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Globalizing Capital: A History of the International Monetary System

Author(s):Eichengreen, Barry J.
Reviewer(s):Selgin, George

Published by EH.NET (October 1997)

Barry J. Eichengreen, Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press, 1996. viii + 223 pp. $24.95 (cloth), ISBN: 0-691-02880-X.

Reviewed for EH.NET by George Selgin, Department of Economics, University of Georgia.

In 1892 the English economist Robert Giffen published an article entitled “Fancy Monetary Standards.” Objecting to a recent proposal for a new monetary standard aimed at stabilizing the purchasing power of money, Giffen observed that “Governments, when they meddle with money, are so apt to make blunders…that a nation which has a good money should beware of its being tampered with.” If we mess with the gold standard, in other words, “we can never tell…what confusion and mischief we may be introducing.” (1)

A generation later, the gold standard was not only tampered with, but largely dismantled. The international monetary system has been witness to a great deal of “confusion and mischief” ever since, including such “fancy” payments arrangements as the IMF, the EPU, the BIS and the EMS, elaborate multinational structures designed by international committees, and regularly shorn-up by exchange controls, stand-by arrangements, SDR’s, gold-pools, and other ad-hoc devices aimed at forestalling major devaluations.

The ultimate failure of all such arrangements, as well as the abandonment of the international gold standard itself, has led Berkeley economist Barry Eichengreen to wonder whether any system of fixed, or at least relatively stable, exchange rates can survive in a world of democratic governments. His book, Globalizing Capital: A History of the International Monetary System, supplies a negative answer. Elaborating a thesis put forth by Karl Polanyi in 1944, Eichengreen argues that modern democratic governments are bound to yield to pressures to pursue goals, such as the avoidance of cyclical unemployment, that conflict with the maintenance of fixed or pegged exchange rates. The history of the international monetary system, according to Eichengreen, is largely a history of major governments’ gradual, grudging acknowledgment of a conflict between internal and external monetary stability, and their generally unsuccessful efforts to overcome the conflict by means of international cooperation. Eichengreen’s book tells the story in four meaty but easily digested chapters (plus an introduction and conclusion, both very brief), covering the gold standard, the interwar period, the Bretton Woods System, and post-Bretton Woods developments.

Eichengreen’s general thesis offers a useful starting point for understanding the often Byzantine political economy of international monetary relations, and he is at his best when offering pithy public-choice explanations for major international monetary developments. For example, Eichengreen accounts for Germany’s seemingly self-destructive support for monetary union by noting that “Germany desired not just an integrated European market, but also deeper political integration in the context of which [it] might gain a foreign policy role. Monetary union was the quid pro quo.” Not the last word, perhaps, but as good and succinct an explanation as I’ve read so far.

Some of Eichengreen’s explanations are perhaps a little too simple, as when he attributes the dollar’s decline after the mid-1980s to the fact that an overvalued currency “imposes high costs on concentrated interests,” whereas an undervalued currency “imposes only modest costs on diffuse interests.” (Just how does America’s involvement in the Louvre Accord of 1987–a failed attempt to restrain the fall of the dollar–square with this public-choice insight? Could it be that the dollar’s decline was simply unavoidable?)

I also wonder whether Eichengreen’s main point concerning the incompatibility of democracy with stable exchange rates really gets to the root cause of the move to floating exchange rates. In some loose sense, of course, democratic pressures fueled the abandonment of the international gold standard and of later schemes for pegging exchange rates. But we should not forget the context: previous changes in domestic monetary arrangements that subjected money to government control. Of particular importance was the establishment of central banks, which removed the enforcement of the gold- standard mechanism from the hands of private, competing bankers, increasing the risk of both a suspension of payments and subsequent yielding to inflationary pressures. Twentieth-century voters might never have developed a taste for accommodative monetary policies had non-democratic governments of previous centuries not set a precedent for such policies by reshaping monetary arrangements to serve their own fiscal ends. After all, the survival of the prewar regime was not so much a reflection of governments’ “single minded pursuit of exchange rate stability” (as Eichengreen claims) as it was a largely unintentional byproduct of private financial firms’ contractual obligations to their customers.

Eichengreen also tends, in my view, to overstate the extent to which democratic nations must rely upon accommodative central bank policies, unhindered by fixed exchange rates, to avoid financial and macroeconomic turmoil. For example, in discussing the success of recent currency board-like arrangements, he argues that they have worked best where banking systems have been heavily internationalized, treating the openness of a nation’s banking system as a given. But that openness is itself to some extent at least a matter of policy. The voters may well favor demand-management approaches to structural alternatives for avoiding financial instability; but this preference has more to do with special-interest politics standing in the way of desirable structural reforms than with sound economic theory.

