DeLong, Goldin and Katz’s (2003) growth accounting analysis for the twentieth century U.S. makes the point that even at modest positive returns to schooling on the order of 5 percent per year of schooling, with large enough increases in educational attainment, the contribution to growth can be substantial.

Human Capital

Economists have generalized the impact of schooling on labor force quality into the concept of human capital. Human capital refers to the investments that human beings make in themselves to enhance their economic productivity. These investments can take on many forms and include not only schooling but also apprenticeship, a healthy diet, and exercise, among other possibilities. Some economists have even suggested that more amorphous societal factors such as trust, institutional tradition, technological know how and innovation can all be viewed as forms of human capital (Temple 2001a; Topel 1999; Mokyr 2002). Thus broadly defined, human capital would appear as a prime candidate for explaining much of the difference across nations and over time in output and economic growth. However, gaining much insight into the actual magnitudes and the channels of influence by which human capital might influence economic growth requires specification of both the nature and determinants of human capital and how human capital affects aggregate production of an economy.

Much of the literature on human capital and growth makes the implicit assumption that some sort of numerical scale exists for human capital, even if multidimensional and even if unobservable. This in turn implies that it is meaningful to relate levels and changes of human capital to levels of income per capita and rates of economic growth. Given the multiplicity of factors that influence human knowledge and skill and in turn how these influence labor productivity, difficulties would seem likely to arise with attempts to measure aggregate human capital similar to those that have arisen with attempts to specify and measure the nature of human intelligence. Woessmann (2002, 2003) provides useful surveys of some of the issues involved in attempting to specify human capital at the aggregate level appropriate for relating it to economic growth.

One can distinguish between approaches to the measurement of human capital that focus on schooling, as in the discussion above, and those that take a broader view. Broad view approaches try to capture all investments that may have improved human productivity from whatever source, including not just schooling but other productivity enhancing investments, such as on-the-job training. The basic premise of broad view approaches is that for an aggregate economy, the income going to labor over and above what that labor would earn if it were paid the income of an unskilled worker can be viewed as human capital. This measure can be constructed in various ways including as a ratio using unskilled labor earnings as the denominator as in Mulligan and Sala-I-Martin (1997) or using the share of labor income not going as compensation for unskilled labor as in Crafts (1995) and Mitch (2004). Mulligan and Sala-I-Martin (2000) point to some of the major index number problems that can arise in using this approach to aggregate heterogeneous workers.

Crafts and Mitch find that for Britain during its late eighteenth and early nineteenth century industrial revolution between one-sixth and one-fourth of income per capita can be attributed to human capital measured as the share of labor income not going as compensation for unskilled labor.

One approach that has been taken recently to estimate the role of human capital differences in explaining international differences in income per capita is to consider changes in immigrant earnings between origin and destination countries along with differences between immigrant and native workers in the destination country. Olson (1996) suggested that the large increase in earnings of immigrants commonly observed in moving from a low income to a high income country points to a small role for human capital in explaining the wide variation in per capita income across countries. Hendricks (2002) has used differences between immigrant and native earnings in the U.S. to estimate the contribution of otherwise unobserved skill differences to explaining differences in income per capita across countries and finds that they account for only a small part of the latter differences. Hendricks’ approach raises the issue of whether there could be long-term increases in otherwise unobserved skills that could have contributed to economic growth.

The Informal Acquisition of Human Capital

One possible source of such skills is through the informal acquisition of human capital through on-the-job experience. Insofar as work has been common from early adolescence onwards, the issue arises of why the aggregate stock of skills acquired through experience would vary over time and thus influence rates of economic growth. Some types of on-the-job experience which contribute to economic productivity, such as apprenticeship, may entail an opportunity cost and aggregate trends in skill accumulation will be influenced by societal willingness to incur such opportunity costs.

Insofar as schooling continues through adolescence, this can interfere with the accumulation of workforce experience. DeLong, Goldin and Katz (2003) note the tradeoff between rising average years of schooling completed and decreasing years of labor force experience in influencing labor force quality of the U.S. labor force in the last half of the twentieth century. Connolly (2004) has found that informal experience played a relatively greater role in Southern economic growth than for other regions of the United States.

Hansen (1997) has also distinguished the academically-oriented secondary schooling the United States developed in the late nineteenth and early twentieth century from the vocationally-oriented schooling and apprenticeship system that Germany developed over the same time period. Goldin (2001) argues that in the United States the educational system developed general abilities suitable for the greater opportunities for geographical and occupational mobility that prevailed there, while specific vocational training was more suitable for the more restricted mobility opportunities in Germany.

Little evidence exists on whether long-term trends in informal opportunities for skill acquisition have influenced growth rates. However, Smith’s (1776) view of the importance of the division of labor in influencing productivity would suggest that the impact of trends in these opportunities may well have been quite sizable.

Externalities from Education

Economists commonly claim that education yields benefits to society over and above the impact on labor market productivity perceived by the person receiving the education. These benefits can include impacts on economic productivity, such as impacts on technological advance. They can also include non-labor market benefits. Thus McMahon (2002, 11) in his assessment of the social benefits of education includes not only direct effects on economic productivity but also impacts on a) population growth rates and health b) democratization, political stability, and human rights, c) the environment, d) reduction of poverty and inequality, e) crime and drug use, and f) labor force participation. While these effects may appear to involve primarily non-market activity and thus would not be reflected in national output measures and growth rates, factors such as political stability, democratization, population growth, and health have obvious consequences for prospects for long-term growth. However, allowance should be made for the simultaneous influence of the distribution of political power and life expectancy on societal investments in schooling.

For the period since 1960, numerous studies have employed cross country variation in various estimates of human capital and income per capita to directly estimate the impact of human capital on levels of income per capita and growth. A central goal of many such estimates is to see if there are externalities to education on output over and above the private returns estimated from micro data. The results have been conflicting and this has been attributed not only to problems of measurement error but also to differences in specification of human capital and its impact on growth. There does not appear to be strong evidence of large positive externalities to human capital (Temple 2001a). Furthermore, McMahon (2004) reports some empirical specifications which yield substantial indirect long-run effects.

For the period before 1960, limits on the availability of data on schooling and income have limited the use of this empirical regression approach. Thus, any discussion of the impact of externalities of education on production is considerably more conjectural. The central role of government, religious, and philanthropic agencies in the provision of schooling suggests the presence of externalities. Politicians and educators more frequently justified government and philanthropic provision of schooling by its impacts on religious and moral behavior than by any market failure resulting in sub-optimal provision of schooling from the standpoint of maximizing labor productivity. Thus, Adam Smith in his discussion of mass schooling in The Wealth of Nations, places more emphasis on its value to the state in enhancing orderliness and decency while reducing the propensity to popular superstition than on its immediate value in enhancing the economic productivity of the individual worker.

The Impact of the Level of Human Capital on Rates of Economic Growth

The approaches considered thus far relate changes in educational attainment of the labor force to changes in output per worker. An alternative, though not mutually exclusive, approach is to relate the level of educational attainment of an economy’s labor force to its rate of economic growth. The argument for doing so is that a high but unchanging level of educational attainment should contribute to growth by facilitating creativity, innovation and adaptation to change as well as facilitating the ongoing maintenance and improvement of skill in the workforce. Topel (1999) has argued that there may not be any fundamental difference between the two types of approach insofar as ongoing sources of productivity advance and adaptation to change could be viewed as reflecting ongoing improvements in human capital. Nevertheless, some empirical studies based on international data for the late twentieth century have found that a country’s level of educational attainment has a much stronger impact on its rate of economic growth than its rate of improvement in educational attainment (Benhabib and Spiegel 1994).

The paucity of data on schooling attainment has limited the empirical examination of the relationship between levels of human capital and economic growth for periods before the late twentieth century. However, Sandberg (1982) has argued, based on a descriptive comparison of economies in various categories, that those with high levels of schooling in 1850 subsequently experienced faster rates of economic growth. Some studies, such as O’Rourke and Williamson (1997) and Foreman-Peck and Lains (1999), have found that high levels of schooling and literacy have contributed to more rapid rates of convergence for European countries in the late nineteenth century and at the state level for the U.S. over the twentieth century (Connolly 2004).

Bowman and Anderson (1963), a much earlier study based on international evidence for the mid-twentieth century, can be interpreted in the spirit of relating levels of education to subsequent levels of income growth. Their reading of the cross-country relationship between literacy rates and per capita income at mid-twentieth-century was that a threshold of 40 percent adult literacy was required for a country to have a per capita income above 300 1955 dollars. Some have ahistorically projected back this literacy threshold to earlier centuries although the Bowman and Anderson proposal was intended to apply to mid-twentieth century development patterns.

The mechanisms by which the level of schooling would influence the rate of economic growth are problematic to establish. One can distinguish two general possibilities. One would be that higher levels of educational attainment facilitate adaptation and responsiveness to change throughout the workforce. This would be especially important where a large percentage of workers are in decision making positions such as an economy composed largely of small farmers and other small enterprises. The finding of Foster and Rosenzweig (1996) for late twentieth century India that the rate of return to schooling is higher during periods of more rapid technological advance in agriculture would be consistent with this. Likewise, Nilsson et al (1999) find that literacy was important for nineteenth-century Swedish farmers in dealing with enclosure, an institutional change. The other possibility is that higher levels of educational attainment increase the potential pool from which an elite group responsible for innovation can be recruited. This could be viewed as applying specifically to scientific and technical innovation as in Mokyr (2002) and Jones (2002) — but also to technological and industrial leadership more generally (Nelson and Wright 1992) and to facilitating advancement in society by ability irrespective of social origins (Galor and Tsiddon 1997). Recently, Labuske and Baten (2004) have found that international rates of patenting are related to secondary enrollment rates.

Two issues have arisen in the recent theoretical literature regarding specifying relationships between the level of human capital and rates of economic growth. First, Lucas (1988) in an influential model of the impact of human capital on growth, specifies that the rate of growth of human capital formation depends on initial levels of human capital, in other words that parents’ and teachers’ human capital has a direct positive influence on the rate of growth of learners’ human capital. This specification of the impact of the initial level of human capital allows for ongoing and unbounded growth of human capital and through this its ongoing contribution to economic growth. Such ongoing growth of human capital could occur through improvements in the quality of schooling or through enhanced improvements in learning from parents and other informal settings. While it might be plausible to suppose that improved education of teachers will enhance their effectiveness with learners, it seems less plausible to suppose that this enhanced effectiveness will increase unbounded in proportion to initial levels of education (Lord 2001, 82).

A second issue is that insofar as higher levels of human capital contribute to economic growth through increases in research and development activity and innovative activity more generally, one would expect the presence of scale effects. Economies with larger populations holding constant their level of human capital per person should benefit from more overall innovative activity simply because they have more people engaged in innovative activity. Jones (1995) has pointed out that such scale effects seem implausible if one looks at the time series relationship between rates of economic growth and those engaged in innovative activity. In recent decades the growth of the number of scientists, engineers, and others engaged in innovative activity has far outstripped the actual growth of productivity and other indicators of direct impact on innovation. Thus, one should allow for diminishing returns in the relationship between levels of education and technological advance.

Thus, as with schooling externalities, considering the impact of levels of education on growth offers numerous channels of influence leaving the challenge for the historian of ascertaining their quantitative importance in the past.

Conclusion

This survey has considered some of the basic ways in which the rise of mass education has contributed to economic growth in recent centuries. Given their potential influence on labor productivity, levels and changes in schooling and of human capital more generally have the potential for explaining a large share of increases in per capita output over time. However, increases in mass schooling seem to explain a major share of economic growth only over relatively short periods of time, with a more modest impact over longer time horizons. In some situations, such as the United States in the twentieth century, it appears that improvements in the schooling of the labor force have made substantial contributions to economic growth. Yet schooling should not be seen as either a necessary or sufficient condition for generating economic growth. Factors other than education can contribute to economic growth and in their absence, it is not clear that schooling in itself can contribute to economic growth. Moreover, there are likely limits on the extent to which average years of schooling of the labor force can expand, although improvement in the quality of schooling is not so obviously bounded. Perhaps the most obvious avenue through which education has contributed to economic growth is by expanding the rate of technological change. But as has been noted, there are numerous other possible channels of influence ranging from political stability and property rights to life expectancy and fertility. The diversity of these channels point to both the challenges and the opportunities in examining the historical connections between education and economic growth.

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[1] I have received helpful comments on this essay from Mac Boot, Claudia Goldin, Bill Lord, Lant Pritchett, Robert Whaples, and an anonymous referee. At an earlier stage in working through some of this material, I benefited from a quite useful conversation with Nick Crafts. However, I bear sole responsibility for remaining errors and shortcomings.

[2] For a detailed survey of trends in schooling in the early modern and modern period see Graff (1987).

[3] See Barro (1998) for a brief intellectual history of growth accounting.

[4] Blaug (1970) provides an accessible, detailed critique of the assumptions behind Denison’s growth accounting approach and Topel (1999) provides a further discussion of the problems of using a growth accounting approach to measure the contribution of education, especially those due to omitting social externalities.

[5] By using a Cobb-Douglas specification of the aggregate production function, one can arrive at the following equation for the ratio between final and initial national income per worker due to increases in average school years completed between the two time periods, t = 0 and t =1:

Start with the aggregate production function specification:

Y = A K(1-α) [(1+r)S L]α

Y/L = A (K/L)(1-α) [(1+r)S L/L]α

Y/L = A (K/L)(1-α) [(1+r)S]α

Assume that the average years of schooling of the labor force is the only change between t = 0 and t =1; that is, assume no change in the ratio of capital to labor between time periods. Then the ratio of the income per worker in the later time period to the earlier time period will be:

(Y/L)1/ (Y/L)0 = ( (1 + r )S1– S0 )α

Where Y = output, A = a measure of the current state of technology, K = the physical capital stock, L = the labor force, r = the percent by which a year of schooling increases labor productivity, S is the average years of schooling completed by the labor force in each time period, α is labor’s share in national income, and the subscripts 0 and 1 denote initial and final time periods.

As noted above, the derivation above is for a partial equilibrium change in years of schooling of the labor force holding constant the physical capital stock. Allowing for physical capital stock accumulation in response to schooling increases in a Solow-type model implies that the ratio of final to initial output per worker will be

(Y/L)1/ (Y/L)0 = ( (1 + r )S1 – S0 ) .

For a derivation of this see Lord (2001, 99-100). Lord’s derivation differs from that here by specifying the technology parameter A as labor augmenting. Allowing for increases in A over time due to technical change would further increase the contribution to output per worker of additional years of schooling.

[6]To take a specific example, suppose that in the steady-state case of Table 1B, a 5 percent earnings premium per year of schooling is assigned to the first 6 years of schooling, i.e. primary schooling, a 10 percent earnings premium per year is assigned to the next 6 years of schooling, i.e. secondary schooling, and a 15 percent earnings premium per year is assigned to the final 4 years of schooling, that is college. In that case, the impact on steady state income per capita compared with no schooling at all would be (1.05)6x(1.10)6x(1.15)4 = 4.15, compared with the 4.59 in going from no schooling to universal college at a 10 percent rate of return for every year of school completed.

[7] Denison’s standard growth accounting approach assumes that education is labor augmenting and, in particular, that there is an infinite elasticity of substitution between skilled and unskilled labor. This specification is conventional in growth accounting analysis. But another common specification in entering education into aggregate production functions is to specify human capital as a third factor of production along with unskilled labor and physical capital. Insofar as this is done with a Cobb-Douglas production function specification, as is conventional, the implied elasticity of substitution between human capital and either unskilled labor or physical capital is unity. The complementarity between human capital and other inputs this implies will tend to increase the contribution of human capital increases to economic growth by decreasing the tendency for diminishing returns to set in. (For a fuller treatment of the considerations involved see Griliches 1970, Conlisk 1970, Broadberry 2003). For an application of this approach in a historical growth accounting exercise, see Crafts (1995), who finds a fairly substantial contribution of human capital during the English industrial revolution. For a critique of Crafts’ estimates see Mitch (1999).

[8] For an examination of long-run growth dynamics with schooling investments endogenously determined by transfer-constrained family decisions see Lord 2001, 209-213 and Rangazas 2000. Lord and Rangazas find that allowing for the fact that families are credit constrained in making schooling investment decisions is consistent with the time path of interest rates in the U.S. between 1870 and 1970.

Citation: Mitch, David. “Education and Economic Growth in Historical Perspective”. EH.Net Encyclopedia, edited by Robert Whaples. July 26, 2005. URL http://eh.net/encyclopedia/education-and-economic-growth-in-historical-perspective/

Economy of England at the Time of the Norman Conquest

John McDonald, Flinders University, Adelaide, Australia

The Domesday Survey of 1086 provides high quality and detailed information on the inputs, outputs and tax assessments of most English estates. This article describes how the data have been used to reconstruct the eleventh-century Domesday economy. By exploiting modern economic theory and statistical methods the reconstruction has led to a radically different assessment of the way in which the Domesday economy and fiscal system were organized. It appears that tax assessments were based on a capacity to pay principle subject to politically expedient concessions and we can discover who received lenient assessments and why. Penetrating questions can be asked about the economy. We can compare the efficiency of Domesday agricultural production with the efficiency of more modern economies, measure the productivity of inputs and assess the impact of feudalism and manorialism on economic activity. The emerging picture of a reasonably well organized economy and fair tax system contrasts with the assessment of earlier historians who saw the Normans as capable military and civil administrators but regarded the economy as haphazardly run and tax assessments as “artificial” or arbitrary. The next section describes the Survey, the contemporary institutional arrangements and the main features of Domesday agricultural production. Some key findings on the Domesday economy and tax system are then briefly discussed.

Domesday England and the Domesday Survey

William the Conqueror invaded England from France in 1066 and carried out the Domesday Survey twenty years later. By 1086, Norman rule had been largely consolidated, although only after rebellion and civil dissent had been harshly put down. The Conquest was achieved by an elite, and, although the Normans brought new institutions and practices, these were superimposed on the existing order. Most of the Anglo-Saxon aristocracy were eliminated, the lands of over 4,000 English lords passing to less than 200 Norman barons, with much of the land held by just a handful of magnates.

William ruled vigorously through the Great Council. England was divided into shires, or counties, which were subdivided into hundreds. There was a sophisticated and long established shire administration. The sheriff was the king’s agent in the county, royal orders could be transmitted through the county and hundred courts, and an effective taxation collection system was in place.

England was a feudal state. All land belonged to the king. He appointed tenants-in-chief, both lay and ecclesiastical, who usually held land in return for providing a quota of fully equipped knights. The tenants-in-chief might then grant the land to sub-tenants in return for rents or services, or work the estate themselves through a bailiff. Although the Survey records 112 boroughs, agriculture was the predominant economic activity, with stock rearing of greater importance in the south-west and arable farming more important in the east and midlands. Manorialism was a pervasive influence, although it existed in most parts of England in a modified form. On the manor the peasants worked the lord’s demesne in return for protection, housing, and the use of plots of land to cultivate their own crops. They were tied to the lord and the manor and provided a resident workforce. The demesne was also worked by slaves who were fed and housed by the lord.

The Domesday Survey was commissioned on Christmas day, 1085, and it is generally thought that work on summarizing the Survey was terminated with the death of William in September 1087. The task was facilitated by the availability of Anglo-Saxon hidage (tax) lists. The counties of England were grouped into (probably) seven circuits. Each circuit was visited by a team of commissioners, bishops, lawyers and lay barons who had no material interests in the area. The commissioners were responsible for circulating a list of questions to land holders, for subjecting the responses to a review in the county court by the hundred juries, often consisting of half Englishmen and half Frenchmen, and for supervising the compilation of county and circuit returns. The circuit returns were then sent to the Exchequer in Winchester where they were summarized, edited and compiled into Great Domesday Book.

Unlike modern surveys, individual questionnaire responses were not treated confidentially but became public knowledge, being verified in the courts by landholders with local knowledge. In such circumstances, the opportunities for giving false or misleading evidence were limited.

Domesday Book consists of two volumes, Great (or Exchequer) Domesday and Little Domesday. Little Domesday is a detailed original survey circuit return of circuit VII, Essex, Norfolk and Suffolk. Great Domesday is a summarized version of the other circuit returns sent to the King’s treasury in Winchester. (It is thought that the death of William occurred before Essex and East Anglia could be included in Great Domesday.) The two volumes contain information on the net incomes or outputs (referred to as the annual values), tax assessments and resources of most manors in England in 1086, some information for 1066, and sometimes also for an intermediate year. The information was used to revise tax assessments and document the feudal structure, “who held what, and owed what, to whom.”

Taxation

The Domesday tax assessments relate to a non-feudal tax, the geld, thought to be levied annually by the end of William’s reign. The tax can be traced back to the danegeld, and, although originally a land tax, by Norman times, it was more broadly based and a significant impost on landholders.

There is an extensive literature on the Norman tax system, much of it influenced by Round (1895), who considered the assessments to be “artificial,” in the sense that they were imposed from above via the county and hundred with little or no consideration of the capacity of an individual estate to pay the tax. Round largely based his argument on an unsystematic and subjective review of the distribution of the assessments across estates, vills and the hundreds of counties.