Nor is it altogether obvious that the international gold standard promoted internal macroeconomic instability. Although the standard proved deflationary until the mid-1890s, this deflation does not seem to have stifled economic growth. (Even Marshall, whom Eichengreen cites as a critic of gold, suggested that the deflation might actually have been beneficial.) This isn’t to deny that the nineteenth century was marked by numerous financial crises in some countries; but those crises and later ones as well had more to do with faulty financial legislation than with any shortage of gold. Thus Scotland, with its relatively free banking system, was largely untouched by the banking crises that forced English banks to seek last-resort aid while also forcing the Bank of England to increase its fiduciary issue; and during the 1907 “credit squeeze” in the United States, private Canadian banks helped make up for a shortage of U.S. currency due in large part to legal restrictions on U.S. banks. (The Canadian banks ran into legal limits themselves, which were then loosened.)

The restored gold standard of the 20s and 30s was another matter entirely. Here central banks played an active role, mainly by trying to run the gold standard on the cheap, supplementing gold reserves with holdings of foreign exchange (instead of further devaluing their currencies or enduring more deflation so as to achieve a higher, sustainable relative price of gold). This cartel-like arrangement could only work so long as creditor central banks resisted the temptation to cash in their foreign exchange holdings. It was, consequently, far more vulnerable to speculative collapse than its prewar counterpart.

In short, while Eichengreen credits “collaboration among central banks and governments” with the maintenance of the gold standard, I am inclined to think that government and central bank involvement tended to undermine the gold standard’s success. The Canadian case is again relevant here, for Canada had little difficulty maintaining its gold standard until 1914 while avoiding financial crises without the help of a central bank, even while experiencing massive capital inflows. The point is of fundamental importance, because it suggests that, notwithstanding what Keynes argued in 1941, a stable exchange rate regime might be just as “automatic” and unreliant upon the chimera of “international cooperation” as one based upon free-floating rates.

On the whole, though, I highly recommend Eichengreen’s book. It is largely compelling, thought-provoking, highly informative, and a pleasure to read.

1. Robert Giffen, “Fancy Monetary Standards,” in Economic Inquiries and Studies (London: George Bell and Sons, 1904), pp. 168-9.

George Selgin Department of Economics University of Georgia

George Selgin is an Associate Professor of Economics at the University of Georgia. His recent publications include Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, 1997) and Bank Deregulation and Monetary Order (London: Routledge, 1996).


Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Farm and Factory: Workers in the Midwest, 1880-1990

Author(s):Nelson, Daniel
Reviewer(s):Sundstrom, William A.


Published by EH.NET (August 1997)

Daniel Nelson, Farm and Factory: Workers in the Midwest, 1880-1990. Bloomington, IN: Indiana University Press, 1995. 258 pp. Includes tables, bibliographical references, and index. $29.95 (cloth), ISBN: 0-253-32883-7.

Reviewed for EH.Net by William A. Sundstrom, Department of Economics, Santa Clara University.

Daniel Nelson’s latest book delivers both more and less than it promises. On the plus side, the book is actually more general than the title would suggest, providing a useful survey of much of the literature on twentieth-century American labor history. Although many of the book’s examples are drawn from midwestern industries and cities, much of the literature cited is not geographically specific. In this sense, the book is a worthy sequel to the author’s Managers and Workers (University of Wisconsin Press, 1975), updating, extending, and broadening that book’s coverage. The greatest virtue of Nelson’s work in the past has been his attention to both the management and labor sides of the employment relationship, as well as the political context of industrial relations. Farm and Factory shares these virtues, synthesizing a wide range of secondary sources from labor, social, and economic history. The book contains less original historical research than many of Nelson’s previous efforts, although it makes extensive use of his own work on such topics as company unions and rubber workers.

On the minus side, Nelson (Department of History, University of Akron) never makes a compelling case for the distinctiveness of the Midwest’s labor history, which would justify the book’s regional focus. Admittedly the region’s industrial composition was unlike that of other regions, with its unusual mix of agriculture and heavy industry. But Nelson claims that these quintessential midwestern sectors had relatively little influence on each others’ labor history. Thus it might be argued that the evolution of the institutions and politics of labor in the Midwest was largely shaped by industry rather than location. Contrast this implication of Nelson’s book with Gavin Wright’s Old South, New South, (Basic Books, 1986) another book about a regional labor market during the twentieth century. In it, Wright depicts a southern labor market that was truly unique in its institutions and development, in large part because of its isolation.