In (1985a) and (1986, Ch. 4), Graeme Snooks and I argued that, contrary to Round’s hypothesis, the tax assessments were based on a capacity to pay principle, subject to some politically expedient tax concessions. Similar tax systems operate in most modern societies and reflect an attempt to collect revenue in a politically acceptable way. We found empirical support for the hypothesis, using statistical methods. We showed, for example, that for Essex lay estates about 65 percent of variation in the tax assessments could be attributed to variations in manorial net incomes or manorial resources, two alternative ways of measuring capacity to pay. Similar results were obtained for other counties. Capacity to pay explains from 64 to 89 percent of variation in individual estate assessment data for the counties of Buckinghamshire, Cambridgeshire, Essex and Wiltshire, and from 72 to 81 percent for aggregate data for 29 counties (see McDonald and Snooks, 1987a). The estimated tax relationships capture the main features of the tax system.

Capacity to pay explains most variation in tax assessments, but some variation remains. Who and which estates were treated favorably? And what factors were associated with lenient taxation? These issues were investigated in McDonald (1998) where frontier methods were used to derive a measure of how favorable the tax assessments were for each Essex lay estate. (The frontier methods, also known as “data envelopment analysis,” use the tax and income observations to trace out an outer bound, or frontier, for the tax relationship.) Estates, tenants-in-chief and local areas (hundreds) of the county with lenient assessments were identified, and statistical methods used to discover factors associated with favorable assessments. Some significant factors were the tenant-in-chief holding the estate (assessments tended to be less beneficial for the tenants-in-chief holding a large number of estates in Essex), the hundred location (some hundreds receiving more favorable treatment than others), proximity to an urban center (estates remote from the urban centers being more favorably treated), economic size of the estate (larger estates being less favorably treated) and tenure (estates held as sub-tenancies having more lenient assessments). The results suggest a similarity with more modern tax systems, with some groups and activities receiving minor concessions and the administrative process inducing some unevenness in the assessments. Although many details of the tax system have been lost in the mists of time, careful analysis of the Survey data has enabled us to rediscover its main features.

Production

Since Victorian times historians have used Domesday Book to study the political, institutional and social structures and the geography of Domesday England. However, the early scholars tended to draw away from economic issues. They were unable to perceive that systematic economic relationships were present in the Domesday economy, and, in contrast to their view that the Normans displayed considerable ability in civil administration and military matters, economic production was regarded as poorly organized (see McDonald and Snooks, 1985a, 1985b and 1986, especially Ch 3). One explanation why the Domesday scholars were unable to discover consistent relationships in the economy lies in the empirical method they adopted. Rather than examining the data as a whole using statistical techniques, conclusions were drawn by generalizing from a few (often atypical) cases. It is not surprising that no consistent pattern was evident when data were restricted to a few unusual observations. It would also appear that the researchers often did not have a firm grasp of economic theory (for example, seemingly being perplexed that the same annual value, that is, net output, could be generated by estates with different input mixes, see McDonald and Snooks, 1986, Ch. 3).

In McDonald and Snooks (1986), using modern economic and statistical methods, Graeme Snooks and I reanalyzed manorial production relationships. The study shows that strong relationships existed linking estate net output to inputs. We estimated manorial production functions which indicate many interesting characteristics of Domesday production: returns to scale were close to constant, oxen plough teams and meadowland were prized inputs in production but horses contributed little, and villans, bordars and slaves (the less free workers) contributed far more than freemen and sokemen ( the more free) to the estate’s net output. The evidence suggested that in many ways Domesday landholders operated in a manner similar to modern entrepreneurs. Unresolved by this research was the question of how similar was the pattern of medieval and modern economic activity. In particular, how well organized was estate production?

Clearly, in an absolute sense Domesday estate production was inefficient. With modern technology, using, for example, motorized tractors, output could have been increased many-fold. A more interesting question is: Given the contemporary technology and institutions, how efficient was production?

In McDonald (1998) frontier methods were used to measure best practice, given the economic environment. We then measured how far, on average, estate production was below the best practice frontier. Providing some estates were effectively organized, so that best practice was good practice, this will be a useful measure. If many estates were run haphazardly and ineffectively, average efficiency will be low and efficiency dispersion measures large. Comparisons with average efficiency levels in similar production situations will give an indication of whether Domesday average efficiency was unusually low.

A large number of efficiency studies have been reported in the literature. Three case studies with characteristics similar to Domesday production are Hall’s (1975) study of agriculture after the Civil War in the American South, Hall and LeVeen’s (1978) analysis of small Californian farms and Byrnes, Färe, Grosskopf and Lovell’s (1988) study of American surface coalmines. For all three studies the individual establishment is the production unit, the economic activity is unsophisticated primary production and similar frontier methods are used to measure efficiency.

The comparison studies suggest that efficiency levels varied less across Domesday estates than they did among postbellum Southern farms and small Californian farms in the 1970s (and were very similar for Domesday estates and US surface coalmines). Certainly, the average Domesday estate efficiency level does not appear to be unusually low when compared with average efficiency levels in similar production situations.

In McDonald (1998) estate efficiency measures are also used to examine details of production on individual estates and statistical methods employed to find factors associated with efficiency. Some of these include the estate’s tenant-in-chief (some tenants-in-chief displayed more entrepreneurial flair than others), the size of the estate (larger estates, using inputs in different proportions to smaller estates, tended to be more efficient) and the kind of agriculture undertaken (estates specialized in grazing were more efficient).

Largely through the influences of feudalism and manorialism, Domesday agriculture suffered from poorly developed factor markets and considerable immobility of inputs. Although there were exceptions to the rule, as a first approximation, manorial production can be characterized in terms of estates worked by a residential labor force using the resources, which were available on the estate.

Input productivity depends on the mix of inputs used in production, and with estates endowed with widely different resource mixes, one might expect that input productivities would vary greatly across estates. The frontier analysis generates input productivity measures (shadow prices), and these confirm this expectation — indeed on many estates some inputs made very little contribution to production. The frontier analysis also allows us to estimate the economic cost of input rigidity induced by the feudal and manorial arrangements. The calculation indicates that if inputs had been mobile among estates an increase in total net output of 40.1 percent would have been possible. This potential loss in output is considerable. The frontier analysis indicates the loss in total net output resulting from estates not being fully efficient was 51.0 percent. The loss in output due to input rigidities is smaller, but of a similar order of magnitude.

Domesday Book is indeed a rich data source. It is remarkable that so much can be discovered about the English economy almost one thousand years ago.

Further reading

Background information on Domesday England is contained in McDonald and Snooks (1986, Ch. 1 and 2; 1985a, 1985b, 1987a and 1987b) and McDonald (1998). For more comprehensive accounts of the history of the period see Brown (1984), Clanchy (1983), Loyn (1962), (1965), (1983), Stenton (1943), and Stenton (1951). Other useful references include Ballard (1906), Darby (1952), (1977), Galbraith (1961), Hollister (1965), Lennard (1959), Maitland (1897), Miller and Hatcher (1978), Postan (1966), (1972), Round (1895), (1903), the articles in Williams (1987) and references cited in McDonald and Snooks (1986). The Survey is discussed in McDonald and Snooks (1986, sec. 2.2), the references cited there, and the articles in Williams (1987). The Domesday and modern surveys are compared in McDonald and Snooks (1985c).
The reconstruction of the Domesday economy is described in McDonald and Snooks (1986). Part 1 contains information on the basic tax and production relationships and Part 2 describes the methods used to estimate the relationships. The tax and production frontier analysis and efficiency comparisons are described in McDonald (1998). The book also explains the frontier methodology. A series of articles describe features of the research to different audiences: McDonald and Snooks (1985a, 1985b, 1987a, 1987b), economic historians; McDonald (2000), economists; McDonald (1997), management scientists; McDonald (2002), accounting historians (who recognize that Domesday Book possesses many attributes of an accounting record); and McDonald and Snooks (1985c), statisticians. Others who have made important contributions to our understanding of the Domesday economy include Miller and Hatcher (1978), Harvey (1983) and the contributors to the volumes edited by Aston (1987), Holt (1987), Hallam (1988) and Britnell and Campbell (1995).

References

Aston, T.H., editor. Landlords, Peasants and Politics in Medieval England. Cambridge: Cambridge University Press, 1987.
Ballard, Adolphus. The Domesday Inquest. London: Methuen, 1906.
Brittnell, Richard H. and Bruce M.S. Campbell, editors. A Commercialising Economy: England 1086 to c. 1300. Manchester: Manchester University Press, 1995.
Brown, R. Allen. The Normans. Woodbridge: Boydell Press, 1984.
Byrnes, P., R. Färe, S. Grosskopf and C.A. K. Lovell. “The Effect of Unions on Productivity: U.S. Surface Mining of Coal.” Management Science 34 (1988): 1037-53.
Clanchy, M.T. England and Its Rulers, 1066-1272. Glasgow: Fontana, 1983.
Darby, H.C. The Domesday Geography of Eastern England. Reprinted 1971. Cambridge: Cambridge University Press, 1952.
Darby, H.C. Domesday England. Reprinted 1979. Cambridge: Cambridge University Press, 1977.
Darby, H.C. and I.S. Maxwell, editor. The Domesday Geography of Northern England. Cambridge: Cambridge University Press, 1962.
Galbraith, V.H. The Making of Domesday Book. Oxford: Clarendon Press,1961.
Hall, A. R. “The Efficiency of Post-Bellum Southern Agriculture.” Ann Arbor, MI: University Microfilms International, 1975.
Hall, B. F. and E. P. LeVeen. “Farm Size and Economic Efficiency: The Case of California.” American Journal of Agricultural Economics 60 (1978): 589-600.
Hallam, H.E. Rural England, 1066-1348. Brighton: Fontana, 1981.
Hallam, H.E., editor. The Agrarian History of England and Wales, II: 1042-1350. Cambridge: Cambridge University Press, 1988.
Harvey, S.P.J. “The Extent and Profitability of Demesne Agriculture in the Latter Eleventh Century.” In Social Relations and Ideas: Essays in Honour of R.H. Hilton, edited by T.H. Ashton et al. Cambridge, Cambridge University Press, 1983.
Hollister, C.W. The Military Organisation of Norman England. Oxford: Clarendon Press. 1965.
Holt, J. C., editor. Domesday Studies. Woodbridge: Boydell Press, 1987.
Langdon, J. “The Economics of Horses and Oxen in Medieval England.” Agricultural History Review 30 (1982): 31-40.
Lennard, R. Rural England 1086-1135: A Study of Social and Agrarian Conditions. Oxford: Clarendon Press, 1959.
Loyn, R. Anglo-Saxon England and the Norman Conquest. Reprinted 1981. London: Longman, 1962.
Loyn, R. The Norman Conquest. Reprinted 1981. London: Longman, 1965.
Loyn, R. The Governance of Anglo-Saxon England, 500-1087. London: Edward Arnold, 1983.
McDonald, John. “Manorial Efficiency in Domesday England.” Journal of Productivity Analysis 8 (1997): 199-213.
McDonald, John. Production Efficiency in Domesday England. London: Routledge, 1998.
McDonald, John. “Domesday Economy: An Analysis of the English Economy Early in the Second Millennium.” National Institute Economic Review 172 (2000): 105-114.
McDonald, John. “Tax Fairness in Eleventh Century England.” Accounting Historians Journal 29 (2002): 173-193.
McDonald, John. and G. D. Snooks. “Were the Tax Assessments of Domesday England Artificial? The Case of Essex.” Economic History Review 38 (1985a): 353-373.
McDonald, John. and G. D. Snooks. “The Determinants of Manorial Income in Domesday England: Evidence from Essex.” Journal of Economic History 45 (1985b): 541-556.
McDonald, John. and G. D. Snooks. “Statistical Analysis of Domesday Book (1086).” Journal of the Royal Statistical Society, Series A 148 (1985c): 147-160.
McDonald, John. and G. D. Snooks. Domesday Economy: A New Approach to Anglo-Norman History. Oxford: Clarendon Press, 1986.
McDonald, John. and G. D. Snooks. “The Suitability of Domesday Book for Cliometric Analysis.” Economic History Review 40 (1987a): 252-261.
McDonald, John. and G. D. Snooks. “The Economics of Domesday England.” In
A. Williams, editor, Domesday Book Studies. London: Alecto Historical Editions, 1987.
Maitland, Frederic William. Domesday Book and Beyond. Reprinted 1921, Cambridge: Cambridge University Press, 1897.
Miller, Edward, and John Hatcher. Medieval England: Rural Society and Economic Change 1086-1348. London: Longman, 1978.
Morris, J., general editor. Domesday Book: A Survey of the Counties of England. Chichester: Phillimore, 1975.
Postan, M. M. Medieval Agrarian Society in Its Prime, The Cambridge Economic History of Europe. Vol. 1, M. M. Postan, editor. Cambridge: Cambridge University Press, 1966.
Postan, M. M. The Medieval Economy and Society: An Economic History of Britain in the Middle Ages. London: Weidenfeld & Nicolson, 1972.
Raftis, J. A. The Estates of Ramsey Abbey: A Study in Economic Growth and Organisation. Toronto: Pontifical Institute of Medieval Studies, 1957.
Round, John Horace. Feudal England: Historical Studies on the Eleventh and Twelfth Centuries. Reprinted 1964. London: Allen & Unwin, 1895.
Round, John Horace. “Essex Survey.” In VCH Essex. Vol. 1, reprinted 1977. London: Dawson, 1903.
Snooks, G. D. “The Dynamic Role of the Market in the Anglo-Saxon Economy and Beyond, 1086-1300.” In A Commercialising Economy: England 1086 to c. 1300, edited by R. H. Brittnell and M. S. Campbell. Manchester: Manchester University Press, 1995.
Stenton, D. M. English Society in the Middle Ages. Reprinted 1983. Harmondsworth: Penguin, 1951.
Stenton, F. M. Anglo-Saxon England. Reprinted 1975. Oxford: Clarendon Press, 1943.
Victoria County History. London: Oxford University Press, 1900-.
Williams, A., editor. Domesday Book Studies. London: Alecto Historical Editions, 1987.

Citation: McDonald, John. “Economy of England at the Time of the Norman Conquest”. EH.Net Encyclopedia, edited by Robert Whaples. September 9, 2004. URL http://eh.net/encyclopedia/economy-of-england-at-the-time-of-the-norman-conquest/

An Economic History of Denmark

Ingrid Henriksen, University of Copenhagen

Denmark is located in Northern Europe between the North Sea and the Baltic. Today Denmark consists of the Jutland Peninsula bordering Germany and the Danish Isles and covers 43,069 square kilometers (16,629 square miles). 1 The present nation is the result of several cessions of territory throughout history. The last of the former Danish territories in southern Sweden were lost to Sweden in 1658, following one of the numerous wars between the two nations, which especially marred the sixteenth and seventeenth centuries. Following defeat in the Napoleonic Wars, Norway was separated from Denmark in 1814. After the last major war, the Second Schleswig War in 1864, Danish territory was further reduced by a third when Schleswig and Holstein were ceded to Germany. After a regional referendum in 1920 only North-Schleswig returned to Denmark. Finally, Iceland, withdrew from the union with Denmark in 1944. The following will deal with the geographical unit of today’s Denmark.

Prerequisites of Growth

Throughout history a number of advantageous factors have shaped the Danish economy. From this perspective it may not be surprising to find today’s Denmark among the richest societies in the world. According to the OECD, it ranked seventh in 2004, with income of $29.231 per capita (PPP). Although we can identify a number of turning points and breaks, for the time period over which we have quantitative evidence this long-run position has changed little. Thus Maddison (2001) in his estimate of GDP per capita around 1600 places Denmark as number six. One interpretation could be that favorable circumstances, rather than ingenious institutions or policies, have determined Danish economic development. Nevertheless, this article also deals with time periods in which the Danish economy was either diverging from or converging towards the leading economies.

Table 1:
Average Annual GDP Growth (at factor costs)
Total Per capita
1870-1880 1.9% 0.9%
1880-1890 2.5% 1.5%
1890-1900 2.9% 1.8%
1900-1913 3.2% 2.0%
1913-1929 3.0% 1.6%
1929-1938 2.2% 1.4%
1938-1950 2.4% 1.4%
1950-1960 3.4% 2.6%
1960-1973 4.6% 3.8%
1973-1982 1.5% 1.3%
1982-1993 1.6% 1.5%
1993-2004 2.2% 2.0%

Sources: Johansen (1985) and Statistics Denmark ‘Statistikbanken’ online.

Denmark’s geographical location in close proximity of the most dynamic nations of sixteenth-century Europe, the Netherlands and the United Kingdom, no doubt exerted a positive influence on the Danish economy and Danish institutions. The North German area influenced Denmark both through long-term economic links and through the Lutheran Protestant Reformation which the Danes embraced in 1536.

The Danish economy traditionally specialized in agriculture like most other small and medium-sized European countries. It is, however, rather unique to find a rich European country in the late-nineteenth and mid-twentieth century which retained such a strong agrarian bias. Only in the late 1950s did the workforce of manufacturing industry overtake that of agriculture. Thus an economic history of Denmark must take its point of departure in agricultural development for quite a long stretch of time.

Looking at resource endowments, Denmark enjoyed a relatively high agricultural land-to-labor ratio compared to other European countries, with the exception of the UK. This was significant for several reasons since it, in this case, was accompanied by a comparatively wealthy peasantry.

Denmark had no mineral resources to speak of until the exploitation of oil and gas in the North Sea began in 1972 and 1984, respectively. From 1991 on Denmark has been a net exporter of energy although on a very modest scale compared to neighboring Norway and Britain. The small deposits are currently projected to be depleted by the end of the second decade of the twenty-first century.

Figure 1. Percent of GDP in selected=

Source: Johansen (1985) and Statistics Denmark ’Nationalregnskaber’

Good logistic can be regarded as a resource in pre-industrial economies. The Danish coast line of 7,314 km and the fact that no point is more than 50 km from the sea were advantages in an age in which transport by sea was more economical than land transport.

Decline and Transformation, 1500-1750

The year of the Lutheran Reformation (1536) conventionally marks the end of the Middle Ages in Danish historiography. Only around 1500 did population growth begin to pick up after the devastating effect of the Black Death. Growth thereafter was modest and at times probably stagnant with large fluctuations in mortality following major wars, particularly during the seventeenth century, and years of bad harvests. About 80-85 percent of the population lived from subsistence agriculture in small rural communities and this did not change. Exports are estimated to have been about 5 percent of GDP between 1550 and 1650. The main export products were oxen and grain. The period after 1650 was characterized by a long lasting slump with a marked decline in exports to the neighboring countries, the Netherlands in particular.

The institutional development after the Black Death showed a return to more archaic forms. Unlike other parts of northwestern Europe, the peasantry on the Danish Isles afterwards became a victim of a process of re-feudalization during the last decades of the fifteenth century. A likely explanation is the low population density that encouraged large landowners to hold on to their labor by all means. Freehold tenure among peasants effectively disappeared during the seventeenth century. Institutions like bonded labor that forced peasants to stay on the estate where they were born, and labor services on the demesne as part of the land rent bring to mind similar arrangements in Europe east of the Elbe River. One exception to the East European model was crucial, however. The demesne land, that is the land worked directly under the estate, never made up more than nine percent of total land by the mid eighteenth century. Although some estate owners saw an interest in encroaching on peasant land, the state protected the latter as production units and, more importantly, as a tax base. Bonded labor was codified in the all-encompassing Danish Law of Christian V in 1683. It was further intensified by being extended, though under another label, to all Denmark during 1733-88, as a means for the state to tide the large landlords over an agrarian crisis. One explanation for the long life of such an authoritarian institution could be that the tenants were relatively well off, with 25-50 acres of land on average. Another reason could be that reality differed from the formal rigor of the institutions.

Following the Protestant Reformation in 1536, the Crown took over all church land, thereby making it the owner of 50 percent of all land. The costs of warfare during most of the sixteenth century could still be covered by the revenue of these substantial possessions. Around 1600 the income from taxation and customs, mostly Sound Toll collected from ships that passed the narrow strait between Denmark and today’s Sweden, on the one hand and Crown land revenues on the other were equally large. About 50 years later, after a major fiscal crisis had led to the sale of about half of all Crown lands, the revenue from royal demesnes declined relatively to about one third, and after 1660 the full transition from domain state to tax state was completed.

The bulk of the former Crown land had been sold to nobles and a few common owners of estates. Consequently, although the Danish constitution of 1665 was the most stringent version of absolutism found anywhere in Europe at the time, the Crown depended heavily on estate owners to perform a number of important local tasks. Thus, conscription of troops for warfare, collection of land taxes and maintenance of law and order enhanced the landlords’ power over their tenants.

Reform and International Market Integration, 1750-1870

The driving force of Danish economic growth, which took off during the late eighteenth century was population growth at home and abroad – which triggered technological and institutional innovation. Whereas the Danish population during the previous hundred years grew by about 0.4 percent per annum, growth climbed to about 0.6 percent, accelerating after 1775 and especially from the second decade of the nineteenth century (Johansen 2002). Like elsewhere in Northern Europe, accelerating growth can be ascribed to a decline in mortality, mainly child mortality. Probably this development was initiated by fewer spells of epidemic diseases due to fewer wars and to greater inherited immunity against contagious diseases. Vaccination against smallpox and formal education of midwives from the early nineteenth century might have played a role (Banggård 2004). Land reforms that entailed some scattering of the farm population may also have had a positive influence. Prices rose from the late eighteenth century in response to the increase in populations in Northern Europe, but also following a number of international conflicts. This again caused a boom in Danish transit shipping and in grain exports.

Population growth rendered the old institutional set up obsolete. Landlords no longer needed to bind labor to their estate, as a new class of landless laborers or cottagers with little land emerged. The work of these day-laborers was to replace the labor services of tenant farmers on the demesnes. The old system of labor services obviously presented an incentive problem all the more since it was often carried by the live-in servants of the tenant farmers. Thus, the labor days on the demesnes represented a loss to both landlords and tenants (Henriksen 2003). Part of the land rent was originally paid in grain. Some of it had been converted to money which meant that real rents declined during the inflation. The solution to these problems was massive land sales both from the remaining crown lands and from private landlords to their tenants. As a result two-thirds of all Danish farmers became owner-occupiers compared to only ten percent in the mid-eighteenth century. This development was halted during the next two and a half decades but resumed as the business cycle picked up during the 1840s and 1850s. It was to become of vital importance to the modernization of Danish agriculture towards the end of the nineteenth century that 75 percent of all agricultural land was farmed by owners of middle-sized farms of about 50 acres. Population growth may also have put a pressure on common lands in the villages. At any rate enclosure begun in the 1760s, accelerated in the 1790s supported by legislation and was almost complete in the third decade of the nineteenth century.

The initiative for the sweeping land reforms from the 1780s is thought to have come from below – that is from the landlords and in some instances also from the peasantry. The absolute monarch and his counselors were, however, strongly supportive of these measures. The desire for peasant land as a tax base weighed heavily and the reforms were believed to enhance the efficiency of peasant farming. Besides, the central government was by now more powerful than in the preceding centuries and less dependent on landlords for local administrative tasks.

Production per capita rose modestly before the 1830s and more pronouncedly thereafter when a better allocation of labor and land followed the reforms and when some new crops like clover and potatoes were introduced at a larger scale. Most importantly, the Danes no longer lived at the margin of hunger. No longer do we find a correlation between demographic variables, deaths and births, and bad harvest years (Johansen 2002).

A liberalization of import tariffs in 1797 marked the end of a short spell of late mercantilism. Further liberalizations during the nineteenth and the beginning of the twentieth century established the Danish liberal tradition in international trade that was only to be broken by the protectionism of the 1930s.

Following the loss of the secured Norwegian market for grain in 1814, Danish exports began to target the British market. The great rush forward came as the British Corn Law was repealed in 1846. The export share of the production value in agriculture rose from roughly 10 to around 30 percent between 1800 and 1870.

In 1849 absolute monarchy was peacefully replaced by a free constitution. The long-term benefits of fundamental principles such as the inviolability of private property rights, the freedom of contracting and the freedom of association were probably essential to future growth though hard to quantify.

Modernization and Convergence, 1870-1914

During this period Danish economic growth outperformed that of most other European countries. A convergence in real wages towards the richest countries, Britain and the U.S., as shown by O’Rourke and Williamsson (1999), can only in part be explained by open economy forces. Denmark became a net importer of foreign capital from the 1890s and foreign debt was well above 40 percent of GDP on the eve of WWI. Overseas emigration reduced the potential workforce but as mortality declined population growth stayed around one percent per annum. The increase in foreign trade was substantial, as in many other economies during the heyday of the gold standard. Thus the export share of Danish agriculture surged to a 60 percent.

The background for the latter development has featured prominently in many international comparative analyses. Part of the explanation for the success, as in other Protestant parts of Northern Europe, was a high rate of literacy that allowed a fast spread of new ideas and new technology.

The driving force of growth was that of a small open economy, which responded effectively to a change in international product prices, in this instance caused by the invasion of cheap grain to Western Europe from North America and Eastern Europe. Like Britain, the Netherlands and Belgium, Denmark did not impose a tariff on grain, in spite of the strong agrarian dominance in society and politics.

Proposals to impose tariffs on grain, and later on cattle and butter, were turned down by Danish farmers. The majority seems to have realized the advantages accruing from the free imports of cheap animal feed during the ongoing process of transition from vegetable to animal production, at a time when the prices of animal products did not decline as much as grain prices. The dominant middle-sized farm was inefficient for wheat but had its comparative advantage in intensive animal farming with the given technology. O’Rourke (1997) found that the grain invasion only lowered Danish rents by 4-5 percent, while real wages rose (according to expectation) but more than in any other agrarian economy and more than in industrialized Britain.

The move from grain exports to exports of animal products, mainly butter and bacon, was to a great extent facilitated by the spread of agricultural cooperatives. This organization allowed the middle-sized and small farms that dominated Danish agriculture to benefit from the economy of scale in processing and marketing. The newly invented steam-driven continuous cream separator skimmed more cream from a kilo of milk than conventional methods and had the further advantage of allowing transported milk brought together from a number of suppliers to be skimmed. From the 1880s the majority of these creameries in Denmark were established as cooperatives and about 20 years later, in 1903, the owners of 81 percent of all milk cows supplied to a cooperative (Henriksen 1999). The Danish dairy industry captured over a third of the rapidly expanding British butter-import market, establishing a reputation for consistent quality that was reflected in high prices. Furthermore, the cooperatives played an active role in persuading the dairy farmers to expand production from summer to year-round dairying. The costs of intensive feeding during the wintertime were more than made up for by a winter price premium (Henriksen and O’Rourke 2005). Year-round dairying resulted in a higher rate of utilization of agrarian capital – that is of farm animals and of the modern cooperative creameries. Not least did this intensive production mean a higher utilization of hitherto underemployed labor. From the late 1890’s, in particular, labor productivity in agriculture rose at an unanticipated speed at par with productivity increase in the urban trades.

Industrialization in Denmark took its modest beginning in the 1870s with a temporary acceleration in the late 1890s. It may be a prime example of an industrialization process governed by domestic demand for industrial goods. Industry’s export never exceeded 10 percent of value added before 1914, compared to agriculture’s export share of 60 percent. The export drive of agriculture towards the end of the nineteenth century was a major force in developing other sectors of the economy not least transport, trade and finance.

Weathering War and Depression, 1914-1950

Denmark, as a neutral nation, escaped the devastating effects of World War I and was even allowed to carry on exports to both sides in the conflict. The ensuing trade surplus resulted in a trebling of the money supply. As the monetary authorities failed to contain the inflationary effects of this development, the value of the Danish currency slumped to about 60 percent of its pre-war value in 1920. The effects of monetary policy failure were aggravated by a decision to return to the gold standard at the 1913 level. When monetary policy was finally tightened in 1924, it resulted in fierce speculation in an appreciation of the Krone. During 1925-26 the currency returned quickly to its pre-war parity. As this was not counterbalanced by an equal decline in prices, the result was a sharp real appreciation and a subsequent deterioration in Denmark’s competitive position (Klovland 1997).

Figure 2. Indices of the Krone Real Exchange Rate and Terms Of Trade (1980=100; Real rates based on Wholesale Price Index

Source: Abildgren (2005)

Note: Trade with Germany is included in the calculation of the real effective exchange rate for the whole period, including 1921-23.

When, in September 1931, Britain decided to leave the gold standard again, Denmark, together with Sweden and Norway, followed only a week later. This move was beneficial as the large real depreciation lead to a long-lasting improvement in Denmark’s competitiveness in the 1930s. It was, no doubt, the single most important policy decision during the depression years. Keynesian demand management, even if it had been fully understood, was barred by a small public sector, only about 13 percent of GDP. As it was, fiscal orthodoxy ruled and policy was slightly procyclical as taxes were raised to cover the deficit created by crisis and unemployment (Topp 1995).

Structural development during the 1920s, surprisingly for a rich nation at this stage, was in favor of agriculture. The total labor force in Danish agriculture grew by 5 percent from 1920 to 1930. The number of employees in agriculture was stagnating whereas the number of self-employed farmers increased by a larger number. The development in relative incomes cannot account for this trend but part of the explanation must be found in a flawed Danish land policy, which actively supported a further parceling out of land into small holdings and restricted the consolidation into larger more viable farms. It took until the early 1960s before this policy began to be unwound.

When the world depression hit Denmark with a minor time lag, agriculture still employed one-third of the total workforce while its contribution to total GDP was a bit less than one-fifth. Perhaps more importantly, agricultural goods still made up 80 percent of total exports.

Denmark’s terms of trade, as a consequence, declined by 24 percent from 1930 to 1932. In 1933 and 1934 bilateral trade agreements were forced upon Denmark by Britain and Germany. In 1932 Denmark had adopted exchange control, a harsh measure even for its time, to stem the net flow of foreign exchange out of the country. By rationing imports exchange control also offered some protection of domestic industry. At the end of the decade manufacture’s GDP had surpassed that of agriculture. In spite of the protectionist policy, unemployment soared to 13-15 percent of the workforce.

The policy mistakes during World War I and its immediate aftermath served as a lesson for policymakers during World War II. The German occupation force (April 9, 1940 until May 5, 1945) drew the funds for its sustenance and for exports to Germany on the Danish central bank whereby the money supply more than doubled. In response the Danish authorities in 1943 launched a policy of absorbing money through open market operations and, for the first time in history, through a surplus on the state budget.

Economic reconstruction after World War II was swift, as again Denmark had been spared the worst consequences of a major war. In 1946 GDP recovered its highest pre-war level. In spite of this, Denmark received relatively generous support through the Marshall Plan of 1948-52, when measured in dollars per capita.

From Riches to Crisis, 1950-1973: Liberalizations and International Integration Once Again

The growth performance during 1950-1957 was markedly lower than the Western European average. The main reason was the high share of agricultural goods in Danish exports, 63 percent in 1950. International trade in agricultural products to a large extent remained regulated. Large deteriorations in the terms of trade caused by the British devaluation 1949, when Denmark followed suit, the outbreak of the Korean War in 1950, and the Suez-crisis of 1956 made matters worse. The ensuing deficits on the balance of payment led the government to contractionary policy measures which restrained growth.

The liberalization of the flow of goods and capital in Western Europe within the framework of the OEEC (the Organization for European Economic Cooperation) during the 1950s probably dealt a blow to some of the Danish manufacturing firms, especially in the textile industry, that had been sheltered through exchange control and wartime. Nevertheless, the export share of industrial production doubled from 10 percent to 20 percent before 1957, at the same time as employment in industry surpassed agricultural employment.

On the question of European economic integration Denmark linked up with its largest trading partner, Britain. After the establishment of the European Common Market in 1958 and when the attempts to create a large European free trade area failed, Denmark entered the European Free Trade Association (EFTA) created under British leadership in 1960. When Britain was finally able to join the European Economic Community (EEC) in 1973, Denmark followed, after a referendum on the issue. Long before admission to the EEC, the advantages to Danish agriculture from the Common Agricultural Policy (CAP) had been emphasized. The higher prices within the EEC were capitalized into higher land prices at the same time that investments were increased based on the expected gains from membership. As a result the most indebted farmers who had borrowed at fixed interests rates were hit hard by two developments from the early 1980s. The EEC started to reduce the producers’ benefits of the CAP because of overproduction and, after 1982, the Danish economy adjusted to a lower level of inflation, and therefore, nominal interest rates. According to Andersen (2001) Danish farmers were left with the highest interest burden of all European Union (EU) farmers in the 1990’s.

Denmark’s relations with the EU, while enthusiastic at the beginning, have since been characterized by a certain amount of reserve. A national referendum in 1992 turned down the treaty on the European Union, the Maastricht Treaty. The Danes, then, opted out of four areas, common citizenship, a common currency, common foreign and defense politics and a common policy on police and legal matters. Once more, in 2000, adoption of the common currency, the Euro, was turned down by the Danish electorate. In the debate leading up to the referendum the possible economic advantages of the Euro in the form of lower transaction costs were considered to be modest, compared to the existent regime of fixed exchange rates vis-à-vis the Euro. All the major political parties, nevertheless, are pro-European, with only the extreme Right and the extreme Left being against. It seems that there is a discrepancy between the general public and the politicians on this particular issue.

As far as domestic economic policy is concerned, the heritage from the 1940s was a new commitment to high employment modified by a balance of payment constraint. The Danish policy differed from that of some other parts of Europe in that the remains of the planned economy from the war and reconstruction period in the form of rationing and price control were dismantled around 1950 and that no nationalizations took place.

Instead of direct regulation, economic policy relied on demand management with fiscal policy as its main instrument. Monetary policy remained a bone of contention between politicians and economists. Coordination of policies was the buzzword but within that framework monetary policy was allotted a passive role. The major political parties for a long time were wary of letting the market rate of interest clear the loan market. Instead, some quantitative measures were carried out with the purpose of dampening the demand for loans.

From Agricultural Society to Service Society: The Growth of the Welfare State

Structural problems in foreign trade extended into the high growth period of 1958-73, as Danish agricultural exports were met with constraints both from the then EEC-member countries and most EFTA countries, as well. During the same decade, the 1960s, as the importance of agriculture was declining the share of employment in the public sector grew rapidly until 1983. Building and construction also took a growing share of the workforce until 1970. These developments left manufacturing industry with a secondary position. Consequently, as pointed out by Pedersen (1995) the sheltered sectors in the economy crowded out the sectors that were exposed to international competition, that is mostly industry and agriculture, by putting a pressure on labor and other costs during the years of strong expansion.

Perhaps the most conspicuous feature of the Danish economy during the Golden Age was the steep increase in welfare-related costs from the mid 1960s and not least the corresponding increases in the number of public employees. Although the seeds of the modern Scandinavian welfare state were sown at a much earlier date, the 1960s was the time when public expenditure as a share of GDP exceeded that of most other countries.

As in other modern welfare states, important elements in the growth of the public sector during the 1960s were the expansion in public health care and education, both free for all citizens. The background for much of the increase in the number of public employees from the late 1960s was the rise in labor participation by married women from the late 1960s until about 1990, partly at least as a consequence. In response, the public day care facilities for young children and old people were expanded. Whereas in 1965 7 percent of 0-6 year olds were in a day nursery or kindergarten, this share rose to 77 per cent in 2000. This again spawned more employment opportunities for women in the public sector. Today the labor participation for women, around 75 percent of 16-66 year olds, is among the highest in the world.

Originally social welfare programs targeted low income earners who were encouraged to take out insurance against sickness (1892), unemployment (1907) and disability (1922). The public subsidized these schemes and initiated a program for the poor among old people (1891). The high unemployment period in the 1930s inspired some temporary relief and some administrative reform, but little fundamental change.

Welfare policy in the first four decades following World War II is commonly believed to have been strongly influenced by the Social Democrat party which held around 30 percent of the votes in general elections and was the party in power for long periods of time. One of the distinctive features of the Danish welfare state has been its focus on the needs of the individual person rather than on the family context. Another important characteristic is the universal nature of a number of benefits starting with a basic old age pension for all in 1956. The compensation rates in a number of schedules are high in international comparison, particularly for low income earners. Public transfers gained a larger share in total public outlays both because standards were raised – that is benefits became higher – and because the number of recipients increased dramatically following the high unemployment regime from the mid 1970s to the mid 1990s. To pay for the high transfers and the large public sector – around 30 percent of the work force – the tax load is also high in international perspective. The share public sector and social expenditure has risen to above 50 percent of GDP, only second to the share in Sweden.

Figure 3. Unemployment, Denmark (percent of total labor force)

Source: Statistics Denmark ‘50 års-oversigten’ and ADAM’s databank

The Danish labor market model has recently attracted favorable international attention (OECD 2005). It has been declared successful in fighting unemployment – especially compared to the policies of countries like Germany and France. The so-called Flexicurity model rests on three pillars. The first is low employment protection, the second is relatively high compensation rates for the unemployed and the third is the requirement for active participation by the unemployed. Low employment protection has a long tradition in Denmark and there is no change in this factor when comparing the twenty years of high unemployment – 8-12 per cent of the labor force – from the mid 1970s to the mid 1990s, to the past ten years when unemployment has declined to a mere 4.5 percent in 2006. The rules governing compensation to the unemployed were tightened from 1994, limiting the number of years the unemployed could receive benefits from 7 to 4. Most noticeably labor market policy in 1994 turned from ‘passive’ measures – besides unemployment benefits, an early retirement scheme and a temporary paid leave scheme – toward ‘active’ measures that were devoted to getting people back to work by providing training and jobs. It is commonly supposed that the strengthening of economic incentives helped to lower unemployment. However, as Andersen and Svarer (2006) point out, while unemployment has declined substantially a large and growing share of Danes of employable age receives transfers other than unemployment benefit – that is benefits related to sickness or social problems of various kinds, early retirement benefits, etc. This makes it hazardous to compare the Danish labor market model with that of many other countries.

Exchange Rates and Macroeconomic Policy

Denmark has traditionally adhered to a fixed exchange rate regime. The belief is that for a small and open economy, a floating exchange rate could lead to very volatile exchange rates which would harm foreign trade. After having abandoned the gold standard in 1931, the Danish currency (the Krone) was, for a while, pegged to the British pound, only to join the IMF system of fixed but adjustable exchange rates, the so-called Bretton Woods system after World War II. The close link with the British economy still manifested itself when the Danish currency was devaluated along with the pound in 1949 and, half way, in 1967. The devaluation also reflected that after 1960, Denmark’s international competitiveness had gradually been eroded by rising real wages, corresponding to a 30 percent real appreciation of the currency (Pedersen 1996).

When the Bretton Woods system broke down in the early 1970s, Denmark joined the European exchange rate cooperation, the “Snake” arrangement, set up in 1972, an arrangement that was to be continued in the form of the Exchange Rate Mechanism within the European Monetary System from 1979. The Deutschmark was effectively the nominal anchor in European currency cooperation until the launch of the Euro in 1999, a fact that put Danish competitiveness under severe pressure because of markedly higher inflation in Denmark compared to Germany. In the end the Danish government gave way before the pressure and undertook four discrete devaluations from 1979 to 1982. Since compensatory increases in wages were held back, the balance of trade improved perceptibly.

This improvement could, however, not make up for the soaring costs of old loans at a time when the international real rates of interests were high. The Danish devaluation strategy exacerbated this problem. The anticipation of further devaluations was mirrored in a steep increase in the long-term rate of interest. It peaked at 22 percent in nominal terms in 1982, with an interest spread to Germany of 10 percent. Combined with the effects of the second oil crisis on the Danish terms of trade, unemployment rose to 10 percent of the labor force. Given the relatively high compensation ratios for the unemployed, the public deficit increased rapidly and public debt grew to about 70 percent of GDP.

Figure 4. Current Account and Foreign Debt (Denmark)

Source: Statistics Denmark Statistical Yearbooks and ADAM’s Databank

In September 1982 the Social Democrat minority government resigned without a general election and was relieved by a Conservative-Liberal minority government. The new government launched a program to improve the competitiveness of the private sector and to rebalance public finances. An important element was a disinflationary economic policy based on fixed exchange rates pegging the Krone to the participants of the EMS and, from 1999, to the Euro. Furthermore, automatic wage indexation that had occurred, with short interruptions since 1920 (with a short lag and high coverage), was abolished. Fiscal policy was tightened, thus bringing an end to the real increases in public expenditure that had lasted since the 1960’s.

The stabilization policy was successful in bringing down inflation and long interest rates. Pedersen (1995) finds that this process, nevertheless, was slower than might have been expected. In view of former Danish exchange rate policy it took some time for the market to believe in the credible commitment to fixed exchange rates. From the late 1990s the interest spread to Germany/ Euroland has been negligible, however.

The initial success of the stabilization policy brought a boom to the Danish economy that, once again, caused overheating in the form of high wage increases (in 1987) and a deterioration of the current account. The solution to this was a number of reforms in 1986-87 aiming at encouraging private savings that had by then fallen to an historical low. Most notable was the reform that reduced tax deductibility of private interest on debts. These measures resulted in a hard landing to the economy caused by the collapse of the housing market.

The period of low growth was further prolonged by the international recession in 1992. In 1993 yet another shift of regime occurred in Danish economic policy. A new Social Democrat government decided to ‘kick start’ the economy by means of a moderate fiscal expansion whereas, in 1994, the same government tightened labor market policies substantially, as we have seen. Mainly as a consequence of these measures the Danish economy from 1994 entered a period of moderate growth with unemployment steadily falling to the level of the 1970s. A new feature that still puzzles Danish economists is that the decline in unemployment over these years has not yet resulted in any increase in wage inflation.

Denmark at the beginning of the twenty-first century in many ways fits the description of a Small Successful European Economy according to Mokyr (2006). Unlike in most of the other small economies, however, Danish exports are broad based and have no “niche” in the world market. Like some other small European countries, Ireland, Finland and Sweden, the short term economic fluctuations as described above have not followed the European business cycle very closely for the past thirty years (Andersen 2001). Domestic demand and domestic economic policy has, after all, played a crucial role even in a very small and very open economy.

References

Abildgren, Kim. “Real Effective Exchange Rates and Purchasing-Power-parity Convergence: Empirical Evidence for Denmark, 1875-2002.” Scandinavian Economic History Review 53, no. 3 (2005): 58-70.

Andersen, Torben M. et al. The Danish Economy: An international Perspective. Copenhagen: DJØF Publishing, 2001.

Andersen, Torben M. and Michael Svarer. “Flexicurity: den danska arbetsmarknadsmodellen.” Ekonomisk debatt 34, no. 1 (2006): 17-29.

Banggaard, Grethe. Befolkningsfremmende foranstaltninger og faldende børnedødelighed. Danmark, ca. 1750-1850. Odense: Syddansk Universitetsforlag, 2004

Hansen, Sv. Aage. Økonomisk vækst i Danmark: Volume I: 1720-1914 and Volume II: 1914-1983. København: Akademisk Forlag, 1984.

Henriksen, Ingrid. “Avoiding Lock-in: Cooperative Creameries in Denmark, 1882-1903.” European Review of Economic History 3, no. 1 (1999): 57-78

Henriksen, Ingrid. “Freehold Tenure in Late Eighteenth-Century Denmark.” Advances in Agricultural Economic History 2 (2003): 21-40.