This is not to deny that Nelson has identified some aspects of the midwestern labor experience that had a unique regional character. The socialist and farm-labor political coalitions associated with such names as Robert LaFollette, for example, appear to have been a homegrown midwestern phenomenon; but at the same time, Nelson notes that such coalitions were short-lived and had little lasting influence. Nelson also notes that union density was higher than average in the Midwest, which became the crucible of the twentieth-century industrial union movement. Again, however, it is not clear whether this was the product of some peculiarly midwestern predisposition toward unionism or merely an accidental consequence of the region’s industrial structure. Such a question could be sorted out with careful comparative analysis, contrasting the industrial union movements in the Midwest and, say, the Middle Atlantic regions for similar industries. But Nelson’s book provides very little in the way of comparative research.

Farm and Factory is arranged in sections chronologically. The first period covered, 1880-1900, sets the stage. In 1880, about half of midwestern workers were engaged in farming, and farm employment increased in numbers over the next two decades. At the same time, the period witnessed a dramatic increase in the relative importance of industry. Because the demand for agricultural labor continued to grow, the industrial labor market depended largely on immigrant workers for its supply, rather than rural-urban migrants. The immigrant character of industrial employment was not, of course, unique to the Midwest at this time.

The book’s first chapter, on farming, includes the first installment of what was for me one of the book’s most fascinating recurring themes: the nature and evolution of women’s work. Nelson’s book demonstrates how much scholarship over the past two decades has been devoted to the area of women’s labor history. In the case of farming, Nelson describes the gender division of labor, how it differed across different farm products, and how by the second half of the century the increased complexity of the farming business (and perhaps the increased educational attainment of farm women) resulted in many farm wives assuming the role of business manager. Later in the book he examines the feminization of clerical work, and the postwar growth of women’s labor- force participation.

Nelson’s attention to clerical and service-sector labor is welcome, given the traditional emphasis of labor history on industrial work, but after a promising discussion of office work near the turn of the century in Chapter 3, the remainder of the book devotes only a handful of pages to the service sector and clerical or white-collar employment. No doubt this lacuna reflects shortcomings in the secondary literature that Nelson draws upon, as well as Nelson’s view that the character of office work was subject to less dramatic technological and institutional changes over the course of the century. Be that as it may, “farms and factories” are indeed the book’s central focus; the rest of the midwestern labor market is treated as a residual category that soaked up a growing share of the work force as employment in agriculture and industry shrank relatively and, eventually, absolutely.

Nelson’s history of labor and labor management in the mass production industries of the Midwest is fairly conventional. He highlights the role of the federal government in creating a political and legal environment that facilitated the rise of industrial unionism: the protective legislation of the NRA and NLRA and the subsequent wartime boost given to unionism by war production demand and government intervention. Nelson’s narrative of the sit-down strikes, the escalation of hostility between labor and capital during the thirties, and the rivalry between the AFL and CIO also suggests the importance of historical contingency in creating the system of labor relations that would persist over the decades that followed.

The book’s final chapters describe the brief postwar “golden age” of economic prosperity and relatively stable industrial relations between Big Business and Big Labor. Nelson provides a multifaceted picture of the demise of this golden age. Economic change was clearly one challenge: competition from lower-cost regions and foreign producers placed pressure on the region’s bread-and-butter manufacturing industries. To this conventional deindustrialization story Nelson adds another critical factor in the demise of union influence in the Midwest: rising racial tensions as the Great Migration brought large numbers of black workers into northern cities. The generally progressive stance on racial issues of the CIO unions alienated a large portion of the rank and file during the tumultuous sixties, with the consequence that “[r]ace, more than any other issue, undermined the unions’ carefully nurtured influence outside the workplace” (p. 187).

In his concluding chapter, Nelson traces the roots of the Midwest’s woes during the 1970s and 80s to various “institutional constraints” put into place beginning in the 1930s, which served to reduce the regional economy’s flexibility and innovativeness. “By the 1970s midwestern workers faced the worst of both worlds: some producers had become obsolete, while others continued to innovate in traditional ways (mechanizing operations, for example) that limited employment opportunities” (p. 203). This claim is provocative, and echoes some of the criticisms of U.S. institutional rigidities to be found in the work of authors like Sabel and Piore or Lazonick. But Nelson provides only the sketchiest defense of this view. Is it not possible that the Midwest was just a victim of bad luck, its economy more dependent on Rust Belt industries than other regional economies for largely unavoidable historical reasons? To shore up his claim of institutional failure, Nelson would have to show what other regions did differently to avoid the Midwest’s difficulties. Again, the absence of a comparative approach precludes his doing this.

In sum, Farm and Factory would serve as a solid textbook in twentieth century U.S. labor history, in spite of its regional focus. The coverage of union and nonunion developments, the evolution of personnel management, the role of politics and government, and nontraditional sectors and workers (including women and minorities) is, to my knowledge, unavailable anywhere else. This breadth of coverage, of course, comes at the cost of diminished depth. One particularly misses a compelling account of how the Midwest’s sad economic fate at the end of the century was the product of the region-specific historical evolution of its labor institutions and politics.

William A. Sundstrom Department of Economics Santa Clara University

William A. Sundstrom is Associate Professor of Economics at Santa Clara University. He is the author of numerous articles on the history of U.S. labor markets, including, most recently, “The Racial Unemployment Gap in Long-Run Perspective” (with Robert W. Fairlie), American Economic Review Papers and Proceedings (May 1997).


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

Emigration from Europe, 1815-1930

Author(s):Baines, Dudley
Reviewer(s):Wegge, Simone A.


Published by EH.NET (August 1997)

Dudley Baines, Emigration from Europe 1815-1930. New York: Cambridge University Press, 1995. 84 pp. $10.95 (paper), ISBN: 0 521 55783 6; $34.95 (cloth), ISBN: 0 521 55270 2.

Reviewed for EH.NET by Simone A. Wegge, Department of Economics and Business, Lake Forest College.

This book is part of the series commissioned by the Economic History Society entitled New Studies in Economic and Social History. As such, the author’s intent is to summarize the literature on nineteenth-century European emigration, covering both key findings and current debates, as well as unresolved questions. Professor Baines meets this objective in admirable fashion, always communicating his ideas on migration in a well thought-out manner and making them easily accessible to both historians and economists. Baines knows the data and the issues, but even more importantly what we do not know and what we cannot answer at present. Baines (Department of Economic History, London School of Economics) focuses most of his discussion on understanding the motivations of emigrants but also touches on issues related to immigration, such as the effects of labor inflows on economies of the destination countries, or the assimilation of migrants in their adopted homelands.

In the first few chapters, Baines lays out the main questions of the literature. Chief on Baines’ list is the issue of how to model and ultimately explain emigration behavior. Throughout the book Baines makes use of two models of migration to discuss emigrant behavior, the standard Heckscher-Ohlin model in international economics that explains factor mobility, and a “core-periphery” model from development economics, which states that as more advanced core countries further industrialize their demand for unskilled labor or unskilled migrants increases. Baines raises a very interesting question in his discussion of migration models: can one explain emigration with a single elegant model? Unfortunately not, as the author appropriately points out, “…one problem has been the ability of different models to obtain different but statistically significant results about the same group of emigrants” (p. 20). Baines blames this on a lack of proper data as well as the use of inappropriate models.

A heavier dose of micro models could have been added to the presentation of the material. Oded Stark’s work on the microeconomics of migration comes to mind, particularly his emphasis on risk-avoidance, family decision models, and relative-deprivation as motivation for mobility. Still, Baines encourages readers to view migration more generally as an economic decision at the individual level: whether an individual decides to emigrate or not depends on how he perceives his economic options at home and abroad. Migration models at the individual level also help us to understand how emigrants are self-selected. The historical evidence shows that emigrants are self-selected on the basis of occupation, gender, and most importantly, on the basis of youth.

Further, Baines believes that the role of information is crucial to understanding the individual decisions of emigrants. What sorts of information did emigrants have about the various destination countries, and how did they view their prospects? All very difficult, if not impossible, questions to answer. Some of this we may be able to glean from emigrant letter studies. Emigrant letters, used to study the issue of information and motivation and ultimately chain migration, however, cannot be viewed as an unbiased source. Baines notes one of these biases, that some letters may have been written with the intent of encouraging the recipients to emigrate (p. 32). There are, however, additional biases. For example, emigrants only wrote home when there was someone to write to, thus leading the examiner of letters to uncover chains and perhaps over-emphasize the influence of chain effects on emigration behavior.

These sorts of observations buttress the author’s preference for studies of migration at the lowest level of analysis possible. Emigration rates, for instance, certainly vary by country but they also vary at the intra-country level as the author discusses in Chapter 4. Here Baines, as in his other writings, advocates breaking down the country emigration rates by region and preferably by village if they are to be understood properly. Baines refers to chain migration for a possible explanation, but may too hastily claim that regions with sustained traditions of high emigration rates were places where chain migration mattered the most (p. 28). I suggest that the reader defer to future research.