Henriksen, Ingrid and Kevin H. O’Rourke. “Incentives, Technology and the Shift to Year-round Dairying in Late Nineteenth-century Denmark.” Economic History Review 58, no. 3 (2005):.520-54.

Johansen, Hans Chr. Danish Population History, 1600-1939. Odense: University Press of Southern Denmark, 2002.

Johansen, Hans Chr. Dansk historisk statistik, 1814-1980. København: Gyldendal, 1985.

Klovland, Jan T. “Monetary Policy and Business Cycles in the Interwar Years: The Scandinavian Experience.” European Review of Economic History 2, no. 3 (1998): 309-44.

Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001

Mokyr, Joel. “Successful Small Open Economies and the Importance of Good Institutions.” In The Road to Prosperity. An Economic History of Finland, edited by Jari Ojala, Jari Eloranta and Jukka Jalava, 8-14. Helsinki: SKS, 2006.

Pedersen, Peder J. “Postwar Growth of the Danish Economy.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo. Cambridge: Cambridge University Press, 1995.

OECD, Employment Outlook, 2005.

O’Rourke, Kevin H. “The European Grain Invasion, 1870-1913.” Journal of Economic History 57, no. 4 (1997): 775-99.

O’Rourke, Kevin H. and Jeffrey G. Williamson. Globalization and History: The Evolution of a Nineteenth-century Atlantic Economy. Cambridge, MA: MIT Press, 1999

Topp, Niels-Henrik. “Influence of the Public Sector on Activity in Denmark, 1929-39.” Scandinavian Economic History Review 43, no. 3 (1995): 339-56.


Footnotes

1 Denmark also includes the Faeroe Islands, with home rule since 1948, and Greenland, with home rule since 1979, both in the North Atlantic. These territories are left out of this account.

Citation: Henriksen, Ingrid. “An Economic History of Denmark”. EH.Net Encyclopedia, edited by Robert Whaples. October 6, 2006. URL http://eh.net/encyclopedia/an-economic-history-of-denmark/

The Economic Impact of the Black Death

David Routt, University of Richmond

The Black Death was the largest demographic disaster in European history. From its arrival in Italy in late 1347 through its clockwise movement across the continent to its petering out in the Russian hinterlands in 1353, the magna pestilencia (great pestilence) killed between seventeen and twenty—eight million people. Its gruesome symptoms and deadliness have fixed the Black Death in popular imagination; moreover, uncovering the disease’s cultural, social, and economic impact has engaged generations of scholars. Despite growing understanding of the Black Death’s effects, definitive assessment of its role as historical watershed remains a work in progress.

A Controversy: What Was the Black Death?

In spite of enduring fascination with the Black Death, even the identity of the disease behind the epidemic remains a point of controversy. Aware that fourteenth—century eyewitnesses described a disease more contagious and deadlier than bubonic plague (Yersinia pestis), the bacillus traditionally associated with the Black Death, dissident scholars in the 1970s and 1980s proposed typhus or anthrax or mixes of typhus, anthrax, or bubonic plague as the culprit. The new millennium brought other challenges to the Black Death—bubonic plague link, such as an unknown and probably unidentifiable bacillus, an Ebola—like haemorrhagic fever or, at the pseudoscientific fringes of academia, a disease of interstellar origin.

Proponents of Black Death as bubonic plague have minimized differences between modern bubonic and the fourteenth—century plague through painstaking analysis of the Black Death’s movement and behavior and by hypothesizing that the fourteenth—century plague was a hypervirulent strain of bubonic plague, yet bubonic plague nonetheless. DNA analysis of human remains from known Black Death cemeteries was intended to eliminate doubt but inability to replicate initially positive results has left uncertainty. New analytical tools used and new evidence marshaled in this lively controversy have enriched understanding of the Black Death while underscoring the elusiveness of certitude regarding phenomena many centuries past.

The Rate and Structure of mortality

The Black Death’s socioeconomic impact stemmed, however, from sudden mortality on a staggering scale, regardless of what bacillus caused it. Assessment of the plague’s economic significance begins with determining the rate of mortality for the initial onslaught in 1347—53 and its frequent recurrences for the balance of the Middle Ages, then unraveling how the plague chose victims according to age, sex, affluence, and place.

Imperfect evidence unfortunately hampers knowing precisely who and how many perished. Many of the Black Death’s contemporary observers, living in an epoch of famine and political, military, and spiritual turmoil, described the plague apocalyptically. A chronicler famously closed his narrative with empty membranes should anyone survive to continue it. Others believed as few as one in ten survived. One writer claimed that only fourteen people were spared in London. Although sober eyewitnesses offered more plausible figures, in light of the medieval preference for narrative dramatic force over numerical veracity, chroniclers’ estimates are considered evidence of the Black Death’s battering of the medieval psyche, not an accurate barometer of its demographic toll.

Even non—narrative and presumably dispassionate, systematic evidence — legal and governmental documents, ecclesiastical records, commercial archives — presents challenges. No medieval scribe dragged his quill across parchment for the demographer’s pleasure and convenience. With a paucity of censuses, estimates of population and tracing of demographic trends have often relied on indirect indicators of demographic change (e.g., activity in the land market, levels of rents and wages, size of peasant holdings) or evidence treating only a segment of the population (e.g., assignment of new priests to vacant churches, payments by peasants to take over holdings of the deceased). Even the rare census—like record, like England’s Domesday Book (1086) or the Poll Tax Return (1377), either enumerates only heads of households or excludes slices of the populace or ignores regions or some combination of all these. To compensate for these imperfections, the demographer relies on potentially debatable assumptions about the size of the medieval household, the representativeness of a discrete group of people, the density of settlement in an undocumented region, the level of tax evasion, and so forth.

A bewildering array of estimates for mortality from the plague of 1347—53 is the result. The first outbreak of the Black Death indisputably was the deadliest but the death rate varied widely according to place and social stratum. National estimates of mortality for England, where the evidence is fullest, range from five percent, to 23.6 percent among aristocrats holding land from the king, to forty to forty—five percent of the kingdom’s clergy, to over sixty percent in a recent estimate. The picture for the continent likewise is varied. Regional mortality in Languedoc (France) was forty to fifty percent while sixty to eighty percent of Tuscans (Italy) perished. Urban death rates were mostly higher but no less disparate, e.g., half in Orvieto (Italy), Siena (Italy), and Volterra (Italy), fifty to sixty—six percent in Hamburg (Germany), fifty—eight to sixty—eight percent in Perpignan (France), sixty percent for Barcelona’s (Spain) clerical population, and seventy percent in Bremen (Germany). The Black Death was often highly arbitrary in how it killed in a narrow locale, which no doubt broadened the spectrum of mortality rates. Two of Durham Cathedral Priory’s manors, for instance, had respective death rates of twenty—one and seventy—eighty percent (Shrewsbury, 1970; Russell, 1948; Waugh, 1991; Ziegler, 1969; Benedictow, 2004; Le Roy Ladurie, 1976; Bowsky, 1964; Pounds, 1974; Emery, 1967; Gyug, 1983; Aberth, 1995; Lomas, 1989).

Credible death rates between one quarter and three quarters complicate reaching a Europe—wide figure. Neither a casual and unscientific averaging of available estimates to arrive at a probably misleading composite death rate nor a timid placing of mortality somewhere between one and two thirds is especially illuminating. Scholars confronting the problem’s complexity before venturing estimates once favored one third as a reasonable aggregate death rate. Since the early 1970s demographers have found higher levels of mortality plausible and European mortality of one half is considered defensible, a figure not too distant from less fanciful contemporary observations.

While the Black Death of 1347—53 inflicted demographic carnage, had it been an isolated event European population might have recovered to its former level in a generation or two and its economic impact would have been moderate. The disease’s long—term demographic and socioeconomic legacy arose from it recurrence. When both national and local epidemics are taken into account, England endured thirty plague years between 1351 and 1485, a pattern mirrored on the continent, where Perugia was struck nineteen times and Hamburg, Cologne, and Nuremburg at least ten times each in the fifteenth century. Deadliness of outbreaks declined — perhaps ten to twenty percent in the second plague (pestis secunda) of 1361—2, ten to fifteen percent in the third plague (pestis tertia) of 1369, and as low as five and rarely above ten percent thereafter — and became more localized; however, the Black Death’s persistence ensured that demographic recovery would be slow and socioeconomic consequences deeper. Europe’s population in 1430 may have been fifty to seventy—five percent lower than in 1290 (Cipolla, 1994; Gottfried, 1983).

Enumeration of corpses does not adequately reflect the Black Death’s demographic impact. Who perished was equally significant as how many; in other words, the structure of mortality influenced the time and rate of demographic recovery. The plague’s preference for urbanite over peasant, man over woman, poor over affluent, and, perhaps most significantly, young over mature shaped its demographic toll. Eyewitnesses so universally reported disproportionate death among the young in the plague’s initial recurrence (1361—2) that it became known as the Childen’s Plague (pestis puerorum, mortalité des enfants). If this preference for youth reflected natural resistance to the disease among plague survivors, the Black Death may have ultimately resembled a lower—mortality childhood disease, a reality that magnified both its demographic and psychological impact.

The Black Death pushed Europe into a long—term demographic trough. Notwithstanding anecdotal reports of nearly universal pregnancy of women in the wake of the magna pestilencia, demographic stagnancy characterized the rest of the Middle Ages. Population growth recommenced at different times in different places but rarely earlier than the second half of the fifteenth century and in many places not until c. 1550.

The European Economy on the Cusp of the Black Death

Like the plague’s death toll, its socioeconomic impact resists categorical measurement. The Black Death’s timing made a facile labeling of it as a watershed in European economic history nearly inevitable. It arrived near the close of an ebullient high Middle Ages (c. 1000 to c. 1300) in which urban life reemerged, long—distance commerce revived, business and manufacturing innovated, manorial agriculture matured, and population burgeoned, doubling or tripling. The Black Death simultaneously portended an economically stagnant, depressed late Middle Ages (c. 1300 to c. 1500). However, even if this simplistic and somewhat misleading portrait of the medieval economy is accepted, isolating the Black Death’s economic impact from manifold factors at play is a daunting challenge.

Cognizant of a qualitative difference between the high and late Middle Ages, students of medieval economy have offered varied explanations, some mutually exclusive, others not, some favoring the less dramatic, less visible, yet inexorable factor as an agent of change rather than a catastrophic demographic shift. For some, a cooling climate undercut agricultural productivity, a downturn that rippled throughout the predominantly agrarian economy. For others, exploitative political, social, and economic institutions enriched an idle elite and deprived working society of wherewithal and incentive to be innovative and productive. Yet others associate monetary factors with the fourteenth— and fifteenth—century economic doldrums.

The particular concerns of the twentieth century unsurprisingly induced some scholars to view the medieval economy through a Malthusian lens. In this reconstruction of the Middle Ages, population growth pressed against the society’s ability to feed itself by the mid—thirteenth century. Rising impoverishment and contracting holdings compelled the peasant to cultivate inferior, low—fertility land and to convert pasture to arable production and thereby inevitably reduce numbers of livestock and make manure for fertilizer scarcer. Boosting gross productivity in the immediate term yet driving yields of grain downward in the longer term exacerbated the imbalance between population and food supply; redressing the imbalance became inevitable. This idea’s adherents see signs of demographic correction from the mid—thirteenth century onward, possibly arising in part from marriage practices that reduced fertility. A more potent correction came with subsistence crises. Miserable weather in 1315 destroyed crops and the ensuing Great Famine (1315—22) reduced northern Europe’s population by perhaps ten to fifteen percent. Poor harvests, moreover, bedeviled England and Italy to the eve of the Black Death.

These factors — climate, imperfect institutions, monetary imbalances, overpopulation — diminish the Black Death’s role as a transformative socioeconomic event. In other words, socioeconomic changes already driven by other causes would have occurred anyway, merely more slowly, had the plague never struck Europe. This conviction fosters receptiveness to lower estimates of the Black Death’s deadliness. Recent scrutiny of the Malthusian analysis, especially studies of agriculture in source—rich eastern England, has, however, rehabilitated the Black Death as an agent of socioeconomic change. Growing awareness of the use of “progressive” agricultural techniques and of alternative, non—grain economies less susceptible to a Malthusian population—versus—resources dynamic has undercut the notion of an absolutely overpopulated Europe and has encouraged acceptance of higher rates of mortality from the plague (Campbell, 1983; Bailey, 1989).

The Black Death and the Agrarian Economy

The lion’s share of the Black Death’s effect was felt in the economy’s agricultural sector, unsurprising in a society in which, except in the most urbanized regions, nine of ten people eked out a living from the soil.

A village struck by the plague underwent a profound though brief disordering of the rhythm of daily life. Strong administrative and social structures, the power of custom, and innate human resiliency restored the village’s routine by the following year in most cases: fields were plowed, crops were sown, tended, and harvested, labor services were performed by the peasantry, the village’s lord collected dues from tenants. Behind this seeming normalcy, however, lord and peasant were adjusting to the Black Death’s principal economic consequence: a much smaller agricultural labor pool. Before the plague, rising population had kept wages low and rents and prices high, an economic reality advantageous to the lord in dealing with the peasant and inclining many a peasant to cleave to demeaning yet secure dependent tenure.

As the Black Death swung the balance in the peasant’s favor, the literate elite bemoaned a disintegrating social and economic order. William of Dene, John Langland, John Gower, and others polemically evoked nostalgia for the peasant who knew his place, worked hard, demanded little, and squelched pride while they condemned their present in which land lay unplowed and only an immediate pang of hunger goaded a lazy, disrespectful, grasping peasant to do a moment’s desultory work (Hatcher, 1994).

Moralizing exaggeration aside, the rural worker indeed demanded and received higher payments in cash (nominal wages) in the plague’s aftermath. Wages in England rose from twelve to twenty—eight percent from the 1340s to the 1350s and twenty to forty percent from the 1340s to the 1360s. Immediate hikes were sometimes more drastic. During the plague year (1348—49) at Fornham All Saints (Suffolk), the lord paid the pre—plague rate of 3d. per acre for more half of the hired reaping but the rest cost 5d., an increase of 67 percent. The reaper, moreover, enjoyed more and larger tips in cash and perquisites in kind to supplement the wage. At Cuxham (Oxfordshire), a plowman making 2s. weekly before the plague demanded 3s. in 1349 and 10s. in 1350 (Farmer, 1988; Farmer, 1991; West Suffolk Record Office 3/15.7/2.4; Harvey, 1965).

In some instances, the initial hikes in nominal or cash wages subsided in the years further out from the plague and any benefit they conferred on the wage laborer was for a time undercut by another economic change fostered by the plague. Grave mortality ensured that the European supply of currency in gold and silver increased on a per—capita basis, which in turned unleashed substantial inflation in prices that did not subside in England until the mid—1370s and even later in many places on the continent. The inflation reduced the purchasing power (real wage) of the wage laborer so significantly that, even with higher cash wages, his earnings either bought him no more or often substantially less than before the magna pestilencia (Munro, 2003; Aberth, 2001).

The lord, however, was confronted not only by the roving wage laborer on whom he relied for occasional and labor—intensive seasonal tasks but also by the peasant bound to the soil who exchanged customary labor services, rent, and dues for holding land from the lord. A pool of labor services greatly reduced by the Black Death enabled the servile peasant to bargain for less onerous responsibilities and better conditions. At Tivetshall (Norfolk), vacant holdings deprived its lord of sixty percent of his week—work and all his winnowing services by 1350—51. A fifth of winter and summer week—work and a third of reaping services vanished at Redgrave (Suffolk) in 1349—50 due to the magna pestilencia. If a lord did not make concessions, a peasant often gravitated toward any better circumstance beckoning elsewhere. At Redgrave, for instance, the loss of services in 1349—50 directly due to the plague was followed in 1350—51 by an equally damaging wave of holdings abandoned by surviving tenants. For the medieval peasant, never so tightly bound to the manor as once imagined, the Black Death nonetheless fostered far greater rural mobility. Beyond loss of labor services, the deceased or absentee peasant paid no rent or dues and rendered no fees for use of manorial monopolies such as mills and ovens and the lord’s revenues shrank. The income of English lords contracted by twenty percent from 1347 to 1353 (Norfolk Record Office WAL 1247/288×1; University of Chicago Bacon 335—6; Gottfried, 1983).

Faced with these disorienting circumstances, the lord often ultimately had to decide how or even whether the pre—plague status quo could be reestablished on his estate. Not capitalistic in the sense of maximizing productivity for reinvestment of profits to enjoy yet more lucrative future returns, the medieval lord nonetheless valued stable income sufficient for aristocratic ostentation and consumption. A recalcitrant peasantry, diminished dues and services, and climbing wages undermined the material foundation of the noble lifestyle, jostled the aristocratic sense of proper social hierarchy, and invited a response.

In exceptional circumstances, a lord sometimes kept the peasant bound to the land. Because the nobility in Spanish Catalonia had already tightened control of the peasantry before the Black Death, because underdeveloped commercial agriculture provided the peasantry narrow options, and because the labor—intensive demesne agriculture common elsewhere was largely absent, the Catalan lord through a mix of coercion (physical intimidation, exorbitant fees to purchase freedom) and concession (reduced rents, conversion of servile dues to less humiliating fixed cash payments) kept the Catalan peasant in place. In England and elsewhere on the continent, where labor services were needed to till the demesne, such a conservative approach was less feasible. This, however, did not deter some lords from trying. The lord of Halesowen (Worcestershire) not only commanded the servile tenant to perform the full range of services but also resuscitated labor obligations in abeyance long before the Black Death, tantamount to an unwillingness to acknowledge anything had changed (Freedman, 1991; Razi, 1981).

Europe’s political elite also looked to legal coercion not only to contain rising wages and to limit the peasant’s mobility but also to allay a sense of disquietude and disorientation arising from the Black Death’s buffeting of pre—plague social realities. England’s Ordinance of Laborers (1349) and Statute of Laborers (1351) called for a return to the wages and terms of employment of 1346. Labor legislation was likewise promulgated by the Córtes of Aragon and Castile, the French crown, and cities such as Siena, Orvieto, Pisa, Florence, and Ragusa. The futility of capping wages by legislative fiat is evident in the French crown’s 1351 revision of its 1349 enactment to permit a wage increase of one third. Perhaps only in England, where effective government permitted robust enforcement, did the law slow wage increases for a time (Aberth, 2001; Gottfried, 1983; Hunt and Murray, 1999; Cohn, 2007).

Once knee—jerk conservatism and legislative palliatives failed to revivify pre—plague socioeconomic arrangements, the lord cast about for a modus vivendi in a new world of abundant land and scarce labor. A sober triage of the available sources of labor, whether it was casual wage labor or a manor’s permanent stipendiary staff (famuli) or the dependent peasant, led to revision of managerial policy. The abbot of Saint Edmund’s, for example, focused on reconstitution of the permanent staff (famuli) on his manors. Despite mortality and flight, the abbot by and large achieved his goal by the mid—1350s. While labor legislation may have facilitated this, the abbot’s provision of more frequent and lucrative seasonal rewards, coupled with the payment of grain stipends in more valuable and marketable cereals such as wheat, no doubt helped secure the loyalty of famuli while circumventing statutory limits on higher wages. With this core of labor solidified, the focus turned to preserving the most essential labor services, especially those associated with the labor—intensive harvesting season. Less vital labor services were commuted for cash payments and ad hoc wage labor then hired to fill gaps. The cultivation of the demesne continued, though not on the pre—plague scale.

For a time in fact circumstances helped the lord continue direct management of the demesne. The general inflation of the quarter—century following the plague as well as poor harvests in the 1350s and 1360s boosted grain prices and partially compensated for more expensive labor. This so—called “Indian summer” of demesne agriculture ended quickly in the mid—1370s in England and subsequently on the continent when the post—plague inflation gave way to deflation and abundant harvests drove prices for commodities downward, where they remained, aside from brief intervals of inflation, for the rest of the Middle Ages. Recurrences of the plague, moreover, placed further stress on new managerial policies. For the lord who successfully persuaded new tenants to take over vacant holdings, such as happened at Chevington (Suffolk) by the late 1350s, the pestis secunda of 1361—62 often inflicted a decisive blow: a second recovery at Chevington never materialized (West Suffolk Records Office 3/15.3/2.9—2.23).

Under unremitting pressure, the traditional cultivation of the demesne ceased to be viable for lord after lord: a centuries—old manorial system gradually unraveled and the nature of agriculture was transformed. The lord’s earliest concession to this new reality was curtailment of cultivated acreage, a trend that accelerated with time. The 590.5 acres sown on average at Great Saxham (Suffolk) in the late 1330s was more than halved (288.67 acres) in the 1360s, for instance (West Suffolk Record Office, 3/15.14/1.1, 1.7, 1.8).

Beyond reducing the demesne to a size commensurate with available labor, the lord could explore types of husbandry less labor—intensive than traditional grain agriculture. Greater domestic manufacture of woolen cloth and growing demand for meat enabled many English lords to reduce arable production in favor of sheep—raising, which required far less labor. Livestock husbandry likewise became more significant on the continent. Suitable climate, soil, and markets made grapes, olives, apples, pears, vegetables, hops, hemp, flax, silk, and dye—stuffs attractive alternatives to grain. In hope of selling these cash crops, rural agriculture became more attuned to urban demand and urban businessmen and investors more intimately involved in what and how much of it was grown in the countryside (Gottfried, 1983; Hunt and Murray, 1999).

The lord also looked to reduce losses from demesne acreage no longer under the plow and from the vacant holdings of onetime tenants. Measures adopted to achieve this end initiated a process that gained momentum with each passing year until the face of the countryside was transformed and manorialism was dead. The English landlord, hopeful for a return to the pre—plague regime, initially granted brief terminal leases of four to six years at fixed rates for bits of demesne and for vacant dependent holdings. Leases over time lengthened to ten, twenty, thirty years, or even a lifetime. In France and Italy, the lord often resorted to métayage or mezzadria leasing, a type of sharecropping in which the lord contributed capital (land, seed, tools, plow teams) to the lessee, who did the work and surrendered a fraction of the harvest to the lord.

Disillusioned by growing obstacles to profitable cultivation of the demesne, the lord, especially in the late fourteenth century and the early fifteenth, adopted a more sweeping type of leasing, the placing of the demesne or even the entire manor “at farm” (ad firmam). A “farmer” (firmarius) paid the lord a fixed annual “farm” (firma) for the right to exploit the lord’s property and take whatever profit he could. The distant or unprofitable manor was usually “farmed” first and other manors followed until a lord’s personal management of his property often ceased entirely. The rising popularity of this expedient made direct management of demesne by lord rare by c. 1425. The lord often became a rentier bound to a fixed income. The tenurial transformation was completed when the lord sold to the peasant his right of lordship, a surrender to the peasant of outright possession of his holding for a fixed cash rent and freedom from dues and services. Manorialism, in effect, collapsed and was gone from western and central Europe by 1500.

The landlord’s discomfort ultimately benefited the peasantry. Lower prices for foodstuffs and greater purchasing power from the last quarter of the fourteenth century onward, progressive disintegration of demesnes, and waning customary land tenure enabled the enterprising, ambitious peasant to lease or purchase property and become a substantial landed proprietor. The average size of the peasant holding grew in the late Middle Ages. Due to the peasant’s generally improved standard of living, the century and a half following the magna pestilencia has been labeled a “golden age” in which the most successful peasant became a “yeoman” or “kulak” within the village community. Freed from labor service, holding a fixed copyhold lease, and enjoying greater disposable income, the peasant exploited his land exclusively for his personal benefit and often pursued leisure and some of the finer things in life. Consumption of meat by England’s humbler social strata rose substantially after the Black Death, a shift in consumer tastes that reduced demand for grain and helped make viable the shift toward pastoralism in the countryside. Late medieval sumptuary legislation, intended to keep the humble from dressing above his station and retain the distinction between low— and highborn, attests both to the peasant’s greater income and the desire of the elite to limit disorienting social change (Dyer, 1989; Gottfried, 1983; Hunt and Murray, 1999).

The Black Death, moreover, profoundly altered the contours of settlement in the countryside. Catastrophic loss of population led to abandonment of less attractive fields, contraction of existing settlements, and even wholesale desertion of villages. More than 1300 English villages vanished between 1350 and 1500. French and Dutch villagers abandoned isolated farmsteads and huddled in smaller villages while their Italian counterparts vacated remote settlements and shunned less desirable fields. The German countryside was mottled with abandoned settlements. Two thirds of named villages disappeared in Thuringia, Anhalt, and the eastern Harz mountains, one fifth in southwestern Germany, and one third in the Rhenish palatinate, abandonment far exceeding loss of population and possibly arising from migration from smaller to larger villages (Gottfried, 1983; Pounds, 1974).

The Black Death and the Commercial Economy

As with agriculture, assessment of the Black Death’s impact on the economy’s commercial sector is a complex problem. The vibrancy of the high medieval economy is generally conceded. As the first millennium gave way to the second, urban life revived, trade and manufacturing flourished, merchant and craft gilds emerged, commercial and financial innovations proliferated (e.g., partnerships, maritime insurance, double—entry bookkeeping, fair letters, letters of credit, bills of exchange, loan contracts, merchant banking, etc.). The integration of the high medieval economy reached its zenith c. 1250 to c. 1325 with the rise of large companies with international interests, such as the Bonsignori of Siena and the Buonaccorsi of Florence and the emergence of so—called “super companies” such as the Florentine Bardi, Peruzzi, and Acciaiuoli (Hunt and Murray, 1999).

How to characterize the late medieval economy has been more fraught with controversy, however. Historians a century past, uncomprehending of how their modern world could be rooted in a retrograde economy, imagined an entrepreneurially creative and expansive late medieval economy. Succeeding generations of historians darkened this optimistic portrait and fashioned a late Middle Ages of unmitigated decline, an “age of adversity” in which the economy was placed under the rubric “depression of the late Middle Ages.” The historiographical pendulum now swings away from this interpretation and a more nuanced picture has emerged that gives the Black Death’s impact on commerce its full due but emphasizes the variety of the plague’s impact from merchant to merchant, industry to industry, and city to city. Success or failure was equally possible after the Black Death and the game favored adaptability, creativity, nimbleness, opportunism, and foresight.

Once the magna pestilencia had passed, the city had to cope with a labor supply even more greatly decimated than in the countryside due to a generally higher urban death rate. The city, however, could reverse some of this damage by attracting, as it had for centuries, new workers from the countryside, a phenomenon that deepened the crisis for the manorial lord and contributed to changes in rural settlement. A resurgence of the slave trade occurred in the Mediterranean, especially in Italy, where the female slave from Asia or Africa entered domestic service in the city and the male slave toiled in the countryside. Finding more labor was not, however, a panacea. A peasant or slave performed an unskilled task adequately but could not necessarily replace a skilled laborer. The gross loss of talent due to the plague caused a decline in per capita productivity by skilled labor remediable only by time and training (Hunt and Murray, 1999; Miskimin, 1975).

Another immediate consequence of the Black Death was dislocation of the demand for goods. A suddenly and sharply smaller population ensured a glut of manufactured and trade goods, whose prices plummeted for a time. The businessman who successfully weathered this short—term imbalance in supply and demand then had to reshape his business’ output to fit a declining or at best stagnant pool of potential customers.

The Black Death transformed the structure of demand as well. While the standard of living of the peasant improved, chronically low prices for grain and other agricultural products from the late fourteenth century may have deprived the peasant of the additional income to purchase enough manufactured or trade items to fill the hole in commercial demand. In the city, however, the plague concentrated wealth, often substantial family fortunes, in fewer and often younger hands, a circumstance that, when coupled with lower prices for grain, left greater per capita disposable income. The plague’s psychological impact, moreover, it is believed, influenced how this windfall was used. Pessimism and the specter of death spurred an individualistic pursuit of pleasure, a hedonism that manifested itself in the purchase of luxuries, especially in Italy. Even with a reduced population, the gross volume of luxury goods manufactured and sold rose, a pattern of consumption that endured even after the extra income had been spent within a generation or so after the magna pestilencia.

Like the manorial lord, the affluent urban bourgeois sometimes employed structural impediments to block the ambitious parvenu from joining his ranks and becoming a competitor. A tendency toward limiting the status of gild master to the son or son—in—law of a sitting master, evident in the first half of the fourteenth century, gained further impetus after the Black Death. The need for more journeymen after the plague was conceded in the shortening of terms of apprenticeship, but the newly minted journeyman often discovered that his chance of breaking through the glass ceiling and becoming a master was virtually nil without an entrée through kinship. Women also were banished from gilds as unwanted competition. The urban wage laborer, by and large controlled by the gilds, was denied membership and had no access to urban structures of power, a potent source of frustration. While these measures may have permitted the bourgeois to hold his ground for a time, the winds of change were blowing in the city as well as the countryside and gild monopolies and gild restrictions were fraying by the close of the Middle Ages.

In the new climate created by the Black Death, the individual businessman did retain an advantage: the business judgment and techniques honed during the high Middle Ages. This was crucial in a contracting economy in which gross productivity never attained its high medieval peak and in which the prevailing pattern was boom and bust on a roughly generational basis. A fluctuating economy demanded adaptability and the most successful post—plague businessman not merely weathered bad times but located opportunities within adversity and exploited them. The post—plague entrepreneur’s preference for short—term rather than long—term ventures, once believed a product of a gloomy despondency caused by the plague and exacerbated by endemic violence, decay of traditional institutions, and nearly continuous warfare, is now viewed as a judicious desire to leave open entrepreneurial options, to manage risk effectively, and to take advantage of whatever better opportunity arose. The successful post—plague businessman observed markets closely and responded to them while exercising strict control over his concern, looking for greater efficiency, and trimming costs (Hunt and Murray, 1999).

The fortunes of the textile industry, a trade singularly susceptible to contracting markets and rising wages, best underscores the importance of flexibility. Competition among textile manufacturers, already great even before the Black Death due to excess productive capacity, was magnified when England entered the market for low— and medium—quality woolen cloth after the magna pestilencia and was exporting forty—thousand pieces annually by 1400. The English took advantage of proximity to raw material, wool England itself produced, a pattern increasingly common in late medieval business. When English producers were undeterred by a Flemish embargo on English cloth, the Flemish and Italians, the textile trade’s other principal players, were compelled to adapt in order to compete. Flemish producers that emphasized higher—grade, luxury textiles or that purchased, improved, and resold cheaper English cloth prospered while those that stubbornly competed head—to—head with the English in lower—quality woolens suffered. The Italians not only produced luxury woolens, improved their domestically—produced wool, found sources for wool outside England (Spain), and increased production of linen but also produced silks and cottons, once only imported into Europe from the East (Hunt and Murray, 1999).

The new mentality of the successful post—plague businessman is exemplified by the Florentines Gregorio Dati and Buonaccorso Pitti and especially the celebrated merchant of Prato, Francesco di Marco Datini. The large companies and super companies, some of which failed even before the Black Death, were not well suited to the post—plague commercial economy. Datini’s family business, with its limited geographical ambitions, better exercised control, was more nimble and flexible as opportunities vanished or materialized, and more effectively managed risk, all keys to success. Datini through voluminous correspondence with his business associates, subordinates, and agents and his conspicuously careful and regular accounting grasped the reins of his concern tightly. He insulated himself from undue risk by never committing too heavily to any individual venture, by dividing cargoes among ships or by insuring them, by never lending money to notoriously uncreditworthy princes, and by remaining as apolitical as he could. His energy and drive to complete every business venture likewise served him well and made him an exemplar for commercial success in a challenging era (Origo, 1957; Hunt and Murray, 1999).

The Black Death and Popular Rebellion

The late medieval popular uprising, a phenomenon with undeniable economic ramifications, is often linked with the demographic, cultural, social, and economic reshuffling caused by the Black Death; however, the connection between pestilence and revolt is neither exclusive nor linear. Any single uprising is rarely susceptible to a single—cause analysis and just as rarely was a single socioeconomic interest group the fomenter of disorder. The outbreak of rebellion in the first half of the fourteenth century (e.g., in urban [1302] and maritime [1325—28] Flanders and in English monastic towns [1326—27]) indicates the existence of socioeconomic and political disgruntlement well before the Black Death.

Some explanations for popular uprising, such as the placing of immediate stresses on the populace and the cumulative effect of centuries of oppression by manorial lords, are now largely dismissed. At times of greatest stress —— the Great Famine and the Black Death —— disorder but no large—scale, organized uprising materialized. Manorial oppression likewise is difficult to defend when the peasant in the plague’s aftermath was often enjoying better pay, reduced dues and services, broader opportunities, and a higher standard of living. Detailed study of the participants in the revolts most often labeled “peasant” uprisings has revealed the central involvement and apparent common cause of urban and rural tradesmen and craftsmen, not only manorial serfs.

The Black Death may indeed have made its greatest contribution to popular rebellion by expanding the peasant’s horizons and fueling a sense of grievance at the pace of change, not at its absence. The plague may also have undercut adherence to the notion of a divinely—sanctioned, static social order and buffeted a belief that preservation of manorial socioeconomic arrangements was essential to the survival of all, which in turn may have raised receptiveness to the apocalyptic socially revolutionary message of preachers like England’s John Ball. After the Black Death, change was inevitable and apparent to all.

The reasons for any individual rebellion were complex. Measures in the environs of Paris to check wage hikes caused by the plague doubtless fanned discontent and contributed to the outbreak of the Jacquerie of 1358 but high taxation to finance the Hundred Years’ War, depredation by marauding mercenary bands in the French countryside, and the peasantry’s conviction that the nobility had failed them in war roiled popular discontent. In the related urban revolt led by étienne Marcel (1355—58), tensions arose from the Parisian bourgeoisie’s discontent with the war’s progress, the crown’s imposition of regressive sales and head taxes, and devaluation of currency rather than change attributable to the Black Death.

In the English Peasants’ Rebellion of 1381, continued enforcement of the Statute of Laborers no doubt rankled and perhaps made the peasantry more open to provocative sermonizing but labor legislation had not halted higher wages or improvement in the standard of living for peasant. It seems likely that discontent may have arisen from an unsatisfying pace of improvement of the peasant’s lot. The regressive Poll Taxes of 1380 and 1381 also contributed to the discontent. It is furthermore noteworthy that the rebellion began in relatively affluent eastern England, not in the poorer west or north.

In the Ciompi revolt in Florence (1378—83), restrictive gild regulations and denial of political voice to workers due to the Black Death raised tensions; however, Florence’s war with the papacy and an economic slump in the 1370s resulting in devaluation of the penny in which the worker was paid were equally if not more important in fomenting unrest. Once the value of the penny was restored to its former level in 1383 the rebellion in fact subsided.

In sum, the Black Death played some role in each uprising but, as with many medieval phenomena, it is difficult to gauge its importance relative to other causes. Perhaps the plague’s greatest contribution to unrest lay in its fostering of a shrinking economy that for a time was less able to absorb socioeconomic tensions than had the growing high medieval economy. The rebellions in any event achieved little. Promises made to the rebels were invariably broken and brutal reprisals often followed. The lot of the lower socioeconomic strata was improved incrementally by the larger economic changes already at work. Viewed from this perspective, the Black Death may have had more influence in resolving the worker’s grievances than in spurring revolt.

Conclusion

The European economy at the close of the Middle Ages (c. 1500) differed fundamentally from the pre—plague economy. In the countryside, a freer peasant derived greater material benefit from his toil. Fixed rents if not outright ownership of land had largely displaced customary dues and services and, despite low grain prices, the peasant more readily fed himself and his family from his own land and produced a surplus for the market. Yields improved as reduced population permitted a greater focus on fertile lands and more frequent fallowing, a beneficial phenomenon for the peasant. More pronounced socioeconomic gradations developed among peasants as some, especially more prosperous ones, exploited the changed circumstances, especially the availability of land. The peasant’s gain was the lord’s loss. As the Middle Ages waned, the lord was commonly a pure rentier whose income was subject to the depredations of inflation.

In trade and manufacturing, the relative ease of success during the high Middle Ages gave way to greater competition, which rewarded better business practices and leaner, meaner, and more efficient concerns. Greater sensitivity to the market and the cutting of costs ultimately rewarded the European consumer with a wider range of good at better prices.

In the long term, the demographic restructuring caused by the Black Death perhaps fostered the possibility of new economic growth. The pestilence returned Europe’s population roughly its level c. 1100. As one scholar notes, the Black Death, unlike other catastrophes, destroyed people but not property and the attenuated population was left with the whole of Europe’s resources to exploit, resources far more substantial by 1347 than they had been two and a half centuries earlier, when they had been created from the ground up. In this environment, survivors also benefited from the technological and commercial skills developed during the course of the high Middle Ages. Viewed from another perspective, the Black Death was a cataclysmic event and retrenchment was inevitable, but it ultimately diminished economic impediments and opened new opportunity.

References and Further Reading:

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Aberth, John. From the Brink of the Apocalypse: Confronting Famine, War, Plague, and Death in the Later Middle Ages. New York: Routledge, 2001.

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Aston, T. H. and C. H. E. Philpin, eds. The Brenner Debate: Agrarian Class Structure and Economic Development in Pre—Industrial Europe. Cambridge: Cambridge University Press, 1985.

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Bailey, Mark D. A Marginal Economy? East Anglian Breckland in the Later Middle Ages. Cambridge: Cambridge University Press, 1989.

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Bleukx, Koenraad. “Was the Black Death (1348—49) a Real Plague Epidemic? England as a Case Study.” In Serta Devota in Memoriam Guillelmi Lourdaux. Pars Posterior: Cultura Medievalis, edited by W. Verbeke, M. Haverals, R. de Keyser, and J. Goossens, 64—113. Leuven: Leuven University Press, 1995.

Blockmans, Willem P. “The Social and Economic Effects of Plague in the Low Countries, 1349—1500.” Revue Belge de Philologie et d’Histoire 58 (1980): 833—63.

Bolton, Jim L. “‘The World Upside Down’: Plague as an Agent of Economic and Social Change.” In The Black Death in England, edited by M. Ormrod and P. Lindley. Stamford: Paul Watkins, 1996.

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Campbell, Bruce M. S., ed. Before the Black Death: Studies in the ‘Crisis’ of the Early Fourteenth Century. Manchester: Manchester University Press, 1991.

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Cohn, Samuel K. The Black Death Transformed: Disease and Culture in Early Renaissance Europe. London: Edward Arnold, 2002.

Cohn, Sameul K. “After the Black Death: Labour Legislation and Attitudes toward Labour in Late—Medieval Western Europe.” Economic History Review 60 (2007): 457—85.

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Citation: Routt, David. “The Economic Impact of the Black Death”. EH.Net Encyclopedia, edited by Robert Whaples. July 20, 2008. URL http://eh.net/encyclopedia/the-economic-impact-of-the-black-death/

The Economy of Ancient Greece

Darel Tai Engen, California State University – San Marcos

Introduction 1

The ancient Greek economy is somewhat of an enigma. Given the remoteness of ancient Greek civilization, the evidence is minimal and difficulties of interpretation abound. Ancient Greek civilization flourished from around 776 to 30 B.C. in what are called the Archaic (776-480), Classical (480-323), and Hellenistic (323-30) periods.2 During this time, Greek civilization was very different from our own in a variety of ways. In the Archaic and Classical periods, Greece was not unified but was comprised of hundreds of small, independent poleis or “city-states.” During the Hellenistic period, Greek civilization spread into the Near East and large kingdoms became the norm. Throughout these periods of ancient Greek civilization, the level of technology was nothing like it is today and values developed that shaped the economy in unique ways. Thus, despite over a century of investigation, scholars are still debating the nature of the ancient Greek economy.

Moreover, the evidence is insufficient to employ all but the most basic quantitative methods of modern economic analysis and has forced scholars to employ other more qualitative methods of investigation. This brief article, therefore, will not include any of the statistics, tables, charts, or graphs that normally accompany economic studies. Rather, it will attempt to set out the types of evidence available for studying the ancient Greek economy, to describe briefly the long-running debate about the ancient Greek economy and the most widely accepted model of it, and then to present a basic view of the various sectors of the ancient Greek economy during the three major phases of its history. In addition, reference will be made to some recent scholarly trends in the field.

Sources of Evidence

Although the ancient Greeks achieved a high degree of sophistication in their political, philosophical, and literary analyses and have, therefore, left us with a significant amount of evidence concerning these matters, few Greeks attempted what we would call sophisticated economic analysis. Nonetheless, the ancient Greeks did engage in economic activity. They produced and exchanged goods both in local and long distance trade and had monetary systems to facilitate their exchanges. These activities have left behind material remains and are described in various contexts scattered throughout the extant writings of the ancient Greeks.

Most of our evidence for the ancient Greek economy concerns Athens in the Classical period and includes literary works, such as legal speeches, philosophical dialogues and treatises, historical narratives, and dramas and other poetic writings. Demosthenes, Lysias, Isokrates, and other Attic Orators have left us with numerous speeches, several of which concern economic matters, usually within the context of a lawsuit. But although these speeches illuminate some aspects of ancient Greek contracts, loans, trade, and other economic activity, one must analyze them with care on account of the biases and distortions inherent in legal speeches.

Philosophical works, especially those of Xenophon, Plato, and Aristotle, provide us with an insight into how the ancient Greeks perceived and analyzed economic matters. We learn about the place of economic activities within the Greek city-state, value system, and social and political institutions. One drawback of such evidence, however, is that the authors of these works were without exception members of the elite, and their political perspective and disdain for day-to-day economic activity should not necessarily be taken to represent the views of all or even the majority of ancient Greeks.

The ancient Greek historians concerned themselves primarily with politics and warfare. But within these contexts, one can find bits of information here and there about public finance and other economic matters. Thucydides, for example, does takes care to describe the financial resources of Athens during the Peloponnesian War.

Poems and dramas also contain evidence concerning the ancient Greek economy. One can find random references to trade, manufacturing, the status of businessmen, and other economic matters. Of course, one must be careful to account for genre and audience in addition to the personal perspective of the author when using such sources for information about the economy. The plays of Aristophanes, for example, make many references to economic activities, but such references are often characterized by stereotyping and exaggeration for comedic purposes.

One of the most extensive collections of economic documents is the papyri from Greek-controlled Egypt during the Hellenistic period. The Ptolemaic dynasty that ruled Egypt developed an extensive bureaucracy to oversee numerous economic activities and like all bureaucracies, they kept detailed records of their administration. Thus, the papyri include information about such things as taxes, government-controlled lands and labor, and the unique numismatic policies of the Ptolemies.