In contrast to the variance in rates, nations experienced both high and low points in the rate of emigration at similar points in time. Baines argues that there were enough differences between countries, and thus we must base this on the cyclical nature of the destination countries’ economies. The reader should note that the evidence for this (Brinley Thomas’ Migration and Economic Growth, Cambridge, 1973) is mostly for the decades after 1870. Here, Baines supports his argument on an examination of possible factors in European nations that might contribute to emigration, including high population growth rates, a fixed supply of land, political discrimination, and so forth. This exercise, he argues, does not help us to understand why more Europeans did not leave. Therefore, we should look at the various peculiarities facing potential emigrants in their hour of decision. Wage and unemployment rates are discussed, but according to the author future mileage might be gained by getting a hand on internal and return migration, as well as using cross-sectional rather than time series data. Baines should stress that we also need more studies of those who stayed.

Return migration is briefly considered in Chapter 5. Why did more people not return to their homelands? Indeed, more emigrants did return in the post-1860 era of cheaper transport. A more complete answer has to do with emigrants’ ages, the degree to which emigrants were economically connected with their family and community back in the homeland, and whether they were male. The percentage of men among the returnees was higher than among the emigrants (p. 36).

Emigration changed in other important ways over the nineteenth century, as Baines notes in Chapter 6. Early migrations tended to be composed of many families, while later migrations contained more single individuals. This is as of yet not completely understood, but Baines suspects that the decline in transport costs had the effect of making emigration decisions less final and more attractive to individuals who planned to return within a short period. But more simply, the drop in the real price of passage made emigration also more possible for a larger segment (younger) of the European population.

Baines discusses how industrialization over the nineteenth century made a difference for emigrants in Chapter 8. Many economists might think that little or no economic growth will induce high emigration rates, as the cases of Ireland and Italy demonstrate. But we also have England, which experienced heavy economic growth and high rates of emigration, making for a contrasting case study. Baines draws on the Scandinavian literature and his own work on Britain to expand this into a discussion on stage migration and internal migration. He argues that stage-migration is more important for Scandinavia than for England (p. 53).

Cross-country comparisons and almost two centuries of immigration experience provide a fertile backdrop in Chapter 9 for a discussion on the economic effects of immigration. In an environment where resources were abundant and laborers scarce, most destination countries did not experience a reduction in the rate of income growth over the historical period of analysis. When labor markets were affected, unskilled workers in industries with few economies of scale bore the brunt of wage declines, while “immigration allowed other workers to be upwardly displaced … into sectors that did have increasing returns” (p. 55). Hence, economies of scale, the ability of destination countries to increase investment, and the degree of segmentation of labor markets all played a part in determining whether immigrants were welcomed or disdained.

For the scholars and students wishing a concisely worded statement on the economic history of emigration, this is the book to read. Baines has a deep and thorough understanding of emigration and addresses many of the interesting and relevant questions in the literature. His intimate knowledge of the primary sources underlying emigration studies is well apparent in his advice to the reader about the biases and the quality of existing historical sources of migration data. Typical of other studies in this series, the bibliography contains short descriptions for many of the works cited, making for a helpful reference guide. Finally, those familiar with Baines’ other writings on emigration, in particular his book on British emigration, Migration in a Mature Economy (Cambridge, 1985), may wish that this little book had been quite a bit longer and contained even more of his insights into nineteenth century European emigration.

Simone A. Wegge Department of Economics and Business Lake Forest College

Simone Wegge is author of a dissertation entitled “Migration Decisions in Mid Nineteenth-Century Germany,” completed in May 1997.


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

Against the Tide

Author(s):Irwin, Douglas
Reviewer(s):De Long, J. Bradford

Douglas Irwin, Against the Tide: An Intellectual History of Free Trade. Princeton, NJ: Princeton University Press, 1996. 274 pp. Bibliography and index. $29.95 (cloth). ISBN 0691011389

Reviewed for EH.Net by Brad De Long, Department of Economics, University of California- Berkeley

Douglas Irwin has written the history of “free trade”–as an idea and as an economic policy–for our generation. His dominant organizing principle is that the move toward freer trade in economic policy has been “against the tide”- that there have been lots of reasons over the ages why free trade should not have triumphed as economic policy, and that its triumph to date is somewhat miraculous: akin to a river running uphill.

Mercantilism and Free Trade

Free trade as an idea was born in the shadow of mercantilism in early modern Britain. It is not the case that before Adam Smith’s Wealth of Nations thinkers rejected the idea of trade: the notion that countries, like individuals, stand to gain from specialization (producing what they make best and most efficiently) and exchange is powerful, fundamental, and obviously true. But before Adam Smith thinkers overwhelmingly believed that imposing delicately-calculated restrictions on international commerce could boost an economy’s resources and achieve important non-economic goals as well. For example, even Adam Smith wrote that “defense is more important than opulence.”