Epigraphic evidence comes in the form of stone inscriptions from public and private institutions. Boundary markers placed on land used as security for loans, called horoi, were often inscribed with the terms of the loans. States such as Athens inscribed honorary decrees for those who had done outstanding services for the state, including economic ones. States also inscribed accounts for public building projects and leases of public lands or mines. In addition, religious sanctuaries frequently inscribed accounts of monies and other assets, such as produce, land, and buildings, under their control. Although accounts tend to be free of human biases, honorary decrees are much more complex and the historian must be careful to consider the perspective of their issuing institutions when interpreting them.

Archaeological evidence is free of some of the representational complexities of the literary and epigraphic evidence. Pottery finds can tell us about pottery manufacture and trade. The vase types indicate the goods they contained, such as olive oil, wine, or grain. The distribution of finds of ancient pottery can, therefore, tell us the extent of trade in various goods. Finds of hoarded coins are also invaluable for the information they reveal about the volume of coins minted by a given state at a given time and the extent to which a state’s coinage was distributed geographically. But such archaeological evidence is not without its drawbacks as well. The same “muteness” that frees such evidence from human biases also makes it incapable of telling us who traded the goods, why they were traded, how they were traded, how much they cost, and how many middlemen they went through before reaching their find spots. Furthermore, it is always dangerous to attempt to extrapolate broad conclusions about the economy from a small number of finds, since we can never be sure if those finds are representative of larger phenomena or merely exceptional cases that archaeologists happened to stumble upon.

Some of the most spectacular and informative finds in recent years have been made under the waters of the Mediterranean, Aegean, and Black Seas by what is known as marine (or nautical) archaeology. Ancient shipwrecks containing goods for trade have opened new doors to the study of ancient Greek merchant vessels, manufacturing, and trade. Although the field is relatively new, it has already yielded much new data and promises great things for the future.

The Debate about the Ancient Greek Economy

As stated above, the ancient Greek economy has been the subject of a long-running debate that continues to this day. Briefly stated, the debate began in the late nineteenth century and revolved around the issue of whether the economy was “primitive” or “modern.” These were a poor choice of terms with which to conceptualize the ancient Greek economy and are to a great extent responsible for the intractability of the debate. These terms are clearly normative in character so that essentially the argument was about whether the ancient Greek economy was like our “modern” economy, which was never carefully defined, but apparently assumed to be a free enterprise, capitalistic one with interconnected price-making markets. In addition, confusion arose over whether the ancient Greek economy was like a modern economy in quantity (scale) or quality (its organizing principles). Lastly, such terms clearly attempt to characterize the ancient Greek economy as a whole and do not distinguish differences among regions or city-states of Greece, time periods, or sectors of the economy (agriculture, banking, long distance trade, etc.).

Seeing extensive trade and use of money in Greece from the fifth century B.C. onward, the modernists extrapolated the existence of a market economy in Classical Greece. On the other hand, seeing traditional Greek social and political values that disdained the productive, impersonal, and industrial nature of modern market economies, the primitivists downplayed the existence of extensive trade and the use of money in the economy. Neither primitivists nor modernists could conceive of the existence of extensive trade and the use of money unless the ancient Greek economy was organized according to market principles. Moreover, neither side in the debate could call activities “economic” unless such activities were productive and aimed at growth.

Historical methods were also a factor in the debate. Traditional ancient historians who relied on philology and archaeology tended to side with the modernist interpretation, whereas historians who employed new methods drawn from sociology and anthropology tended to hold to the primitivist view. For example, Michael Rostovtzeff assembled a wealth of archaeological data to argue that the scale of the ancient Greek economy in the Hellenistic period was so great that it could not be considered primitive. On the other hand, Johannes Hasebroek used sociological methods developed by Max Weber to argue that the ancient Greek citizen was a homo politicus (“political man”) and not a homo economicus (“economic man”) – he disdained economic activities and subordinated them to traditional political interests.

A turning point in the debate came with the work of Karl Polanyi who drew on anthropological methods to argue that economies need not be organized according to the independent and self-regulating institutions of a market system. He distinguished between “substantivist” and “formalist” economic analysis. The latter, which is typical of economic analysis today, is appropriate only for market economies. Market economies operate independently of non-economic institutions and their most characteristic feature is that prices are set according to an aggregate derived from the impersonal forces of supply and demand among a group of interconnected markets. But material goods may be produced, exchanged, and valued by means other than market institutions. Such means may be tied to non-economic social and political institutions, including gift exchange or state-controlled redistribution and price-setting. Hence, other tools of analysis, namely “substantivist” economics, must be employed to understand them. Polanyi concluded that ancient Greece did not have a developed market system until the Hellenistic period. Before that time, the economy of ancient Greece did not comprise an independent sphere of institutions, but rather was “embedded” in other social and political institutions. Thus, Polanyi opened the door through which scholars could begin to examine the ancient Greek economy free from the normative parameters originally imposed on the debate. Unfortunately, the grip of the old parameters has been very strong and the debate has never completely freed itself from their influence.

The Finley Model and Its Aftermath

At present the most widely accepted model of the ancient Greek economy is that which was first set forth by Moses Finley in 1973. This view owes much to the Weber-Hasebroek-Polanyi line of analysis and holds that the ancient Greek economy was fundamentally different from the market economy that predominates in most of the world today. Not only was the ancient Greek economy much smaller in scale than economies today, it also differed greatly in quality.

Although the ancient Greek word oikonomia is the root of our modern English word “economy,” the two words are not synonymous. Whereas today “economy” refers to a distinct sphere of human interactions involving the production, distribution, and consumption of goods and services, oikonomia meant “household management,” a familial activity that was subsumed or “embedded” in traditional social and political institutions. True, the Greeks produced and consumed goods, engaged in various forms of exchanges including long-distance trade, and developed monetary systems employing coinage, but they did not see such activities as being part of a distinct institution which we call the “economy.”

According to Finley’s model, the subordination of economic activities to social and political ones was a byproduct of a Greek value system that emphasized the wellbeing of the community over that of the individual. Economic activity was necessary in this system only in so far as the individual male citizen had to provide sustenance for himself and his family. This could be accomplished simply by farming a small plot of land. Beyond that, the male citizen was expected to devote himself to the wellbeing of the community by participating in the public religious, political, and military life of the polis.

On the other hand, ancient Greek values held in low esteem economic activities that were not subordinated to the traditional activities of managing the family farm and obtaining goods for necessary consumption. So-called banausic work, which included manufacturing, business, and trade (which were not tied to the land and the family farm), and what we would call “capitalism” (investing money to make more money) were considered to be incompatible with active participation in the affairs of the polis and even as unnatural and morally corrupting. A life on the land, farming to produce only so much as was needed for consumption and leaving enough leisure time for active participation in the public life of the polis, was the social ideal. Production and exchange were to be undertaken only for personal need, to help out friends, or to benefit the community as a whole. Such activities were not to be undertaken simply to make a profit and certainly not to obtain capital for future investment and economic growth.

Given the limits put on economic activity by traditional values and the absence of a modern conception of the economy, agriculture comprised the bulk of production and exchange. Most production, therefore, was carried out in the countryside and cities were net consumers rather than producers, living off the surplus of the countryside. With limited technology and no understanding of economies of scale, cities were not hubs of industry, and manufacturing existed only on a small scale. Cities were mainly places for people to live as well as religious and governmental centers. Their contribution to the economy was only to demand the surplus produce of the countryside, manufacture limited amounts of goods, and provide market places and ports of trade for the exchange of goods.

Since the bulk of economic wealth was produced from the land and banausic occupations were not esteemed, the elite of ancient Greek society were landowners who consequently dominated politics, even in democratic poleis like Athens. Such men had little interest in manufacturing, business, and trade and, like their society as a whole, did not consider the economy as a distinct sphere separate from social and political concerns. Thus, their official policies with regard to the economy were much different from that of modern states.

Modern states undertake policies with specifically economic goals, desiring in particular to make their national economy more productive, to expand or grow, thereby increasing the per capita wealth of the state. Ancient Greek city-states, on the other hand, had an interest and involvement in what we would call economic activities (trade, minting coins, production, etc.) that, like oikonomia on the household level, were consumptive in nature and fulfilled traditional social and political needs, not strictly economic ones.

Finley’s model also holds that there was neither a “market mentality” nor interconnected markets that could operate according to impersonal price-setting market mechanisms. Individual city-states certainly had “market places” (agorai), but such markets existed largely in isolation with minimal connections among them. Thus, prices were set according to local conditions and personal relationships rather than in accordance with the impersonal forces of supply and demand. This was so in part because of the Greek socio-political emphasis on self-sufficiency (autarkeia), but also because the physical environment and industry of the eastern Mediterranean tended to produce similar goods, so that there were few items that a city-state needed which could not be obtained from within its own boundaries.

Moreover, according to Finley’s model, the interests of Greek city-states in trade were likewise limited by traditional political concerns to the consumptive goals of ensuring the import of adequate supplies of “material wants,” such as food at reasonable prices for their citizens, and revenue which could be obtained from taxes on trade. The former goal could be fulfilled by making laws that required or provided incentives for traders to bring grain into the city. Laws such as these were merely extensions of traditional political policies, like conquest and plunder, but in which a less violent form of acquisition would now be undertaken. But though the means had changed, the ends were still political; there was no interest in the economy per se. The same holds true for the traditional need of city-states for revenue to pay for public projects, such as temple building and road maintenance. Here again, old and often violent methods of obtaining revenue were augmented through such things as taxes on trade.

Finley’s model has had a great impact on those who study the ancient Greek economy and is still widely accepted today. But although the general picture it presents of the ancient Greek economy has not been superceded, the model is not without flaws. It was inevitable that Finley would overstate his model, since it attempted to encompass the general character of the ancient Greek economy as a whole. Thus, the model makes little distinction between different regions or city-states of Greece, even though it is clear that the economies of Athens and Sparta, for example, were quite different in many respects. Finley also treats the various sectors of the economy (agriculture, labor, manufacturing, long-distance trade, banking, etc.) as if they were all governed equally in accordance with the general tenets of the model, despite the fact that, for example, there were significant differences between the values that applied in the landed economy and those that prevailed in overseas trade. Lastly, Finley’s model is synchronic and hardly acknowledges changes in both the quantity and the quality of the economy over time.

Some close examinations of the various sectors of the ancient Greek economy in different places and at different times have supported Finley’s model in its general outlines. But they have been matched by just as many studies that have revealed exceptions to the model. Thus, one recent trend in the scholarship has been to try to revise the Finley model in light of focused studies of particular sectors of the economy at specific times and places. Another trend has been simply to ignore the Finley model and bypass the old debate altogether by examining the ancient Greek economy in ways that make them irrelevant. Basically, given the quantity and the quality of the available evidence, our attempts to understand the ancient Greek economy are greatly affected by the perspective from which we approach it. We can choose to try to characterize the entire ancient Greek economy in general, to see the forest as it were, and debate whether it was more or less similar to our own. Or we can focus in on the trees and undertake narrow studies of particular sectors of the ancient Greek economy at specific times and places. Both approaches are useful and not necessarily mutually exclusive.

The Archaic Period

Finley’s model holds most true for the Archaic period (c. 776-480 B.C.) of ancient Greek history. Archaeological evidence and literary references from such works as the epic poems of Homer (the Iliad and the Odyssey), the Works and Days of Hesiod, and the works of the lyric poets attest to an economy that was generally small in scale and centered on household production and consumption. This is not surprising, since it was during the Archaic period that Greek civilization was re-emerging from a “Dark Age” of upheaval and forming its basic social, legal, political, and economic institutions. The fundamental political unit, the polis or independent city-state, appears at this time as do non-monarchal governments allowing for at least some degree of political participation among a broad swath of citizens.

For the most part, governments did not actively involve themselves in economic matters, except during the occasional political upheavals between “haves” and “have-nots” in which land might be confiscated from the few and redistributed to the many. Despite the fact that much of the Greek mainland is mountainous and the rivers generally small, there was enough fertile land and winter rainfall so that agriculture could account for the bulk of economic production, as it would in all civilizations before the modern industrial era. But unlike the large kingdoms of the Near East, Greece had a free-enterprise economy and most land was privately owned. Agriculture was carried out primarily on small family farms, though the Homeric epics indicate that there were also some larger estates controlled by the elite and worked with the help of free landless thetes whose labor would be needed especially at harvest time. Slaves existed, but not in such large numbers as to make the economy and society dependent on them.

As the populations of cities were fairly small, crafts and manufacturing were largely carried out within households for internal consumption. Both literary accounts and material remains, however, indicate that there was a certain amount of specialization. Artisans are referred to in the Homeric epics and the level of craftsmanship seen on items, such as metal work and painted pottery, was not likely to have been accomplished by non-specialists. Nevertheless, without large-scale manufacturing, safety from brigands on land and pirates at sea, and a monetary system employing coinage (until late in the sixth century), markets were necessarily small, devoted to local products, and certainly not interconnected into a price-setting market economy. Trade was limited mostly to local exchanges between the countryside and the urban center of city-states. Farmers might load up their surplus goods on a small ship to sell them in a neighboring city, as Hesiod attests, but long-distance sea-borne trade was devoted almost exclusively to luxury items, such as precious metals, jewelry, and finely-painted pottery. Moreover, gift exchanges in accordance with social traditions were as prominent if not more so than impersonal exchanges for profit. In general, those who engaged in banausic occupations on more than a part-time basis and sought profit from such activities were looked down on and did not hold positions of prestige in society or government.

Nevertheless, it cannot be denied that the scale of the Greek economy grew during the Archaic period and if not per capita, at least in proportion to the clear growth in population. Population increases and the desire for more land were the primary impetuses for a colonizing movement that established Greek poleis throughout the Mediterranean and Black Sea regions during this period. These new city-states put more land under cultivation, thereby providing the agriculture necessary to sustain the growing population. Moreover, archaeological evidence for the dispersal of Greek products (particularly pottery) over a wide area indicate that trade and manufacturing had also expanded greatly since the Dark Age. It is probably no coincidence that the end of the Archaic period witnessed for the first time a divergence between the designs of merchant vessels and warships, a distinction that would become permanent. Also, after the invention of coinage in Asia Minor in the early sixth century B.C., even though various other forms of money and barter continued to be employed throughout the course of ancient Greek history, the Greeks were quick to adopt coinage and it became the predominant means of exchange from the end of the sixth century onward. The aforementioned economic trends are traced in an important recent book by David Tandy, who argues that they had a fundamental impact on the development of the social and political organization and values of the Archaic polis.

Key Economic Sectors of the Classical Period

During the Classical period of ancient Greek history (480-323 B.C.), continued increases in population as well as political developments influenced various sectors of the economy to the extent that one can see a growing number of deviations from the Finley model. Evidence concerning the economy also becomes more abundant and informative. Thus, a more detailed description of the economy during the Classical period is possible and more attention to the distinctions between its various sectors is also desirable.

In light of the cautionary statements made earlier in this article about overgeneralization, it is important to note that great variation existed among the regions and city-states of the ancient Greek world, especially during the Classical period. Athens and Sparta are famous examples of two almost polar opposites in their social and political organizations and this is no less true with regard to their economic institutions. Given, however, the fact that Athens is the best documented and most studied place in ancient Greek history, the various sectors of the ancient Greek economy during the Classical period will be discussed primarily as they existed in Athens, despite the fact that it was in many ways exceptional. Significant variations from the Athenian example will be noted, however, as will some recent trends in scholarship.

Public and Private Economic Sectors

It is first necessary to distinguish between the public and private sectors of the economy. Throughout most of ancient Greek history before the Hellenistic period, a free enterprise economy with private property and limited government intervention predominated. This places Greece in sharp contrast to most other ancient civilizations, in which governmental or religious institutions tended to dominate the economy. The main economic concerns of the governments of the Greek city-states were to maintain harmony within the private economy (make laws, adjudicate disputes, and protect private property rights), make sure that food was available to their citizenries at reasonable prices, and obtain revenue from economic activities (through taxes) to pay for government expenses.

Athens had numerous laws to protect private property rights and had officials and law courts to enforce them. In addition, there were officials who oversaw such things as weights, measures, and coinage to make sure that people were not cheated in the market place. Athens also had laws to ensure an adequate supply of grain for its citizens, such as a law against the export of grain and laws to encourage traders to import grain. Athens even had agreements with other states in which the latter gave favorable treatment to traders bound for Athens with grain.

On the other hand, Athens did not tax its citizens directly except in cases of state emergencies (eisphorai) and in requiring the wealthiest citizens to perform public services (liturgies). Most taxes were indirect: market taxes, port taxes, import-export taxes, and taxes on foreigners who took up long-term residence in Athens. Taxes were collected by companies of private tax farmers who bid on contracts issued by the state. In addition to taxes, Athens obtained revenue from leases of publicly owned lands and mines. Revenue was necessary for various government expenditures, including administrative costs, public festivals, and maintenance of widows and orphans of soldiers who died in battle as well as building ships’ hulls for the navy, walls for the city, and temples for the gods. Such state expenditures could have a significant impact on the economy, as is clear from the large quantities of money and labor that appear in the inscribed accounts of the building projects on the Athenian acropolis.

Although the Finley model is right in many respects with regard to the limited interest and involvement of the state in the economy, one recent trend has been to show through carefully focused examinations of specific phenomena that Finley pressed his case too far. For example, Finley drew too sharp a distinction between the interests of non-citizen (and, therefore, non-landowning) traders and the landed citizens who dominated Athenian government. It is true that the latter might not have exactly the same economic interests as the former, but the interests of the two were nevertheless complementary, for how could Athens get the grain imports it required without making it in the interest of traders to bring it to Athens?. Moreover, it has been argued that the policies of Athens with regard to its coinage betray a state interest in the export of at least one locally produced commodity (namely silver), something completely discounted by the Finley model.

But again, Finley was probably right to argue that during the Archaic and Classical periods the vast majority of economic activity was left untouched by government and carried out by private individuals. On the other hand, by the Classical period a self-sufficient household economy was an ideal that was becoming increasingly difficult to maintain as the various sectors of economic activity became more specialized, more impersonal, and more profit oriented as well.

Land

As in the Archaic period, the most important economic sector was still tied to the land and the majority of agriculture continued to be carried out on the subsistence level by numerous small family farms, even though the distribution of land among the population was far from equal. Primary crops were grains, mostly barley but also some wheat, which were usually sown on a two-year fallowing cycle. Olives and grapes were also widely produced throughout Greece on land unsuitable for grains. Animal husbandry focused on sheep and goats, which could be moved from their winter lowland pasturage to the moister and cooler mountainous regions during the hot summer months. Cattle, horses, and donkeys, though less numerous, were also significant. While usually sufficient to support the population of ancient Greece, unpredictable rainfall made agriculture precarious and there is much evidence for periodic crop failures, shortages, and famines. Consequently, competition for fertile land was a hallmark of Greek history and the cause of much social and political strife within and between city-states.

One recent trend in the study of ancient Greek agriculture is the use of ethnoarchaeology, which attempts to understand the ancient economy through comparative data from better-documented modern peasant economies. In general, studies employing this method have supported the prevailing view of subsistence agriculture in ancient Greece. But caution is necessary, since there have been changes in the physical environment of and settlement patterns in Greece over time that can skew comparative analyses. Ethnoarchaeology has also been used to show that Greek farmers in both ancient and modern times have had to be flexible in their responses to wide variations in local topographical and climatic conditions and, thus, varied their crops and fallowing regimes to a significant degree. Rational exploitation of fluctuations in production brought on by such variations might have been the means by which some farmers were able to obtain enough wealth to rise above their peers and become members of a landed elite and this might point to a productive mentality at odds with the Finley model.

Metals were another important landed resource of Greece and so mining occupied an important place in the economy. Ancient Greeks typically used bronze and iron tools and weapons. There is little evidence that copper, the principal metal in bronze, was ever mined in abundance on mainland Greece. It had to be imported from the island of Cyprus, where it existed in large quantities, and other more distant regions. Tin, the other metal in bronze, was also rare in Greece and had to be imported from as far away as Britain. Iron is relatively plentiful throughout Greece and there is archaeological evidence of iron mining; however, literary references to it are few and so we know little about the process.

Precious metals were used in jewelry, art, and coinage. Athens had an abundance of silver and we know much about its mining industry from surviving inscriptions of government mine leases to private entrepreneurs. The mines were extremely productive, providing Athens with an income of 200 talents per year for twelve years from 338 B.C. onward. One talent was the equivalent of around nine year’s worth of wages for single skilled laborer working five days a week, 52 weeks a year, according to the wage rates we know from 377 B.C. Though productive in silver, ancient Greece was not as rich in gold, which was found primarily in Thrace and on the islands of Thasos and Siphnos.

Recent scholarship continues to focus on the silver mines of Athens, drawing not only on the inscribed mine leases, but also on extensive archaeological investigation of the mines themselves. They tend to indicate that, contrary to the Finley model, mining in Athens was specialized enough and extensive enough to constitute an “industry” in the modern sense of the word and one geared toward growth. In a study of mine-leasing records Kirsty Shipton has shown that the elite of Athens preferred mines leases, with their potential for greater profits, to land leases. Thus, the traditional preference of the elite for the consumptive acquisition of land and disdain for productive investments for profit postulated by the Finley model might be a characteristic feature of the ancient Greek world as a whole, but it does not entirely hold for Athens in the Classical period.

Stone for building and sculpture was another valuable natural resource of Greece. Limestone was available in abundance and fine marble could be found in Athens on the slopes of Mount Pentelikos and on the island of Paros. The former was used in building the Parthenon and the other structures of the Athenian acropolis while the latter was often used for the most famous ancient Greek free-standing and relief sculptures.