It is hard from our current perspective to make much sense of the mercantilist writers. They were aggressively pro-export–sharply critical of restrictions that limited export. Irwin sees their doctrines as having four components:

A moral argument that foreign-produced luxuries were not worth consuming, and that the state should (for the good of those who would buy French fripperies if unrestrained) restrict imports of foreign-produced luxuries.

An unemployment-equilibrium argument that allowing imports to increase would throw people out of work.

A belief that manufacturing should be promoted to enhance economic development–perhaps with some recognition that this argument required that the benefits to society from expanding manufacturing be greater than the profits to the manufacturer.

Non-economic goals: “defense more important than opulence.”

Against mercantilism, Adam Smith established a strong presumption in favor of the economic benefits of free trade. David Ricardo nailed the case down with his exposition of “comparative advantage.” Ever since trying to construct a coherent intellectual case for trade protection has been like trying to roll Sisyphus’s stone up the hill.

This is not to say that people have not tried. The case for free trade is not absolute. It is limited by:

Worries about the distributional effects of trade–in which case free trade can boost real national product but erode social welfare if it shifts the distribution of income and wealth in an unfavorable direction.

Worries about the effect of free trade on the terms-of-trade–in which case finely-tuned protectionist measures that erode the total surplus from trade can nevertheless garner a larger surplus for the home country (under the assumption that foreign governments do not retaliate).

Worries about the effect of free trade on high-externality industries–in which case policies that restrict trade might boost external benefits by more than enough to offset the lost gains from trade.

But as Irwin eloquently argues, all these limitations of the case for free trade are fragile. In many cases trade protection is a poor second-best policy, to be avoided because there are other more direct and less costly alternative policies that will produce higher economic welfare. In other cases, close scrutiny reveals that the reasons for rejecting free trade “have foundered under the weight of the manifold qualifications that narrow the range of circumstances under which the argument is valid…. [For example] the strategic use of trade policy to shift rents between countries… hinges critically upon numerous assumptions about competitive behavior and market structure.”

Irwin thus concludes–I believe correctly–that arguments for protection are fragile and frail compared with the presumption that free trade is a good thing. To do better than free trade requires an enormous amount of knowledge and policy-making skill on the part of the government, skill that can only make things a little bit better if protectionist policies are properly applied–but could make things a lot worse if misapplied.

The Rent-Seeking Society

However strong the intellectual case for free trade, the victory of free trade as an economic policy is still quite surprising. We can run through–Irwin runs through–the standard rent-seeking society arguments:

Beneficiaries from protection know who they are.

Each beneficiary from protection gains a lot more than each consumer loses.

Beneficiaries from protection can organize easily.

The logic of politics is not the logic of market exchange–but the logic of power exercised, and identifiable favors done for those who can someday return them.

For all these reasons, governments seeking to assemble coalitions of politically powerful elites should be powerfully attracted by individual protectionist proposals. There is a principle that the set of economists is dense in the space of possible policies: for every small number epsilon, for every policy theta, there is someone who can wear a tie, speak with authority on television, and make semi-coherent arguments that some policy that is within epsilon of theta is in fact optimal. When the stakes are large the returns to being a tame politician or a tame intellectual for protectionist interests are large too, and the labor market works well enough that demand calls forth supply–and we have Pat Choate claiming with an apparently straight face that five million American manufacturing jobs are “at risk” if the United States lowers its tariffs on Mexican imports from an average level of 3% to zero.

And it was here that I found myself wishing that Douglas Irwin had written a slightly different book. For I do not believe that the production and reproduction of intellectual arguments proceeds independently of the rest of social life, and I think the links between the strength of protectionist ideas and the potential benefits to those with the wherewithal to fund the creation and distribution of protectionist ideas are very strong and very interesting. But Irwin remains at the level of the intellect. He does not descend to the sociology of ideology at all–and I think that what is a very good book is less than the Platonic Ideal of a history of free trade because of its limited scope.

In addition, there is powerful feedback from the political economy back to the case for free trade. The very strength of the political-economic pressures toward protection generated in a rent-seeking society serves to powerfully reinforce the case for free trade. Douglas Irwin quotes Paul Krugman that the most powerful case for free trade today “‘is not the old argument that free trade is optimal because markets are efficient’ but rather ‘it is a sadder-but-wiser argument for free trade as a rule-of-thumb in a world whose politics are as imperfect as its markets…. to abandon the free-trade principle in pursuit of the gains from sophisticated intervention could therefore open the door to adverse political consequences that would outweigh the potential gains.'”

The Future

Irwin concludes his book with a resounding triumphalist sentence: “Yet if the historical experiences described here continue, free trade will remain one of the most durable and robust propositions that economic analysis has to offer for the conduct of economic policy.”