Labor

It is notoriously difficult to estimate the population of Athens or any other Greek city-state in ancient times. Generally accepted figures for Athens at the height of its power and prosperity in 431 B.C., though, are in the range of approximately 305,000 people, of which perhaps 160,000 were citizens (40,000 male, 40,000 female, 80,000 children), 25,000 were free resident foreigners (metics), and 120,000 were slaves. Athens was the largest polis and the populations of most city-states were probably much smaller. Citizens, metics, and slaves all performed labor in the economy. In addition, many city-states included forms of dependent labor somewhere in between slave and free.

As stated above, much of the agriculture of ancient Greece was carried out by small farmers who were exclusively free citizens, since non-citizens were barred from owning land. But although being a farmer was the social ideal, good land was scarce in Greece and it is estimated that in Athens about a quarter of the male citizens did not own land and had to take up other occupations for their livelihoods. Such occupations existed in the manufacturing, service, retail, and trade sectors. These “business” occupations were not only socially disesteemed, but they also tended to be small scale. Wage earning was very much looked down upon, since working for another person was thought of as an impingement on freedom and akin to slavery. Thus, free men doing the same work side by side with metics and slaves on the Acropolis building projects earned the same wages. Yet wages appear to have been adequate to make a living. In Athens the typical wage for a skilled laborer was one drachma per day at the end of the fifth century and two and a half drachmai in 377. In the fifth century a Greek soldier on campaign received a ration of 1 choinix of wheat per day. The price of wheat in Athens at the end of the fifth century was 3 drachmai per medimnos. There are 48 choinices in a medimnos. Thus, one drachma could buy enough food for 16 days for one person, four days for a family of four.

One thing that made up for the limited number of free citizens who were willing or had to become businessmen or wage earners was the existence of metics, foreign-born, free non-citizens who took up residence in a city-state. It is estimated that Athens had about 25,000 metics at its height and since they were barred from owning land, they engaged in banausic occupations that tended to be looked down upon by the free citizenry. The economic opportunities afforded by such occupations in Athens and other port cities where they were particularly abundant must have been significant. They attracted metics despite the fact that metics had to pay a special poll tax and serve in the military even though they could not own land or participate in politics and had to have a citizen represent them in legal matters. This is confirmed by the numerous metics in Athens who became wealthy and whose names we know, such as the bankers Pasion and Phormion and the shield-maker Cephalus, the father of the orator, Lysias.

Foreign-born, free non-citizen transients known as xenoi also played an important role in the ancient Greek economy, since it is apparent that many, though certainly not all, those who carried out long-distance trade were such men. Like metics, they too were subject to special taxes, but few rights.

Slaves comprised an undeniably large part of the labor force of ancient Greece. In fact, it is fair to say, as Finley did, that ancient Greece was a “slave dependent society.” There were so many slaves; they were so essential to the economy; and they became so thoroughly embedded into the every day life and values of the society that without slavery, ancient Greek civilization could not have existed in the manner it did. In Classical Athens it has been estimated that there were around 120,000 slaves. Thus, slaves comprised over a third of the total population and outnumbered adult male citizens by three to one.

The slaves of Athens were chattel, that is the private property of their owners, and had few, if any, rights. The demand for them was high as they performed almost every kind of work imaginable from agricultural labor to mining labor to shop assistants to domestic labor even to serving as the police force and secretaries for the government in Athens. About the only thing slaves did not normally do was military service, except in emergencies, when they did that too.

Slaves were supplied by a variety of sources. Many were war captives. Some were enslaved for failure to pay debts, though this was outlawed in Athens in the early sixth century B.C. Some were foundlings, abandoned children rescued and reared in return for their labor as slaves. Of course, the children of slaves would also be slaves. In addition, there was an extensive and regular slave trade that trafficked in people who had become slaves by all the means mentioned previously.

In part because of the diverse means by which slaves were supplied, there was no particular race that was singled out for enslavement. Anyone could become a slave if unfortunate enough, including Greeks. It does appear, however, that a large percentage of slaves in Greece originated in the Black Sea and Danubian regions. In most cases they were probably captives from internecine tribal wars and sold to slave traders who shipped them to various parts of the Greek world.

The treatment of chattel slaves varied, depending on the whims of individual slave owners and the types of jobs done by the slaves. Slaves who worked in the silver mines of Athens, for example, worked in dangerous conditions in large numbers (as many as 10,000 at a time) and had virtually no contact with their owners that could result in human bonds of affection (they were usually leased out). On the other hand, slaves who worked in households assisting the matron of the family in her household tasks were probably treated much better as a rule. Their labor was less strenuous and since they worked in close proximity with their owners’ families, at least some human bonds of affection were likely to form between them and their owners. Some slaves even lived on their own and ran their owners’ businesses largely unsupervised.

One aspect of ancient Greek slavery that is often cited as evidence for it being more “humane” than other slavery regimes is manumission. There is enough evidence for slaves being freed to make us believe that manumission was not uncommon and many slaves could probably hope for freedom, even if most of them never actually obtained it. But manumission was quite self-serving for slave owners, since it made slaves much less likely to risk rebellion in the hope that they might some day be given their freedom. As it turns out, there were only two noteworthy large-scale rebellions of chattel slaves in the history of ancient Greece. Moreover, inscriptions from the religious sanctuary of Delphi from the Hellenistic period show that slaves almost always had to compensate their owners for their freedom, either in the form of cash or some other valuable commodity, like their own children, who would also be slaves of the master and eventually replace their aging parents with young labor. So it is a dubious matter to say that the manumission of slaves is a testament to the humanity of ancient Greek slavery. Individual slaves might benefit, but the practice allowed the institution of slavery to flourish throughout Greek history.

When slaves were freed, they did not become citizens, but rather metics. Yet even though they still could not possess the full rights and privileges of citizens, they could prosper economically, just as other metics could. In Athens the prominent and wealthy metic banker, Pasion, for example, was originally a slave who assisted his masters Antisthenes and Archestratus. By the terms of his will, Pasion in turn manumitted his own slave assistant, Phormion, and not only left him his bank, but also stipulated that Phormion marry his widow and manage the inheritance of his son, Apollodorus.

In addition to chattel slavery, there were other forms of dependent labor in the ancient Greek world. One famous example is helotry, known principally from the city-state of Sparta. The helots of Sparta were agricultural serfs, indigenous peoples conquered by the Spartans and forced to work their former lands for their Spartan overlords. They were not the private property of the individual Spartans, who were allotted the former lands of the helots, and could not be bought or sold. But their mobility was completely restricted; they had very few rights; they had to turn over a large percentage of their produce to their Spartan overlords; and they were routinely terrorized as a matter Spartan state policy. The one drawback for the Spartans of using helot labor, though, was that the helots, living still on their former homeland and having a sense of ethnic unity, were prone to revolt and did so on several occasions at great cost both to themselves and to the Spartans.

With the exception of Sparta and a few other city-states, women in ancient Greece, free citizens or otherwise, could not control land. They could own it in name only and were not allowed to dispose of it as they saw fit, but were legally obliged to yield control of it to a male representative. Since land was the chief source of wealth in the ancient Greek economy, the inability to control it severely constrained the economic role of women. The ideal was for women to get married, have children, raise them, and carry out the indoor tasks of the household, such as cooking and textile production.

Of course, not all women could live up to such an ideal at all times. Women undoubtedly helped outdoors on the farm during harvest time. Those of poorer families might by necessity have to sell in the market place what little surplus produce their households could generate or perform service-oriented jobs for others for wages. Female metics and slaves did similar work and also comprised the majority of the prostitutes of Athens, which was a legal profession. Prostitutes, though, ranged from lowly brothel workers to high-class call girls, the latter of which, such as Aspasia, sometimes obtained prominence in Athenian society.

Despite their disdain for certain types of work and their dependence on slave labor, most Greeks had to work hard to make a living. Yet they did not develop a “work ethic” and did not consider work to be ennobling, but simply necessary. Hence, if one could afford a slave to do one’s work, then one bought a slave. The availability of cheap slaves was a major factor in Greek attitudes toward labor and may also explain why there were no labor unions in Greece. For how could wage-earners pressure their employers for better conditions or wages when the latter could always replace them with slaves if necessary?

Manufacturing

Slavery also affected manufacturing in ancient Greece. It is often said that technology and industrial organization stagnated in ancient Greece because the availability of cheap slave labor obviated any imminent need to improve them. If one wanted to produce more, one merely bought a few more slaves. Thus, most manufactured products were literally hand-made with simple tools. There were no assembly lines and no big factories. The largest manufacturing establishment we know of was a shield factory owned by the metic, Cephalus, the father of the orator, Lysias, which employed 120 slaves. Most manufacturing was carried out in small shops or within households. Hence, in comparison with agriculture, manufacturing comprised a small part of the ancient Greek economy.

Nevertheless, documentary and archaeological evidence attests to a wide variety of manufactured items and some in large quantities. Among the most extensively manufactured products was clay pottery, the remains of which archaeologists have found scattered throughout the Mediterranean world. The wheel-made pots took many shapes appropriate for their contents and use, which ranged from hydria for water to amphorae for olive oil and wine to pithoi for grain to aryballoi for perfume to kylikes for drinking cups. Finely painted vases were also manufactured for decorative and ritual purposes. The finest, most numerous, and widely dispersed of these were made in Corinth, Aegina, Athens, and Rhodes.

Literary accounts as well as scenes from painted vases make it clear that the ancient Greeks left textile production largely to women. The principal material they worked with was wool, but linen from flax was also common. Textiles were used in turn in the manufacture of clothing. Again, women were largely responsible for this and it was done primarily within the household. Textiles were often dyed, the most desirable dye being a reddish purple color derived from aquatic murex snails. These had to be harvested, mashed into a jelly, and then boiled to extract the dye.

Although the trees of Greece were for the most part not particularly good for woodworking materials and especially not for large-scale building, the Greeks did use wood extensively and, therefore, had to import good timber from places like Macedonia, the Black Sea region, and Asia Minor. Given the countless islands of Greece, it is not surprising that shipbuilding was an important sector of manufacturing. Vessels were needed for commercial as well as military uses. In Athens the state obtained the necessary timber for the ships (and oars) of its navy, but it contracted with carpenters who worked under the supervision of state officials to craft the timber into the warships that were so vital for Athenian power in the Classical period.

Buildings ranged from private houses to monumental stone temples. The former tended to be rather humble, made of unbaked mud brick laid on a stone foundation and covered by a thatched or tiled roof. On the other hand, the great temples of ancient Greece required much organization, many resources, and incredible technical skill. As is evidenced by the extant accounts for the construction of the buildings of the Athenian acropolis, the work was normally contracted out in small units to private individuals who either worked alone or in charge of others to do anything from quarrying marble to transporting wooden beams to sculpting facades. The degree of specialization varied. In some cases we see contractors carrying out a variety of tasks, whereas in others we see them specializing in only one.

Metal crafts were highly specialized. The Greeks smelted iron, but only in wrought form. They were unable to achieve furnace temperatures high enough to make pig iron and did not have the technical know-how to add carbon to the smelting process with enough precision to make steel with any consistency. Blacksmiths crafted body armor, shields, spears, swords, farm implements, and household utensils. Bronze casting reached the level of fine art in Classical Greece. Sculptors used the lost-wax method, in which they first made a clay model of a statue, then covered the model with a layer of wax, which they then covered again with another layer of clay. Small openings were left in the outer clay covering, into which molten bronze was poured. The hot molten bronze melted the wax, which then flowed out another opening in the outer clay covering. After the bronze cooled the outer clay covering was broken off, leaving the cast bronze.

It is clear that in the Classical period in Athens there was much specialization in manufacturing and that the quantity of goods was far greater than that which could have been produced in a purely “household economy.” At the same time, however, the scale and organization of manufacturing was a far cry from those of industrialized civilizations of recent centuries.

Markets and Prices

According to the Finley model, there was no network of interconnected markets to form a price-setting market economy in the ancient Greek world. Although this is true for the most part, like other aspects of the Finley model, the case is overstated. There do, for example, appear to be connections between markets for some commodities, such as grain and probably precious metals as well. In the case of grain, it can be shown that supply and demand over long-distances did have an impact on prices and traders sought to take advantage of the lag-time between price adjustments in order to make a profit. Obviously, though, this is nothing like the modern world in which the price of crude oil changes instantly worldwide in reaction to a change in supply from one of the major producers. For the most part in ancient Greece, prices were set in accordance with local conditions, personal relationships, and haggling.

Government price-fixing was limited. Although there is evidence that Athens, for example, fixed the retail price of bread in proportion to the wholesale price of grain, there is no evidence that it fixed the price of the latter. Even in times of severe grain shortages, Athens was content to allow traders bringing grain to Athens to charge the going rate. In such cases, the state alleviated the crises for its citizens by paying the going rate for the grain and then reselling it to its citizenry at a lower price.

Despite the general absence of interconnected markets, however, there were market places. Each city-state had at least one market place (agora) in the heart of city and a port market (emporion) as well, if it had a good harbor. The agora was a place of much activity, serving not only as a center of economic exchange, but also as a political, religious, and social center. In the agora one could find law courts, offices for public officials, and coin mints as well as shrines and temples. In fact, agorai were considered sacred places to the degree that they were marked off with boundary stones across which no one who had the stain of religious pollution could cross. Within the agora economic activities were segregated by types of goods, services, and labor so that there were specific places where one could regularly find the fishmongers, blacksmiths, money changers, and so on.

Ancient Greek city-states regulated the economic activities that took place in their markets to a certain degree. Public officials oversaw weights, measures, scales, and coinage to limit and resolve disputes in exchanges as well as to ensure state interests. For example, Athens employed a publicly owned slave to check coins and guard against counterfeiters. In this way, Athens protected the integrity of its own coinage as well as the interests of buyers and sellers. The state ensured the affordability of key goods, such as bread, by fixing its retail prices relative to the wholesale price of grain. Various activities in the market place were also taxed by the state. Port and transit taxes affected exchanges in emporia like the Piraeus of Athens and xenoi had to pay a special tax for engaging in transactions in the agora.

Trade

Local trade between countryside and urban center and on the retail level within cities continued largely as it had in the Archaic period. But rather than producers transporting and selling their surplus goods directly in city markets, specialized retailers (kapeloi) who profited as middlemen between producers and consumers became more the norm. Local trade goods could be probably transported over short distances on land. But long-distance trade over land was difficult and time consuming, given the mountainous topography of Greece and the fact that the fragmented city-states of Greece never built an extensive system of paved roads that tied them together in the manner of the Roman Empire. Most “roads” between cities were single track and suitable only for pack animals, though there were some on which wheeled carts could be pulled by oxen, donkeys, or mules.

Long-distance trade was primarily done by merchant ships over the waters of the Aegean, Mediterranean, and Black Seas. Evidence from the Attic Orators indicates that during the Classical period overseas trade developed into a specialized and important sector of the economy. Trade was carried out by private individuals and not organized by the state. A typical trading venture involved a non-citizen trader (emporos) who either owned his own ship or rented space on a ship owned by another (naukleros). In most cases described by the orators, the traders typically borrowed money from a citizen lender to finance the venture. There is some dispute among scholars whether such loans constituted productive borrowing on the part of the traders or were just a type of insurance, because the loans would only have to be repaid if the ship and cargo reached their contracted destinations. From the perspective of the lenders, the loans were certainly productive, since they charged interest at a rate much higher than that which applied to loans on the security of land, anywhere from 12 to 30%.

Marine archaeology has recently increased our knowledge of merchant vessels and their cargoes tenfold by the discovery of several ancient shipwrecks. The ships appear to have been generally small by modern standards. In 1968 the well-preserved wreck of a merchant ship from c. 300 B.C. was found off the coast of Kyrenia in Cyprus. Being only 35 feet long and 15 feet wide with a capacity of 30 tons, it is probably the kind of merchant vessel that made short hauls and kept within sight of the coastline. But other shipwrecks as well as evidence from the Attic Orators seem to indicate that the typical capacity of merchant vessels that traveled over long distances on the open sea was some 80 tons.

Many of the goods traded throughout ancient Greek history were luxury goods, manufactured items, such as jewelry and finely painted vases, as well as specialty agricultural products like fine wine and honey. Necessities were also traded, however, for without long-distance trade, many Greek cities would not have been able to obtain metals, timber, wine, and slaves. One of the most extensively traded necessity items was grain, which came to Athens typically from the Black Sea region, Thrace, and Egypt. According to the orator, Demosthenes, Athens imported some 400,000 medimnoi (approximately 4,800,000 liters) of grain per year in the late fourth century from the Crimean kingdom of the Bosporus alone.

Chiefly because of the need for certain imports, such as grain and timber, and for revenue drawn from taxes on trade, many cities did have an interest and involvement in overseas trade. Athens in particular made laws that prohibited the export of grain produced in Athens and required that loans on trading ventures be for cargoes of grain and that ships bringing grain into the Piraeus sell one-third of it on the spot and the remaining two-thirds in Athens. Athens also instituted special courts to expedite the adjudication of disputes involving traders, granted honors and privileges to anyone who performed extraordinary services relating to trade for the city, and made agreements with other states to obtain favorable conditions for those bringing grain to Athens.

In all the aforementioned examples Athens’ chief interest was to supply itself with imported grain so that its citizenry could obtain food at reasonable prices. Athens was not particularly concerned with helping traders and enhancing their profits per se or in obtaining a trade surplus or to protect home produced goods against imported foreign ones. To this extent, then, the Finley model holds true, even if it is clear that the Athenian state recognized that its interests were complementary with those of foreign traders and, thus, had to help them in order to help itself.

Moreover, it does appear that Athens had some concern about its home produced products as well, at least in the case of silver. Xenophon, an Athenian writer from the fourth century, noted that Athens could always be assured of traders bringing their goods into Athens, because traders knew they could always get a valuable trade commodity, namely silver in the form of Athenian coinage, in exchange. To ensure the demand for its silver, Athens took great care to maintain the reputation of its coinage for high quality and to associate that reputation with a familiar design that went unchanged for several centuries. Such a policy attests to a state interest in production and exports, at least in this sector of the economy.

Athens was also motivated to encourage trade to obtain revenue from taxes. Both transient and resident foreigner traders had to pay poll taxes in Athens that citizens did not. Athens also had various port, transit, and market taxes that would benefit by increased trade, including a two percent tax on all imports and exports.

Money and Banking

With few exceptions (Sparta being the most famous), the Greeks of the Classical period had a thoroughly monetized economy employing coinage whose value was based on precious metals, principally silver. The value of the coinage was commensurate to the value of the precious metal it contained with a small mark-up, since the value of the metal was guaranteed by its issuing state. The tie of the Greek monetary system to the supply of precious metals limited the ability of governments to influence their economies through the manipulation of their money supplies. However, we do know of cases when states debased their coinages for such purposes.

Ancient Greek coins are similar in appearance to modern ones. But like other manufactured products in ancient Greece, they were made by hand. A blank metal circular “flan” was placed on an obverse die that rested on an anvil and then was struck with a hammer bearing a reverse die. The nature of the process naturally produced coins in which the image was often poorly centered on the flan. Nevertheless, the issuing authority, usually a government, was clear as the designs or “types” of the coins expressed an image symbolic of the issuing authority and were often augmented by a “legend” of letters that spelled out an abbreviation of the issuing authority’s name.

Coinage was issued in a variety of denominations and weight standards by various city-states. The chief weight standards of the Classical period were the Attic, Aeginetan, Euboiic, and Corinthian. The basis of the Attic standard was the silver tetradrachm of 17.2 grams, which retained the design of the head of Athena on the obverse and her symbolic owl on the reverse throughout the Classical period. It was the most widely circulated coinage during this time and appears in large numbers of hoards found throughout the Greek world and beyond. This was due not only to the far reach of Athenian trade, but also to Athenian imperialism. Athens used its coinage to pay for its military operations abroad and even issued the “Standards Decree,” which for a few decades of the fifth century required the many cities of the Aegean Sea under its control to discontinue their local types and use only Athenian coinage. The local coinage had to be turned in, melted down, and re-struck as Athenian coinage for a fee. Unlike that of Athens, most city-states’ coinages circulated only locally. When such local issues were taken abroad, they were probably treated as bullion, as can be inferred from test-cuts often found on them.

A recent debate among scholars concerns the degree to which coinage was an economic or a political phenomenon in the ancient Greek world. Finley’s model, of course, holds that coinage had strictly political functions. Finley believed that coinage was merely a tool designed to reinforce and project a city-state’s civic identity. States minted coins not to facilitate economic transactions among their citizens, but merely for state purposes so that, for example, it had a convenient medium through which to collect taxes or make state expenditures. Athens’ “Standards Decree” was not undertaken for economic gain, but for political purposes to facilitate tribute payments and to show Athens’ subjects who was boss.

But here again Finley goes too far. Although the type of a Greek coin certainly expressed political symbols and could, therefore, serve as a political tool, such symbolism was largely lost on people who used the coins in places like Egypt, the Levant, Asia Minor, and Mesopotamia, where hoards of Greek coins have been found in abundance. The fact that they could use the coins independently of their original political context (and for what else besides economic purposes then?) is a good reason to believe that the Greeks could do so as well. Moreover, as Henry Kim has recently argued, the minting of large quantities of small-denomination coinage from the outset in Greece shows that the state did have a concern for the wide use of coinage at the micro-level by common people in day-to-day economic exchanges, not just for large-scale public and political purposes.

Nevertheless, one of the most active areas of research on ancient Greek money and coinage today concerns its representational nature and place within sectors other than the economy, including religion, society, and politics. Both Leslie Kurke and Sitta von Reden have argued that the advent of a monetized economy employing coinage need not have undermined traditional values or led to a disembedding of the economy. Rather, the symbolic aspect of coinage could be manipulated to reinforce traditional social and religious practices that were non-economic in the modern sense. In her analysis of the poetry of Pindar, for example, Kurke argues that the poet re-embedded money within traditional social values, thereby allowing the landed aristocratic elite to embrace money and its potential for de-personalizing social interactions without discarding the old social ties and values that bolstered their privileged place in society. Although von Reden believes that the use of coinage arose within an embedded economic context and, therefore, did not have to be re-embedded, she has argued that coinage and other forms of money did not have an intrinsically economic use or meaning in ancient Greece, but rather multiple meanings that were determined by the context within which they were used, which could be social, religious, or political as well as economic.

Given that the ancient Greeks did have a monetized economy, it is not surprising that they also developed banking and credit institutions. It is generally agreed that at the very least, bankers, who were metics as a rule (note Pasion and Phormion above), performed various functions from money-changing to securing deposits in cash and other assets. The question whether bankers lent out money deposited by others at interest, however, is the subject of some debate. Paul Millett, a student of Finley, not surprisingly argues in his book, Lending and Borrowing in Ancient Athens, that bankers did not loan out other peoples money for interest and he formulates a model in which lending and borrowing were predominantly done for consumptive purposes and, therefore, thoroughly embedded in traditional social relations. In contrast, Edward Cohen’s book, Athenian Economy and Society: A Banking Perspective, employs a close philological analysis of the evidence in his assertion that productive lending and borrowing, divorced from concerns for personal relationships, were common in Classical Athens and that bankers did indeed lend out deposited money at interest. Although Millett may be right that much of the lending and borrowing in Athens was for consumptive purposes, particularly those secured by landed property, it is hard to deny that the evidence of productive lending and borrowing from banking practices, numerous maritime loans, and even temple loans in the Classical period constitute something more than just exceptions to the rule.

Economic Changes during the Hellenistic Period

In large part owing to the Near Eastern conquests of Alexander the Great, but also because of social and economic changes that had already been occurring during the Classical period, the economy of the Hellenistic period (323-30 B.C.) grew immensely in scale. The Finley model is probably right in general to hold that the essentially consumptive nature of the economy in the traditional Greek homelands changed little during this time. But it is clear that there were significant innovations in some places and sectors on account of the collision and fusion of Greek notions of the economy with those of the newly won lands of the Near East. Thus, we see greatly increased government control over the economy, as evidenced most strikingly in the surviving papyrus records of the Greek Ptolemaic dynasty that ruled Egypt.

A large percentage of the land and, therefore, agriculture, was controlled by the Greek royal dynasties that ran the Hellenistic kingdoms. Peasants whose status lay somewhere between slave and free not only worked the king’s lands, but were also often required to labor on other royal projects. The Ptolemies of Egypt dominated agriculture to such an extent that they instituted an official planting schedule for various crops and even loaned out the tools used by farmers on state-owned lands. Almost all produce from these estates was turned over to the government and redistributed for sale to the population. Some crown lands, however, were assigned to government officials or soldiers and though technically still the property of the state, they often came to be treated as de facto private property.

The Ptolemaic state also involved itself in various manufacturing processes, such as olive oil production. Not only were the olives cultivated on state-controlled lands by peasant labor, but the oil was extracted by contracted labor and sold at the retail level by licensed dealers at fixed prices. However, the state probably had no intention to improve efficiency or to provide better quality olive oil at lower prices to its citizens. The Ptolemies instituted a tax on imported olive oil of 50 percent that was essentially a protective tariff. The goal of the government seems to have been to protect the profits of its state-run business.

Yet for all its interference in the economy, the Ptolemaic government did not assemble a state merchant fleet and instead contracted with private traders to transport grain to and from public granaries. It also left it up to private traders to import the few goods that Egypt needed from abroad, including various metals, timber, horses, and elephants, all of which were essential for the Ptolemies’ standing mercenary army and fleet. But although the Ptolemies also exported wheat and papyrus, for the most part, the economy of Egypt was a closed one. Unlike the other Hellenistic kingdoms, Egypt minted coins on a lighter standard than the Attic one universalized by Alexander the Great. Moreover, in 285, the Ptolemies barred the use of foreign coins in Egypt and required them to be turned in to government officials, melted down, and re-minted as Egyptian coinage for a fee. Although Egypt controlled gold mines in Nubia, it did not produce silver and had chronic shortages of silver coins for daily transactions. Thus, many exchanges were performed in kind rather than in cash, even though value was always expressed in cash equivalents.

Despite its chronic shortages of silver coins and its closed coinage system, Egypt still had a coin-based economy largely because of Alexander the Great, who flooded the economies of the eastern Mediterranean with coins and monetized some places in the Near East for the first time. Along with coinage, Greek banking practices also made their way into these areas. Thus, the general scale of economic activities increased as large kingdoms of the Near East and the Greek mainland and islands became more interconnected. Although this was offset to some degree by political instability and warfare during the Hellenistic period, in general we do see economic activity on a larger scale and increased specialization as some places, such as Tyre and Sidon in Phoenicia, became renowned for particular products, in this case purple dye and glassware respectively. Moreover, thousands of amphorae whose handles were stamped with names of issuing magistrates have been found that, if nothing else, reveal a very high volume of pottery production and may also allow scholars some day to reconstruct in more detail other aspects of the economy, such as agricultural production, land tenure, and trade patterns.

The Hellenistic period is known for its technological innovation and some new technologies did have an impact on the economy. Archimedes’ screw-like pump was used to remove water from mines and to improve irrigation for agriculture. In addition, new varieties of wheat and the increased use of iron ploughs improved yield while better grape and olive presses facilitated wine and oil production. Unfortunately, some of the most impressive technological innovations of the Hellenistic period, such as Heron’s steam engine, were never applied in any significant way. Thus, most production continued to be low tech and labor intensive.

All in all, then, although the scale of the economy increased during the Hellenistic period, consumption still seems to have been the primary goal. Technology was not applied as much as it might have been to increase production. States were much more involved in economic affairs, both in controlling production and in collecting taxes on countless items and activities, but mostly just to extract as much revenue from them as possible. The revenue was spent in turn in royal benefactions (euergetism), but mostly only for ostentatious display that threw money into non-productive sink holes.

Conclusion

The foregoing survey shows that the Finley model provides a reasonable, if simplified, general picture of the ancient Greek economy. Overall, the ancient Greek economy was very different from our own. It was much smaller in scale and differed in quality as well, since it generally lacked the productive growth mentality and the interconnected markets that are so characteristic of most of the world economy today. With regard to the details, however, recent studies are showing that the Finley model does at least need to be revised. As more research is done, it may even be necessary to replace the Finley model altogether in favor of one that fits the evidence better. In the meantime, though, we can still use Finley’s model as a basic description while being careful to acknowledge the contradictory evidence provided by recent studies and continuing to investigate the various sectors of the ancient Greek economy at various times and places.

Select Annotated Bibliography

The bibliography on the ancient Greek economy is enormous and it would be counterproductive to list all works here. Therefore, I list only a selection of the essential primary and secondary works, preferring more recent works in English for the sake of students. Further and more specialized works may be found within the bibliographies of the works listed below.

Primary Sources

Literary Works

Many of the literary works listed below are available in the Loeb Classical Library and Penguin Classics series in English translations.

Aristotle, Politics (particularly 1.1258b37-1.1259a5)

In his study of the polis, Aristotle devotes this section to modes of acquisition and criticizes what we would call “capitalism.”

[Aristotle], Oikonomikos (Economics – “household management”)

Book 2 shows how states obtain revenues. The methods are largely coercive, not productive, such as cornering the market in grain during a famine, debasing coinage, etc.

Demosthenes and [Demosthenes], speeches

Especially useful are several speeches for lawsuits involving economic matters.

Hesiod, Works and Days

A poem containing advice and attitudes about farming in the early Archaic period, c 700 B.C.

Homer, Iliad and Odyssey

Two great epic poems with much information about economic practices at the outset of the Archaic period, c. 800-750 B.C.

Isokrates, speeches (especially Trapezitikos and On the Peace)

On the Peace argues for economic activity rather than warfare as a means of obtaining revenues for the state. Trapezitikos concerns a lawsuit involving trade and banking.

Lysias, speeches (especially On the Grain Retailers)

Plato, Republic and Laws

These two dialogues concern the organization of the polis. Although the Republic represents the ideal city-state and the Laws presents a more realistic picture, both betray an elitist disdain for non-landed economic activities.

Xenophon, Oikonomikos (Economics – “household management”) and Poroi (Revenues)

Two extended essays on household management and the means by which the state may obtain more revenues, respectively. The latter is one of the most important documents concerning state interests in trade and mining.

[Xenophon] “The Old Oligarch” (or “Constitution of the Athenians”)

This is an anonymous mid-fifth-century B.C. political pamphlet that argues that the life-blood of Athenian democracy is the economic exploitation of the so-called “allies” of Athens.

Collections of Primary Sources: Documentary, Epigraphic, and Material

Burstein, S.M. The Hellenistic Age from the Battle of Ipsos to the Death of Kleopatra VII. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Fornara, C.W. From Archaic Times to the End of the Peloponnesian War, second edition. Cambridge: Cambridge University Press, 1983.

A collection of documents, including inscriptions, translated into English.

Harding, P. From the End of the Peloponnesian War to the Battle of Ipsus. Cambridge: Cambridge University Press, 1985.

A collection of documents, including inscriptions, translated into English.

Meijer, F. and O. van Nijf. Trade, Transport, and Society in the Ancient World. New York and London: Routledge, 1992.

A sourcebook of documents translated into English.

Thompson, M., O. Mørkholm, and C.M. Kraay, editors. An Inventory of Greek Coin Hoards. New York: American Numismatic Society, 1973.

Essential listing of all discovered hoards of ancient Greek coins up to 1973.

Wiedemann, T. Greek and Roman Slavery. Baltimore: Johns Hopkins University Press, 1981.

Excellent collection of documents on Greek and Roman slavery translated into English.

Secondary Sources

General Works and Surveys

Austin, M.M. and P. Vidal-Naquet. Economic and Social History of Ancient Greece. Berkeley: University of California Press, 1977.

Provides both a survey of the subject and excerpts from the primary sources of evidence. It adheres to the Finley model in general.

Austin, M.M. 1988. “Greek Trade, Industry, and Labor.” In Civilization of the Ancient Mediterranean: Greece and Rome, volume 2, edited by M. Grant and R. Kitzinger, 723-51. New York: Scribner’s.

Often insightful overview of the ancient Greek economy primarily from the Finley perspective.

Cambridge Ancient History (CAH), second edition. Several volumes. Cambridge: Cambridge University Press.

The standard encyclopedia of ancient history with entries on various subjects, including the ancient Greek economy at different periods, by leading scholars.

Finley, M. I. The Ancient Economy, second edition. Berkeley: University of California Press. 1985. (Now available in an “Updated Edition” with a foreword by Ian Morris. Berkeley: University of California Press, 1999.)

The most influential book on the subject since its initial publication in 1973. It takes a synchronic approach to the Greek and Roman economies and argues that they cannot be analyzed or understood in terms appropriate for modern economic analysis. In general, the ancient Greek economy was “embedded” in “non-economic” social and political values and institutions. Heavily influenced by Weber, Hasebroek, and Polanyi.

Hasebroek, J. Trade and Politics in Ancient Greece. Translated by L.M. Fraser and D.C. MacGregor. Reprint. London, 1933. (Originally published as Staat und Handel im alten Griechenland [Tübingen, 1928].)

A classic that greatly influenced Finley.

Hopper, R.J. Trade and Industry in Classical Greece. London: Thames and Hudson, 1979.

Survey of various aspects of the ancient Greek economy in the Classical period.

Humphreys, S.C. “Economy and Society in Classical Athens.” Annali della Scuola Normale Superiore di Pisa 39 (1970):1-26.

An important survey that also argues for focused studies on individual sectors of the ancient Greek economy at particular times and places.

Lowry, S.T. “Recent Literature on Ancient Greek Economic Thought.” Journal of Economic Literature 17 (1979): 65-86.

Michell, H. The Economics of Ancient Greece, second edition. Cambridge: W. Heffer, 1963.

Slightly dated, but useful survey.

Morris, Ian. “The Ancient Economy Twenty Years after The Ancient Economy.” Classical Philology 89 (1994): 351-366.

Excellent survey of new approaches to the study of the ancient Greek and Roman economies since Finley, to whose model the author is generally sympathetic.

Oxford Classical Dictionary (OCD), third revised edition, edited by S. Hornblower and A. Spawforth. Oxford: Oxford University Press, 2003.

Includes brief entries by leading scholars on various aspects of the ancient Greek economy.

Pearson, H.W. “The Secular Debate on Economic Primitivism.” In Trade and Market in the Early Empires, edited by K. Polanyi, C.M. Arensberg, and H.W. Pearson, 3-11. Glencoe, IL: Free Press, 1957.

A concise statement of the influential ideas of Karl Polyani about the ancient Greek economy.

Rostovtzeff, M. The Social and Economic History of the Hellenistic World. Oxford: Oxford University Press, 1941.

Monumental “modernist” approach to a wealth of archaeological evidence about the economy during the Hellenistic period.

Samuel, A.E. From Athens to Alexandria: Hellenism and Social Goals in Ptolemaic Egypt. Lovanii, 1983.

A good survey with an important discussion of ancient Greek attitudes toward economic growth.

Starr, C.G. The Economic and Social Growth of Early Greece, 800-500 B.C. Oxford: Oxford University Press, 1977.

Modernist survey.

Weber, M. Economy and Society. Translated by E. Fischoff et al. Edited by G. Roth and C.

Wittich. Berkeley: University of California Press, 1968. (Originally published as Wirtschaft und Gesellschaft [Tübingen, 1956].)

A classic that greatly influenced Hasebroek and Finley.

Collections

Archibald, Z.H., J. Davies, and G. Oliver. Hellenistic Economies. London: Routledge, 2001.

Collection of articles that take the study of the economy in the Hellenistic period beyond Rostovtzeff.

Cartledge, P., E.E. Cohen, and L. Foxhall. Money, Labour, and Land: Approaches to the Economies of Ancient Greece. London: Routledge, 2002.

Finley, M.I. Economy and Society in Ancient Greece. Edited by B.D. Shaw and R.P. Saller. New York: Viking, 1982.

Garnsey, P. Non-Slave Labour in the Graeco-Roman World. Cambridge: Cambridge Philological Society, 1980.

Garnsey, P., K. Hopkins, and C.R. Whittaker. Trade in the Ancient Economy. Berkeley: University of California Press, 1983.

A collection of articles along Finley lines.

Mattingly, D.J. and J. Salmon. Economies beyond Agriculture in the Classical World. London: Routledge, 2001.

A collection of articles that focuses on the non-agrarian sectors of the ancient Greek and Roman economies with a mind to revising the Finley model.

Meadows, A. and K. Shipton. Money and Its Uses in the Ancient Greek World. Oxford: Oxford University Press, 2001.

A collection of articles on the use of money and coinage in ancient Greece.

Parkins, H. and C. Smith. Trade, Traders, and the Ancient City. London: Routledge, 1998.

Scheidel, W. and S. von Reden. The Ancient Economy. London: Routledge, 2002.

An excellent collection of some of the most important articles on the ancient Greek and Roman economy from the last 30 years with a helpful introduction, notes, and glossary. Especially useful is their “Guide to Further Reading,” pp. 272-278.

Specialized Works

Brock, R. “The Labour of Women in Classical Athens.” Classical Quarterly 44 (1994): 336-346.

Burke, E.M. “The Economy of Athens in the Classical Era: Some Adjustments to the Primitivist Model.” Transactions of the American Philological Association 122 (1992): 199-226.

A good argument that attempts to adjust the Finley model.

Carradice, I. and M. Price. Coinage in the Greek World. London: Seaby, 1988.

A brief, accessible survey.

Cohen, E. E. Athenian Economy and Society: A Banking Perspective. Princeton: Princeton University Press, 1992.

A close philological study of the evidence for banking practices in Classical Athens that argues for a disembedded economy with productive credit transactions.

Engen, D.T. Athenian Trade Policy, 415-307 B.C.: Honors and Privileges for Trade-Related Services. Ph.D. dissertation, UCLA, 1996. (This dissertation is currently being revised for publication as a book tentatively entitled, Honor and Profit: Athenian Trade Policy, 415-307 B.C.E.)

Examines Athenian state honors for those performing services relating to trade and argues for a revision of some aspects of the Finley model.

Engen, D.T. “Trade, Traders, and the Economy of Athens in the Fourth Century B.C.E.” In Prehistory and History: Ethnicity, Class, and Political Economy, edited by David W. Tandy, 179-202. Montreal: Black Rose, 2001.

Argues for the diversity of those responsible for trade involving Classical Athens.

Engen, D.T. “Ancient Greenbacks: Athenian Owls, the Law of Nikophon, and the Ancient Greek Economy.” Historia, forthcoming(a).

Argues that the numismatic policies of Athens may indicate a state interest in exports.

­­­­­Engen, D.T. “Seeing the Forest for the Trees of the Ancient Economy.” Ancient History Bulletin, forthcoming(b).

A review article of Meadows and Shipton, 2001, and Scheidel and von Reden, 2002, that argues for the mutual compatibility of broad and detailed studies of the ancient Greek and Roman economies.

Finley, M.I. The World of Odysseus, revised edition. Harmondsworth: Penguin, 1965.

A brief and highly readable survey of the early Archaic period.

Fisher, N.R.E. Slavery in Classical Greece. London: Bristol Classical Press, 1993.

A brief survey.

Garlan, Y. Slavery in Ancient Greece, revised edition. Ithaca: Cornell University Press, 1988.

The standard survey of slavery in ancient Greece.

Garnsey, P. Famine and Food Supply in the Greco-Roman World. Cambridge: Cambridge University Press, 1988.

Examines private and public strategies to ensure food supplies.

Isager, S. and J.E. Skydsgaard. Ancient Greek Agriculture: An Introduction. London: Routledge, 1992.

Kim, H.S. “Archaic Coinage as Evidence for the Use of Money.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 7-21. Oxford: Oxford University Press, 2001.

Argues that the existence of large quantities of small-denomination coins from the earliest of coinage in ancient Greece is evidence of the economic use of coinage.

Kraay, C.M. Archaic and Classical Greek Coins. Berkeley: University of California Press, 1976.

Long the standard survey of ancient Greek coinage.

Kurke, L. The Traffic in Praise: Pindar and the Poetics of Social Economy. Ithaca: Cornell University Press, 1991.

Takes the new cultural history approach to analyzing the poetry of Pindar and how it represents money within the social and political value system of ancient Greece.

Kurke, L. Coins, Bodies, Games, and Gold: The Politics of Meaning in Archaic Greece, 1999. Princeton: Princeton University Press.

Millett, P. Lending and Borrowing in Ancient Athens. Cambridge: Cambridge University Press, 1991.

Reinforces the Finley model by arguing that lending and borrowing was primarily for consumptive purposes and embedded among traditional communal values in Athens.

Osborne, R. Classical Landscape with Figures: The Ancient Greek City and Its Countryside. London: George Philip, 1987.

Explores rural production and exchange within political and religious contexts.

Sallares, R. The Ecology of the Ancient Greek World. London: Duckworth, 1991.

Interdisciplinary analysis of a massive amount of information on a wide variety of aspects of the ecology of ancient Greece.

Schaps, David M. The Invention of Coinage and the Monetization of Ancient Greece. Ann Arbor: University of Michigan Press, 2004.

Shipton, K. “Money and the Elite in Classical Athens.” In Money and Its Uses in the Ancient Greek World, edited by A. Meadows and K. Shipton, 129-44. Oxford: Oxford University Press, 2001.

Argues that the elite of Athens preferred leasing high-profit silver mines to public land.

Tandy, D. Warriors into Traders: The Power of the Market in Early Greece. Berkeley: University of California Press, 1997.

Traces developments in the economy of the Archaic period and argues that they had an important impact in the formation of the basic social and political institutions of the polis.

Von Reden, S. Exchange in Ancient Greece. London: Duckworth. 1995.

Employs the methods of new cultural history to argue that exchange in ancient Greece was thoroughly embedded in non-economic social, religious, and political institutions and practices.

Von Reden, S. “Money, Law, and Exchange: Coinage in the Greek Polis.” Journal of Hellenic Studies 107 (1997): 154-176.

A cultural historical study of the representational uses of coinage in the social, political, and economic life of ancient Greece at the advent of the use of coinage.

White, K.D. Greek and Roman Technology. London: Thames and Hudson, 1984.

1 Portions of this article have or will appear in other forms in Engen, 1996, Engen, 2001, Engen, Forthcoming(a), and Engen, Forthcoming(b).

2 This article will not discuss the preceding Mycenaean period (c. 1700-1100 B.C.) and “Dark Age” (c. 1100-776 B.C.E.). During the Mycenaean period, the ancient Greeks had primarily a Near Eastern style palace-controlled, redistributive economy, but this crumbled on account of violent disruptions and population movements, leaving Greece largely in the “dark” and the economy depressed for most of the next 300 years.

Citation: Engen, Darel. “The Economy of Ancient Greece”. EH.Net Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/the-economy-of-ancient-greece/