I find myself much more pessimistic–not that I think that free trade does not deserve to flourish, but that I doubt that it will flourish. There are two reasons to be skeptical of the future of free trade:

The first reason is that the East Asian economies that have grown so impressively in the past two generations have not been committed to free trade. There are arguments that they have been committed to free trade in what matters most for production (if not for consumer welfare): “a free-trade regime for exports and for imports for exporting industries” is the phrase often used. There are arguments that they have been lucky not to have been badly hurt by their deviations from free trade. There are arguments that they have managed to find a set of trade restrictions that actually does promote high-externality activities and rapid growth.

Which is true is unclear.

What is clear is that for the next generation opponents of free trade will say: “Japan, Korea, Taiwan, etc. did not adopt free trade–and look how fast they grew.” And at the level of economic policymaking and public ideology, this statement has the potential to erode a lot of support for free trade.

The second reason is that arguments for protection today hinge much more on the duties that first world consumers owe third world workers than on the links between protection and first world prosperity. Does the restriction of imports that violate fair labor standards give employers in developing countries the right incentives to improve working conditions and boost social welfare? Or does it just destroy jobs in developing countries–making the life chances of the poor even worse? It is not clear. But consumers in the first world do have moral obligations toward workers in developing countries, and the economic theory of free trade sheds little light on what policies are best in light of these moral obligations.

Brad De Long Department of Economics University of California- Berkeley


Subject(s):International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Economics and the Historian

Author(s):Rawski, Thomas G.
Reviewer(s):Kiesling, Lynne

Thomas G. Rawski, ed., Economics and the Historian. Berkeley: University of California Press, 1996. xiv + 297 pp. Bibliography and index. $45.00 (cloth), ISBN 0-520-07268-5; $17.00 (paper), ISBN 0-520-07269-3.

Reviewed for EH.Net by Lynne Kiesling, College of William and Mary

Economic historians fill a peculiar, and sometimes uncomfortable, intellectual gap in the social sciences. In an ever-fracturing and increasingly compartmentalized scholarly environment, the economic historian may not find a welcoming, collegial home with either historians or economists; the notion of a truly interdisciplinary analysis is more rhetoric than reality for many scholars.

This volume of essays seeks to bridge the gap in the direction of historians. Arguing that economic analysis contributes a useful set of tools to historical scholarship, the eight economic historians writing these essays attempt to negate the stereotype of economic analysis as false quantification and so much mathematical esoterica. These chapters are well written, tightly argued, and should be of value both to the historian looking to learn more about the economic approach to history and to the economist looking for a clear presentation of the general methodological foundations of “historical economics.”

In his introductory chapter Thomas Rawski starts by observing how pervasive economic factors are, and were, in everyday situations, and that economists and historians ignoring each other is a two-way street:

“Even if man does not live by bread alone, economics lurks beneath the surface of any historical inquiry. The economist who hesitates to peek outside the confines of his models can overlook cultural influences on markets. Likewise the historian of labor, of agriculture, of trade policy, of elite politics, of the church, of international conflict, of the arts, of migration, ideas, industrialization, universities, technology, demography, or crime ignores the economic approach at the risk of losing important lines of explanation” (p. 1).

After noting the apparent enthusiasm of economists for the benefits of history, Rawski goes on to discuss briefly the ideas underlying basic economic models; by doing so he lays a foundation of understanding in the reader for the more sophisticated analyses presented in the subsequent chapters.

Rawski also wrote the second chapter, in which he discusses the analysis of economic trends. Historical analysis is especially suited to studying long-term changes in factors such as “economic welfare, distribution of income and wealth, degree of commercialization, patterns of cropping, organization of economic activity, [and] significance and functioning of various economic institutions” (p. 15). Getting to the heart of a common misperception that historians often hold concerning economic modeling, Rawski clearly points out that examining long-term changes in such factors is meaningless without putting the trend in its relevant economic context. Rawski then refers to the most common way to explore aggregate trends across time and across countries, national income accounts, and briefly explores the three areas of economic activity that national income accounts miss: household production, underground activity, and unrecorded costs. However, when we look at broad trends we are looking for general tendencies across time, and national income accounts give us an imperfect, but rather consistent, indication of these tendencies or trends. After a useful explanation of how national income accounts are derived, on both the expenditure and the output sides, Rawski also examines economic cycles and trends within them.

Jon Cohen then provides an interesting discussion of the role of institutions in economic analysis, a currently fruitful area of research in some fields of economics. Cohen defines institutions as “efficient ways of organizing human activity where markets alone will not suffice” (p. 60), such as the firm or the family. In the most basic, most restricted economic model of human behavior, all resources in the economy find their highest value use through the market, without any need for relationships beyond those stemming from market activity. Clearly, this simplistic model abstracts too far from the real relationships of life, all of which do have some economic component (even friendship does–when we spend time with friends and do things for and with them, we forego opportunities to do other things that might also be of value to us). Cohen focuses on the family, the farm, and the firm as institutions that work in conjunction with the market, in a more realistic model of human behavior. In the course of discussing why such institutions exist and what benefits they provide, Cohen highlights the property rights literature building on Coase’s work analyzing the existence of the firm.

Exploring labor economics and labor history, Susan Carter and Stephen Cullenberg creatively construct a dialogue between “Clio” and “Hades,” two professors of history and economics, respectively, on the relative merits of their methodologies. They first discuss social norms and market forces as determinants of female labor-force participation, subsequently covering the individual choice between work and leisure as the basis for most economic models of labor. Carter and Cullenberg reinforce what I perceive as the essential elements of this book: economic models are tools, nothing more, but they are useful tools because they may highlight relationships that might otherwise not have been obvious; these tools, as well as the tools of historical analysis, need to be used in context.

The fourth chapter, written by Donald McCloskey, focuses on the basic model of neoclassical economics and its emphasis on choice. Because economists emphasize resource scarcity, they look at human behavior in the context of individuals making choices facing a set of alternatives. McCloskey argues that (neoclassical, but I would argue all) economists “would urge the historian not to jump hastily to a diagnosis that peasants follow their plows by custom alone or that traders trust each other on grounds of solidarity alone…. Neoclassical economics, in other words, completes sociology and anthropology, because it studies a motivation unattractive to those fields: choice under constraint” (p. 123). Choice transcends markets and permeates nonmarket institutions, as Cohen’s chapter suggested. McCloskey’s articulation of the choice basis of economics also enables him to address a common misperception of economics–economics is not about money alone. Choices made and profits garnered need not be pecuniary. This focus on choice complements other historical approaches emphasizing, for example, culture.

Richard Sutch’s chapter provides a concise survey of macroeconomics, peppered with historical examples that highlight some benefits of aggregate economic analysis. He concludes that thinking in terms of a macroeconomic approach could be useful to the historian, even if he or she is not using aggregate economic data. Sutch clears up another problem area for non-economists–what exactly are inflation and unemployment, and how can we tell if they are present in our historical situation? Sutch also addresses the potential pitfalls of aggregation, fruitfully discussing the benefits of, for example, micro studies of real wages in 1830s Britain by region and by occupation, but reminding the reader not to commit the fallacy of composition. Just because handloom weavers in Lancashire suffered large declines in their incomes does not mean that all British workers fared poorly during the 1830s. Sutch also uses the tools of macroeconomic analysis to understand wartime destruction and postwar economic activity after the Civil War and World War II.

Next Hugh Rockoff tackles the thorny topic of money, banking and inflation. He structures his discussion as the tale of the development of money in a hypothetical economy, using examples from history to illustrate issues that arise as an economy becomes more commercial. He starts in medieval times with a gold-based money, moving on to explain how new discoveries of gold caused inflation. His subsequent explanation of the quantity theory of money and Hume’s price-specie flow mechanism is valuable to non-monetary economists as well as to historians interested in monetary history. Rockoff then discusses the rise of banking, usually starting with individuals “depositing” gold coins with their local goldsmith for safekeeping. As goldsmiths discovered that not everyone wanted all of their money back at the same time, they found that they could make money by lending out some of the deposits they held: thus the birth of fractional reserve banking. This development also meant that the goldsmith had an incentive to pay the depositor interest on his deposit, thereby creating a dimension on which goldsmiths compete for business. Rockoff also explores banking panics, fiat money and central banking, which require more sophisticated economic models and some attention to institutional detail.

The final chapter, by Peter Lindert, highlights the role of international economics in understanding the evolution of trade relationships through history. In the context of discussing international relations, Lindert emphasizes one of the basic tenets of economics–trade creates value, and both parties benefit. But that value is not distributed equally among the trading partners, and Lindert addresses the implications of that fact in terms of the development of trade restrictions (tariffs and quotas) and the evolution of trading relationships. In the final section of his chapter Lindert provides a discussion of the determination of exchange rates that I found extremely valuable, and much clearer than any other I’ve seen on the subject.

Every chapter in this collection provides valuable insights on the use of economic logic and modeling in explaining historical phenomena. I sensed no condescension from the authors toward the methodology of the historians among their readers; I sensed only respect and appreciation for good economic methodology, and an interest in sharing that enthusiasm with historian colleagues.

Lynne Kiesling Department of Economics College of William and Mary


Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative