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Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not

Author(s):Rubin, Jared
Reviewer(s):Mokyr, Joel

Published by EH.Net (April 2017)

Jared Rubin, Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not. New York: Cambridge University Press, 2017. xxi + 273 pp. $30 (paperback), ISBN: 978-1-108-40005-3.

Reviewed for EH.Net by Joel Mokyr, Departments of Economics and History, Northwestern University.

The Middle East, it has been said, is not just a collection of failed states. It is a failed region. It generates a disproportional number of the world’s orphans and refugees, its GDP per capita is intolerably low despite oil riches, and there are few signs that there is light at the end of tunnel. Democracy seems to have been put on the back burner indefinitely, and human rights are a lost cause in most countries and in retreat elsewhere. Intellectually, too, things look rather dismal: In 2005 Harvard University alone produced more scientific papers than 17 Arabic-speaking countries combined. Muslim countries contribute just 2.5 percent of more than 11.5 million papers published worldwide each year (Muslims constituted 23 percent of the world’s population in 2010). A 1997 Scientometrics paper estimated that 46 Muslim countries (which of course contain much more than the Middle East) contributed 1.17 percent to world science literature as opposed to Spain (1.48 percent).

Is the Islamic religion to blame? Jared Rubin, in this stimulating and highly original study, would deny that emphatically. Although this is a book about religion and its implication for institutional and economic change, Rubin is little interested in the actual doctrinal content of religion. He points out, as many others have, that the essence of Islam could not possibly be as rigid and opposed to commerce and economic change as it may seem, because for the first centuries of its existence, the nations that adopted Islam flourished not just commercially but also in terms of technology, architecture, poetry, agriculture, medicine, and engineering, while western Europe was an ignorant, violent and poverty-stricken backwater. What we have witnessed since 1200 is more than a “divergence”: it is a Great Reversal, of momentous importance till the present day.

Rubin’s book presents us with an explanation for this great reversal, which will have to be taken into account from now on in all future discussions on the economic history of the Islamic world. He does not oversell his argument as the reason for the great reversal, he makes a plausible argument for it as a complementary argument to the ones other serious scholars have made. The book is divided into a few chapters that outline the theory and logic of the argument and then applies these insights to a number of historical case studies. It is a tale that combines economic history, political economy, and religion in a unique and novel way.

Here is the basic argument: any kind of ruler has power because his or her subjects accept their rule and their main concern is what Rubin calls “propagating their rule.”  How do you get people to accept you as their ruler and let you keep your job? Political power is supported by a combination of coercion (that is, violence) and legitimacy (people willingly accept a ruler because they believe that this person has the right to rule them). Through most of history, rulers depended on a combination of the two, though the weights of each differed greatly depending on their costs and benefits. Rubin is exclusively interested in the legitimacy part. Legitimacy is provided by what he calls “legitimizing agents” — groups or entities that have enough influence to make the subjects of the ruler follow instructions and pay taxes. An obvious legitimizing agent is the religious establishment — for example, European rulers once ruled ex dei gratia and called themselves the most Catholic King. Some modern royalty still include the line in their title, although in most places such relics are empty.

Rubin observes that in the early medieval period, both Christian and Muslim rulers used religious authorities as legitimizing agents, but that at some point in the later Middle Ages, Muslim and western European society diverged. Whereas in the Ottoman Empire the sultans continued to rely on religious authorities for their legitimacy, in many western societies the Church’s political leverage was diminished irreversibly. From the beginning, Rubin points out, Christian doctrine envisaged separate spheres for secular and religious power. The schisms and exiles to which the late medieval papacy was subject weakened it greatly in the face of ambitious rulers, and the reformation administered to religious legitimization the coup de grace. Apart from a few corners of Europe such as Spain, religion lost the power it had exercised since even before the prophet Samuel anointed Kings Saul and David.

Why and how did this matter to economic history? Rubin argues that religious authorities were in general conservative, and that the institutions they established are less aligned with commerce and finance than when an economically important elite such as rich urban merchants and artisans are more powerful. As a result of their political influence, religious authorities in the Middle East were successful in blocking critical breakthroughs, most notably the printing press and more sophisticated financial institutions. The printing press facilitated the success of the Reformation, and the Reformation had further favorable economic effects, as has recently been shown by a pair of important papers (Cantoni, Dittmar and Yuchtman, 2016; Dittmar and Meisenzahl, 2016). One might add that even in France, in which the reformation was suppressed, the power of religious authorities to legitimize the king disappeared. Napoleon famously took the crown out of the hands of Pope Pius VII during his 1804 coronation and crowned himself, symbolizing that his legitimization came from military power, not God.

In summary, Rubin argues that the leaders of organized religion tended to be conservative across the board. Their influence, he thinks, depended on their monopoly of eternal truths, and updating those truths threatened to erode their credibility.  The Islamic world was unable to curtail the influence of Islamic scholars until the Islamic world had fallen hopelessly behind Europe. Even within Christian Europe, the power of religious authorities, he feels, helped determine the difference between successful regions such as the Netherlands and Britain and economic laggards such as Spain. When discussing the past three centuries, the influence of religious authorities is somewhat diminished, but what counts in Rubin’s view is that in all poor and backward states, the institutional structure and the capability of key players to “sit at the bargaining table” as he calls it was little affected by the urban-commercial classes whose demands for free and open markets, constraints on the executive, and a rule of law led to rapid economic progress in the north-west corners of Europe.

By combining an institutional argument with religion through the effect that religion had on institutions and politics (rather than on cultural beliefs), Rubin’s argument is reminiscent of an important recent book by Karel Davids, which has not thus far received sufficient attention (Davids, 2013). Both books, in a different way, stress how religious institutions mattered regardless of the precise content of religion. Davids, however, emphasizes another aspect, namely the role of religion in the generation and dissemination of technology. Rubin is primarily interested in institutions that support markets. Yet an explanation of modern economic growth cannot possibly avoid the primum movens of economic growth, which was the rapid expansion and dissemination of useful knowledge. In early medieval Islam, engineers, doctors, and chemists were at the forefront of pushing the envelope. By 1600 the Islamic world had become a follower, by 1800 they were a laggard. A natural extension of Rubin’s idea is that a government dominated by religious authorities will also be less than accommodating to out-of-the-box ideas from natural philosophers, astronomers, mathematicians, and medical doctors. The tradeoff between religiosity and scientific and technological progress has become a serious topic of investigation in recent years (Benabou, Ticchi, and Vindigni, 2014; Squicciarini, 2016). Their findings support the notion that devoutness affects innovativeness negatively and that political institutions could be used by powerful religious leaders to suppress what they considered heretical views.

Rubin is correct in pointing out that in the most progressive countries in western Europe the ability of religious leaders to halt progress was limited.  A striking example of this phenomenon is provided by Amir Alexander (2014), who documents the fierce resistance to infinitesimal mathematics by the Jesuits in the seventeenth century, which seriously slowed down the development of mathematics in Italy. The reason the reactionary powers such as the Jesuits were not able to slow down the development of radical new ideas in Europe materially is primarily the high level of political fragmentation in Europe. If a particular ruler tried to crack down on his most creative subjects because they wrote things he felt to be subversive or heretical, they could always move across the border. Such outside options may have been much more limited in the Ottoman Empire and in China. Interstate competition is another factor that rulers worried about, beside Rubin’s legitimization story. After all, every ruler faced both internal and external threats. Without interstate competition, or “emulation” as eighteenth-century writers called it, Europe might never have had the Enlightenment, which opened the doors to so many of the institutional and technological changes that have helped create economic modernity.

Here and there one could nitpick some of Rubin’s historical interpretations. His account of Spain’s political economy would have greatly benefitted from a closer attention to Regina Grafe’s path-breaking work (Grafe, 2012). Rubin’s agnosticism as to the actual content of religion may be somewhat misplaced: the Sunni revival of the eleventh century did in time move the ruling orthodoxy into a more conservative direction, as Eric Chaney (2015) has shown. More generally, an argument that focuses on “the ruler” and the significance of the propagation of political power may exaggerate the ability of the state to control what the citizens did in pre-twentieth-century societies.

All the same, Rubin has written an important and timely book. His methodology is very much that of the historically informed economist: certain choices are made at some point because they make sense, that is, the benefits to those that make the decision exceed the costs. But once made, these initial conditions can have cascading unintended and unanticipated consequences, and those historically contingent causal chains may well be what drove much of the great and little divergences that our profession is so interested in. Equally important, this well-argued and sensible book about Islam provides a much-needed antidote to the toxic rubbish masquerading as scholarship produced by some of the Islamophobes in the current American administration (e.g., Gorka, 2016). The Middle East’s problem is not Islam; it is History.

References:

Alexander, Amir. 2014. Infinitesimal: How a Dangerous Mathematical Theory Shaped the Modern World. New York: Farrar, Straus and Giroux.

Benabou, Roland, Davide Ticchi, and Andrea Vindigni. 2014. “Forbidden Fruits: The Political Economy of Science, Religion and Growth.” Unpublished working paper, Princeton University.

Cantoni, Davide, Jeremiah Dittmar and Noam Yuchtman. 2016.  “Reformation and Reallocation: Religious and Secular Economic Activity in Early Modern Germany.” Unpublished.

Chaney, Eric. 2015. “Religion and the Rise and Fall of Islamic Science.” Unpublished working paper, Harvard University.

Davids, Karel. 2013. Religion, Technology and the Great and Little Divergences. Leiden: Brill.

Dittmar, Jeremiah E. and Ralf Meisenzahl. 2016. “Origins of Growth: Health Shocks, Institutions, and Human Capital in the Protestant Reformation.” Unpublished.

Gorka, Sebastian. 2016. Defeating Jihad: The Winnable War. Washington, DC: Regnery Publishing.

Grafe, Regina. 2012. Distant Tyranny: Markets, Power, and Backwardness in Spain, 1650–1800. Princeton, NJ: Princeton University Press.

Squicciarini, Mara. 2017. “Devotion and Development: Religiosity, Education, and Economic Progress in 19th-century France.” Unpublished working paper, Northwestern University.

Joel Mokyr is the author of Culture of Growth: The Origins of the Modern Economy (Princeton University Press, 2016).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (April 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Middle East
Time Period(s):General or Comparative

Innovation and Its Enemies: Why People Resist New Technologies

Author(s):Juma, Calestous
Reviewer(s):Mokyr, Joel

Published by EH.Net (January 2017)

Calestous Juma, Innovation and Its Enemies: Why People Resist New Technologies. New York: Oxford University Press, 2016. xii + 416 pp. $30 (hardcover), ISBN: 978-0-19-046703-6.

Reviewed for EH.Net by Joel Mokyr, Department of Economics, Northwestern University.

Technological progress is, by general consensus, the chief engine of modern economic growth. It is also an untidy and highly non-linear historical process. Any notion that in the real world some kind of good-ideas-drive-out-bad-ideas rule obtains should be abandoned from the outset. Many old and bad ideas are retained for many years, even centuries, and many good ideas are rejected, resisted, maligned, and at times abandoned. In 1679, William Petty, the founder of political economy, wrote that “when a new invention is first propounded, in the beginning every man objects, and the poor inventor runs the gantloop of all petulent wits … not one [inventor] of a hundred outlives this torture … and moreover, this commonly is so long a doing that the poor inventor is either dead or disabled by the debts contracted to pursue his design” (The Economic Writings of Sir William Petty, Charles Henry Hull, ed. Cambridge University Press, 1899, Vol. 1, p. 74).

In the interest of full disclosure: the title of Calestous Juma’s engaging and informed book is identical to the title of a paper written by this reviewer and published in 2000 and elaborated upon in my Gifts of Athena (2002). Juma graciously acknowledges this in the first footnote to the book. There is no question that he has taken the idea a great deal further, yet it is written very much in the same spirit. Resistance to new technology has three major origins. First, there are the incumbents who fear a threat to the stream of rents generated by their physical capital, human capital, market power, or political influence. Innovation inevitably disrupt such rents. Second, there is the concern about broader repercussions: innovations have unintended ripple effects on a host of social and political variables that may generate additional costs and pain to people even if they themselves have no direct say over whether to adopt the innovation. And beyond that there is risk- and loss-aversion, the often well-founded fear than a new technique may have unanticipated and unknowable consequences. These three motives often merge and create powerful forces that use political power and persuasion to thwart innovations. As a result, technological progress does not follow a linear and neat trajectory. It is, as social constructionists have been trying to tell us for decades, a profoundly political process.

As the late Nathan Rosenberg pointed out in a classic essay entitled “Uncertainty and Technological Change,” by definition innovation is a journey into the unknown. The unforeseen and unintended consequences could be negative, making what seemed at the time to be an improvement actually welfare-reducing. The classic case of reducing engine-knock by adding lead to gasoline in the 1920s with horrid consequences that only now are becoming fully known stands as a classic example, but many others come to mind. Knowing this has biased the popular view of innovations — and various organizations have played upon these fears. Yet it is striking that the bias is not distributed uniformly: while transgenic salmon is still not available to consumers despite the complete absence of any evidence of harmful effects, cellular phones and GPS have spread like wildfire, perhaps because they were able to align themselves with the forces of globalization.

In a series of fascinating case studies arranged in separate chapters, Juma illustrates these principles over and over again. The chapters have clever titles (my favorite is the one on the fierce and persistent resistance of the American dairy lobby to margarine, entitled “smear campaigns”) and are well-written and documented. A few of them deal with well-known cases, such as the resistance of Moslem society to the printing press and the struggle of European farm lobbies and environmentalists against transgenic crops. Others concern little-known episodes, such as the tale of AquaBounty, an aquaculture firm founded by Elliott Entis, which ingeniously devised a slightly genetically-altered salmon that matures in half the time of regular salmon. The technique offers considerable cost savings and environmental advantages, yet has no discernible negative side effects. Yet the idea was fought tooth and nail by well-meaning but misguided environmentalists as well as salmon fishers, who worried about competition and denounced Entis’s idea using inflammatory terms such as “Frankenfish.” The product is still not available and environmentally correct chain stores such as Whole Foods have already announced they will not carry it. Yet with fishery depletion one of the major environmental disasters looming, such techniques are exactly what is needed.

Juma is at his most eloquent and informative in his chapter on transgenic crops. The use of such crops, as he points out, is not only a way to increase agricultural productivity but also environmentally responsible, as it leads to lower use of pesticides and fertilizer. Yet it is ironically opposed by a coalition of environmentalists that led to the formulation of the infamous Cartagena protocols of 2000. As he points out, the main thrust of this emblematic manifestation of resistance to transgenic crops, known as the “precautionary principle,” was to reverse the burden of proof: the originator of the biological innovation had to show it was harmless before it could be marketed — basically an impossible task. As he stresses over and over again, the logical error of those driven by loss- or risk-aversion is to assume that the status quo is risk-free.

One could quibble about some of Juma’s decisions to include certain episodes and not others. The struggle between Edison’s DC and Westinghouse’s AC (the “war of the currents”) is not really a case of “resistance to innovation” as much as a struggle between two incompatible new network standards. Most readers will be disappointed that there is no chapter on the long and fascinating history of popular resistance to nuclear power, one of the paradigmatic cases of technological conservatism that is still with us. This reviewer would have liked more discussion of the Luddites — the resistance movement that gave the phenomenon its name — as well as the fanatical resistance to medical innovations such as the anti-vaccination campaigns conducted by certain groups mostly affiliated with Christian and Muslim radical philosophy. Religious authorities, whose beliefs are often based on “not-playing-God,” get little attention despite their record of resisting many new ideas. To economic historians, the absence of much discussion of workers’ resistance based on the fear of technological unemployment and dystopian scenarios in the Player Piano mode seems a bit disappointing, as this seems to be a main concern of modern-day critics of innovation, such as Jeremy Rifkin, as well as more serious academics. The cost of innovation in terms of accelerated depreciation of human capital should have been stressed a bit more. Yet these minor quibbles do not detract from the value of a timely and insightful book.

In the end, perhaps the surprising thing is not that there has been so much resistance to technological progress, but that humanity has actually been able to overcome most of it. For much of human history, the heavy hand of conservatism and neophobia (what Timur Kuran has called the “tenacious past”), suppressed intellectual innovators of all kinds, condemning many past societies to a fate of virtual technological stasis. When reactionary forces were weakened in Europe after 1500, innovation slowly found its way to the surface, but even then it had to struggle against opponents every inch of the way. In that sense our globalized age must consider itself lucky. While some societies may try to resist certain innovations, original and creative minds can always go offshore and develop their ideas in more hospitable places. In the end, if an idea is truly superior, it will catch on, if with a disastrous delay. After all, Islamic countries in the end overcame their reluctance to the printing press (in no small part thanks to a Hungarian-born convert to Islam named Ibrahim Muteferrika, as Juma recounts). Yet the absence of printing and inexpensive books in Arabic or Turkish for centuries has had inestimably deleterious consequences for the intellectual and political development of the Middle East. As Juma stresses repeatedly, doing nothing is risky too, especially if your competitors storm ahead.

Joel Mokyr is the author of A Culture of Growth: The Origins of the Modern Economy (Princeton University Press, 2017).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (January 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):History of Technology, including Technological Change
Geographic Area(s):General, International, or Comparative
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Handbook of Cliometrics

Editor(s):Diebolt, Claude
Haupert, Michael
Reviewer(s):Mitch, David

Published by EH.Net (July 2016)

Claude Diebolt and Michael Haupert, editors, Handbook of Cliometrics. Berlin and Heidelberg: Springer, 2016. xxii + 590 pp.  $149 (hardcover), ISBN: 978-3-642-40405-4.

Reviewed for EH.Net by David Mitch, Department of Economics, University of Maryland – Baltimore County.

There is by now a long tradition of handbooks in economics. And they have varied over the decades in their intended audience and aims. J.M. Keynes in his 1922 introduction to the Cambridge Economic Handbook series described it as “intended to convey to the ordinary reader and to the uninitiated student some conception of the general principles of thought which economists apply to economic problems.”  Kenneth Arrow and Michael Intrilligator in their introduction to the North-Holland Handbooks in Economics series describe them as “a definitive source, reference and teaching supplement for use by professional researchers and advanced graduate students. Each Handbook contains self-contained surveys of the current state of a branch of economics in the form of chapters prepared by leading specialists on various aspects of this branch of economics.”

Claude Diebolt (University of Strasbourg) and Michael Haupert (University of Wisconsin-La Crosse), the editors of Springer’s Handbook of Cliometrics have not clearly identified the audience at which the volume is aimed. They do indicate in their introduction (p. xi) that the contributions “stress the usefulness of cliometrics for economists, historians, and social scientists in general.” Their preface and introduction describe the handbook as one that “contains digested knowledge in an easily accessible format,” (p. xv) while also asserting the aim “to foster world-class research” (p. xv).  They have followed the lead of North-Holland’s handbook series of choosing leading specialists in various branches of cliometrics to write its chapters but appear to have given them quite free reign regarding intended audience, scope, and methodology employed.   Indeed one message the volume as a whole conveys is the diversity of formats that can be associated with cliometric history ranging from exercises in applied econometrics to purely verbal narrative expositions.

The volume comes in at just under 600 pages. It is divided into 22 chapters subsumed under some 7 headings.  This implies an average allotment of 27 pages per chapter with the actual chapters varying from 15 to 35 pages in length.  By way of comparison, the North-Holland Handbook of Economic Growth, Vols. 1A and 1B (to choose just one immediately available volume from the many in the series) runs to a total  of 1800 pages in some 28 chapters for an average length of 64 pages per chapter.  The considerable relative restriction in length for the Springer Handbook implies tradeoffs between the scope and level of the audience for a given contribution.  Some contributions in this volume provide an overview of the forest, taking up general concepts such as labor markets or human capital or landmark episodes such as the Great Depression and accomplish this by aiming at primarily an undergraduate audience albeit with elegance and incisiveness.  Other contributions focus on specific trees, considering a few key issues, key studies or key methodologies which they cover in a depth more suitable for advanced graduate students and researchers.

What choice of topics and organization is appropriate for a handbook of cliometrics?  Insofar as cliometrics is a method rather than substantive economic history, organization according to chronological or geographical coverage would not seem in order. If cliometrics is defined as the application of economic theory and quantitative methods to the study of history, then what is to be covered in such a handbook over and above the theoretical and quantitative tools to be applied? Are there either general principles or specific techniques that can be articulated for the application of economic theory and methods to the study of history? Forums on the future of economic history (such as that from the 2015 Economic History Association annual meeting published in the December, 2015 Journal of Economic History) suggest no shortage of methodological advances to consider including Geographical Information Systems, big data and computational power, and use of quasi-experimental methods — to name just some.

The editors acknowledge the difficulty of deciding what to include and that some important and historically significant topics were excluded (p. xi) and point to the goals of achieving “variety over time, topic, and geography” and “a sampling of topics cliometrics has helped to transform over the past half-century” as principles of selection.

The seven section headings chosen for the volume seem more Fogelian than Northian in conception.  Four of the categories, Human Capital, Finance, Innovation, and Government have clear parallels with headings in The Reinterpretation of American Economic History, the important 1972 compilation by Fogel and Engerman of cliometric work. The three other categories that round off the work include a section on the history of cliometrics, a section on growth, and a section on statistics and cycles.  While Douglass North and new institutional approaches certainly get mention throughout this handbook, none of the chapters give extended coverage to institutions or a Northian framework, an understandable decision given space constraints.

The opening section on history contains both Michael Haupert’s history of cliometrics and Peter Temin’s effort to link economic history and economic development via his own illustrious career experiences.  Almost half of Haupert’s history of cliometrics is actually devoted to the history of pre-cliometric economic history; which limits the detail he provides to either old or new economic history.  Such important episodes as the controversy over the cliometrics of slavery are notably missing from his account, though it does provide a quite useful entrée to the topic. Peter Temin’s contribution fills in this gap with his insightful romp through selected cliometrics highlights over the past fifty years pointing to parallels and synergies between the study of economic history and economic development.  He offers the perspective of a pioneering practitioner of cliometrics on work by more recent generations of cliometricians. His is one of the few contributions in the volume to give explicit consideration to the quasi-experimental methods that have become widespread in the work of younger cliometricians. He also considers tensions and opportunities in publication strategies aiming at alternatively economic history or mainstream economics journals as outlets.

The second section on human capital has five contributions which differ widely in scope and detail.  Claudia Goldin and Robert Margo provide quite general, albeit cogent, overviews of respectively cliometric work on human capital and labor markets. Given their own scholarly work they both not surprisingly focus on the U.S. case, though Goldin sets this in the global context of unified growth theory with Malthusian, transition, and human capital phases.  Her treatment of education and schooling centers on her landmark 2008 book with Lawrence Katz rather than a detailed overview of recent research. She also treats health as a form of human capital in considering long run trends in mortality and life expectancy.  She does not provide any assessment or even mention of recent age-heaping approaches to estimating human capital historically.  Robert Margo’s treatment of labor markets centers around estimates of long term trends in some basic magnitudes including that of the labor force as a whole, occupational structure, wage structure, and racial differences.  He provides concise but insightful interpretations of these trends utilizing a simple demand and supply framework. Margo does refer to work exploring underlying sources and data limitations but given his space limitations does not do so in any depth.  A major and innovative area of cliometric research since the late 1970s has been in examining the relationship between nutrition, heights, and biological living standards, and disease environments as evidenced in trends in human heights, the field of anthropometrics.  Lee Craig overviews this research and his particular emphasis on nineteenth century U.S. developments allows him some focus in depth, though he does draw extensively on more global evidence.  He considers in more depth than the Goldin chapter the role of improvements in nutrition and in public health measures in improving the biological standard of living.  Franziska Tollen and Joerg Baten’s contribution provides an in-depth survey of the use of age-heaping indicators to estimate human capital.  They go in detail into the methodology of how age-heaping indicators are constructed and survey a wide range of findings stemming from use of the age-heaping approach.  Unlike other contributions in this section the level of detail is more suited to advanced researchers.  Jacob Weisdorf surveys the use of parish registers by cliometricians and economic and demographic historians more generally. He provides a useful description of the registries themselves. And he makes note of their use not only for the English and other Western European cases but also for Africa and potentially for other regions as well. Weisdorf embeds his survey in a discussion of the Malthusian population framework and the unified growth approach of Oded Galor and collaborators through the evidence parish registers can provide on trends in births, deaths, and marriages. He connects with the human capital theme by taking up the important information registries can provide on occupational trends.  He gives coverage to historically integrated occupational coding schemes that have been developed to categorize the occupations sometimes recorded on parish registries as in the work of Marco van Leeuwen, Andrew Miles and others (2004, 2005), but only passing mention to the major Cambridge Group project of using occupational information on parish registers to extend back in time knowledge about trends in English occupational structure (Shaw-Taylor and Wrigley 2014).

Section Three on Economic Growth contains a further five chapters that are quite varied in character and coverage.  Claude Diebolt and Faustine Perrin nominally give coverage to a range of growth theories, although they use the unified growth approach of Oded Galor and David Weil to provide a narrative of growth over the past millennium while offering an extension by incorporating implications of female economic and social empowerment into their discussion.   Gregory Clark offers a cliometric perspective on the British Industrial Revolution centering on the sources of productivity advance and identifying it as driven by an “upturn in the rate of technological innovation” (p. 207).  Although he does not provide an in-depth survey of cliometric work on the Industrial Revolution, Clark does consider some of the leading underlying explanations that have been offered including institutional and intellectual approaches and those grounded in human capital; he argues that none can provide convincing explanations. He thus concludes that the “Industrial Revolution remains one of history’s great mysteries” (p. 232). James Foreman-Peck takes up economic-demographic interactions by using a simple linear specification of the Malthusian model as his starting point and quite effectively uses it as a unifying framework for his review both of empirical evidence and causal estimation strategies. While I would have been interested in seeing further discussion of the implications of relaxing the assumptions of linearity, Foreman-Peck’s contribution should prove an effective teaching tool in showing how some simple micro-specifications can have far-reaching applications.  Emanuele Felice provides a quite detailed discussion of issues involved in constructing GDP estimates that are comparable across countries and over time and even for sub-national regions, as well as turning to the evidence and approaches in using such estimates to examine tendencies to growth convergence and factors influencing these tendencies.  Markus Lampe and Paul Sharp take up the topic of trade, turning first to the importance of trade, then to how to measure the extent of trade and market integration, then to the role of institutions, technology, and policy in determining trade and finally to the measurement and determinants of trade policy. Their coverage is very well informed, but with only a sentence or two to devote to each study they consider, the emphasis is on breadth rather than depth.

Section Four on Finance, has more unity and coherence between its four chapters than other sections of this volume.  Larry Neal’s opening contribution on the cliometrics of finance focuses specifically on surveying the market for sovereign debt from early modern times through the early twentieth century and the market for short-term commercial credit with particular emphasis on exchange rates, including extensive comments for both topics on available data sources. Neal concludes, however, with extended general reflections on both the accomplishments and limitations of the now quite extensive body of cliometric work on finance.  For his contribution, the late John James defines “Payment Systems” as “the complex of financial instruments and relationships that transfer value between buyers and sellers to complete their transactions” (pp. 353-54).  James provides a wide ranging narrative account — suitable for non-specialists that can be viewed as informed by a cliometric framework or spirit rather than directly cliometric — of the evolution of payment systems so defined from the demonetization accompanying the collapse of the Roman Empire through the early twenty-first century U.S.  In contrast to Neal and James, Matthew Jaremski organizes his survey of cliometric work on financial crises methodologically.  He first considers studies that employ survival and hazard models to examine determinants of banking crises, then turns to the use of data envelopment analysis for a production function/efficiency perspective on deposit insurance and then in the last part of the survey considers approaches to deal with simultaneity in the interaction between financial crises and more general economic activity; these include vector auto-regression, instrumental variables approaches and difference-in-difference models.  Jaremski’s exposition is lucid despite the amount of technical detail presented, though it seems aimed at specialists and researchers in the field.  Caroline Fohlin concludes the Finance section with a wide-ranging international comparative perspective on financial systems.  She starts with some basic typologies on financial systems, distinguishing first between functional and institutional perspectives and then to standard distinctions between a) bank-based versus market-based systems, b) universal versus specialized systems and c) relationship versus arms-length systems.  She then turns to the extent to which the actual historical evolution of financial systems adds complexity to these distinctions. She proceeds to consider determinants of choices between the various types of systems she distinguishes and to evidence on the nexus between finance and economic growth.  Throughout her detailed survey of a large number of studies and countries, Fohlin warns against rigid classification by over-arching categories or mono-causal explanations, leaving her with the final conclusion (p. 427) that “history matters.”

The remaining three sections of the volume each contain pairs of contribution.  The two essays in the fifth section on Innovation provides a quite interesting contrast.  Stanley Engerman and the late Nathan Rosenberg comment on “innovation in historical perspective” by arguing that uncertainty associated with the innovation process implies that the richness of historical accounts of the innovation process can capture important aspects that would be missed in an ahistorical theoretical framework. Engerman and Rosenberg were both early contributors to cliometrics; their chapter, as with that of John James described above, can perhaps be seen as more informed by a cliometric framework than involving direct application of either the theoretical or empirical methods associated with Cliometrics.  In contrast, Jochen Streb directly embraces “the Cliometric Study of Innovations,” surveying both theoretical and empirical cliometric studies of the history of innovation with a particular, though not exclusive, focus on patents as measures of innovation.

The sixth section is on “Statistics and Cycles.”  The contribution by Thomas Rahlf in this section on “Statistical Inference” is actually a history of thought of statistical inference during the twentieth century.  He attempts to link this with cliometrics in the last part of his essay by suggesting that Alfred Conrad, John Meyer and others formulating cliometric methodology were informed by a Bayesian approach and that the history of Bayesian statistics is thus relevant for understanding the methodology of cliometrics.  He also suggests that cliometric inference could benefit from further attention to the criticisms of econometric methodology offered by Rudolf Kalman of Kalman filter fame. However, neither of these suggestions is articulated in any detail. The other contribution is by Terence Mills on “Trends, Cycles, and Structural Breaks in Cliometrics,” which offers a helpful primer on developments over the past quarter century in time-series statistics and econometrics pertinent to this topic and provides a number of illustrations based on cliometric work.

In the final section on government Price Fishback contributes an essay focused on a particular historical episode in which the role of government loomed large and on which he has considerable expertise, that of the 1930s Great Depression in the United States. And Jari Eloranta brings his specialist knowledge to surveying a recurring situation in which governments have been prominent, that of war.  Given the large literatures they each consider, Fishback and Eloranta make the quite sensible choice of providing non-technical narrative overviews suitable for undergraduates and general readers.

Given the varying audiences at which the contributions appear to aim, as well as the range of formats and styles of the contributions, it may be more apt to label this volume a companion to cliometrics or a cliometric sampler than a handbook with the comprehensiveness the latter title might imply. Indeed, as already mentioned above, the editors are more circumspect than Springer’s blurb on its website about the comprehensiveness of coverage.  One can readily come up with a list of topics in which cliometrics has made important contributions that are omitted, including coverage of work on the major economic sectors, income and wealth inequality, and (as noted above) extended treatment of institutional approaches. And as suggested above, I would also have welcomed discussion of quasi-experimental approaches — both opportunities and reservations, in light of how prevalent this has become in recent research.  Nevertheless, given the apparent constraints on length presumably set by the publisher, the choice of topics is quite appropriate.  The editors are to be commended for taking on such a challenging yet important assignment and for recruiting such a strong set of contributors.  The resultant volume contains worthwhile contributions that readers from a range of disciplines and varying degrees of commitment to cliometrics will want to consult.   As more and more historians and sociologists, as well as economists, seem to be venturing into financial history, economic history, and the history of capitalism, it would be interesting to know more about how persuaded they will be about the usefulness of cliometrics by the essays in this volume.

References:

Philippe Aghion and Steven N. Durlauf, eds. 2005. Handbook of Economic Growth Vols. 1A and 1B, Amsterdam: North-Holland Elsevier.

William Collins, Kris Mitchener, Ran Abramitzky, and Naomi Lamoreaux. 2015. “Essays: The Future of Economic History,” Journal of Economic History, 75, 4: 1228-1257.

Robert Fogel and Stanley Engerman, editors. 1972. The Reinterpretation of American Economic History, New York: Harper and Row.

Oded Galor and David N. Weil. 2000. “Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond,” American Economic Review, 90, 4: 806-828.

Claudia Goldin and Lawrence Katz. 2008. The Race between Education and Technology, Cambridge, MA: Harvard University Press.

J.M. Keynes. 1922. “Introduction to H.D. Henderson, Supply and Demand,” Cambridge Economic Handbooks – 1, New York: Harcourt and Brace, pp. v-vi.

Marco H.D. van Leeuwen, Ineke Maas and Andrew Miles. 2004. “Creating a Historical International Standard Classification of Occupations: An Exercise in Multinational, Interdisciplinary Cooperation,” Historical Methods, 37, 4: 186-197.

Bart Van de Putte and Andrew Miles. 2005. “A Social Classification Scheme for Historical Occupational Data,” Historical Methods, 38, 2: 61-94.

Leigh Shaw-Taylor and E.A. Wrigley. 2014. “Occupational Structure and Population Change” in Roderick Floud, Jane Humphries, and Paul Johnson, editors, The Cambridge Economic History of Modern Britain, New Edition, Vol.1, Cambridge: Cambridge University Press, 53-88.

David Mitch is Professor of Economics at the University of Maryland, Baltimore County. He is the author of “Schooling for All by Financing by Some,” Paedagogica Historica, 52: 4 (August, 2016): 325-348.

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Economic Development, Growth, and Aggregate Productivity
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Historical Demography, including Migration
History of Economic Thought; Methodology
History of Technology, including Technological Change
Military and War
Industry: Manufacturing and Construction
International and Domestic Trade and Relations
Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The Engine of Enterprise: Credit in America

Author(s):Olegario, Rowena
Reviewer(s):Wright, Robert E.

Published by EH.Net (February 2016)

Rowena Olegario, The Engine of Enterprise: Credit in America. Cambridge: Harvard University Press, 2016. v + 301 pp. $40 (cloth), ISBN: 978-0-674-05114-0.

Reviewed for EH.Net by Robert E. Wright, Thomas Willing Institute, Augustana University.
Rest assured that I did not judge this book by its cover, ugly as the 1940 GMAC advertisement the book designer chose to use appears to my eye. But try as I might, I could not find an appropriate audience for this (perhaps overly) ambitious undertaking after perusing it for several days. There is no preface to help readers to understand the author’s goals or the book’s purpose and the introduction launches directly into the content.

As its title suggests, the thesis of The Engine of Enterprise is that “the United States was built on credit” (p. 1) or, with more nuance, “despite problems with credit that were at times severe, and which Americans have never fully solved, credit has been the invigorating principle that turned potential wealth into national prosperity” (p. 226) (my emphases). The proof comes in the form of five narrative chapters covering the colonial and early national (Chapter 1: “The Foundations of Credit in the New Republic”), antebellum (Chapter 2: “Credit, Enterprise, and Risk in the Antebellum Era”), postbellum (Chapter 3: “Credit in the Reconstructed Nation”), interwar and postwar (Chapter 4: “A Nation of Consumers and Homeowners”), and late twentieth century (Chapter 5: “The Erosion of Credit Standards”) periods, plus a brief postscript (“Creative and Destructive Credit”) on the causes and consequences of the Panic of 2008. The chapters do not follow a cookie cutter format but many cover the same topics, e.g., consumer credit, business credit, bankruptcy, and so forth.

While narrative descriptions of the evolution of different types of credit abound, the book does not show the primal importance of credit in statistically rigorous (e.g., Rousseau and Sylla 2005) or internationally comparative (e.g., Beck, Demirguc-Kunt, Levine 2007) ways, or even cite the finance-led growth literature (see Levine 2005 for a review). Moreover, the finance-led growth hypothesis was tempered by studies (e.g., Martin 2010; Wright 2008) that showed that financial development is just one of a series of growth-inducing economic changes that begin with secure human rights and end with improvements in physical and human capital that drive productivity gains. Because microfinance failed to spur growth in anarchic or dictatorial states, few continue to baldly assert the primacy of finance, let alone just its credit component. Alexander Hamilton had it exactly right when he argued that credit “was among the principal engines of useful enterprise” (p. 4) (my emphasis), i.e., that credit is a necessary but not a sufficient cause of economic growth. It is the fuel injection system, in other words, not the entire engine.

The book is unlikely to appeal to other specialists, either, as it is not based on new or extensive archival research or even novel interpretations of printed primary sources. As a senior research fellow at Said School of Business, author Rowena Olegario lives thousands of miles from scores of archival U.S. bank records that range from underutilized to completely untouched (for a partial list, see New Bedford Whaling Museum 2011), but one would think that Oxford University could afford to pay for the filming of, and/or travel to, at least one set of U.S. banking records. Moreover, although Olegario occasionally alludes to the theory of asymmetric information, the book is largely devoid of pertinent economic theories. So in her narrative, the early economy was “vulnerable to external shocks” (p. 24) due to unregulated banks and banknotes rather than the nation’s solution to the Trilemma or Impossible Trinity, a bimetallic standard demanding free international capital flows and fixed exchange rates in lieu of a central bank with significant monetary policy discretion.

Although The Engine of Enterprise presents more evidence about what people thought than how they behaved, the book is not a compelling “history of thought” either. Olegario, for instance, credits Henry C. Carey with being “the most notable economist of his time” and with anticipating “the new institutional economics by a century and a half” (p. 7). Carey’s life (1793-1879) overlapped those of important American political economists like Edward Atkinson (1827-1905), Alexander Bryan Johnson (1786-1867), and Erasmus Peshine Smith (1814-1882), not to mention numerous European economists of far more probity. Moreover, most of Carey’s ideas merely reiterated the thought of Hamilton and other financial founding fathers and even his own biological father. Olegario herself later (p. 59) admits that Carey was less important than Henry George (1839-1897).

Given its long coverage, from the colonial period to the present, the book might have been designed as a survey text, but for what course and at what level? Graduate students would quickly dismiss The Engine of Enterprise because it does not discuss historiography and glosses over the few debates that it explicitly recognizes without describing the major issues or even mentioning the major contributors. For example, Olegario informs readers that “historians are not in full agreement about how stringently” (p. 28) usury laws were enforced in colonial America but the corresponding note refers only to Geisst (2013). Most other debates are not even hinted at in the notes. For instance, the author blithely asserts that some colonial bills of credit depreciated because they “were insufficiently backed by land or taxes” (p. 21) without mentioning the long debate over “backing theory” (e.g., Michener 2015). Moreover, many endnotes point to a relatively limited set of broad secondary sources, like Wood (1991), Morgan (2000), and Calomiris and Haber (2014), rather than relevant specialized monographs like Kamoie (2007), which details the credit relations of the important Tayloe family in Virginia, or Roney (2014), which describes how NGOs in colonial Philadelphia served as financial intermediaries. Worse, works long since superseded are cited, some with disturbing frequency (e.g., Foulke 1941; Trescott 1963).

I also doubt that anyone teaching a financial history survey would adopt this book as an undergraduate text. The prose, while competent, is pedestrian throughout and hence more likely to bore Millennials than to spur their interest in financial history. Similarly, general readers usually demand ripping yarns like those spun in Kamensky (2008) or Mihm (2009). Lucid sections can of course be found (particularly recommended are the discussions of bankruptcy), but their benefits are outweighed by conceptual flaws and errors of commission and omission. By the latter, I mean missing important supporting data, superior examples, or more telling points. For instance, to make the point that Benjamin Franklin “took for granted that credit was essential to commerce” (p. 2), Olegario adduces mere words, Franklin’s “Advice to a Young Tradesman,” rather than Franklin’s actual actions, most notably his establishment of microfinance institutions in Philadelphia and Boston (Yenawine and Costello 2010). Likewise, the best evidence that the “new banks were meant not just to serve the needs of governments and merchants but also tradesmen, farmers, and manufacturers” (p. 24) is not Pennsylvania’s Omnibus Banking Act of 1814 but studies like Lockard (2000) and Wang (2006) that document actual bank lending patterns, a type of direct evidence that the author suggests does not exist (p. 64).

Olegario has particular difficulty astutely narrating the history of early U.S. finance because she accepts a narrow anthropological literature (e.g., Muldrew 1998) that sees much of the colonial credit system as pre-capitalist, as part of a “moral economy” characterized by “trust” and “barter” (pp. 24-25). But Olegario herself destroys both claims, presumably inadvertently. “Households bartered produce, game, and animal skins to obtain the services of blacksmiths, coopers, and other artisans,” she claims, but then adds that such exchanges were “notated in rough ledgers [sic] using monetary values even though no actual cash changed hands” (p. 24). So such transactions were not barter (trading one good for another without the use of money in any of its forms) at all but rather a form of open account, book credit, or “bookkeeping barter” (Michener 2011). Olegario also subverts the supposed reliance of colonial creditors on “trust” by detailing the widespread use of collateral, co-signers, lawsuits, prison, threats of reputation tarnishing, and other devices designed to induce borrowers to repay their debts. Colonists were certainly more apt to be lax when lending to family and friends, but that does not mean a “noncommercial morality” (p. 25) suffused the economy as family matters stand no differently today.

Other errors abound and many would flummox students and general readers. Olegario claims, for example, that bills of exchange “functioned as currency” (p. 21) by conflating negotiability (via endorsement) and currency (passing from hand to hand without formal assignment). By conflating banknotes with bank loans, she can assert that “entrepreneurial society desired … paper money” (p. 23) when in fact it sought intermediation. Imagine the confusion that would ensue were students to read that retailers “notated the value of purchased goods in a day book or ledger without issuing [sic] formal instruments like notes or bills of exchange” (p. 24). (Borrowers, not lenders, issue debt instruments.) Or that the Bank of the United States (1791-1811) was “rechartered [sic]” (p. 42) to be “in existence … again [sic]” (p. 49) as the Bank of the United States (1816-1836)!

I could continue but won’t for fear of drawing a flag for unscholarly-like conduct. Perhaps some readers will think I deserve a flag already but when the author’s school and publisher are so prestigious I think it incumbent upon reviewers to support negative generalizations with sufficient citations, details, and examples. The dust jacket can be removed if readers don’t like it, but the same can’t be said of the text, so potential readers must be credibly pointed elsewhere, like to the recent works cited below.

References:

Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine. 2007. “Finance, Inequality, and Poverty: Cross-Country Evidence.” Journal of Economic Growth (March): 27-49.

Calomiris, Charles and Stephen Haber. 2014. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton: Princeton University Press.

Foulke, Ray. 1941. The Sinews of American Commerce. New York: Dun and Bradstreet.

Geisst, Charles. 2013. Beggar Thy Neighbor: A History of Usury and Debt. Philadelphia: University of Pennsylvania Press.

Kamensky, Jane. 2008. The Exchange Artist: A Tale of High Flying Speculation and America’s First Banking Collapse. New York: Viking.

Kamoie, Laura Croghan. 2007. Irons in the Fire: The Business History of the Tayloe Family and Virginia’s Gentry, 1700-1860. Charlottesville: University Press of Virginia.

Levine, Ross. 2005. “Finance and Growth: Theory and Evidence.” Handbook of Economic Growth, edited by Philippe Aghion and Steven Durlauf. Amsterdam: Elsevier Science.

Lockard, Paul. 2000. “Banks, Insider Lending, and Industries of the Connecticut River Valley of Massachusetts, 1813-1860.” Ph.D. Dissertation. University of Massachusetts, Amherst.

Martin, Joe. 2010. Relentless Change: A Casebook for the Study of Canadian Business History. Toronto: University of Toronto Press.

Michener, Ron. 2011. “Money in the American Colonies.” EH.Net Encyclopedia, edited by Robert Whaples. http://eh.net/encyclopedia/money-in-the-american-colonies/

Michener, Ron. 2015. “Redemption Theories and the Value of American Paper Money.” Financial History Review (December): 1-21.

Mihm, Stephen. 2009. A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States. Cambridge: Harvard University Press.

Morgan, Kenneth. 2000. Slavery, Atlantic Trade and the British Economy, 1660-1800. New York: Cambridge University Press.

Muldrew, Craig. 1998. The Economy of Obligation: The Culture of Credit and Social Relations in Early Modern England. New York: St. Martin’s Press.

New Bedford Whaling Museum. 2011. “Records of the Merchants Bank Finding Aid, Appendix C,” MSS 107, New Bedford, Mass. http://www.whalingmuseum.org/explore/library/finding-aids/mss107#idp10883696

Roney, Jessica Choppin. 2014. Governed by a Spirit of Opposition: The Origins of American Political Practice in Colonial Philadelphia. Baltimore: Johns Hopkins University Press.

Rousseau, Peter and Richard Sylla. 2005. “Emerging Financial Markets and Early U.S. Growth.” Explorations in Economic History (March): 1-26.

Trescott, Paul. 1963. Financing American Enterprise: The Story of Commercial Banking. New York: Harper and Row.

Wang, Ta-Chen. 2006. “Courts, Banks, and Credit Markets in Early American Development.” Ph.D. Dissertation. Stanford University.

Wood, Gordon. 1991. Radicalism of the American Revolution. New York: Random House.

Wright, Robert. 2008. One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe. New York: McGraw Hill.

Yenawine, Bruce and Michele Costello. 2010. Benjamin Franklin and the Invention of Microfinance. London: Pickering & Chatto.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University and the author or co-author of seventeen books, including, with Richard Sylla, Genealogy of American Finance (Columbia University Press, 2015).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (February 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Project 2000/2001

Project 2000

Each month during 2000, EH.NET published a review essay on a significant work in twentieth-century economic history. The purpose of these essays was to survey the works that have had the most influence on the field of economic history and to highlight the intellectual accomplishments of twentieth-century economic historians. Each review essay outlines the work’s argument and findings, discusses the author’s methods and sources, and examines the impact that the work has had since its publication.

Nominations were received from dozens of EH.Net’s users. P2K
selection committee members were: Stanley Engerman (University of
Rochester), Alan Heston (University of Pennsylvania), Paul
Hohenberg, chair (Rensselaer Polytechnic Institute), and Mary
Yeager (University of California-Los Angeles). Project Chair was
Robert Whaples (Wake Forest University).

The review essays are:

Braudel, Fernand
Civilization and Capitalism, 15th-18th Century Time
Reviewed by Alan Heston (University of Pennsylvania).

Chandler, Alfred D. Jr.
The Visible Hand: The Managerial Revolution in American Business
Reviewed by David S. Landes (Department of Economics and History, Harvard University).

Chaudhuri, K. N.
The Trading World of Asia and the English East India Company, 1660-1760
Reviewed by Santhi Hejeebu.

Davis, Lance E. and North, Douglass C. (with the assistance of Calla Smorodin)
Institutional Change and American Economic Growth.
Reviewed by Cynthia Taft Morris (Department of Economics, Smith College and American University).

Fogel, Robert W.
Railroads and American Economic Growth: Essays in Econometric History
Reviewed by Lance Davis (California Institute of Technology).

Friedman, Milton and Schwartz, Anna Jacobson
A Monetary History of the United States, 1867-1960
Reviewed by Hugh Rockoff (Rutgers University).

Heckscher, Eli F.
Mercantilism
Reviewed by John J. McCusker (Departments of History and Economics, Trinity University).

Landes, David S.
The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present
Reviewed by Paul M. Hohenberg (Rensselaer Polytechnic Institute).

Pinchbeck, Ivy
Women Workers and the Industrial Revolution, 1750-1850 
Reviewed by Joyce Burnette (Wabash College).

Polanyi, Karl
The Great Transformation: The Political and Economic Origins of Our Time
Reviewed by Anne Mayhew (University of Tennessee).

Schumpeter, Joseph A.
Capitalism, Socialism and Democracy 
Reviewed by Thomas K. McCraw (Harvard Business School).

Weber, Max
The Protestant Ethic and the Spirit of Capitalism
Reviewed by Stanley Engerman.

Project 2001

Throughout 2001 and 2002, EH.Net published a second series
of review essays on important and influential works in economic
history. As with Project 2000, nominations for Project 2001 were
received from many EH.Net users and reviewed by the Selection
Committee: Lee Craig (North Carolina State University); Giovanni
Federico (University of Pisa); Anne McCants (MIT); Marvin McInnis
(Queen’s University); Albrecht Ritschl (University of Zurich);
Winifred Rothenberg (Tufts University); and Richard Salvucci
(Trinity College).

Project 2001 selections were:

Borah, Woodrow Wilson
New Spain’s Century of Depression
Reviewed by Richard Salvucci (Department of Economics, Trinity University).

Boserup, Ester
Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure
Reviewed by Giovanni Federico (Department of Modern History, University of Pisa).

Deane, Phyllis and W. A. Cole
British Economic Growth, 1688-1959: Trends and Structure
Reviewed by Knick Harley (Department of Economics, University of Western Ontario).

Fogel, Robert and Stanley Engerman
Time on the Cross: The Economics of American Negro Slavery
Reviewed by Thomas Weiss (Department of Economics, University of Kansas).

Gerschenkron, Alexander
Economic Backwardness in Historical Perspective
Review Essay by Albert Fishlow (International Affairs, Columbia University).

Horwitz, Morton
The Transformation of American Law, 1780-1860
Reviewed by Winifred B. Rothenberg (Department of Economics, Tufts University).

Kuznets, Simon
Modern Economic Growth: Rate, Structure and Spread
Reviewed by Richard A. Easterlin (Department of Economics, University of Southern California).

Le Roy Ladurie, Emmanuel
The Peasants of Languedoc
Reviewed by Anne E.C. McCants (Department of History, Massachusetts Institute of Technology).

North, Douglass and Robert Paul Thomas
The Rise of the Western World: A New Economic History
Reviewed by Philip R. P. Coelho (Department of Economics, Ball State University).

de Vries, Jan
The Economy of Europe in an Age of Crisis, 1600-1750
Review Essay by George Grantham (Department of Economics, McGill University).

Temin, Peter
The Jacksonian Economy
Reviewed by Richard Sylla (Department of Economics, Stern School of Business, New York University).

Wrigley, E. A. and R. S. Schofield
The Population History of England, 1541-1871: A Reconstruction

Project Coordinator and Editor: Robert Whaples (Wake Forest
University)

Antebellum Banking in the United States

Howard Bodenhorn, Lafayette College

The first legitimate commercial bank in the United States was the Bank of North America founded in 1781. Encouraged by Alexander Hamilton, Robert Morris persuaded the Continental Congress to charter the bank, which loaned to the cash-strapped Revolutionary government as well as private citizens, mostly Philadelphia merchants. The possibilities of commercial banking had been widely recognized by many colonists, but British law forbade the establishment of commercial, limited-liability banks in the colonies. Given that many of the colonists’ grievances against Parliament centered on economic and monetary issues, it is not surprising that one of the earliest acts of the Continental Congress was the establishment of a bank.

The introduction of banking to the U.S. was viewed as an important first step in forming an independent nation because banks supplied a medium of exchange (banknotes1 and deposits) in an economy perpetually strangled by shortages of specie money and credit, because they animated industry, and because they fostered wealth creation and promoted well-being. In the last case, contemporaries typically viewed banks as an integral part of a wider system of government-sponsored commercial infrastructure. Like schools, bridges, road, canals, river clearing and harbor improvements, the benefits of banks were expected to accrue to everyone even if dividends accrued only to shareholders.

Financial Sector Growth

By 1800 each major U.S. port city had at least one commercial bank serving the local mercantile community. As city banks proved themselves, banking spread into smaller cities and towns and expanded their clientele. Although most banks specialized in mercantile lending, others served artisans and farmers. In 1820 there were 327 commercial banks and several mutual savings banks that promoted thrift among the poor. Thus, at the onset of the antebellum period (defined here as the period between 1820 and 1860), urban residents were familiar with the intermediary function of banks and used bank-supplied currencies (deposits and banknotes) for most transactions. Table 1 reports the number of banks and the value of loans outstanding at year end between 1820 and 1860. During the era, the number of banks increased from 327 to 1,562 and total loans increased from just over $55.1 million to $691.9 million. Bank-supplied credit in the U.S. economy increased at a remarkable annual average rate of 6.3 percent. Growth in the financial sector, then outpaced growth in aggregate economic activity. Nominal gross domestic product increased an average annual rate of about 4.3 percent over the same interval. This essay discusses how regional regulatory structures evolved as the banking sector grew and radiated out from northeastern cities to the hinterlands.

Table 1

Number of Banks and Total Loans, 1820-1860

Year Banks Loans ($ millions)
1820 327 55.1
1821 273 71.9
1822 267 56.0
1823 274 75.9
1824 300 73.8
1825 330 88.7
1826 331 104.8
1827 333 90.5
1828 355 100.3
1829 369 103.0
1830 381 115.3
1831 424 149.0
1832 464 152.5
1833 517 222.9
1834 506 324.1
1835 704 365.1
1836 713 457.5
1837 788 525.1
1838 829 485.6
1839 840 492.3
1840 901 462.9
1841 784 386.5
1842 692 324.0
1843 691 254.5
1844 696 264.9
1845 707 288.6
1846 707 312.1
1847 715 310.3
1848 751 344.5
1849 782 332.3
1850 824 364.2
1851 879 413.8
1852 913 429.8
1853 750 408.9
1854 1208 557.4
1855 1307 576.1
1856 1398 634.2
1857 1416 684.5
1858 1422 583.2
1859 1476 657.2
1860 1562 691.9

Sources: Fenstermaker (1965); U.S. Comptroller of the Currency (1931).

Adaptability

As important as early American banks were in the process of capital accumulation, perhaps their most notable feature was their adaptability. Kuznets (1958) argues that one measure of the financial sector’s value is how and to what extent it evolves with changing economic conditions. Put in place to perform certain functions under one set of economic circumstances, how did it alter its behavior and service the needs of borrowers as circumstances changed. One benefit of the federalist U.S. political system was that states were given the freedom to establish systems reflecting local needs and preferences. While the political structure deserves credit in promoting regional adaptations, North (1994) credits the adaptability of America’s formal rules and informal constraints that rewarded adventurism in the economic, as well as the noneconomic, sphere. Differences in geography, climate, crop mix, manufacturing activity, population density and a host of other variables were reflected in different state banking systems. Rhode Island’s banks bore little resemblance to those in far away Louisiana or Missouri, or even those in neighboring Connecticut. Each state’s banks took a different form, but their purpose was the same; namely, to provide the state’s citizens with monetary and intermediary services and to promote the general economic welfare. This section provides a sketch of regional differences. A more detailed discussion can be found in Bodenhorn (2002).

State Banking in New England

New England’s banks most resemble the common conception of the antebellum bank. They were relatively small, unit banks; their stock was closely held; they granted loans to local farmers, merchants and artisans with whom the bank’s managers had more than a passing familiarity; and the state took little direct interest in their daily operations.

Of the banking systems put in place in the antebellum era, New England’s is typically viewed as the most stable and conservative. Friedman and Schwartz (1986) attribute their stability to an Old World concern with business reputations, familial ties, and personal legacies. New England was long settled, its society well established, and its business community mature and respected throughout the Atlantic trading network. Wealthy businessmen and bankers with strong ties to the community — like the Browns of Providence or the Bowdoins of Boston — emphasized stability not just because doing so benefited and reflected well on them, but because they realized that bad banking was bad for everyone’s business.

Besides their reputation for soundness, the two defining characteristics of New England’s early banks were their insider nature and their small size. The typical New England bank was small compared to banks in other regions. Table 2 shows that in 1820 the average Massachusetts country bank was about the same size as a Pennsylvania country bank, but both were only about half the size of a Virginia bank. A Rhode Island bank was about one-third the size of a Massachusetts or Pennsylvania bank and a mere one-sixth as large as Virginia’s banks. By 1850 the average Massachusetts bank declined relatively, operating on about two-thirds the paid-in capital of a Pennsylvania country bank. Rhode Island’s banks also shrank relative to Pennsylvania’s and were tiny compared to the large branch banks in the South and West.

Table 2

Average Bank Size by Capital and Lending in 1820 and 1850 Selected States and Cities

(in $ thousands)

1820Capital Loans 1850 Capital Loans
Massachusetts $374.5 $480.4 $293.5 $494.0
except Boston 176.6 230.8 170.3 281.9
Rhode Island 95.7 103.2 186.0 246.2
except Providence 60.6 72.0 79.5 108.5
New York na na 246.8 516.3
except NYC na na 126.7 240.1
Pennsylvania 221.8 262.9 340.2 674.6
except Philadelphia 162.6 195.2 246.0 420.7
Virginia1,2 351.5 340.0 270.3 504.5
South Carolina2 na na 938.5 1,471.5
Kentucky2 na na 439.4 727.3

Notes: 1 Virginia figures for 1822. 2 Figures represent branch averages.

Source: Bodenhorn (2002).

Explanations for New England Banks’ Relatively Small Size

Several explanations have been offered for the relatively small size of New England’s banks. Contemporaries attributed it to the New England states’ propensity to tax bank capital, which was thought to work to the detriment of large banks. They argued that large banks circulated fewer banknotes per dollar of capital. The result was a progressive tax that fell disproportionately on large banks. Data compiled from Massachusetts’s bank reports suggest that large banks were not disadvantaged by the capital tax. It was a fact, as contemporaries believed, that large banks paid higher taxes per dollar of circulating banknotes, but a potentially better benchmark is the tax to loan ratio because large banks made more use of deposits than small banks. The tax to loan ratio was remarkably constant across both bank size and time, averaging just 0.6 percent between 1834 and 1855. Moreover, there is evidence of constant to modestly increasing returns to scale in New England banking. Large banks were generally at least as profitable as small banks in all years between 1834 and 1860, and slightly more so in many.

Lamoreaux (1993) offers a different explanation for the modest size of the region’s banks. New England’s banks, she argues, were not impersonal financial intermediaries. Rather, they acted as the financial arms of extended kinship trading networks. Throughout the antebellum era banks catered to insiders: directors, officers, shareholders, or business partners and kin of directors, officers, shareholders and business partners. Such preferences toward insiders represented the perpetuation of the eighteenth-century custom of pooling capital to finance family enterprises. In the nineteenth century the practice continued under corporate auspices. The corporate form, in fact, facilitated raising capital in greater amounts than the family unit could raise on its own. But because the banks kept their loans within a relatively small circle of business connections, it was not until the late nineteenth century that bank size increased.2

Once the kinship orientation of the region’s banks was established it perpetuated itself. When outsiders could not obtain loans from existing insider organizations, they formed their own insider bank. In doing so the promoters assured themselves of a steady supply of credit and created engines of economic mobility for kinship networks formerly closed off from many sources of credit. State legislatures accommodated the practice through their liberal chartering policies. By 1860, Rhode Island had 91 banks, Maine had 68, New Hampshire 51, Vermont 44, Connecticut 74 and Massachusetts 178.

The Suffolk System

One of the most commented on characteristic of New England’s banking system was its unique regional banknote redemption and clearing mechanism. Established by the Suffolk Bank of Boston in the early 1820s, the system became known as the Suffolk System. With so many banks in New England, each issuing it own form of currency, it was sometimes difficult for merchants, farmers, artisans, and even other bankers, to discriminate between real and bogus banknotes, or to discriminate between good and bad bankers. Moreover, the rural-urban terms of trade pulled most banknotes toward the region’s port cities. Because country merchants and farmers were typically indebted to city merchants, country banknotes tended to flow toward the cities, Boston more so than any other. By the second decade of the nineteenth century, country banknotes became a constant irritant for city bankers. City bankers believed that country issues displaced Boston banknotes in local transactions. More irritating though was the constant demand by the city banks’ customers to accept country banknotes on deposit, which placed the burden of interbank clearing on the city banks.3

In 1803 the city banks embarked on a first attempt to deal with country banknotes. They joined together, bought up a large quantity of country banknotes, and returned them to the country banks for redemption into specie. This effort to reduce country banknote circulation encountered so many obstacles that it was quickly abandoned. Several other schemes were hatched in the next two decades, but none proved any more successful than the 1803 plan.

The Suffolk Bank was chartered in 1818 and within a year embarked on a novel scheme to deal with the influx of country banknotes. The Suffolk sponsored a consortium of Boston bank in which each member appointed the Suffolk as its lone agent in the collection and redemption of country banknotes. In addition, each city bank contributed to a fund used to purchase and redeem country banknotes. When the Suffolk collected a large quantity of a country bank’s notes, it presented them for immediate redemption with an ultimatum: Join in a regular and organized redemption system or be subject to further unannounced redemption calls.4 Country banks objected to the Suffolk’s proposal, because it required them to keep noninterest-earning assets on deposit with the Suffolk in amounts equal to their average weekly redemptions at the city banks. Most country banks initially refused to join the redemption network, but after the Suffolk made good on a few redemption threats, the system achieved near universal membership.

Early interpretations of the Suffolk system, like those of Redlich (1949) and Hammond (1957), portray the Suffolk as a proto-central bank, which acted as a restraining influence that exercised some control over the region’s banking system and money supply. Recent studies are less quick to pronounce the Suffolk a successful experiment in early central banking. Mullineaux (1987) argues that the Suffolk’s redemption system was actually self-defeating. Instead of making country banknotes less desirable in Boston, the fact that they became readily redeemable there made them perfect substitutes for banknotes issued by Boston’s prestigious banks. This policy made country banknotes more desirable, which made it more, not less, difficult for Boston’s banks to keep their own notes in circulation.

Fenstermaker and Filer (1986) also contest the long-held view that the Suffolk exercised control over the region’s money supply (banknotes and deposits). Indeed, the Suffolk’s system was self-defeating in this regard as well. By increasing confidence in the value of a randomly encountered banknote, people were willing to hold increases in banknotes issues. In an interesting twist on the traditional interpretation, a possible outcome of the Suffolk system is that New England may have grown increasingly financial backward as a direct result of the region’s unique clearing system. Because banknotes were viewed as relatively safe and easily redeemed, the next big financial innovation — deposit banking — in New England lagged far behind other regions. With such wide acceptance of banknotes, there was no reason for banks to encourage the use of deposits and little reason for consumers to switch over.

Summary: New England Banks

New England’s banking system can be summarized as follows: Small unit banks predominated; many banks catered to small groups of capitalists bound by personal and familial ties; banking was becoming increasingly interconnected with other lines of business, such as insurance, shipping and manufacturing; the state took little direct interest in the daily operations of the banks and its supervisory role amounted to little more than a demand that every bank submit an unaudited balance sheet at year’s end; and that the Suffolk developed an interbank clearing system that facilitated the use of banknotes throughout the region, but had little effective control over the region’s money supply.

Banking in the Middle Atlantic Region

Pennsylvania

After 1810 or so, many bank charters were granted in New England, but not because of the presumption that the bank would promote the commonweal. Charters were granted for the personal gain of the promoter and the shareholders and in proportion to the personal, political and economic influence of the bank’s founders. No New England state took a significant financial stake in its banks. In both respects, New England differed markedly from states in other regions. From the beginning of state-chartered commercial banking in Pennsylvania, the state took a direct interest in the operations and profits of its banks. The Bank of North America was the obvious case: chartered to provide support to the colonial belligerents and the fledgling nation. Because the bank was popularly perceived to be dominated by Philadelphia’s Federalist merchants, who rarely loaned to outsiders, support for the bank waned.5 After a pitched political battle in which the Bank of North America’s charter was revoked and reinstated, the legislature chartered the Bank of Pennsylvania in 1793. As its name implies, this bank became the financial arm of the state. Pennsylvania subscribed $1 million of the bank’s capital, giving it the right to appoint six of thirteen directors and a $500,000 line of credit. The bank benefited by becoming the state’s fiscal agent, which guaranteed a constant inflow of deposits from regular treasury operations as well as western land sales.

By 1803 the demand for loans outstripped the existing banks’ supply and a plan for a new bank, the Philadelphia Bank, was hatched and its promoters petitioned the legislature for a charter. The existing banks lobbied against the charter, and nearly sank the new bank’s chances until it established a precedent that lasted throughout the antebellum era. Its promoters bribed the legislature with a payment of $135,000 in return for the charter, handed over one-sixth of its shares, and opened a line of credit for the state.

Between 1803 and 1814, the only other bank chartered in Pennsylvania was the Farmers and Mechanics Bank of Philadelphia, which established a second substantive precedent that persisted throughout the era. Existing banks followed a strict real-bills lending policy, restricting lending to merchants at very short terms of 30 to 90 days.6 Their adherence to a real-bills philosophy left a growing community of artisans, manufacturers and farmers on the outside looking in. The Farmers and Mechanics Bank was chartered to serve excluded groups. At least seven of its thirteen directors had to be farmers, artisans or manufacturers and the bank was required to lend the equivalent of 10 percent of its capital to farmers on mortgage for at least one year. In later years, banks were established to provide services to even more narrowly defined groups. Within a decade or two, most substantial port cities had banks with names like Merchants Bank, Planters Bank, Farmers Bank, and Mechanics Bank. By 1860 it was common to find banks with names like Leather Manufacturers Bank, Grocers Bank, Drovers Bank, and Importers Bank. Indeed, the Emigrant Savings Bank in New York City served Irish immigrants almost exclusively. In the other instances, it is not known how much of a bank’s lending was directed toward the occupational group included in its name. The adoption of such names may have been marketing ploys as much as mission statements. Only further research will reveal the answer.

New York

State-chartered banking in New York arrived less auspiciously than it had in Philadelphia or Boston. The Bank of New York opened in 1784, but operated without a charter and in open violation of state law until 1791 when the legislature finally sanctioned it. The city’s second bank obtained its charter surreptitiously. Alexander Hamilton was one of the driving forces behind the Bank of New York, and his long-time nemesis, Aaron Burr, was determined to establish a competing bank. Unable to get a charter from a Federalist legislature, Burr and his colleagues petitioned to incorporate a company to supply fresh water to the inhabitants of Manhattan Island. Burr tucked a clause into the charter of the Manhattan Company (the predecessor to today’s Chase Manhattan Bank) granting the water company the right to employ any excess capital in financial transactions. Once chartered, the company’s directors announced that $500,000 of its capital would be invested in banking.7 Thereafter, banking grew more quickly in New York than in Philadelphia, so that by 1812 New York had seven banks compared to the three operating in Philadelphia.

Deposit Insurance

Despite its inauspicious banking beginnings, New York introduced two innovations that influenced American banking down to the present. The Safety Fund system, introduced in 1829, was the nation’s first experiment in bank liability insurance (similar to that provided by the Federal Deposit Insurance Corporation today). The 1829 act authorized the appointment of bank regulators charged with regular inspections of member banks. An equally novel aspect was that it established an insurance fund insuring holders of banknotes and deposits against loss from bank failure. Ultimately, the insurance fund was insufficient to protect all bank creditors from loss during the panic of 1837 when eleven failures in rapid succession all but bankrupted the insurance fund, which delayed noteholder and depositor recoveries for months, even years. Even though the Safety Fund failed to provide its promised protections, it was an important episode in the subsequent evolution of American banking. Several Midwestern states instituted deposit insurance in the early twentieth century, and the federal government adopted it after the banking panics in the 1930s resulted in the failure of thousands of banks in which millions of depositors lost money.

“Free Banking”

Although the Safety Fund was nearly bankrupted in the late 1830s, it continued to insure a number of banks up to the mid 1860s when it was finally closed. No new banks joined the Safety Fund system after 1838 with the introduction of free banking — New York’s second significant banking innovation. Free banking represented a compromise between those most concerned with the underlying safety and stability of the currency and those most concerned with competition and freeing the country’s entrepreneurs from unduly harsh and anticompetitive restraints. Under free banking, a prospective banker could start a bank anywhere he saw fit, provided he met a few regulatory requirements. Each free bank’s capital was invested in state or federal bonds that were turned over to the state’s treasurer. If a bank failed to redeem even a single note into specie, the treasurer initiated bankruptcy proceedings and banknote holders were reimbursed from the sale of the bonds.

Actually Michigan preempted New York’s claim to be the first free-banking state, but Michigan’s 1837 law was modeled closely after a bill then under debate in New York’s legislature. Ultimately, New York’s influence was profound in this as well, because free banking became one of the century’s most widely copied financial innovations. By 1860 eighteen states adopted free banking laws closely resembling New York’s law. Three other states introduced watered-down variants. Eventually, the post-Civil War system of national banking adopted many of the substantive provisions of New York’s 1838 act.

Both the Safety Fund system and free banking were attempts to protect society from losses resulting from bank failures and to entice people to hold financial assets. Banks and bank-supplied currency were novel developments in the hinterlands in the early nineteenth century and many rural inhabitants were skeptical about the value of small pieces of paper. They were more familiar with gold and silver. Getting them to exchange one for the other was a slow process, and one that relied heavily on trust. But trust was built slowly and destroyed quickly. The failure of a single bank could, in a week, destroy the confidence in a system built up over a decade. New York’s experiments were designed to mitigate, if not eliminate, the negative consequences of bank failures. New York’s Safety Fund, then, differed in the details but not in intent, from New England’s Suffolk system. Bankers and legislators in each region grappled with the difficult issue of protecting a fragile but vital sector of the economy. Each region responded to the problem differently. The South and West settled on yet another solution.

Banking in the South and West

One distinguishing characteristic of southern and western banks was their extensive branch networks. Pennsylvania provided for branch banking in the early nineteenth century and two banks jointly opened about ten branches. In both instances, however, the branches became a net liability. The Philadelphia Bank opened four branches in 1809 and by 1811 was forced to pass on its semi-annual dividends because losses at the branches offset profits at the Philadelphia office. At bottom, branch losses resulted from a combination of ineffective central office oversight and unrealistic expectations about the scale and scope of hinterland lending. Philadelphia’s bank directors instructed branch managers to invest in high-grade commercial paper or real bills. Rural banks found a limited number of such lending opportunities and quickly turned to mortgage-based lending. Many of these loans fell into arrears and were ultimately written when land sales faltered.

Branch Banking

Unlike Pennsylvania, where branch banking failed, branch banks throughout the South and West thrived. The Bank of Virginia, founded in 1804, was the first state-chartered branch bank and up to the Civil War branch banks served the state’s financial needs. Several small, independent banks were chartered in the 1850s, but they never threatened the dominance of Virginia’s “Big Six” banks. Virginia’s branch banks, unlike Pennsylvania’s, were profitable. In 1821, for example, the net return to capital at the Farmers Bank of Virginia’s home office in Richmond was 5.4 percent. Returns at its branches ranged from a low of 3 percent at Norfolk (which was consistently the low-profit branch) to 9 percent in Winchester. In 1835, the last year the bank reported separate branch statistics, net returns to capital at the Farmers Bank’s branches ranged from 2.9 and 11.7 percent, with an average of 7.9 percent.

The low profits at the Norfolk branch represent a net subsidy from the state’s banking sector to the political system, which was not immune to the same kind of infrastructure boosterism that erupted in New York, Pennsylvania, Maryland and elsewhere. In the immediate post-Revolutionary era, the value of exports shipped from Virginia’s ports (Norfolk and Alexandria) slightly exceeded the value shipped from Baltimore. In the 1790s the numbers turned sharply in Baltimore’s favor and Virginia entered the internal-improvements craze and the battle for western shipments. Banks represented the first phase of the state’s internal improvements plan in that many believed that Baltimore’s new-found advantage resulted from easier credit supplied by the city’s banks. If Norfolk, with one of the best natural harbors on the North American Atlantic coast, was to compete with other port cities, it needed banks and the state required three of the state’s Big Six branch banks to operate branches there. Despite its natural advantages, Norfolk never became an important entrepot and it probably had more bank capital than it required. This pattern was repeated elsewhere. Other states required their branch banks to serve markets such as Memphis, Louisville, Natchez and Mobile that might, with the proper infrastructure grow into important ports.

State Involvement and Intervention in Banking

The second distinguishing characteristic of southern and western banking was sweeping state involvement and intervention. Virginia, for example, interjected the state into the banking system by taking significant stakes in its first chartered banks (providing an implicit subsidy) and by requiring them, once they established themselves, to subsidize the state’s continuing internal improvements programs of the 1820s and 1830s. Indiana followed such a strategy. So, too, did Kentucky, Louisiana, Mississippi, Illinois, Kentucky, Tennessee and Georgia in different degrees. South Carolina followed a wholly different strategy. On one hand, it chartered several banks in which it took no financial interest. On the other, it chartered the Bank of the State of South Carolina, a bank wholly owned by the state and designed to lend to planters and farmers who complained constantly that the state’s existing banks served only the urban mercantile community. The state-owned bank eventually divided its lending between merchants, farmers and artisans and dominated South Carolina’s financial sector.

The 1820s and 1830s witnessed a deluge of new banks in the South and West, with a corresponding increase in state involvement. No state matched Louisiana’s breadth of involvement in the 1830s when it chartered three distinct types of banks: commercial banks that served merchants and manufacturers; improvement banks that financed various internal improvements projects; and property banks that extended long-term mortgage credit to planters and other property holders. Louisiana’s improvement banks included the New Orleans Canal and Banking Company that built a canal connecting Lake Ponchartrain to the Mississippi River. The Exchange and Banking Company and the New Orleans Improvement and Banking Company were required to build and operate hotels. The New Orleans Gas Light and Banking Company constructed and operated gas streetlights in New Orleans and five other cities. Finally, the Carrollton Railroad and Banking Company and the Atchafalaya Railroad and Banking Company were rail construction companies whose bank subsidiaries subsidized railroad construction.

“Commonwealth Ideal” and Inflationary Banking

Louisiana’s 1830s banking exuberance reflected what some historians label the “commonwealth ideal” of banking; that is, the promotion of the general welfare through the promotion of banks. Legislatures in the South and West, however, never demonstrated a greater commitment to the commonwealth ideal than during the tough times of the early 1820s. With the collapse of the post-war land boom in 1819, a political coalition of debt-strapped landowners lobbied legislatures throughout the region for relief and its focus was banking. Relief advocates lobbied for inflationary banking that would reduce the real burden of debts taken on during prior flush times.

Several western states responded to these calls and chartered state-subsidized and state-managed banks designed to reinflate their embattled economies. Chartered in 1821, the Bank of the Commonwealth of Kentucky loaned on mortgages at longer than customary periods and all Kentucky landowners were eligible for $1,000 loans. The loans allowed landowners to discharge their existing debts without being forced to liquidate their property at ruinously low prices. Although the bank’s notes were not redeemable into specie, they were given currency in two ways. First, they were accepted at the state treasury in tax payments. Second, the state passed a law that forced creditors to accept the notes in payment of existing debts or agree to delay collection for two years.

The commonwealth ideal was not unique to Kentucky. During the depression of the 1820s, Tennessee chartered the State Bank of Tennessee, Illinois chartered the State Bank of Illinois and Louisiana chartered the Louisiana State Bank. Although they took slightly different forms, they all had the same intent; namely, to relieve distressed and embarrassed farmers, planters and land owners. What all these banks shared in common was the notion that the state should promote the general welfare and economic growth. In this instance, and again during the depression of the 1840s, state-owned banks were organized to minimize the transfer of property when economic conditions demanded wholesale liquidation. Such liquidation would have been inefficient and imposed unnecessary hardship on a large fraction of the population. To the extent that hastily chartered relief banks forestalled inefficient liquidation, they served their purpose. Although most of these banks eventually became insolvent, requiring taxpayer bailouts, we cannot label them unsuccessful. They reinflated economies and allowed for an orderly disposal of property. Determining if the net benefits were positive or negative requires more research, but for the moment we are forced to accept the possibility that the region’s state-owned banks of the 1820s and 1840s advanced the commonweal.

Conclusion: Banks and Economic Growth

Despite notable differences in the specific form and structure of each region’s banking system, they were all aimed squarely at a common goal; namely, realizing that region’s economic potential. Banks helped achieve the goal in two ways. First, banks monetized economies, which reduced the costs of transacting and helped smooth consumption and production across time. It was no longer necessary for every farm family to inventory their entire harvest. They could sell most of it, and expend the proceeds on consumption goods as the need arose until the next harvest brought a new cash infusion. Crop and livestock inventories are prone to substantial losses and an increased use of money reduced them significantly. Second, banks provided credit, which unleashed entrepreneurial spirits and talents. A complete appreciation of early American banking recognizes the banks’ contribution to antebellum America’s economic growth.

Bibliographic Essay

Because of the large number of sources used to construct the essay, the essay was more readable and less cluttered by including a brief bibliographic essay. A full bibliography is included at the end.

Good general histories of antebellum banking include Dewey (1910), Fenstermaker (1965), Gouge (1833), Hammond (1957), Knox (1903), Redlich (1949), and Trescott (1963). If only one book is read on antebellum banking, Hammond’s (1957) Pulitzer-Prize winning book remains the best choice.

The literature on New England banking is not particularly large, and the more important historical interpretations of state-wide systems include Chadbourne (1936), Hasse (1946, 1957), Simonton (1971), Spencer (1949), and Stokes (1902). Gras (1937) does an excellent job of placing the history of a single bank within the larger regional and national context. In a recent book and a number of articles Lamoreaux (1994 and sources therein) provides a compelling and eminently readable reinterpretation of the region’s banking structure. Nathan Appleton (1831, 1856) provides a contemporary observer’s interpretation, while Walker (1857) provides an entertaining if perverse and satirical history of a fictional New England bank. Martin (1969) provides details of bank share prices and dividend payments from the establishment of the first banks in Boston through the end of the nineteenth century. Less technical studies of the Suffolk system include Lake (1947), Trivoli (1979) and Whitney (1878); more technical interpretations include Calomiris and Kahn (1996), Mullineaux (1987), and Rolnick, Smith and Weber (1998).

The literature on Middle Atlantic banking is huge, but the better state-level histories include Bryan (1899), Daniels (1976), and Holdsworth (1928). The better studies of individual banks include Adams (1978), Lewis (1882), Nevins (1934), and Wainwright (1953). Chaddock (1910) provides a general history of the Safety Fund system. Golembe (1960) places it in the context of modern deposit insurance, while Bodenhorn (1996) and Calomiris (1989) provide modern analyses. A recent revival of interest in free banking has brought about a veritable explosion in the number of studies on the subject, but the better introductory ones remain Rockoff (1974, 1985), Rolnick and Weber (1982, 1983), and Dwyer (1996).

The literature on southern and western banking is large and of highly variable quality, but I have found the following to be the most readable and useful general sources: Caldwell (1935), Duke (1895), Esary (1912), Golembe (1978), Huntington (1915), Green (1972), Lesesne (1970), Royalty (1979), Schweikart (1987) and Starnes (1931).

References and Further Reading

Adams, Donald R., Jr. Finance and Enterprise in Early America: A Study of Stephen Girard’s Bank, 1812-1831. Philadelphia: University of Pennsylvania Press, 1978.

Alter, George, Claudia Goldin and Elyce Rotella. “The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth-Century.” Journal of Economic History 54, no. 4 (December 1994): 735-67.

Appleton, Nathan. A Defence of Country Banks: Being a Reply to a Pamphlet Entitled ‘An Examination of the Banking System of Massachusetts, in Reference to the Renewal of the Bank Charters.’ Boston: Stimpson & Clapp, 1831.

Appleton, Nathan. Bank Bills or Paper Currency and the Banking System of Massachusetts with Remarks on Present High Prices. Boston: Little, Brown and Company, 1856.

Berry, Thomas Senior. Revised Annual Estimates of American Gross National Product: Preliminary Estimates of Four Major Components of Demand, 1789-1889. Richmond: University of Richmond Bostwick Paper No. 3, 1978.

Bodenhorn, Howard. “Zombie Banks and the Demise of New York’s Safety Fund.” Eastern Economic Journal 22, no. 1 (1996): 21-34.

Bodenhorn, Howard. “Private Banking in Antebellum Virginia: Thomas Branch & Sons of Petersburg.” Business History Review 71, no. 4 (1997): 513-42.

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. Cambridge and New York: Cambridge University Press, 2000.

Bodenhorn, Howard. State Banking in Early America: A New Economic History. New York: Oxford University Press, 2002.

Bryan, Alfred C. A History of State Banking in Maryland. Baltimore: Johns Hopkins University Press, 1899.

Caldwell, Stephen A. A Banking History of Louisiana. Baton Rouge: Louisiana State University Press, 1935.

Calomiris, Charles W. “Deposit Insurance: Lessons from the Record.” Federal Reserve Bank of Chicago Economic Perspectives 13 (1989): 10-30.

Calomiris, Charles W., and Charles Kahn. “The Efficiency of Self-Regulated Payments Systems: Learnings from the Suffolk System.” Journal of Money, Credit, and Banking 28, no. 4 (1996): 766-97.

Chadbourne, Walter W. A History of Banking in Maine, 1799-1930. Orono: University of Maine Press, 1936.

Chaddock, Robert E. The Safety Fund Banking System in New York, 1829-1866. Washington, D.C.: Government Printing Office, 1910.

Daniels, Belden L. Pennsylvania: Birthplace of Banking in America. Harrisburg: Pennsylvania Bankers Association, 1976.

Davis, Lance, and Robert E. Gallman. “Capital Formation in the United States during the Nineteenth Century.” In Cambridge Economic History of Europe (Vol. 7, Part 2), edited by Peter Mathias and M.M. Postan, 1-69. Cambridge: Cambridge University Press, 1978.

Davis, Lance, and Robert E. Gallman. “Savings, Investment, and Economic Growth: The United States in the Nineteenth Century.” In Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R.M. Hartwell, edited by John A. James and Mark Thomas, 202-29. Chicago: University of Chicago Press, 1994.

Dewey, Davis R. State Banking before the Civil War. Washington, D.C.: Government Printing Office, 1910.

Duke, Basil W. History of the Bank of Kentucky, 1792-1895. Louisville: J.P. Morton, 1895.

Dwyer, Gerald P., Jr. “Wildcat Banking, Banking Panics, and Free Banking in the United States.” Federal Reserve Bank of Atlanta Economic Review 81, no. 3 (1996): 1-20.

Engerman, Stanley L., and Robert E. Gallman. “U.S. Economic Growth, 1783-1860.” Research in Economic History 8 (1983): 1-46.

Esary, Logan. State Banking in Indiana, 1814-1873. Indiana University Studies No. 15. Bloomington: Indiana University Press, 1912.

Fenstermaker, J. Van. The Development of American Commercial Banking, 1782-1837. Kent, Ohio: Kent State University, 1965.

Fenstermaker, J. Van, and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money, 1791-1837.” Journal of Money, Credit, and Banking 18, no. 1 (1986): 28-40.

Friedman, Milton, and Anna J. Schwartz. “Has the Government Any Role in Money?” Journal of Monetary Economics 17, no. 1 (1986): 37-62.

Gallman, Robert E. “American Economic Growth before the Civil War: The Testimony of the Capital Stock Estimates.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 79-115. Chicago: University of Chicago Press, 1992.

Goldsmith, Raymond. Financial Structure and Development. New Haven: Yale University Press, 1969.

Golembe, Carter H. “The Deposit Insurance Legislation of 1933: An Examination of its Antecedents and Purposes.” Political Science Quarterly 76, no. 2 (1960): 181-200.

Golembe, Carter H. State Banks and the Economic Development of the West. New York: Arno Press, 1978.

Gouge, William M. A Short History of Paper Money and Banking in the United States. Philadelphia: T.W. Ustick, 1833.

Gras, N.S.B. The Massachusetts First National Bank of Boston, 1784-1934. Cambridge, MA: Harvard University Press, 1937.

Green, George D. Finance and Economic Development in the Old South: Louisiana Banking, 1804-1861. Stanford: Stanford University Press, 1972.

Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton: Princeton University Press, 1957.

Hasse, William F., Jr. A History of Banking in New Haven, Connecticut. New Haven: privately printed, 1946.

Hasse, William F., Jr. A History of Money and Banking in Connecticut. New Haven: privately printed, 1957.

Holdsworth, John Thom. Financing an Empire: History of Banking in Pennsylvania. Chicago: S.J. Clarke Publishing Company, 1928.

Huntington, Charles Clifford. A History of Banking and Currency in Ohio before the Civil War. Columbus: F. J. Herr Printing Company, 1915.

Knox, John Jay. A History of Banking in the United States. New York: Bradford Rhodes & Company, 1903.

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1 Banknotes were small demonination IOUs printed by banks and circulated as currency. Modern U.S. money are simply banknotes issued by the Federal Reserve Bank, which has a monopoly privilege in the issue of legal tender currency. In antebellum American, when a bank made a loan, the borrower was typically handed banknotes with a face value equal to the dollar value of the loan. The borrower then spent these banknotes in purchasing goods and services, putting them into circulation. Contemporary law held that banks were required to redeem banknotes into gold and silver legal tender on demand. Banks found it profitable to issue notes because they typically held about 30 percent of the total value of banknotes in circulation as reserves. Thus, banks were able to leverage $30 in gold and silver into $100 in loans that returned about 7 percent interest on average.

2 Paul Lockard (2000) challenges Lamoreaux’s interpretation. In a study of 4 banks in the Connecticut River valley, Lockard finds that insiders did not dominate these banks’ resources. As provocative as Lockard’s findings are, he draws conclusions from a small and unrepresentative sample. Two of his four sample banks were savings banks, which were designed as quasi-charitable organizations designed to encourage savings by the working classes and provide small loans. Thus, Lockard’s sample is effectively reduced to two banks. At these two banks, he identifies about 10 percent of loans as insider loans, but readily admits that he cannot always distinguish between insiders and outsiders. For a recent study of how early Americans used savings banks, see Alter, Goldin and Rotella (1994). The literature on savings banks is so large that it cannot be be given its due here.

3 Interbank clearing involves the settling of balances between banks. Modern banks cash checks drawn on other banks and credit the funds to the depositor. The Federal Reserve system provides clearing services between banks. The accepting bank sends the checks to the Federal Reserve, who credits the sending bank’s accounts and sends the checks back to the bank on which they were drawn for reimbursement. In the antebellum era, interbank clearing involved sending banknotes back to issuing banks. Because New England had so many small and scattered banks, the costs of returning banknotes to their issuers were large and sometimes avoided by recirculating notes of distant banks rather than returning them. Regular clearings and redemptions served an important purpose, however, because they kept banks in touch with the current market conditions. A massive redemption of notes was indicative of a declining demand for money and credit. Because the bank’s reserves were drawn down with the redemptions, it was forced to reduce its volume of loans in accord with changing demand conditions.

4 The law held that banknotes were redeemable on demand into gold or silver coin or bullion. If a bank refused to redeem even a single $1 banknote, the banknote holder could have the bank closed and liquidated to recover his or her claim against it.

5 Rappaport (1996) found that the bank’s loans were about equally divided between insiders (shareholders and shareholders’ family and business associates) and outsiders, but nonshareholders received loans about 30 percent smaller than shareholders. The issue remains about whether this bank was an “insider” bank, and depends largely on one’s definition. Any modern bank which made half of its loans to shareholders and their families would be viewed as an “insider” bank. It is less clear where the line can be usefully drawn for antebellum banks.

6 Real-bills lending followed from a nineteenth-century banking philosophy, which held that bank lending should be used to finance the warehousing or wholesaling of already-produced goods. Loans made on these bases were thought to be self-liquidating in that the loan was made against readily sold collateral actually in the hands of a merchant. Under the real-bills doctrine, the banks’ proper functions were to bridge the gap between production and retail sale of goods. A strict adherence to real-bills tenets excluded loans on property (mortgages), loans on goods in process (trade credit), or loans to start-up firms (venture capital). Thus, real-bills lending prescribed a limited role for banks and bank credit. Few banks were strict adherents to the doctrine, but many followed it in large part.

7 Robert E. Wright (1998) offers a different interpretation, but notes that Burr pushed the bill through at the end of a busy legislative session so that many legislators voted on the bill without having read it thoroughly or at all.

Citation: Bodenhorn, Howard. “Antebellum Banking in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL http://eh.net/encyclopedia/antebellum-banking-in-the-united-states/

The Protestant Ethic Thesis

Donald Frey, Wake Forest University

German sociologist Max Weber (1864 -1920) developed the Protestant-ethic thesis in two journal articles published in 1904-05. The English translation appeared in book form as The Protestant Ethic and the Spirit of Capitalism in 1930. Weber argued that Reformed (i.e., Calvinist) Protestantism was the seedbed of character traits and values that under-girded modern capitalism. This article summarizes Weber’s formulation, considers criticisms of Weber’s thesis, and reviews evidence of linkages between cultural values and economic growth.

Outline of Weber’s Thesis

Weber emphasized that money making as a calling had been “contrary to the ethical feelings of whole epochs…” (Weber 1930, p.73; further Weber references by page number alone). Lacking moral support in pre-Protestant societies, business had been strictly limited to “the traditional manner of life, the traditional rate of profit, the traditional amount of work…” (67). Yet, this pattern “was suddenly destroyed, and often entirely without any essential change in the form of organization…” Calvinism, Weber argued, changed the spirit of capitalism, transforming it into a rational and unashamed pursuit of profit for its own sake.

In an era when religion dominated all of life, Martin Luther’s (1483-1546) insistence that salvation was by God’s grace through faith had placed all vocations on the same plane. Contrary to medieval belief, religious vocations were no longer considered superior to economic vocations for only personal faith mattered with God. Nevertheless, Luther did not push this potential revolution further because he clung to a traditional, static view of economic life. John Calvin (1509-1564), or more accurately Calvinism, changed that.

Calvinism accomplished this transformation, not so much by its direct teachings, but (according to Weber) by the interaction of its core theology with human psychology. Calvin had pushed the doctrine of God’s grace to the limits of the definition: grace is a free gift, something that the Giver, by definition, must be free to bestow or withhold. Under this definition, sacraments, good deeds, contrition, virtue, assent to doctrines, etc. could not influence God (104); for, if they could, that would turn grace into God’s side of a transaction instead its being a pure gift. Such absolute divine freedom, from mortal man’s perspective, however, seemed unfathomable and arbitrary (103). Thus, whether one was among those saved (the elect) became the urgent question for the average Reformed churchman according to Weber.

Uncertainty about salvation, according to Weber, had the psychological effect of producing a single-minded search for certainty. Although one could never influence God’s decision to extend or withhold election, one might still attempt to ascertain his or her status. A life that “… served to increase the glory of God” presumably flowed naturally from a state of election (114). If one glorified God and conformed to what was known of God’s requirements for this life then that might provide some evidence of election. Thus upright living, which could not earn salvation, returned as evidence of salvation.

The upshot was that the Calvinist’s living was “thoroughly rationalized in this world and dominated by the aim to add to the glory of God in earth…” (118). Such a life became a systematic living out of God’s revealed will. This singleness of purpose left no room for diversion and created what Weber called an ascetic character. “Not leisure and enjoyment, but only activity serves to increase the glory of God, according to the definite manifestations of His will” (157). Only in a calling does this focus find full expression. “A man without a calling thus lacks the systematic, methodical character which is… demanded by worldly asceticism” (161). A calling represented God’s will for that person in the economy and society.

Such emphasis on a calling was but a small step from a full-fledged capitalistic spirit. In practice, according to Weber, that small step was taken, for “the most important criterion [of a calling] is … profitableness. For if God … shows one of His elect a chance of profit, he must do it with a purpose…” (162). This “providential interpretation of profit-making justified the activities of the business man,” and led to “the highest ethical appreciation of the sober, middle-class, self-made man” (163).

A sense of calling and an ascetic ethic applied to laborers as well as to entrepreneurs and businessmen. Nascent capitalism required reliable, honest, and punctual labor (23-24), which in traditional societies had not existed (59-62). That free labor would voluntarily submit to the systematic discipline of work under capitalism required an internalized value system unlike any seen before (63). Calvinism provided this value system (178-79).

Weber’s “ascetic Protestantism” was an all-encompassing value system that shaped one’s whole life, not merely ethics on the job. Life was to be controlled the better to serve God. Impulse and those activities that encouraged impulse, such as sport or dance, were to be shunned. External finery and ornaments turned attention away from inner character and purpose; so the simpler life was better. Excess consumption and idleness were resources wasted that could otherwise glorify God. In short, the Protestant ethic ordered life according to its own logic, but also according to the needs of modern capitalism as understood by Weber.

An adequate summary requires several additional points. First, Weber virtually ignored the issue of usury or interest. This contrasts with some writers who take a church’s doctrine on usury to be the major indicator of its sympathy to capitalism. Second, Weber magnified the extent of his Protestant ethic by claiming to find Calvinist economic traits in later, otherwise non-Calvinist Protestant movements. He recalled the Methodist John Wesley’s (1703-1791) “Earn all you can, save all you can, give all you can,” and ascetic practices by followers of the eighteenth-century Moravian leader Nicholas Von Zinzendorf (1700-1760). Third, Weber thought that once established the spirit of modern capitalism could perpetuate its values without religion, citing Benjamin Franklin whose ethic already rested on utilitarian foundations. Fourth, Weber’s book showed little sympathy for either Calvinism, which he thought encouraged a “spiritual aristocracy of the predestined saints” (121), or capitalism , which he thought irrational for valuing profit for its own sake. Finally, although Weber’s thesis could be viewed as a rejoinder to Karl Marx (1818-1883), Weber claimed it was not his goal to replace Marx’s one-sided materialism with “an equally one-sided spiritualistic causal interpretation…” of capitalism (183).

Critiques of Weber

Critiques of Weber can be put into three categories. First, Weber might have been wrong about the facts: modern capitalism might have arisen before Reformed Protestantism or in places where the Reformed influence was much smaller than Weber believed. Second, Weber might have misinterpreted Calvinism or, more narrowly, Puritanism; if Reformed teachings were not what Weber supposed, then logically they might not have supported capitalism. Third, Weber might have overstated capitalism’s need for the ascetic practices produced by Reformed teachings.

On the first count, Weber has been criticized by many. During the early twentieth century, historians studied the timing of the emergence of capitalism and Calvinism in Europe. E. Fischoff (1944, 113) reviewed the literature and concluded that the “timing will show that Calvinism emerged later than capitalism where the latter became decisively powerful,” suggesting no cause-and-effect relationship. Roland Bainton also suggests that the Reformed contributed to the development of capitalism only as a “matter of circumstance” (Bainton 1952, 254). The Netherlands “had long been the mart of Christendom, before ever the Calvinists entered the land.” Finally, Kurt Samuelsson (1957) concedes that “the Protestant countries, and especially those adhering to the Reformed church, were particularly vigorous economically” (Samuelsson, 102). However, he finds much reason to discredit a cause-and-effect relationship. Sometimes capitalism preceded Calvinism (Netherlands), and sometimes lagged by too long a period to suggest causality (Switzerland). Sometimes Catholic countries (Belgium) developed about the same time as the Protestant countries. Even in America, capitalist New England was cancelled out by the South, which Samuelsson claims also shared a Puritan outlook.

Weber himself, perhaps seeking to circumvent such evidence, created a distinction between traditional capitalism and modern capitalism. The view that traditional capitalism could have existed first, but that Calvinism in some meaningful sense created modern capitalism, depends on too fine a distinction according to critics such as Samuelsson. Nevertheless, because of the impossibility of controlled experiments to firmly resolve the question, the issue will never be completely closed.

The second type of critique is that Weber misinterpreted Calvinism or Puritanism. British scholar R. H. Tawney in Religion and the Rise of Capitalism (1926) noted that Weber treated multi-faceted Reformed Christianity as though it were equivalent to late-era English Puritanism, the period from which Weber’s most telling quotes were drawn. Tawney observed that the “iron collectivism” of Calvin’s Geneva had evolved before Calvinism became harmonious with capitalism. “[Calvinism] had begun by being the very soul of authoritarian regimentation. It ended by being the vehicle of an almost Utilitarian individualism” (Tawney 1962, 226-7). Nevertheless, Tawney affirmed Weber’s point that Puritanism “braced [capitalism’s] energies and fortified its already vigorous temper.”

Roland Bainton in his own history of the Reformation disputed Weber’s psychological claims. Despite the psychological uncertainty Weber imputed to Puritans, their activism could be “not psychological and self-centered but theological and God-centered” (Bainton 1952, 252-53). That is, God ordered all of life and society, and Puritans felt obliged to act on His will. And if some Puritans scrutinized themselves for evidence of election, “the test was emphatically not economic activity as such but upright character…” He concludes that Calvinists had no particular affinity for capitalism but that they brought “vitality and drive into every area … whether they were subduing a continent, overthrowing a monarchy, or managing a business, or reforming the evils of the very order which they helped to create” (255).

Samuelsson, in a long section (27-48), argued that Puritan leaders did not truly endorse capitalistic behavior. Rather, they were ambivalent. Given that Puritan congregations were composed of businessmen and their families (who allied with Puritan churches because both wished for less royal control of society), the preachers could hardly condemn capitalism. Instead, they clarified “the moral conditions under which a prosperous, even wealthy, businessman may, despite success and wealth, become a good Christian” (38). But this, Samuelsson makes clear, was hardly a ringing endorsement of capitalism.

Criticisms that what Weber described as Puritanism was not true Puritanism, much less Calvinism, may be correct but beside the point. Puritan leaders indeed condemned exclusive devotion to one’s business because it excluded God and the common good. Thus, the Protestant ethic as described by Weber apparently would have been a deviation from pure doctrine. However, the pastors’ very attacks suggest that such a (mistaken) spirit did exist within their flocks. But such mistaken doctrine, if widespread enough, could still have contributed to the formation of the capitalist spirit.

Furthermore, any misinterpretation of Puritan orthodoxy was not entirely the fault of Puritan laypersons. Puritan theologians and preachers could place heavier emphasis on economic success and virtuous labor than critics such as Samuelsson would admit. The American preacher John Cotton (1582-1652) made clear that God “would have his best gifts improved to the best advantage.” The respected theologian William Ames (1576-1633) spoke of “taking and using rightly opportunity.” And, speaking of the idle, Cotton Mather said, “find employment for them, set them to work, and keep them at work…” A lesser standard would hardly apply to his hearers. Although these exhortations were usually balanced with admonitions to use wealth for the common good, and not to be motivated by greed, they are nevertheless clear endorsements of vigorous economic behavior. Puritan leaders may have placed boundaries around economic activism, but they still preached activism.

Frey (1998) has argued that orthodox Puritanism exhibited an inherent tension between approval of economic activity and emphasis upon the moral boundaries that define acceptable economic activity. A calling was never meant for the service of self alone but for the service of God and the common good. That is, Puritan thinkers always viewed economic activity against the backdrop of social and moral obligation. Perhaps what orthodox Puritanism contributed to capitalism was a sense of economic calling bounded by moral responsibility. In an age when Puritan theologians were widely read, Williams Ames defined the essence of the business contract as “upright dealing, by which one does sincerely intend to oblige himself…” If nothing else, business would be enhanced and made more efficient by an environment of honesty and trust.

Finally, whether Weber misinterpreted Puritanism is one issue. Whether he misinterpreted capitalism by exaggerating the importance of asceticism is another. Weber’s favorite exemplar of capitalism, Benjamin Franklin, did advocate unremitting personal thrift and discipline. No doubt, certain sectors of capitalism advanced by personal thrift, sometimes carried to the point of deprivation. Samuelsson (83-87) raises serious questions, however, that thrift could have contributed even in a minor way to the creation of the large fortunes of capitalists. Perhaps more important than personal fortunes is the finance of business. The retained earnings of successful enterprises, rather than personal savings, probably have provided a major source of funding for business ventures from the earliest days of capitalism. And successful capitalists, even in Puritan New England, have been willing to enjoy at least some of the fruits of their labors. Perhaps the spirit of capitalism was not the spirit of asceticism.

Evidence of Links between Values and Capitalism

Despite the critics, some have taken the Protestant ethic to be a contributing cause of capitalism, perhaps a necessary cause. Sociologist C. T. Jonassen (1947) understood the Protestant ethic this way. By examining a case of capitalism’s emergence in the nineteenth century, rather than in the Reformation or Puritan eras, he sought to resolve some of the uncertainties of studying earlier eras. Jonassen argued that capitalism emerged in nineteenth-century Norway only after an indigenous, Calvinist-like movement challenged the Lutheranism and Catholicism that had dominated the country. Capitalism had not “developed in Norway under centuries of Catholic and Lutheran influence,” although it appeared only “two generations after the introduction of a type of religion that produced the same behavior as Calvinism” (Jonassen, 684). Jonassen’s argument also discounted other often-cited causes of capitalism, such as the early discoveries of science, the Renaissance, or developments in post-Reformation Catholicism; these factors had existed for centuries by the nineteenth century and still had left Norway as a non-capitalist society. Only in the nineteenth century, after a Calvinist-like faith emerged, did capitalism develop.

Engerman’s (2000) review of economic historians shows that they have given little explicit attention to Weber in recent years. However, they show an interest in the impact of cultural values broadly understood on economic growth. A modified version of the Weber thesis has also found some support in empirical economic research. Granato, Inglehart and Leblang (1996, 610) incorporated cultural values in cross-country growth models on the grounds that Weber’s thesis fits the historical evidence in Europe and America. They did not focus on Protestant values, but accepted “Weber’s more general concept, that certain cultural factors influence economic growth…” Specifically they incorporated a measure of “achievement motivation” in their regressions and concluded that such motivation “is highly relevant to economic growth rates” (625). Conversely, they found that “post-materialist” (i.e., environmentalist) values are correlated with slower economic growth. Barro’s (1997, 27) modified Solow growth models also find that a “rule of law index” is associated with more rapid economic growth. This index is a proxy for such things as “effectiveness of law enforcement, sanctity of contracts and … the security of property rights.” Recalling Puritan theologian William Ames’ definition of a contract, one might conclude that a religion such as Puritanism could create precisely the cultural values that Barro finds associated with economic growth.

Conclusion

Max Weber’s thesis has attracted the attention of scholars and researchers for most of a century. Some (including Weber) deny that the Protestant ethic should be understood to be a cause of capitalism — that it merely points to a congruency between and culture’s religion and its economic system. Yet Weber, despite his own protests, wrote as though he believed that traditional capitalism would never have turned into modern capitalism except for the Protestant ethic– implying causality of sorts. Historical evidence from the Reformation era (sixteenth century) does not provide much support for a strong (causal) interpretation of the Protestant ethic. However, the emergence of a vigorous capitalism in Puritan England and its American colonies (and the case of Norway) at least keeps the case open. More recent quantitative evidence supports the hypothesis that cultural values count in economic development. The cultural values examined in recent studies are not religious values, as such. Rather, such presumably secular values as the need to achieve, intolerance for corruption, respect for property rights, are all correlated with economic growth. However, in its own time Puritanism produced a social and economic ethic known for precisely these sorts of values.

References

Bainton, Roland. The Reformation of the Sixteenth Century. Boston: Beacon Press, 1952.

Barro, Robert. Determinants of Economic Growth: A Cross-country Empirical Study. Cambridge, MA: MIT Press, 1997.

Engerman, Stanley. “Capitalism, Protestantism, and Economic Development.” EH.NET, 2000. http://www.eh.net/bookreviews/library/engerman.shtml

Fischoff, Ephraim. “The Protestant Ethic and the Spirit of Capitalism: The History of a Controversy.” Social Research (1944). Reprinted in R. W. Green (ed.), Protestantism and Capitalism: The Weber Thesis and Its Critics. Boston: D.C. Heath, 1958.

Frey, Donald E. “Individualist Economic Values and Self-Interest: The Problem in the Protestant Ethic.” Journal of Business Ethics (Oct. 1998).

Granato, Jim, R. Inglehart and D. Leblang. “The Effect of Cultural Values on Economic Development: Theory, Hypotheses and Some Empirical Tests.” American Journal of Political Science (Aug. 1996).

Green, Robert W. (ed.), Protestantism and Capitalism: The Weber Thesis and Its Critics. Boston: D.C. Heath, 1959.

Jonassen, Christen. “The Protestant Ethic and the Spirit of Capitalism in Norway.” American Sociological Review (Dec. 1947).

Samuelsson, Kurt. Religion and Economic Action. Toronto: University of Toronto Press, 1993 [orig. 1957].

Tawney, R. H. Religion and the Rise of Capitalism. Gloucester, MA: Peter Smith, 1962 [orig., 1926].

Weber, Max, The Protestant Ethic and the Spirit of Capitalism. New York: Charles Scribner’s Sons, 1958 [orig. 1930].

Citation: Frey, Donald. “Protestant Ethic Thesis”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/the-protestant-ethic-thesis/

Path Dependence

Douglas Puffert, University of Warwick

Path dependence is the dependence of economic outcomes on the path of previous outcomes, rather than simply on current conditions. In a path dependent process, “history matters” — it has an enduring influence. Choices made on the basis of transitory conditions can persist long after those conditions change. Thus, explanations of the outcomes of path-dependent processes require looking at history, rather than simply at current conditions of technology, preferences, and other factors that determine outcomes.

Path-dependent features of the economy range from small-scale technical standards to large-scale institutions and patterns of economic development. Several of the most prominent path-dependent features of the economy are technical standards, such as the “QWERTY” standard typewriter (and computer) keyboard and the “standard gauge” of railway track — i.e., the width between the rails. The case of QWERTY has been particularly controversial, and it is discussed at some length below. The case of track gauge is useful for introducing several typical features of path-dependent processes and their outcomes.

Standard Railway Gauges and the Questions They Suggest

Four feet 8-1/2 inches (1.435 meters) is the standard gauge for railways throughout North America, in much of Europe, and altogether on over half of the world’s railway routes. Indeed, it has been the most common gauge throughout the history of modern railways, since the late 1820s. Should we conclude, as economists often do for popular products or practices, that this standard gauge has proven itself technically and economically optimal? Has it been chosen because of its superior performance or lower costs? If so, has it proven superior for every new generation of railway technology and for all changes in traffic conditions? What of the other gauges, broader or narrower, that are used as local standards in some parts of the world — are these gauges generally used because different technology or different traffic conditions in those regions favor these gauges?

The answer to all these questions is no. The consensus of engineering opinion has usually favored gauges broader than 4’8.5″, and in the late nineteenth century an important minority of engineers favored narrower gauges. Nevertheless, the gauge of 4’8.5″ has always had greater use in practice because of the history of its use. Indeed, even the earliest modern railways adopted the gauge as a result of history. The “father of railways,” British engineer George Stephenson, had experience using the gauge on an older system of primitive coal tramways serving a small group of mines near Newcastle, England. Rather than determining optimal gauge anew for a new generation of railways, he simply continued his prior practice. Thus the gauge first adopted more than two hundred years ago for horse-drawn coal carts is the gauge now used for powerful locomotives, massive tonnages of freight shipments, and passenger trains traveling at speeds as great as 300 kilometers per hour (186 mph).

We will examine the case of railway track gauge in more detail below, along with other instances of path dependence. We first take an analytical look at what conditions may give rise to path dependence — or prevent it from arising, as some critics of the importance of path dependence have argued.

What Conditions Give Rise to Path Dependence?

Durability of Capital Equipment

The most trivial — and uninteresting — form of path dependence is based simply on the durability of capital equipment. Obsolete, inferior equipment may remain in use because its fixed cost is already “sunk” or paid for, while its variable costs are lower than the total costs of replacing it with a new generation of equipment. The duration of this sort of path dependence is limited by the service life of the obsolete equipment.

Technical Interrelatedness

In railways, none of the original gauge-specific capital equipment from the early nineteenth century remains in use today. Why, then, has Stephenson’s standard gauge persisted? Part of the reason is the technical interrelatedness of railway track and the wheel sets of rolling stock. When either track or rolling stock wears out, it must be replaced with equipment of the same gauge, so that the wheels will still fit the track and the track will still fit the wheels. Railways almost never replace all their track and rolling stock at the same time. Thus a gauge readily persists beyond the life of any piece of equipment that uses it.

Increasing Returns

A further reason for the persistence, and indeed spread, of the Stephenson gauge is increasing returns to the extent of use. Different railway companies or administrations benefit from using a common gauge, because this saves costs and improves both service quality and profits on through-shipments or passenger trips that pass over each other’s track. New railways have therefore nearly always adopted the gauge of established connecting lines, even when engineers have favored different gauges. Once built, railway lines are reluctant to change their gauge unless neighboring lines do so as well. This adds coordination costs to the physical costs of any conversion.

In early articles on path dependence, Paul David (1985, 1987) listed these same three conditions for path dependence: first, the technical interrelatedness of system components; second, increasing returns to scale in the use of a common technique; and, third, “quasi-irreversibility of investment,” for example in the durability of capital equipment (or of human capital). The third condition gives rise to switching costs, while the first two conditions make gradual change impractical and rapid change costly, due to the transactions costs required to coordinate the actions of different agents. Thus together, these three conditions may lend persistence or stability to a particular path of outcomes, “locking in” a particular feature of the economy, such as a standard railway track gauge.

David’s early work on path dependence represents, in part, the culmination of an earlier economic literature on technical interrelatedness (Veblen 1915; Frankel 1955; Kindleberger 1964; David 1975). By contrast, the other co-developer of the concept of path dependence, W. Brian Arthur, based his ideas on an analogy between increasing returns in the economy, particularly when expressed in the form of positive externalities, and conditions that give rise to positive feedbacks in the natural sciences.

Dynamic Increasing Returns to Adoption

In a series of theoretical papers starting in the early 1980s, Arthur (1989, 1990, 1994) emphasized the role of “increasing returns to adoption,” especially dynamic increasing returns that develop over time. These increasing returns might arise on the supply side of a market, as a result of learning effects that lower the cost or improve the quality of a product as its cumulative production increases. Alternatively, increasing returns might arise on the demand side of a market, as a result of positive “network” externalities, which raise the value of a product or technique for each user as the total number of users increases (Katz and Shapiro 1985, 1994). In the context of railways, for example, a railway finds a particular track gauge more valuable if a greater number of connecting railways use that gauge. (Note that a track gauge is not a “product” but rather a “technology,” as Arthur puts it, or a “technique,” as I prefer to call it.)

In Arthur’s (1989) basic analytical framework, “small events,” which he treated as random, lead to early fluctuations in the market shares of competing techniques. These fluctuations are magnified by positive feedbacks, because techniques with larger market shares tend to be more valuable to new adopters. As a result, one technique grows in market share until it is “locked in” as a de facto standard. In a simple version of Arthur’s model (Table 1), different consumers or firms initially favor different products or techniques. At first, market share for each technique fluctuates randomly, depending on how many early adopters happen to prefer each technique. Eventually, however, one of the techniques will gain enough of a lead in market share that it will offer higher payoffs to everyone — including to the consumers or firms that have a preference for the minority technique. For example, if the total number of adoptions for technique A reaches 80, while the number of adoptions of B is less than 60, then technique A offers higher payoffs for everyone, and it is locked in as the de facto standard.

Table 1. Adoption Payoffs in Arthur’s Basic Model

Number of previous adoptions 0 10 20 30 40 50 60 70 80 90
“R-type agents” (who prefer technique A):
Technique A 10 11 12 13 14 15 16 17 18 19
Technique B 8 9 10 11 12 13 14 15 16 17
“S-type agents” (who prefer technique B):
Technique A 8 9 10 11 12 13 14 15 16 17
Technique B 10 11 12 13 14 15 16 17 18 19

Source: Adapted from Arthur (1989).

Which of the competing techniques becomes the de facto standard is unpredictable on the basis of systematic conditions. Rather, later outcomes depend on the specific early history of the process. If early “small” events and choices are governed in part by non-systematic factors — even “historical accidents” — then these factors may have large effects on later outcomes. This is in contrast to the predictions of standard economic models, where decreasing returns and negative feedbacks diminish the impact of non-systematic factors. To cite another illustration from the history of railways, George Stephenson’s personal background was a non-systematic or “accidental” factor that, due to positive feedbacks, had a large influence on the entire subsequent history of track gauge.

Efficiency, Foresight, Remedies, and the Controversy over Path Dependence

Arthur’s (1989) basic model of a path-dependent process considered a case in which the selection of one outcome (or one path of outcomes) rather than another has no consequences for general economic efficiency — different economic agents favor different techniques, but no technique is best for all. Arthur also, however, used a variation of his modeling approach to argue that an inefficient outcome is possible. He considered a case where one technique offers higher payoffs than another for larger numbers of cumulative adoptions (technique B in Table 2), while for smaller numbers the other technique offers higher payoffs (technique A). Arthur argued that, given his model’s assumptions, each new adopter, arriving in turn, will prefer technique A and adopt only it, resulting later in lower total payoffs than would have resulted if each adopter had chosen technique B. Arthur’s assumptions were, first, that each agent’s payoff depends only on the number of previous adoptions and, second, that the competing techniques are “unsponsored,” that is, not owned and promoted by suppliers.

Table 2. Adoption Payoffs in Arthur’s Alternative Model

Number of previous adoptions 0 10 20 30 40 50 60 70 80 90
All agents:
Technique A 10 11 12 13 14 15 16 17 18 19
Technique B 4 7 10 13 16 19 22 25 28 31

Source: Arthur (1989), table 2.

Liebowitz and Margolis’s Critique of Arthur’s Model

Arthur’s discussion of efficiency provided the starting point for a theoretical critique of path dependence offered by Stan Liebowitz and Stephen E. Margolis (1995). Liebowitz and Margolis argued that two conditions, when present, prevent path-dependent processes from resulting in inefficient outcomes: first, foresight into the effects of choices and, second, opportunities to coordinate people’s choices, using direct communication, market interactions, and active product promotion. Using Arthur’s payoff table (Table 2), Liebowitz and Margolis argued that the purposeful, rational behavior of forward-looking, profit-seeking economic agents can override the effects of events in the past. In particular, if agents can foresee that some potential outcomes will be more efficient than others, then they have incentives to avoid the suboptimal ones. Agents who already own — or else find ways to appropriate — products or techniques that offer superior outcomes can often earn substantial profits by steering the process to favor those products or techniques. For the situation in Table 2, for example, the supplier of product or technique B could draw early adopters to that technique by temporarily setting a price below cost, making a profit by raising price above cost later.

Thus, in Liebowitz and Margolis’s analysis, the sort of inefficient or inferior outcomes that can arise in Arthur’s model are often not true equilibrium outcomes that market processes would lead to in the real world. Rather, they argued, purposeful behavior is likely to remedy any inferior outcome — except where the costs of a remedy, including transactions costs, are greater than the potential benefits. In that case, they argued, an apparently “inferior” outcome is actually the most efficient one available, once all costs are taken into account. “Remediable” inefficiency, they argued in contrast, is highly unlikely to persist.

Liebowitz and Margolis’s analysis gave rise to a substantial controversy over the meaning and implications of path dependence. In the view of Liebowitz and Margolis, the major claims of the economists who promote the concept of path dependence have amounted to assertions of remediable inefficiency. Liebowitz and Margolis coined the term “third-degree” path dependence to refer to such cases. They contrasted this category both to “first-degree” path dependence, which has no implications for efficiency, and to “second-degree” path dependence, where transactions costs and/or the impossibility of foresight lead to outcomes that offer lower payoffs than some hypothetical — but unattainable — alternative. In Liebowitz and Margolis’s view, only “third-degree” path dependence offers scope for optimizing behavior, and thus only this type stands in conflict with what they call “the neoclassical model of relentlessly rational behavior leading to efficient, and therefore predictable, outcomes” (1995). Only this category of path dependence, they argue, would constitute market failure. They cast strong doubt on the likelihood of its occurrence, and they asserted that no empirical examples have been demonstrated.

Responses to Liebowitz and Margolis’s Critique

Proponents of the importance of path dependence have responded, in large part, by asserting that the interesting features of path dependence have little to do with the question of remediability. David (1997, 2000) argued that the concept of third-degree path dependence proves incoherent upon close examination and that Liebowitz and Margolis had misconstrued the issues at stake. The present author asserted that one can usefully incorporate several of Liebowitz and Margolis’s ideas on foresight and forward-looking behavior into the theory of path dependence while still affirming the claims made by proponents (Puffert 2000, 2002, 2003).

Imperfect Foresight and Inefficiency

One point that I have emphasized is that the cases of path dependence cited by proponents typically involve imperfect foresight, and sometimes other features, that make remediation impossible. Indeed, proponents of the importance of path dependence partly recognized this point prior to the work of Liebowitz and Margolis. Nobel Prize-winner Kenneth Arrow argued in his foreword to Arthur’s collected articles that Arthur’s modeling approach applies specifically to cases where foresight is imperfect, or “expectations are based on limited information” (Arthur 1994). Thus, economic agents cannot foresee future payoffs, and they cannot know how best to direct the process to the outcomes they would prefer. In terms of the payoffs in Table 2, technique A might become locked-in because adopters as well as suppliers initially think, mistakenly, that technique A will continue to offer the higher payoffs. Similarly, David (1987) had argued still earlier that path dependence is sometimes of interest precisely because lock-in might happen too quickly, before the payoffs of different paths are known. Lock-in, as David and Arthur use the term, applies to a stable equilibrium — i.e., to an outcome that, if inefficient, is not remediable. (Liebowitz and Margolis introduce a different definition of lock-in.)

Imperfect foresight is, of course, a common condition — and especially common for new, unproven products (or techniques) in untested markets. Part of the difference between path-dependent and “path-independent” processes is that foresight doesn’t matter for path-independent processes. No matter what the path of events, path-independent processes still end up at unique outcomes that are predictable on the basis of fundamental conditions. Generally, these predictable outcomes are those that are most efficient and that offer the highest payoffs. By contrast, path-dependent processes have multiple potential outcomes, and the outcome selected is not necessarily the one offering the highest payoffs. This contrast to the results of standard economic analysis is part of what makes path dependence interesting.

Winners, Losers and Path Dependence

Path dependence is also interesting, however, when the issue at stake is not the overall efficiency (i.e., Pareto efficiency) of the outcome, but rather the distribution of rewards between “winners” and “losers” — for example, between firms competing to establish their products or techniques as a de facto standard, resulting in profits or economic rents to the winner only. This is something that finds no place in Liebowitz and Margolis’s taxonomy of “degrees.” In keeping with Liebowitz and Margolis’s analysis, competing firms certainly exercise forward-looking behavior in efforts to determine the outcome, but imperfect information and imperfect control over circumstances still make the outcome path dependent, as some of the case studies below illustrate.

Lack of Agreement on What the Debate Is About

Finally, market failure per se has never been the primary concern of proponents of the importance of path dependence. Even when proponents have highlighted inefficiency as one possible consequence of path dependence, this inefficiency is often the result of imperfect foresight rather than of market failure. Market failure is, however, the primary concern of Liebowitz and Margolis. This difference in perspective is one reason that the arguments of proponents and opponents have often failed to meet head on, as we shall consider in several case studies.

These contrasting analytical arguments can best be assessed through empirical cases. The case of the QWERTY keyboard is considered first, because it has generated the most controversy and it illustrates opposing arguments. Three further cases are particularly useful for the lessons they offer. Britain’s “coal wagon problem” offers a strong example of inefficiency. The worldwide history of railway track gauge, now considered at greater length, illustrates the roles of foresight (or lack thereof) and transitory circumstances, as well as the role of purposeful behavior to remedy outcomes. The case of competition in videocassette recorders illustrates how path dependence is compatible with purposeful behavior, and it shows how proponents and critics of the importance of path dependence can offer different interpretations of the same events.

The Debate over QWERTY

The most influential empirical case has been that of the “QWERTY” standard typewriter and computer keyboard, named for the first letters appearing on the top row of keys. The concept of path dependence first gained widespread attention through David’s (1985, 1986) interpretation of the emergence and persistence of the QWERTY standard. The critique of path dependence began with the alternative interpretation offered by Liebowitz and Margolis (1990).

David (1986) noted that the QWERTY keyboard was designed, in part, to reduce mechanical jamming on an early typewriter design that quickly went out of use, while other early keyboards were designed more with the intention of facilitating fast, efficient typing. In David’s account, QWERTY’s triumph over its initial revivals resulted largely from the happenstance that typing schools and manuals offered instruction in eight-finger “touch” typing first for QWERTY. The availability of trained typists encouraged office managers to buy QWERTY machines, which in turn gave further encouragement to budding typists to learn QWERTY. These positive feedbacks increased QWERTY’s market share until it was established as the de facto standard keyboard.

Furthermore, according to David, similar positive feedbacks have kept typewriter users “locked in” to QWERTY, so that new, superior keyboards could gain no more than a small foothold in the market. In particular the Dvorak Simplified Keyboard, introduced during the 1930s, has been locked out of the market despite experiments showing its superior ergonomic efficiency. David concluded that our choice of a keyboard even today is governed by history, not by what would be ergonomically and economically optimal apart from history.

Liebowitz and Margolis (1990) directed much of their counterargument to the alleged superiority of the Dvorak keyboard. They showed, indeed, that claims David cited for the dramatic superiority of the Dvorak keyboard were based on dubious experiments. The experiments that Liebowitz and Margolis prefer support the conclusion that it could never be profitable to retrain typists from QWERTY to the Dvorak keyboard. Moreover, Liebowitz and Margolis cited ergonomic studies that conclude that the Dvorak keyboard offers at most only a two to six percent efficiency advantage over QWERTY.

Liebowitz and Margolis did not address David’s proposed mechanism for the original triumph of QWERTY. Instead, they argued against the claims of some popular accounts that QWERTY owes its success largely to the demonstration effect of winning a single early typing contest. Liebowitz and Margolis showed that other, well-known typing contests were won by non-QWERTY typists, and so they cast doubt on the impact of a single historical accident. This, however, did not address the argument that David made about that one typing contest. David’s argument was that the contest’s modest impact consisted largely in vindicating the effectiveness of eight-finger touch-typing, which was being taught at the time only for QWERTY.

Although Liebowitz and Margolis never addressed David’s claims about the role of third-party typing instruction, they did argue that suppliers had opportunities to offer training in conjunction with selling typewriters to new offices, so that non-QWERTY keyboards would not have been disadvantaged. They did not, however, present evidence that suppliers actually offered such training during the early years of touch-typing, the time when QWERTY became dominant. Whether the early history of QWERTY was path dependent thus seems to depend largely on the unaddressed question of how much typing instruction was offered directly by suppliers, as Liebowitz and Margolis suggest could have happened, and how much was offered by third parties using QWERTY, as David showed did happen.

Liebowitz and Margolis showed that early typewriter manufacturers competed vigorously in the features of their machines. They inferred, therefore, that the reason that typewriter suppliers increasingly supported and promoted QWERTY must have been that it offered a competitive advantage as the most effective system available. This reasoning is plausible, but it was not supported by direct evidence. The alternative, path-dependent explanation would be that QWERTY’s competitive advantage in winning new customers consisted largely in its lead in trained typists and market share. That is, positive feedbacks would have affected the decisions of customers and, thus, also suppliers. David presented some evidence for this, although, in light of the issues raised by Liebowitz and Margolis, this evidence might now appear less than conclusive.

Liebowitz and Margolis highlighted the following lines from David’s article: “… competition in the absence of perfect futures markets drove the industry prematurely into de facto standardization on the wrong system — and that is where decentralized decision-making subsequently has sufficed to hold it” (emphasis original in David’s article). In Liebowitz and Margolis’s view, the focus here on decentralized decision-making constitutes a claim for market failure and third-degree path dependence, and they treat this as the central claim of David’s article. In the view of the present author, this interpretation is mistaken. David’s claim here plays only a minor role in his argument — indeed it is less than one sentence. Moreover, it is not clear that David’s comment about decentralized decision-making amounts to anything more than a reference to the high transactions costs that would be entailed in organizing a coordinated movement to an alternative outcome — a point that Liebowitz and Margolis themselves have argued in other (non-QWERTY) contexts. (A coordinated change would be necessary because few typists would wish to learn a non-QWERTY system unless they could be sure of conveniently finding a compatible keyboard wherever they go.) David may have wished to suggest that centralized decision-making (by government?) would have greatly reduced these transactions costs, but David made no explicit claim that such a remedy would be feasible. If David had wished to make market failure or remediable inefficiency the central focus of his claims for path dependence, then he surely could and would have done so in a more explicit and forceful manner.

Part of what remains of the case of QWERTY is modest support for David’s central claim that history has mattered, leaving us with a standard keyboard that is less efficient than alternatives available today — not as inefficient as the claims David cited, but still somewhat so. Donald Norman, one of the world’s leading authorities on ergonomics, estimates on the basis of several recent studies that QWERTY is about 10 percent less efficient than the Dvorak keyboard and other alternatives (Norman, 1990, and recent personal correspondence).

For Liebowitz and Margolis, it was most important to show that the costs of switching to an alternative keyboard would outweigh any benefits, so that there is no market failure in remaining with the QWERTY standard. This claim appears to stand. David had made no explicit claim for market failure, but Liebowitz and Margolis — as well, indeed, as some supporters of David’s account — took that as the main issue at stake in David’s argument.

Britain’s “Silly Little Bobtailed” Coal Wagons

A strong example of inefficiency in path dependence is offered by the small coal wagons that persisted in British railway traffic until the mid-twentieth century. Already in 1915, economist Thorstein Veblen cited these “silly little bobtailed carriages” as an example of how industrial modernization may be inhibited by “the restraining dead hand of … past achievement,” that is, the historical legacy of interrelated physical infrastructure: “the terminal facilities, tracks, shunting facilities, and all the ways and means of handling freight on this oldest and most complete of railway systems” (Veblen, 1915, pp. 125-8). Veblen’s analysis was the starting point for the literature on technical and institutional interrelatedness that formed the background to David’s early views on path dependence.

In recent years Van Vleck (1997, 1999) has defended the efficiency of Britain’s small coal wagons, arguing that they offered “a crude just-in-time approach to inventory” for coal users while economizing on the substantial costs of road haulage that would have been necessary for small deliveries if railway coal wagons were larger. More recently, however, Scott (1999, 2001) presented evidence that few coal users benefited from small deliveries. Rather, he showed, the wagons’ small size, widely dispersed ownership and control, antiquated braking and lubrication systems, and generally poor physical condition made them quite inefficient indeed. Replacing these cars and associated infrastructure with modern, larger wagons owned and controlled by the railways would have offered savings in railway operating costs of about 56 percent and a social rate of return of about 24 percent. Nevertheless, the small wagons were not replaced until both railways and collieries were nationalized after World War II. The reason, according to Scott, lay partly in the regulatory system that allocated certain rights to collieries and other car owners at the expense of the railways, and partly in the massive coordination problem that arose because railways would not have realized much savings in costs until a large proportion of antiquated cars were replaced. Together, these factors lowered the railways’ realizable private rate of return below profitable levels. (Van Vleck’s smaller estimates for potential efficiency gains from scrapping the small wagons were largely the result of assuming that there would be no change in the regulatory system or in the ownership and control of wagons. Scott argued that such changes added greatly to the potential cost savings.)

Scott noted that the persistence of small wagons was path dependent, because both the technology embodied in the small wagons and the institutions that supported fragmented ownership long outlasted the earlier, transitory conditions to which they were a rational response. Ownership of wagons by the collieries had been advantageous to railways as well as collieries in the mid-nineteenth century, and government regulation had assigned rights in a way designed to protect the interests of wagon owners from opportunistic behavior by the railways. By the early twentieth century, these regulatory institutions imposed a heavy burden on the railways, because they required either conveyance even of antiquated wagons for set rates or else payment of high levels of compensation to the wagon owners. The requirement for compensation helped to raise the railways’ private costs of scrapping the small wagons above the social costs of doing so.

The case shows the relevance of Paul David’s approach to path dependence, with its discussion of technical (and institutional) interrelatedness and quasi-irreversible investment, above and beyond Brian Arthur’s more narrow focus on increasing returns.

The case also supports Liebowitz and Margolis’s insight that an inferior path-dependent outcome can only persist where transactions costs (and other costs) prevent remediation, but it undercuts those authors’ skepticism toward the possibility of market failure. The high transactions costs that would have been entailed in scrapping Britain’s small wagons indeed outweighed the potential gains, but these costs were high only due to the institutions of property rights that supported fragmented ownership. When these institutions were later changed, a remedy to Britain’s coal-wagon problem followed quickly. Thus, the failure to scrap the small wagons earlier can be ascribed to institutional and market failure.

The case thus appears to satisfy Liebowitz and Margolis’s criterion for “third-degree” path dependence. This is not completely clear, however. Whether Britain’s coal-wagon problem qualifies for that status depends on whether the benefits of solving the problem would have been worth the cost of implementing the necessary institutional changes, a question that Scott did not address. Liebowitz and Margolis argue that an inferior outcome cannot be considered a result of market failure, or even meaningfully inefficient, unless this criterion of remediability is satisfied.

In this present author’s view, Liebowitz and Margolis’s criterion has some usefulness in the context of considering government policy toward inferior outcomes, which is Liebowitz and Margolis’s chief concern, but the criterion is much less useful for a more general analysis of these outcomes. If Britain’s coal-wagon problem does not qualify for “third-degree” status, then it suggests that Liebowitz and Margolis’s dismissive approach toward cases that they relegate to “second-degree” status is misplaced. The case seems to show that path dependence can have substantial effects on the economy, that the outcomes of path-dependent processes can vary substantially from the predictions of standard economic models, that these outcomes can exhibit substantial inefficiency of a sort discussed by proponents of path dependence, and that all this can happen despite the exercise of foresight and forward-looking behavior.

Railway Track Gauges

The case of railway track gauge illustrates how “accidental” or “contingent” events and transitory circumstances can affect choice of technique and economic efficiency over a period now approaching two centuries (Puffert 2000, 2002). The gauge now used on over half the world’s railways, 4 feet 8.5 inches (4’8.5″, 1435 mm), comes from the primitive mining tramway where George Stephenson gained his early experience. Stephenson transferred this gauge to the Liverpool and Manchester Railway, opened in 1830, which served as the model of best practice for many of the earliest modern railways in Britain, continental Europe, and North America. Many railway engineers today view this gauge as narrower than optimal. Yet, although they would choose a broader gauge today if the choice were open, they do not view potential gains in operating efficiency as worth the costs of conversion.

A much greater source of inefficiency has been the emergence of diversity in gauge. Six gauges came into widespread use in North America by the 1870s, and Britain’s extensive Great Western Railway system maintained a variant gauge for over half a century until 1892. Even today, Australia and Argentina each have three different regional-standard gauges, while India, Chile, and several other countries each make extensive use of two gauges. Breaks of gauge also persist at the border of France and Spain and most external borders of the former Russian and Soviet empires. This diversity adds costs and impairs service in interregional and international traffic. Where diversity has been resolved, conversion costs have sometimes been substantial.

This diversity arose as a result of several contributing factors: limited foresight, the search for an improved railway technology, transitory circumstances, and contingent events or “historical accidents.” Many early railway builders sought simply to serve local or regional transportation needs, and they did not foresee the later importance of railways in interregional traffic. Beginning in the late 1830s, locomotive builders found their ability to construct more powerful, easily maintained engines constrained by the Stephenson gauge, while some civil engineers thought that a broader gauge would offer improved capacity, speed, and passenger comfort. This led to a wave of adoption of broad gauges for new regions in Europe, the Americas, South Asia, and Australia. Changes in locomotive design soon eliminated much of the advantage of broad gauges, and by the 1860s it became possible to take advantage of the ability of narrow gauges to make sharper curves, following the contours of rugged landscape and reducing the need for costly bridges, embankments, cuttings, and tunnels. This, together with the beliefs of some engineers and promoters that narrow gauges would offer savings in operating costs, led to a wave of introductions of narrow gauges to new regions.

At every point of time there was some variation in engineering opinion and practice, so that which gauge was introduced to each new region often depended on the contingent circumstances of who decided the gauge. To cite only the most fateful example, Stephenson’s rivals for the contract to build the Liverpool and Manchester Railway proposed to adopt the gauge of 5’6″ (1676 mm). If that team had been employed, or if Stephenson had gained his earlier experience on almost any other mining tramway, then the ensuing worldwide history of railway gauge would have been different — perhaps far different.

After the introduction of particular gauges to new regions, later railways nearly always adopted the gauge of established connecting lines, reinforcing early contingent choices with positive feedbacks. As different local common-gauge regions expanded, regions that happened to have the same gauge merged into one another, but breaks of gauge emerged between regions of differing gauge. The extent of diversity that emerged at the national and continental levels, and thus the relative efficiency of the outcome, thus depended on earlier contingent events.

Once these patterns of diversity had been established by a path-dependent process, they were partly rationalized by the sort of forward-looking, profit-seeking behavior proposed by Liebowitz and Margolis. In North America, for example, a continental standard emerged quickly after demand for interregional transport grew, and standardization was facilitated both by the formation of interregional railway systems and by cooperation among independent railways. Elsewhere as well, much of the most inefficient diversity was resolved relatively quickly. Nonetheless, a costly diversity has persisted in places where variant-gauge regions had grown large and costly to convert before the value of conversion became apparent. Spain’s variant gauge has become more costly in recent years as the country’s economy has been integrated into that of the European Union, but estimated costs of (U.S.) $5 billion have precluded conversion. India and Australia have only recently made substantial progress toward the resolution of their century-old diversity.

Wherever gauge diversity has been resolved, it is one of the earliest gauges that has emerged as the standard. In no significant part of the world has current practice in gauge broken free of its early history. The inefficiency that has resulted, relative to what other sequences of events might have produced, was not the result of market failure. Rather, it resulted primarily from the natural inability of railway builders to foresee how railway networks and traffic patterns would develop and how technology would evolve.

The case also illustrates the usefulness of Arthur’s (1989) modeling approach for cases of unsponsored techniques and limited foresight (Puffert 2000, 2002). These were essentially the conditions Arthur assumed in proposing his model.

Videocassette Recording Systems

Markets for technical systems exhibiting network externalities (where users benefit from using the same system as other users) often tend to give rise to de facto standards — one system used by all. Foreseeing this, suppliers sometimes join to offer a common system standard from the outset, precluding any possibility for path-dependent competition. Examples include first-generation compact discs (CDs and CD-ROMs) and second-generation DVDs.

In the case of consumer videocassette recorders (VCRs), however, Sony with its Betamax system and JVC with its VHS system were unable to agree on a common set of technical specifications. This gave rise to a celebrated battle between the systems lasting from the mid-1970s to the mid-1980s. Arthur (1990) used this competition as the basis for a thought experiment to illustrate path dependence. He explained the triumph of VHS as the result of positive feedbacks in the video film rental market, as video rental stores stocked more film titles for the system with the larger user base, while new adopters chose the system for which they could rent more videos. He also suggested tentatively that, if the common perception that Betamax offered a superior picture quality is true, then the “the market’s choice” was not the best possible outcome.

In a closer look at the case, Cusumano et al. (1992) showed that Arthur’s suggested positive-feedback mechanism was real, and that this mechanism explains why Sony eventually withdrew Betamax from the market rather than continuing to offer it as an alternative system. However, they also showed that the video rental market emerged only at a late stage in the competition, after VHS already had a strong lead in market share. Thus, Arthur’s mechanism does not explain how the initial symmetry in competitors’ positions was broken.

Cusumano et al. argued, nonetheless, that the earlier competition already had a path-dependent market-share dynamic. They presented evidence that suppliers and distributors of VCRs increasingly chose to support VHS rather than Betamax because they saw other market participants doing so, leading them to believe that VHS would win the competition and emerge as a de facto standard. The authors did not make clear, however, why market participants believed that a single system would become so dominant. (In a private communication, coauthor Richard Rosenbloom said that this was largely because they foresaw the later emergence of a market for prerecorded videos.)

The authors argue that three early differences in promoters’ strategies gave VHS its initial lead. First, Sony proceeded without major co-sponsors for its Betamax system, while JVC shared VHS with several major competitors. Second, the VHS consortium quickly installed a large manufacturing capacity. Third, Sony opted for a more compact videocassette, while JVC chose instead a longer playing time for VHS. In the event, a longer playing time proved more important to many consumers and distributors, at least during early years of the competition when Sony cassettes could not accommodate a full (U.S.) football game.

This interpretation shows how purposeful, forward-looking behavior interacted with positive feedbacks in producing the final outcome. The different strategies, made under conditions of limited foresight, were contingent decisions that set competition among the firms on one path rather than another (Puffert 2003). Furthermore, the early inability of Sony cassettes to accommodate a football game was a transitory circumstance that may have affected outcomes long afterward.

Liebowitz and Margolis’s (1995) initial interpretation of the case responded only to Arthur’s brief discussion. They argued that the playing-time advantage for VHS was the crucial factor in the competition, so that VHS won because its features most closely matched consumer demand — and not due to path dependence. Although their discussion covers part of the same ground as that of Cusumano et al., Liebowitz and Margolis did not respond to the earlier article’s argument that the purposeful behavior of suppliers interacted with positive feedbacks. Rather, they treated this purposeful behavior as the antithesis of the mechanistic, non-purposeful evolution of market share that they see as the ultimate basis of path dependence.

Liebowitz and Margolis also presented substantial evidence that Betamax was not, in fact, a superior system for the consumer market. The primary concern of their argument was to refute a suggested case of path-dependent lock-in to an inferior technique, and in this they succeeded. It is arguable that they overstated their case, however, in asserting that what they refuted amounted to a claim for “third-degree” path dependence. Arthur had not argued that the selection of VHS, if inferior to Betamax, would have been remediable.

Recently, Liebowitz (2002) did respond to Cusumano et al. He argued, in part, that the larger VHS tape size offered a permanent rather than transitory advantage, as this size facilitated higher tape speeds and thus better picture quality for any given total playing time.

A Brief Discussion of Further Cases

Pest Control

Cowan and Gunby (1996) showed that there is path dependence in farmers’ choices between systems of chemical pest control and integrated pest management (IPM). IPM relies in part on predatory insects to devour harmful ones, and the drift of chemical pesticides from neighboring fields often makes the use of IPM impossible. Predatory insects also drift among fields, further raising farmers’ incentives to use the same techniques as neighbors. To be practical, IPM must be used on the whole set of farms that are in proximity to each other. Where this set is large, the transactions costs of persuading all farmers to forego chemical methods often prevent adoption. In addition to these localized positive feedbacks, local learning effects also make the choice between systems path dependent. The path-dependent local lock-in of each technique has sometimes been upset by such developments as invasions by new pests and the emergence of resistance to pesticides.

Nuclear Power Reactors

Cowan (1990) argued that transitory circumstances led to the establishment of the dominant “light-water” design for civilian nuclear power reactors. This design, adapted from power plants for nuclear submarines, was rushed into use during the Cold War because the political value of demonstrating peaceful uses for nuclear technology overrode the value of finding the most efficient technique. Thereafter, according to Cowan, learning effects arising from engineering experience for the light-water design continued to make it the rational choice for new reactors. He argued that there are fundamental scientific and engineering reasons for believing, however, that an equivalent degree of development of alternative designs may have made them superior.

Information Technology

Although Shapiro and Varian (1998) did not emphasize the term path dependence, they pointed to a broad range of research documenting positive feedbacks that affect competition in contemporary information technology. Like Morris and Ferguson (1993), they showed how competing firms recognize and seek to take advantage of these positive feedbacks. Strictly speaking, not all of these cases are path dependent, because in some cases firms have been able to control the direction and outcome of the allocation processes. In other cases, however, the allocation process has had its own path-dependent dynamic, affected both by the attempts of rival firms to promote their products and by factors that are unforeseen or out of their control.

Among the cases that Shapiro and Varian discuss are some involving Microsoft. In addition, some proponents of the importance of path dependence have argued that positive feedbacks favor Microsoft’s competitive position in ways that hinder competitors from developing and introducing innovative products (see, for example, Reback et al., 1995). Liebowitz and Margolis (2000), by contrast, offered evidence of cases where superior computer software products have had no trouble winning markets. Liebowitz and Margolis also argued that the lack of demonstrated empirical examples of “third-degree” path dependence creates a strong presumption against the existence of an inferior outcome that government antitrust measures could remedy.

Path Dependence at Larger Levels

Geography and Trade

The examples thus far all treat path dependence in the selection of alternative products or techniques. Krugman (1991, 1994) and Arthur (1994) have also pointed to a role for contingent events and positive feedbacks in economic geography, including in the establishment of Silicon Valley and other concentrations of economic activity. Some of these locations, they showed, are the result not of systematic advantages but rather of accidental origins reinforced by “agglomeration” economies that lead new firms to locate in the vicinity of similar established firms. Krugman (1994) also discussed how these same effects produce path dependence in patterns of international trade. Geographic patterns of economic activity, some of which arise as a result of contingent historical events, determine the patterns of comparative advantage that in turn determine patterns of trade.

Institutional Development

Path dependence also arises in the development of institutions — a term that economists use to refer to the “rules of the game” for an economy. Eichengreen (1996) showed, for example, that the emergence of international monetary systems, such as the classical gold standard of the late nineteenth century, was path dependent. This path dependence has been based on the benefits to different countries of adopting a common monetary system. Eichengreen noted that these benefits take the form of network externalities. Puffert (2003) has argued that path dependence in institutions is likely to be similar to path dependence in technology, as both are based on the value of adopting a common practice — some technique or rule — that becomes costly to change.

Thus path dependence can affect not only individual features of the economy but also larger patterns of economic activity and development. Indeed, some teachers of economic history interpret major regional and national patterns of industrialization and growth as partly the result of contingent events reinforced by positive feedbacks — that is, as path dependent. Some suggest, as well, that the institutions responsible for economic development in some parts of the world and those responsible for backwardness in others are, at least in part, path dependent. In the coming years we may expect these ideas to be included in a growing literature on path dependence.

Conclusion

Path dependence arises, ultimately, because there are increasing returns to the adoption of some technique or other practice and because there are costs in changing from an established practice to a different one. As a result, many current features of the economy are based on what appeared optimal or profit-maximizing at some point in the past, rather than on what might be preferred on the basis of current general conditions.

The theory of path dependence is not an alternative to neoclassical economics but rather a supplement to it. The theory of path dependence assumes, generally, that people optimize on the basis of their own interests and the information at their disposal, but it highlights ways that earlier choices put constraints on later ones, channeling the sequence of economic outcomes along one possible path rather than another. This theory offers reason to believe that some — or perhaps many — economic processes have multiple possible paths of outcomes, rather than a unique equilibrium (or unique path of equilibria). Thus the selection among outcomes may depend on nonsystematic or “contingent” choices or events. Empirical case studies offer examples of how such choices or events have led to the establishment, and “lock in,” of particular techniques, institutions, and other features of the economy that we observe today — although other outcomes would have been possible. Thus, the analysis of path dependence adds to what economists know on the basis of more established forms of neoclassical analysis.

It is not possible at this time to assess the overall importance of path dependence, either in determining individual features of the economy or in determining larger patterns of economic activity. Research has only partly sorted out the concrete conditions of technology, interactions among agents, foresight, and markets and other institutions that make allocation path dependent in some cases but not in others (Puffert 2003; see also David 1997, 1999, 2000 for recent refinements on theoretical conditions for path dependence).

Addendum: Technical Notes on Definitions

Path dependence, as economists use the term, corresponds closely to what mathematicians call non-ergodicity (David 2000). A non-ergodic stochastic process is one that, as it develops, undergoes a change in the limiting distribution of future states, that is, in the probabilities of different outcomes in the distant future. This is somewhat different from what mathematicians call path dependence. In mathematics, a stochastic process is called path dependent, as opposed to state dependent, if the probabilities of transition to alternative states depend not simply on the current state of the system but, additionally, on previous states.

Furthermore, the term path dependence is applied to economic processes in which small variations in early events can lead to large or discrete variations in later outcomes, but generally not to processes in which small variations in events lead only to small and continuous variations in outcomes. That is, the term is used for cases where positive feedbacks magnify the impact of early events, not for cases where negative feedbacks diminish this impact over time.

The term path dependence can also be used for cases in which the impact of early events persists without appreciably increasing or decreasing over time. The most important examples would be instances where transitory conditions have large, persistent impacts.

References

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Arthur, W. Brian. 1990. “Positive Feedbacks in the Economy.” Scientific American 262 (February): 92-99.

Arthur, W. Brian. 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press.

Cowan, Robin. 1990. “Nuclear Power Reactors: A Study in Technological Lock-in.” Journal of Economic History 50: 541-67.

Cowan, Robin, and Philip Gunby. 1996. “Sprayed to Death: Path Dependence, Lock-in and Pest Control Strategies.” Economic Journal 106: 521-42.

Cusumano, Michael A., Yiorgos Mylonadis, and Richard S. Rosenbloom. 1992. “Strategic Maneuvering and Mass-Market Dynamics: The Triumph of VHS over Beta.” Business History Review 66: 51-94.

David, Paul A. 1975. Technical Choice, Innovation and Economic Growth: Essays on American and British Experience in the Nineteenth Century. Cambridge: Cambridge University Press.

David, Paul A. 1985. “Clio and the Economics of QWERTY.” American Economic Review (Papers and Proceedings) 75: 332-37.

David, Paul A. 1986. “Understanding the Economics of QWERTY: The Necessity of History.” In W.N. Parker, ed., Economic History and the Modern Economist. Oxford: Oxford University Press.

David, Paul A. 1987. “Some New Standards for the Economics of Standardization in the Information Age.” In P. Dasgupta and P. Stoneman, eds., Economic Policy and Technological Performance. Cambridge, England: Cambridge University Press.

David, Paul A. 1997. “Path Dependence and the Quest for Historical Economics: One More Chorus of the Ballad of QWERTY.” University of Oxford Discussion Papers in Economic and Social History, Number 20. http://www.nuff.ox.ac.uk/economics/history/paper20/david3.pdf

David, Paul A. 1999. ” At Last, a Remedy for Chronic QWERTY-Skepticism!” Working paper, All Souls College, Oxford University. http://www.eh.net/Clio/Publications/remedy.shtml

David, Paul A. 2000. “Path Dependence, Its Critics and the Quest for ‘Historical Economics’.” Working paper, All Souls College, Oxford University.
http://www-econ.stanford.edu/faculty/workp/swp00011.html

Eichengreen, Barry. 1996 Globalizing Capital: A History of the International Monetary System. Princeton: Princeton University Press.

Frankel, M. 1955. “Obsolescence and Technological Change in a Maturing Economy.” American Economic Review 45: 296-319.

Katz, Michael L., and Carl Shapiro. 1985. “Network Externalities, Competition, and Compatibility.” American Economic Review 75: 424-40.

Katz, Michael L., and Carl Shapiro. 1994. “Systems Competition and Network Effects.” Journal of Economic Perspectives 8: 93-115.

Kindleberger, Charles P. 1964. Economic Growth in France and Britain, 1851-1950. Cambridge, MA: Harvard University Press.

Krugman, Paul. 1991. “Increasing Returns and Economic Geography.” Journal of Political Economy 99: 483-99.

Krugman, Paul. 1994. Peddling Prosperity. New York: W.W. Norton.

Liebowitz, S.J. 2002. Rethinking the Network Economy. New York: AMACOM

Liebowitz, S.J., and Stephen E. Margolis. 1990. “The Fable of the Keys.” Journal of Law and Economics 33: 1-25.

Liebowitz, S.J., and Stephen E. Margolis. 1995. “Path Dependence, Lock-In, and History.” Journal of Law, Economics, and Organization 11: 204-26. http://wwwpub.utdallas.edu/~liebowit/paths.html

Liebowitz, S.J., and Stephen E. Margolis. 2000. Winners, Losers, and Microsoft. Oakland: The Independent Institute.

Morris, Charles R., and Charles H. Ferguson. 1993. “How Architecture Wins Technology Wars.” Harvard Business Review (March-April): 86-96.

Norman, Donald A. 1990. The Design of Everyday Things. New York: Doubleday. (Originally published in 1988 as The Psychology of Everyday Things.)

Puffert, Douglas J. 2000. “The Standardization of Track Gauge on North American Railways, 1830-1890.” Journal of Economic History 60: 933-60.

Puffert, Douglas J. 2002. “Path Dependence in Spatial Networks: The Standardization of Railway Track Gauge.” Explorations in Economic History 39: 282-314.

Puffert, Douglas J. 2003 forthcoming. “Path Dependence, Network Form, and Technological Change.” In W. Sundstrom, T. Guinnane, and W. Whatley, eds., History Matters: Essays on Economic Growth, Technology, and Demographic Change. Stanford: Stanford University Press. http://www.vwl.uni-muenchen.de/ls_komlos/nettech1.pdf

Reback, Gary, Susan Creighton, David Killam, and Neil Nathanson. 1995. “Technological, Economic and Legal Perspectives Regarding Microsoft’s Business Strategy in Light of the Proposed Acquisition of Intuit, Inc.” (“Microsoft White Paper”). White paper, law firm of Wilson, Sonsini, Goodrich & Rosati. http://www.antitrust.org/cases/microsoft/whitep.html

Scott, Peter. 1999. “The Efficiency of Britain’s ‘Silly Little Bobtailed’ Coal Wagons: A Comment on Van Vleck.” Journal of Economic History 59: 1072-80.

Scott, Peter. 2001. “Path Dependence and Britain’s ‘Coal Wagon Problem’.” Explorations in Economic History 38: 366-85.

Shapiro, Carl and Hal R. Varian. 1998. Information Rules. Cambridge, MA: Harvard Business School Press.

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Van Vleck, Va Nee L. 1999. “In Defense (Again) of ‘Silly Little Bobtailed’ Coal Wagons: Reply to Peter Scott.” Journal of Economic History 59: 1081-84.

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Citation: Puffert, Douglas. “Path Dependence”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/path-dependence/

Labor Unions in the United States

Gerald Friedman, University of Massachusetts at Amherst

Unions and Collective Action

In capitalist labor markets, which developed in the nineteenth-century in the United States and Western Europe, workers exchange their time and effort for wages. But even while laboring under the supervision of others, wage earners have never been slaves, because they have recourse from abuse. They can quit to seek better employment. Or they are free to join with others to take collective action, forming political movements or labor unions. By the end of the nineteenth century, labor unions and labor-oriented political parties had become major forces influencing wages and working conditions. This article explores the nature and development of labor unions in the United States. It reviews the growth and recent decline of the American labor movement and makes comparisons with the experience of foreign labor unions to clarify particular aspects of the history of labor unions in the United States.

Unions and the Free-Rider Problem

Quitting, exit, is straightforward, a simple act for individuals unhappy with their employment. By contrast, collective action, such as forming a labor union, is always difficult because it requires that individuals commit themselves to produce “public goods” enjoyed by all, including those who “free ride” rather than contribute to the group effort. If the union succeeds, free riders receive the same benefits as do activists; but if it fails, the activists suffer while those who remained outside lose nothing. Because individualist logic leads workers to “free ride,” unions cannot grow by appealing to individual self-interest (Hirschman, 1970; 1982; Olson, 1966; Gamson, 1975).

Union Growth Comes in Spurts

Free riding is a problem for all collective movements, including Rotary Clubs, the Red Cross, and the Audubon Society. But unionization is especially difficult because unions must attract members against the opposition of often-hostile employers. Workers who support unions sacrifice money and risk their jobs, even their lives. Success comes only when large numbers simultaneously follow a different rationality. Unions must persuade whole groups to abandon individualism to throw themselves into the collective project. Rarely have unions grown incrementally, gradually adding members. Instead, workers have joined unions en masse in periods of great excitement, attracted by what the French sociologist Emile Durkheim labeled “collective effervescence” or the joy of participating in a common project without regard for individual interest. Growth has come in spurts, short periods of social upheaval punctuated by major demonstrations and strikes when large numbers see their fellow workers publicly demonstrating a shared commitment to the collective project. Union growth, therefore, is concentrated in short periods of dramatic social upheaval; in the thirteen countries listed in Tables 1 and 2, 67 percent of growth comes in only five years, and over 90 percent in only ten years. As Table 3 shows, in these thirteen countries, unions grew by over 10 percent a year in years with the greatest strike activity but by less than 1 percent a year in the years with the fewest strikers (Friedman, 1999; Shorter and Tilly, 1974; Zolberg, 1972).

Table 1
Union Members per 100 Nonagricultural Workers, 1880-1985: Selected Countries

Year Canada US Austria Denmark France Italy Germany Netherlands Norway Sweden UK Australia Japan
1880 n.a. 1.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
1900 4.6 7.5 n.a. 20.8 5.0 n.a. 7.0 n.a. 3.4 4.8 12.7 n.a. n.a.
1914 8.6 10.5 n.a. 25.1 8.1 n.a. 16.9 17.0 13.6 9.9 23.0 32.8 n.a.
1928 11.6 9.9 41.7 39.7 8.0 n.a. 32.5 26.0 17.4 32.0 25.6 46.2 n.a.
1939 10.9 20.7 n.a. 51.8 22.4 n.a. n.a. 32.5 57.0 53.6 31.6 39.2 n.a.
1947 24.6 31.4 64.6 55.9 40.0 n.a. 29.1 40.4 55.1 64.6 44.5 52.9 45.3
1950 26.3 28.4 62.3 58.1 30.2 49.0 33.1 43.0 58.4 67.7 44.1 56.0 46.2
1960 28.3 30.4 63.4 64.4 20.0 29.6 37.1 41.8 61.5 73.0 44.2 54.5 32.2
1975 35.6 26.4 58.5 66.6 21.4 50.1 38.2 39.1 60.5 87.2 51.0 54.7 34.4
1985 33.7 18.9 57.8 82.2 14.5 51.0 39.3 28.6 65.3 103.0 44.2 51.5 28.9

Note: This table shows the unionization rate, the share of nonagricultural workers belonging to unions, in different countries in different years, 1880-1985. Because union membership often includes unemployed and retired union members it may exceed the number of employed workers, giving a unionization rate of greater than 100 percent.

Table 2
Union Growth in Peak and Other Years

Country Years Membership Growth Share of Growth (%) Excess Growth (%)
Top 5 Years Top 10 Years All Years 5 Years 10 Years 5 Years 10 Years
Australia 83 720 000 1 230 000 3 125 000 23.0 39.4 17.0 27.3
Austria 52 5 411 000 6 545 000 3 074 000 176.0 212.9 166.8 194.4
Canada 108 855 000 1 532 000 4 028 000 21.2 38.0 16.6 28.8
Denmark 85 521 000 795 000 1 883 000 27.7 42.2 21.8 30.5
France 92 6 605 000 7 557 000 2 872 000 230.0 263.1 224.5 252.3
Germany 82 10 849 000 13 543 000 9 120 000 119.0 148.5 112.9 136.3
Italy 38 3 028 000 4 671 000 3 713 000 81.6 125.8 68.4 99.5
Japan 43 4 757 000 6 692 000 8 983 000 53.0 74.5 41.3 51.2
Netherlands 71 671 000 1 009 000 1 158 000 57.9 87.1 50.9 73.0
Norway 85 304 000 525 000 1 177 000 25.8 44.6 19.9 32.8
Sweden 99 633 000 1 036 000 3 859 000 16.4 26.8 11.4 16.7
UK 96 4 929 000 8 011 000 8 662 000 56.9 92.5 51.7 82.1
US 109 10 247 000 14 796 000 22 293 000 46.0 66.4 41.4 57.2
Total 1043 49 530 000 67 942 000 73 947 000 67.0 91.9 60.7 79.4

Note: This table shows that most union growth comes in a few years. Union membership growth (net of membership losses) has been calculated for each country for each year. Years were then sorted for each country according to membership growth. This table reports growth for each country for the five and the ten years with the fastest growth and compares this with total growth over all years for which data are available. Excess growth has been calculated as the difference between the share of growth in the top five or ten years and the share that would have come in these periods if growth had been distributed evenly across all years.

Note that years of rapid growth are not necessarily contiguous. There can be more growth in years of rapid growth than over the entire period. This is because some is temporary when years of rapid growth are followed by years of decline.

Sources: Bain and Price (1980): 39, Visser (1989)

Table 3
Impact of Strike Activity on Union Growth
Average Union Membership Growth in Years Sorted by Proportion of Workers Striking

Country Striker Rate Quartile Change
Lowest Third Second Highest
Australia 5.1 2.5 4.5 2.7 -2.4
Austria 0.5 -1.9 0.4 2.4 1.9
Canada 1.3 1.9 2.3 15.8 14.5
Denmark 0.3 1.1 3.0 11.3 11.0
France 0.0 2.1 5.6 17.0 17.0
Germany -0.2 0.4 1.3 20.3 20.5
Italy -2.2 -0.3 2.3 5.8 8.0
Japan -0.2 5.1 3.0 4.3 4.5
Netherlands -0.9 1.2 3.5 6.3 7.2
Norway 1.9 4.3 8.6 10.3 8.4
Sweden 2.5 3.2 5.9 16.9 14.4
UK 1.7 1.7 1.9 3.4 1.7
US -0.5 0.6 2.1 19.9 20.4
Total: Average 0.72 1.68 3.42 10.49 9.78

Note: This table shows that except in Australia unions grew fastest in years with large number of strikers. The proportion of workers striking was calculated for each country for each year as the number of strikers divided by the nonagricultural labor force. Years were then sorted into quartiles, each including one-fourth of the years, according to this striker rate statistic. The average annual union membership growth rate was then calculated for each quartile as the mean of the growth rate in each year in the quartile.

Rapid Union Growth Provokes a Hostile Reaction

These periods of rapid union growth end because social upheaval provokes a hostile reaction. Union growth leads employers to organize, to discover their own collective interests. Emulating their workers, they join together to discharge union activists, to support each other in strikes, and to demand government action against unions. This rising opposition ends periods of rapid union growth, beginning a new phase of decline followed by longer periods of stagnant membership. The weakest unions formed during the union surge succumb to the post-boom reaction; but if enough unions survive they leave a movement larger and broader than before.

Early Labor Unions, Democrats and Socialists

Guilds

Before modern labor unions, guilds united artisans and their employees. Craftsmen did the work of early industry, “masters” working beside “journeymen” and apprentices in small workplaces. Throughout the cities and towns of medieval Europe, guilds regulated production by setting minimum prices and quality, and capping wages, employment, and output. Controlled by independent craftsmen, “masters” who employed journeymen and trained apprentices, guilds regulated industry to protect the comfort and status of the masters. Apprentices and journeymen benefited from guild restrictions only when they advanced to master status.

Guild power was gradually undermined in the early-modern period. Employing workers outside the guild system, including rural workers and semiskilled workers in large urban workplaces, merchants transformed medieval industry. By the early 1800s, few could anticipate moving up to becoming a master artisan or owning their own establishment. Instead, facing the prospect of a lifetime of wage labor punctuated by periods of unemployment, some wage earners began to seek a collective regulation of their individual employment (Thompson, 1966; Scott, 1974; Dawley, 1976; Sewell, 1980; Wilentz, 1984; Blewett, 1988).

The labor movement within the broader movement for democracy

This new wage-labor regime led to the modern labor movement. Organizing propertyless workers who were laboring for capitalists, organized labor formed one wing of a broader democratic movement struggling for equality and for the rights of commoners (Friedman, 1998). Within the broader democratic movement for legal and political equality, labor fought the rise of a new aristocracy that controlled the machinery of modern industry just as the old aristocracy had monopolized land. Seen in this light, the fundamental idea of the labor movement, that employees should have a voice in the management of industry, is comparable to the demand that citizens should have a voice in the management of public affairs. Democratic values do not, by any means, guarantee that unions will be fair and evenhanded to all workers. In the United States, by reserving good jobs for their members, unions of white men sometimes contributed to the exploitation of women and nonwhites. Democracy only means that exploitation will be carried out at the behest of a political majority rather than at the say of an individual capitalist (Roediger, 1991; Arnesen, 2001; Foner, 1974; 1979; Milkman, 1985).

Craft unions’ strategy

Workers formed unions to voice their interests against their employers, and also against other workers. Rejecting broad alliances along class lines, alliances uniting workers on the basis of their lack of property and their common relationship with capitalists, craft unions followed a narrow strategy, uniting workers with the same skill against both the capitalists and against workers in different trades. By using their monopoly of knowledge of the work process to restrict access to the trade, craft unions could have a strong bargaining position that was enhanced by alliances with other craftsmen to finance long strikes. A narrow craft strategy was followed by the first successful unions throughout Europe and America, especially in small urban shops using technologies that still depended on traditional specialized skills, including printers, furniture makers, carpenters, gold beaters and jewelry makers, iron molders, engineers, machinists, and plumbers. Craft unions’ characteristic action was the small, local strike, the concerted withdrawal of labor by a few workers critical to production. Typically, craft unions would present a set of demands to local employers on a “take-it-or-leave-it” basis; either the employer accepted their demands or fought a contest of strength to determine whether the employers could do without the skilled workers for longer than the workers could manage without their jobs.

The craft strategy offered little to the great masses of workers. Because it depends on restricting access to trades it could not be applied by common laborers, who were untrained, nor by semi-skilled employees in modern mass-production establishments whose employers trained them on-the-job. Shunned by craft unions, most women and African-Americans in the United States were crowded into nonunion occupations. Some sought employment as strikebreakers in occupations otherwise monopolized by craft unions controlled by white, native-born males (Washington, 1913; Whatley, 1993).

Unions among unskilled workers

To form unions, the unskilled needed a strategy of the weak that would utilize their numbers rather than specialized knowledge and accumulated savings. Inclusive unions have succeeded but only when they attract allies among politicians, state officials, and the affluent public. Sponsoring unions and protecting them from employer repression, allies can allow organization among workers without specialized skills. When successful, inclusive unions can grow quickly in mass mobilization of common laborers. This happened, for example, in Germany at the beginning of the Weimar Republic, during the French Popular Front of 1936-37, and in the United States during the New Deal of the 1930s. These were times when state support rewarded inclusive unions for organizing the unskilled. The bill for mass mobilization usually came later. Each boom was followed by a reaction against the extensive promises of the inclusive labor movement when employers and conservative politicians worked to put labor’s genie back in the bottle.

Solidarity and the Trade Unions

Unionized occupations of the late 1800s

By the late-nineteenth century, trade unions had gained a powerful position in several skilled occupations in the United States and elsewhere. Outside of mining, craft unions were formed among well-paid skilled craft workers — workers whom historian Eric Hobsbawm labeled the “labor aristocracy” (Hobsbawm, 1964; Geary, 1981). In 1892, for example, nearly two-thirds of British coal miners were union members, as were a third of machinists, millwrights and metal workers, cobblers and shoe makers, glass workers, printers, mule spinners, and construction workers (Bain and Price, 1980). French miners had formed relatively strong unions, as had skilled workers in the railroad operating crafts, printers, jewelry makers, cigar makers, and furniture workers (Friedman, 1998). Cigar makers, printers, furniture workers, some construction and metal craftsmen took the lead in early German unions (Kocka, 1986). In the United States, there were about 160,000 union members in 1880, including 120,000 belonging to craft unions, including carpenters, engineers, furniture makers, stone-cutters, iron puddlers and rollers, printers, and several railroad crafts. Another 40,000 belonged to “industrial” unions organized without regard for trade. About half of these were coal miners; most of the rest belonged to the Knights of Labor (KOL) (Friedman, 1999).

The Knights of Labor

In Europe, these craft organizations were to be the basis of larger, mass unions uniting workers without regard for trade or, in some cases, industry (Ansell, 2001). This process began in the United States in the 1880s when craft workers in the Knights of Labor reached out to organize more broadly. Formed by skilled male, native-born garment cutters in 1869, the Knights of Labor would seem an odd candidate to mobilize the mass of unskilled workers. But from a few Philadelphia craft workers, the Knights grew to become a national and even international movement. Membership reached 20,000 in 1881 and grew to 100,000 in 1885. Then, in 1886, when successful strikes on some western railroads attracted a mass of previously unorganized unskilled workers, the KOL grew to a peak membership of a million workers. For a brief time, the Knights of Labor was a general movement of the American working class (Ware, 1929; Voss, 1993).

The KOL became a mass movement with an ideology and program that united workers without regard for occupation, industry, race or gender (Hattam, 1993). Never espousing Marxist or socialist doctrines, the Knights advanced an indigenous form of popular American radicalism, a “republicanism” that would overcome social problems by extending democracy to the workplace. Valuing citizens according to their work, their productive labor, the Knights were true heirs of earlier bourgeois radicals. Open to all producers, including farmers and other employers, they excluded only those seen to be parasitic on the labor of producers — liquor dealers, gamblers, bankers, stock manipulators and lawyers. Welcoming all others without regard for race, gender, or skill, the KOL was the first American labor union to attract significant numbers of women, African-Americans, and the unskilled (Foner, 1974; 1979; Rachleff, 1984).

The KOL’s strategy

In practice, most KOL local assemblies acted like craft unions. They bargained with employers, conducted boycotts, and called members out on strike to demand higher wages and better working conditions. But unlike craft unions that depended on the bargaining leverage of a few strategically positioned workers, the KOL’s tactics reflected its inclusive and democratic vision. Without a craft union’s resources or control over labor supply, the Knights sought to win labor disputes by widening them to involve political authorities and the outside public able to pressure employers to make concessions. Activists hoped that politicizing strikes would favor the KOL because its large membership would tempt ambitious politicians while its members’ poverty drew public sympathy.

In Europe, a strategy like that of the KOL succeeded in promoting the organization of inclusive unions. But it failed in the United States. Comparing the strike strategies of trade unions and the Knights provides insight into the survival and eventual success of the trade unions and their confederation, the American Federation of Labor (AFL) in late-nineteenth century America. Seeking to transform industrial relations, local assemblies of the KOL struck frequently with large but short strikes involving skilled and unskilled workers. The Knights’ industrial leverage depended on political and social influence. It could succeed where trade unions would not go because the KOL strategy utilized numbers, the one advantage held by common laborers. But this strategy could succeed only where political authorities and the outside public might sympathize with labor. Later industrial and regional unions tried the same strategy, conducting short but large strikes. By demonstrating sufficient numbers and commitment, French and Italian unions, for example, would win from state officials concessions they could not force from recalcitrant employers (Shorter and Tilly, 1974; Friedman, 1998). But compared with the small strikes conducted by craft unions, “solidarity” strikes must walk a fine line, aggressive enough to draw attention but not so threatening to provoke a hostile reaction from threatened authorities. Such a reaction doomed the KOL.

The Knights’ collapse in 1886

In 1886, the Knights became embroiled in a national general strike demanding an eight-hour workday, the world’s first May Day. This led directly to the collapse of the KOL. The May Day strike wave in 1886 and the bombing at Haymarket Square in Chicago provoked a “red scare” of historic proportions driving membership down to half a million in September 1887. Police in Chicago, for example, broke up union meetings, seized union records, and even banned the color red from advertisements. The KOL responded politically, sponsoring a wave of independent labor parties in the elections of 1886 and supporting the Populist Party in 1890 (Fink, 1983). But even relatively strong showings by these independent political movements could not halt the KOL’s decline. By 1890, its membership had fallen by half again, and it fell to under 50,000 members by 1897.

Unions and radical political movements in Europe in the late 1800s

The KOL spread outside the United States, attracting an energetic following in the Canada, the United Kingdom, France, and other European countries. Industrial and regional unionism fared better in these countries than in the United States. Most German unionists belonged to industrial unions allied with the Social Democratic Party. Under Marxist leadership, unions and political party formed a centralized labor movement to maximize labor’s political leverage. English union membership was divided between members of a stable core of craft unions and a growing membership in industrial and regional unions based in mining, cotton textiles, and transportation. Allied with political radicals, these industrial and regional unions formed the backbone of the Labor Party, which held the balance of power in British politics after 1906.

The most radical unions were found in France. By the early 1890s, revolutionary syndicalists controlled the national union center, the Confédération générale du travail (or CGT), which they tried to use as a base for a revolutionary general strike where the workers would seize economic and political power. Consolidating craft unions into industrial and regional unions, the Bourses du travail, syndicalists conducted large strikes designed to demonstrate labor’s solidarity. Paradoxically, the syndicalists’ large strikes were effective because they provoked friendly government mediation. In the United States, state intervention was fatal for labor because government and employers usually united to crush labor radicalism. But in France, officials were more concerned to maintain a center-left coalition with organized labor against reactionary employers opposed to the Third Republic. State intervention helped French unionists to win concessions beyond any they could win with economic leverage. A radical strategy of inclusive industrial and regional unionism could succeed in France because the political leadership of the early Third Republic needed labor’s support against powerful economic and social groups who would replace the Republic with an authoritarian regime. Reminded daily of the importance of republican values and the coalition that sustained the Republic, French state officials promoted collective bargaining and labor unions. Ironically, it was the support of liberal state officials that allowed French union radicalism to succeed, and allowed French unions to grow faster than American unions and to organize the semi-skilled workers in the large establishments of France’s modern industries (Friedman, 1997; 1998).

The AFL and American Exceptionalism

By 1914, unions outside the United States had found that broad organization reduced the availability of strike breakers, advanced labor’s political goals, and could lead to state intervention on behalf of the unions. The United States was becoming exceptional, the only advanced capitalist country without a strong, united labor movement. The collapse of the Knights of Labor cleared the way for the AFL. Formed in 1881 as the Federation of Trade and Labor Unions, the AFL was organized to uphold the narrow interests of craft workers against the general interests of common laborers in the KOL. In practice, AFL-craft unions were little labor monopolies, able to win concessions because of their control over uncommon skills and because their narrow strategy did not frighten state officials. Many early AFL leaders, notably the AFL’s founding president Samuel Gompers and P. J. McGuire of the Carpenters, had been active in radical political movements. But after 1886, they learned to reject political involvements for fear that radicalism might antagonize state officials or employers and provoke repression.

AFL successes in the early twentieth-century

Entering the twentieth century, the AFL appeared to have a winning strategy. Union membership rose sharply in the late 1890s, doubling between 1896 and 1900 and again between 1900 and 1904. Fewer than 5 percent of industrial wage earners belonged to labor unions in 1895, but this share rose to 7 percent in 1900 and 13 percent in 1904, including over 21 percent of industrial wage earners (workers outside of commerce, government, and the professions). Half of coal miners in 1904 belonged to an industrial union (the United Mine Workers of America), but otherwise, most union members belonged to craft organizations, including nearly half the printers, and a third of cigar makers, construction workers and transportation workers. As shown in Table 4, other pockets of union strength included skilled workers in the metal trades, leather, and apparel. These craft unions had demonstrated their economic power, raising wages by around 15 percent and reducing hours worked (Friedman, 1991; Mullin, 1993).

Table 4
Unionization rates by industry in the United States, 1880-2000

Industry 1880 1910 1930 1953 1974 1983 2000
Agriculture Forestry Fishing 0.0 0.1 0.4 0.6 4.0 4.8 2.1
Mining 11.2 37.7 19.8 64.7 34.7 21.1 10.9
Construction 2.8 25.2 29.8 83.8 38.0 28.0 18.3
Manufacturing 3.4 10.3 7.3 42.4 37.2 27.9 14.8
Transportation Communication Utilities 3.7 20.0 18.3 82.5 49.8 46.4 24.0
Private Services 0.1 3.3 1.8 9.5 8.6 8.7 4.8
Public Employment 0.3 4.0 9.6 11.3 38.0 31.1 37.5
All Private 1.7 8.7 7.0 31.9 22.4 18.4 10.9
All 1.7 8.5 7.1 29.6 24.8 20.4 14.1

Note: This table shows the unionization rate, the share of workers belonging to unions, in different industries in the United States, 1880-1996.

Sources: 1880 and 1910: Friedman (1999): 83; 1930: Union membership from Wolman (1936); employment from United States, Bureau of the Census (1932); 1953: Troy (1957); 1974, 1986, 2000: United States, Current Population Survey.

Limits to the craft strategy

Even at this peak, the craft strategy had clear limits. Craft unions succeeded only in a declining part of American industry among workers still performing traditional tasks where training was through apprenticeship programs controlled by the workers themselves. By contrast, there were few unions in the rapidly growing industries employing semi-skilled workers. Nor was the AFL able to overcome racial divisions and state opposition to organize in the South (Friedman, 2000; Letwin, 1998). Compared with the KOL in the early 1880s, or with France’s revolutionary syndicalist unions, American unions were weak in steel, textiles, chemicals, paper and metal fabrication using technologies without traditional craft skills. AFL strongholds included construction, printing, cigar rolling, apparel cutting and pressing, and custom metal engineering, employed craft workers in relatively small establishments little changed from 25 years earlier (see Table 4).

Dependent on skilled craftsmen’s economic leverage, the AFL was poorly organized to battle large, technologically dynamic corporations. For a brief time, the revolutionary International Workers of the World (IWW), formed in 1905, organized semi-skilled workers in some mass production industries. But by 1914, it too had failed. It was state support that forced powerful French employers to accept unions. Without such assistance, no union strategy could force large American employers to accept unions.

Unions in the World War I Era

The AFL and World War I

For all its limits, it must be acknowledged that the AFL and its craft affiliates survived after their rivals ignited and died. The AFL formed a solid union movement among skilled craftsmen that with favorable circumstances could form the core of a broader union movement like what developed in Europe after 1900. During World War I, the Wilson administration endorsed unionization and collective bargaining in exchange for union support for the war effort. AFL affiliates used state support to organize mass-production workers in shipbuilding, metal fabrication, meatpacking and steel doubling union membership between 1915 and 1919. But when Federal support ended after the war’s end, employers mobilized to crush the nascent unions. The post-war union collapse has been attributed to the AFL’s failings. The larger truth is that American unions needed state support to overcome the entrenched power of capital. The AFL did not fail because of its deficient economic strategy; it failed because it had an ineffective political strategy (Friedman, 1998; Frank, 1994; Montgomery, 1987).

International effects of World War I

War gave labor extraordinary opportunities. Combatant governments rewarded pro-war labor leaders with positions in the expanded state bureaucracy and support for collective bargaining and unions. Union growth also reflected economic conditions when wartime labor shortages strengthened the bargaining position of workers and unions. Unions grew rapidly during and immediately after the war. British unions, for example, doubled their membership between 1914 and 1920, to enroll eight million workers, almost half the nonagricultural labor force (Bain and Price, 1980; Visser, 1989). Union membership tripled in Germany and Sweden, doubled in Canada, Denmark, the Netherlands, and Norway, and almost doubled in the United States (see Table 5 and Table 1). For twelve countries, membership grew by 121 percent between 1913 and 1920, including 119 percent growth in seven combatant countries and 160 percent growth in five neutral states.

Table 5
Impact of World War I on Union Membership Growth
Membership Growth in Wartime and After

12 Countries 7 Combatants 5 Neutrals
War-Time 1913 12 498 000 11 742 000 756 000
1920 27 649 000 25 687 000 1 962 000
Growth 1913-20: 121% 119% 160%
Post-war 1920 27 649 000
1929 18 149 000
Growth 1920-29: -34%

Shift toward the revolutionary left

Even before the war, frustration with the slow pace of social reform had led to a shift towards the revolutionary socialist and syndicalist left in Germany, the United Kingdom, and the United States (Nolan, 1981; Montgomery, 1987). In Europe, frustrations with rising prices, declining real wages and working conditions, and anger at catastrophic war losses fanned the flames of discontent into a raging conflagration. Compared with pre-war levels, the number of strikers rose ten or even twenty times after the war, including 2.5 million strikers in France in 1919 and 1920, compared with 200,000 strikers in 1913, 13 million German strikers, up from 300,000 in 1913, and 5 million American strikers, up from under 1 million in 1913. British Prime Minister Lloyd George warned in March 1919 that “The whole of Europe is filled with the spirit of revolution. There is a deep sense not only of discontent, but of anger and revolt among the workmen . . . The whole existing order in its political, social and economic aspects is questioned by the masses of the population from one end of Europe to the other” (quoted in Cronin, 1983: 22).

Impact of Communists

Inspired by the success of the Bolshevik revolution in Russia, revolutionary Communist Parties were organized throughout the world to promote revolution by organizing labor unions, strikes, and political protest. Communism was a mixed blessing for labor. The Communists included some of labor’s most dedicated activists and organizers who contributed greatly to union organization. But Communist help came at a high price. Secretive, domineering, intolerant of opposition, the Communists divided unions between their dwindling allies and a growing collection of outraged opponents. Moreover, they galvanized opposition, depriving labor of needed allies among state officials and the liberal bourgeoisie.

The “Lean Years”: Welfare Capitalism and the Open Shop

Aftermath of World War I

As with most great surges in union membership, the postwar boom was self-limiting. Helped by a sharp post- war economic contraction, employers and state officials ruthlessly drove back the radical threat, purging their workforce of known union activists and easily absorbing futile strikes during a period of rising unemployment. Such campaigns drove membership down by a third from a 1920 peak of 26 million members in eleven countries in 1920 to fewer than 18 million in 1924. In Austria, France, Germany, and the United States, labor unrest contributed to the election of conservative governments; in Hungary, Italy, and Poland it led to the installation of anti- democratic dictatorships that ruthlessly crushed labor unions. Economic stagnation, state repression, and anti-union campaigns by employers prevented any union resurgence through the rest of the 1920s. By 1929, unions in these eleven countries had added only 30,000 members, one-fifth of one percent.

Injunctions and welfare capitalism

The 1920s was an especially dark period for organized labor in the United States where weaknesses visible before World War I became critical failures. Labor’s opponents used fear of Communism to foment a post-war red scare that targeted union activists for police and vigilante violence. Hundreds of foreign-born activists were deported, and mobs led by the American Legion and the Ku Klux Klan broke up union meetings and destroyed union offices (see, for example, Frank, 1994: 104-5). Judges added law to the campaign against unions. Ignoring the intent of the Clayton Anti-Trust Act (1914) they used anti-trust law and injunctions against unions, forbidding activists from picketing or publicizing disputes, holding signs, or even enrolling new union members. Employers competed for their workers’ allegiance, offering paternalist welfare programs and systems of employee representation as substitutes for independent unions. They sought to build a nonunion industrial relations system around welfare capitalism (Cohen, 1990).

Stagnation and decline

After the promises of the war years, the defeat of postwar union drives in mass production industries like steel and meatpacking inaugurated a decade of union stagnation and decline. Membership fell by a third between 1920 and 1924. Unions survived only in the older trades where employment was usually declining. By 1924, they were almost completely eliminated from the dynamic industries of the second industrial revolution: including steel, automobiles, consumer electronics, chemicals and rubber manufacture.

New Deals for Labor

Great Depression

The nonunion industrial relations system of the 1920s might have endured and produced a docile working class organized in company unions (Brody, 1985). But the welfare capitalism of the 1920s collapsed when the Great Depression of the 1930s exposed its weaknesses and undermined political support for the nonunion, open shop. Between 1929 and 1933, real national income in the United States fell by one third, nonagricultural employment fell by a quarter, and unemployment rose from under 2 million in 1929 to 13 million in 1933, a quarter of the civilian labor force. Economic decline was nearly as great elsewhere, raising unemployment to over 15 percent in Austria, Canada, Germany, and the United Kingdom (Maddison, 1991: 260-61). Only the Soviet Union, with its authoritarian political economy was largely spared the scourge of unemployment and economic collapse — a point emphasized by Communists throughout the 1930s and later. Depression discredited the nonunion industrial relations system by forcing welfare capitalists to renege on promises to stabilize employment and to maintain wages. Then, by ignoring protests from members of employee representation plans, welfare capitalists further exposed the fundamental weakness of their system. Lacking any independent support, paternalist promises had no standing but depended entirely on the variable good will of employers. And sometimes that was not enough (Cohen, 1990).

Depression-era political shifts

Voters, too, lost confidence in employers. The Great Depression discredited the old political economy. Even before Franklin Roosevelt’s election as President of the United States in 1932, American states enacted legislation restricting the rights of creditors and landlords, restraining the use of the injunction in labor disputes, and providing expanded relief for the unemployed (Ely, 1998; Friedman, 2001). European voters abandoned centrist parties, embracing extremists of both left and right, Communists and Fascists. In Germany, the Nazis won, but Popular Front governments uniting Communists and socialists with bourgeois liberals assumed power in other countries, including Sweden, France and Spain. (The Spanish Popular Front was overthrown by a Fascist rebellion that installed a dictatorship led by Francisco Franco.) Throughout there was an impulse to take public control over the economy because free market capitalism and orthodox finance had led to disaster (Temin, 1990).

Economic depression lowers union membership when unemployed workers drop their membership and employers use their stronger bargaining position to defeat union drives (Bain and Elsheikh, 1976). Indeed, union membership fell with the onset of the Great Depression but, contradicting the usual pattern, membership rebounded sharply after 1932 despite high unemployment, rising by over 76 percent in ten countries by 1938 (see Table 6 and Table 1). The fastest growth came in countries with openly pro-union governments. In France, where the Socialist Léon Blum led a Popular Front government, and the United States, during Franklin Roosevelt’s New Deal, membership rose by 160 percent 1933-38. But membership grew by 33 percent in eight other countries even without openly pro-labor governments.

Table 6
Impact of the Great Depression and World War II on Union Membership Growth

11 Countries (no Germany) 10 Countries (no Austria)
Depression 1929 12 401 000 11 508 000
1933 11 455 000 10 802 000
Growth 1929-33 -7.6% -6.1%
Popular Front Period 1933 10 802 000
1938 19 007 000
Growth 1933-38 76.0%
Second World War 1938 19 007 000
1947 35 485 000
Growth 1938-47 86.7%

French unions and the Matignon agreements

French union membership rose from under 900,000 in 1935 to over 4,500,000 in 1937. The Popular Front’s victory in the elections of June 1936 precipitated a massive strike wave and the occupation of factories and workplaces throughout France. Remembered in movie, song and legend, the factory occupations were a nearly spontaneous uprising of French workers that brought France’s economy to a halt. Contemporaries were struck by the extraordinarily cheerful feelings that prevailed, the “holiday feeling” and sense that the strikes were a new sort of non-violent revolution that would overturn hierarchy and replace capitalist authoritarianism with true social democracy (Phillippe and Dubief, 1993: 307-8). After Blum assumed office, he brokered the Matignon agreements, named after the premier’s official residence in Paris. Union leaders and heads of France’s leading employer associations agreed to end the strikes and occupations in exchange for wage increases of around 15 percent, a 40 hour workweek, annual vacations, and union recognition. Codified in statute by the Popular Front government, French unions gained new rights and protections from employer repression. Only then did workers flock into unions. In a few weeks, French unions gained four million members with the fastest growth in the new industries of the second industrial revolution. Unions in metal fabrication and chemicals grew by 1,450 percent and 4,000 percent respectively (Magraw, 1992: 2, 287-88).

French union leader Léon Jouhaux hailed the Matignon agreements as “the greatest victory of the workers’ movement.” It included lasting gains, including annual vacations and shorter workweeks. But Simone Weil described the strikers of May 1936 as “soldiers on leave,” and they were soon returned to work. Regrouping, employers discharged union activists and attacked the precarious unity of the Popular Front government. Fighting an uphill battle against renewed employer resistance, the Popular Front government fell before it could build a new system of cooperative industrial relations. Contained, French unions were unable to maintain their momentum towards industrial democracy. Membership fell by a third in 1937-39.

The National Industrial Recovery Act

A different union paradigm was developed in the United States. Rather than vehicles for a democratic revolution, the New Deal sought to integrate organized labor into a reformed capitalism that recognized capitalist hierarchy in the workplace, using unions only to promote macroeconomic stabilization by raising wages and consumer spending (Brinkley, 1995). Included as part of a program for economic recovery was section 7(a) of the National Industrial Recovery Act (NIRA) giving “employees . . . the right to organize and bargain collectively through representatives of their own choosing . . . free from the interference, restraint, or coercion of employers.” AFL-leader William Green pronounced this a “charter of industrial freedom” and workers rushed into unions in a wave unmatched since the Knights of Labor in 1886. As with the KOL, the greatest increase came among the unskilled. Coal miners, southern textile workers, northern apparel workers, Ohio tire makers, Detroit automobile workers, aluminum, lumber and sawmill workers all rushed into unions. For the first time in fifty years, American unions gained a foothold in mass production industries.

AFL’s lack of enthusiasm

Promises of state support brought common laborers into unions. But once there, the new unionists received little help from aging AFL leaders. Fearing that the new unionists’ impetuous zeal and militant radicalism would provoke repression, AFL leaders tried to scatter the new members among contending craft unions with archaic craft jurisdictions. The new unionists were swept up in the excitement of unity and collective action but a half-century of experience had taught the AFL’s leadership to fear such enthusiasms.

The AFL dampened the union boom of 1933-34, but, again, the larger problem was not with the AFL’s flawed tactics but with its lack of political leverage. Doing little to enforce the promises of Section 7(a), the Federal government left employers free to ignore the law. Some flatly prohibited union organization; others formally honored the law but established anemic employee representation plans while refusing to deal with independent unions (Irons, 2000). By 1935 almost as many industrial establishments had employer-dominated employee- representation plans (27 percent) as had unions (30 percent). The greatest number had no labor organization at all (43 percent).

Birth of the CIO

Implacable management resistance and divided leadership killed the early New Deal union surge. It died even before the NIRA was ruled unconstitutional in 1935. Failure provoked rebellion within the AFL. Led by John L. Lewis of the United Mine Workers, eight national unions launched a campaign for industrial organization as the Committee for Industrial Organization. After Lewis punched Carpenter’s Union leader William L Hutcheson on the floor of the AFL convention in 1935, the Committee became an independent Congress of Industrial Organization (CIO). Including many Communist activists, CIO committees fanned out to organize workers in steel, automobiles, retail trade, journalism and other industries. Building effectively on local rank and file militancy, including sitdown strikes in automobiles, rubber, and other industries, the CIO quickly won contracts from some of the strongest bastions of the open shop, including United States Steel and General Motors (Zieger, 1995).

The Wagner Act

Creative strategy and energetic organizing helped. But the CIO owed its lasting success to state support. After the failure of the NIRA, New Dealers sought another way to strengthen labor as a force for economic stimulus. This led to the enactment in 1935 of the National Labor Relations Act, also known as the “Wagner Act.” The Wagner Act established a National Labor Relations Board charged to enforce employees’ “right to self-organization, to form, join, or assist labor organizations to bargain collectively through representatives of their own choosing and to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection.” It provided for elections to choose union representation and required employers to negotiate “in good faith” with their workers’ chosen representatives. Shifting labor conflict from strikes to elections and protecting activists from dismissal for their union work, the Act lowered the cost to individual workers of supporting collective action. It also put the Federal government’s imprimatur on union organization.

Crucial role of rank-and-file militants and state government support

Appointed by President Roosevelt, the first NLRB was openly pro-union, viewing the Act’s preamble as mandate to promote organization. By 1945 the Board had supervised 24,000 union elections involving some 6,000,000 workers, leading to the unionization of nearly 5,000,000 workers. Still, the NLRB was not responsible for the period’s union boom. The Wagner Act had no direct role in the early CIO years because it was ignored for two years until its constitutionality was established by the Supreme Court in National Labor Relations Board v. Jones and Laughlin Steel Company (1937). Furthermore, the election procedure’s gross contribution of 5,000,000 members was less than half of the period’s net union growth of 11,000,000 members. More important than the Wagner Act were crucial union victories over prominent open shop employers in cities like Akron, Ohio, Flint, Michigan, and among Philadelphia-area metal workers. Dedicated rank-and-file militants and effective union leadership were crucial in these victories. As important was the support of pro-New Deal local and state governments. The Roosevelt landslides of 1934 and 1936 brought to office liberal Democratic governors and mayors who gave crucial support to the early CIO. Placing a right to collective bargaining above private property rights, liberal governors and other elected officials in Michigan, Ohio, Pennsylvania and elsewhere refused to send police to evict sit-down strikers who had seized control of factories. This state support allowed the minority of workers who actively supported unionization to use force to overcome the passivity of the majority of workers and the opposition of the employers. The Open Shop of the 1920s was not abandoned; it was overwhelmed by an aggressive, government-backed labor movement (Gall, 1999; Harris, 2000).

World War II

Federal support for union organization was also crucial during World War II. Again, war helped unions both by eliminating unemployment and because state officials supported unions to gain support for the war effort. Established to minimize labor disputes that might disrupt war production, the National War Labor Board instituted a labor truce where unions exchanged a no-strike pledge for employer recognition. During World War II, employers conceded union security and “maintenance of membership” rules requiring workers to pay their union dues. Acquiescing to government demands, employers accepted the institutionalization of the American labor movement, guaranteeing unions a steady flow of dues to fund an expanded bureaucracy, new benefit programs, and even to raise funds for political action. After growing from 3.5 to 10.2 million members between 1935 and 1941, unions added another 4 million members during the war. “Maintenance of membership” rules prevented free riders even more effectively than had the factory takeovers and violence of the late-1930s. With millions of members and money in the bank, labor leaders like Sidney Hillman and Phillip Murray had the ear of business leaders and official Washington. Large, established, and respected: American labor had made it, part of a reformed capitalism committed to both property and prosperity.

Even more than the First World War, World War Two promoted unions and social change. A European civil war, the war divided the continent not only between warring countries but within countries between those, usually on the political right, who favored fascism over liberal parliamentary government and those who defended democracy. Before the war, left and right contended over the appeasement of Nazi Germany and fascist Italy; during the war, many businesses and conservative politicians collaborated with the German occupation against a resistance movement dominated by the left. Throughout Europe, victory over Germany was a triumph for labor that led directly to the entry into government of socialists and Communists.

Successes and Failures after World War II

Union membership exploded during and after the war, nearly doubling between 1938 and 1946. By 1947, unions had enrolled a majority of nonagricultural workers in Scandinavia, Australia, and Italy, and over 40 percent in most other European countries (see Table 1). Accumulated depression and wartime grievances sparked a post- war strike wave that included over 6 million strikers in France in 1948, 4 million in Italy in 1949 and 1950, and 5 million in the United States in 1946. In Europe, popular unrest led to a dramatic political shift to the left. The Labor Party government elected in the United Kingdom in 1945 established a new National Health Service, and nationalized mining, the railroads, and the Bank of England. A center-left post-war coalition government in France expanded the national pension system and nationalized the Bank of France, Renault, and other companies associated with the wartime Vichy regime. Throughout Europe, the share of national income devoted to social services jumped dramatically, as did the share of income going to the working classes.

Europeans unions and the state after World War II

Unions and the political left were stronger everywhere throughout post-war Europe, but in some countries labor’s position deteriorated quickly. In France, Italy, and Japan, the popular front uniting Communists, socialists, and bourgeois liberals dissolved, and labor’s management opponents recovered state support, with the onset of the Cold War. In these countries, union membership dropped after 1947 and unions remained on the defensive for over a decade in a largely adversarial industrial relations system. Elsewhere, notably in countries with weak Communist movements, such as in Scandinavia but also in Austria, Germany, and the Netherlands, labor was able to compel management and state officials to accept strong and centralized labor movements as social partners. In these countries, stable industrial relations allowed cooperation between management and labor to raise productivity and to open new markets for national companies. High-union-density and high-union-centralization allowed Scandinavian and German labor leaders to negotiate incomes policies with governments and employers restraining wage inflation in exchange for stable employment, investment, and wages linked to productivity growth. Such policies could not be instituted in countries with weaker and less centralized labor movements, including France, Italy, Japan, the United Kingdom and the United States because their unions had not been accepted as bargaining partners by management and they lacked the centralized authority to enforce incomes policies and productivity bargains (Alvarez, Garrett, and Lange, 1992).

Europe since the 1960s

Even where European labor was the weakest, in France or Italy in the 1950s, unions were stronger than before World War II. Working with entrenched socialist and labor political parties, European unions were able to maintain high wages, restrictions on managerial autonomy, and social security. The wave of popular unrest in the late 1960s and early 1970s would carry most European unions to new heights, briefly bringing membership to over 50 percent of the labor force in the United Kingdom and in Italy, and bringing socialists into the government in France, Germany, Italy, and the United Kingdom. Since 1980, union membership has declined some and there has been some retrenchment in the welfare state. But the essentials of European welfare states and labor relations have remained (Western, 1997; Golden and Pontusson, 1992).

Unions begin to decline in the US

It was after World War II that American Exceptionalism became most valid, when the United States emerged as the advanced, capitalist democracy with the weakest labor movement. The United States was the only advanced capitalist democracy where unions went into prolonged decline right after World War II. At 35 percent, the unionization rate in 1945 was the highest in American history, but even then it was lower than in most other advanced capitalist economies. It has been falling since. The post-war strike wave, including three million strikers in 1945 and five million in 1946, was the largest in American history but it did little to enhance labor’s political position or bargaining leverage. Instead, it provoked a powerful reaction among employers and others suspicious of growing union power. A concerted drive by the CIO to organize the South, “Operation Dixie,” failed dismally in 1946. Unable to overcome private repression, racial divisions, and the pro-employer stance of southern local and state governments, the CIO’s defeat left the South as a nonunion, low-wage domestic enclave and a bastion of anti- union politics (Griffith, 1988). Then, in 1946, a conservative Republican majority was elected to Congress, dashing hopes for a renewed, post-war New Deal.

The Taft-Hartley Act and the CIO’s Expulsion of Communists

Quickly, labor’s wartime dreams turned to post-war nightmares. The Republican Congress amended the Wagner Act, enacting the Taft-Hartley Act in 1947 to give employers and state officials new powers against strikers and unions. The law also required union leaders to sign a non-Communist affidavit as a condition for union participation in NLRB-sponsored elections. This loyalty oath divided labor during a time of weakness. With its roots in radical politics and an alliance of convenience between Lewis and the Communists, the CIO was torn by the new Red Scare. Hoping to appease the political right, the CIO majority in 1949 expelled ten Communist-led unions with nearly a third of the organization’s members. This marked the end of the CIO’s expansive period. Shorn of its left, the CIO lost its most dynamic and energetic organizers and leaders. Worse, it plunged the CIO into a civil war; non-Communist affiliates raided locals belonging to the “communist-led” unions fatally distracting both sides from the CIO’s original mission to organize the unorganized and empower the dispossessed. By breaking with the Communists, the CIO’s leadership signaled that it had accepted its place within a system of capitalist hierarchy. Little reason remained for the CIO to remain independent. In 1955 it merged with the AFL to form the AFL-CIO.

The Golden Age of American Unions

Without the revolutionary aspirations now associated with the discredited Communists, America’s unions settled down to bargain over wages and working conditions without challenging such managerial prerogatives as decisions about prices, production, and investment. Some labor leaders, notably James Hoffa of the Teamsters but also local leaders in construction and service trades, abandoned all higher aspirations to use their unions for purely personal financial gain. Allying themselves with organized crime, they used violence to maintain their power over employers and their own rank-and-file membership. Others, including former-CIO leaders, like Walter Reuther of the United Auto Workers, continued to push the envelope of legitimate bargaining topics, building challenges to capitalist authority at the workplace. But even the UAW was unable to force major managerial prerogatives onto the bargaining table.

The quarter century after 1950 formed a ‘golden age’ for American unions. Established unions found a secure place at the bargaining table with America’s leading firms in such industries as autos, steel, trucking, and chemicals. Contracts were periodically negotiated providing for the exchange of good wages for cooperative workplace relations. Rules were negotiated providing a system of civil authority at work, with negotiated regulations for promotion and layoffs, and procedures giving workers opportunities to voice grievances before neutral arbitrators. Wages rose steadily, by over 2 percent per year and union workers earned a comfortable 20 percent more than nonunion workers of similar age, experience and education. Wages grew faster in Europe but American wages were higher and growth was rapid enough to narrow the gap between rich and poor, and between management salaries and worker wages. Unions also won a growing list of benefit programs, medical and dental insurance, paid holidays and vacations, supplemental unemployment insurance, and pensions. Competition for workers forced many nonunion employers to match the benefit packages won by unions, but unionized employers provided benefits worth over 60 percent more than were given nonunion workers (Freeman and Medoff, 1984; Hirsch and Addison, 1986).

Impact of decentralized bargaining in the US

In most of Europe, strong labor movements limit the wage and benefit advantages of union membership by forcing governments to extend union gains to all workers in an industry regardless of union status. By compelling nonunion employers to match union gains, this limited the competitive penalty borne by unionized firms. By contrast, decentralized bargaining and weak unions in the United States created large union wage differentials that put unionized firms at a competitive disadvantage, encouraging them to seek out nonunion labor and localities. A stable and vocal workforce with more experience and training did raise unionized firms’ labor productivity by 15 percent or more above the level of nonunion firms and some scholars have argued that unionized workers earn much of their wage gain. Others, however, find little productivity gain for unionized workers after account is taken of greater use of machinery and other nonlabor inputs by unionized firms (compare Freeman and Medoff, 1984 and Hirsch and Addison, 1986). But even unionized firms with higher labor productivity were usually more conscious of the wages and benefits paid to union worker than they were of unionization’s productivity benefits.

Unions and the Civil Rights Movement

Post-war unions remained politically active. European unions were closely associated with political parties, Communists in France and Italy, socialists or labor parties elsewhere. In practice, notwithstanding revolutionary pronouncements, even the Communist’s political agenda came to resemble that of unions in the United States, liberal reform including a commitment to full employment and the redistribution of income towards workers and the poor (Boyle, 1998). Golden age unions have also been at the forefront of campaigns to extend individual rights. The major domestic political issue of the post-war United States, civil rights, was troubling for many unions because of the racist provisions in their own practice. Nonetheless, in the 1950s and 1960s, the AFL-CIO strongly supported the civil rights movement, funded civil rights organizations and lobbied in support of civil rights legislation. The AFL-CIO pushed unions to open their ranks to African-American workers, even at the expense of losing affiliates in states like Mississippi. Seizing the opportunity created by the civil rights movement, some unions gained members among nonwhites. The feminist movement of the 1970s created new challenges for the masculine and sometimes misogynist labor movement. But, here too, the search for members and a desire to remove sources of division eventually brought organized labor to the forefront. The AFL-CIO supported the Equal Rights Amendment and began to promote women to leadership positions.

Shift of unions to the public sector

In no other country have women and members of racial minorities assumed such prominent positions in the labor movement as they have in the United States. The movement of African-American and women to leadership positions in the late-twentieth century labor movement was accelerated by a shift in the membership structure of the United States union movement. Maintaining their strength in traditional, masculine occupations in manufacturing, construction, mining, and transportation, European unions remained predominantly male. Union decline in these industries combined with growth in heavily female public sector employments in the United States led to the femininization of the American labor movement. Union membership began to decline in the private sector in the United States immediately after World War II. Between 1953 and 1983, for example, the unionization rate fell from 42 percent to 28 percent in manufacturing, by nearly half in transportation, and by over half in construction and mining (see Table 4). By contrast, after 1960, public sector workers won new opportunities to form unions. Because women and racial minorities form a disproportionate share of these public sector workers, increasing union membership there has changed the American labor movement’s racial and gender composition. Women comprised only 19 percent of American union members in the mid-1950s but their share rose to 40 percent by the late 1990s. By then, the most unionized workers were no longer the white male skilled craftsmen of old. Instead, they were nurses, parole officers, government clerks, and most of all, school teachers.

Union Collapse and Union Avoidance in the US

Outside the United States, unions grew through the 1970s and, despite some decline since the 1980s, European and Canadian unions remain large and powerful. The United States is different. Union decline since World War II has brought the United States private-sector labor movement down to early twentieth century levels. As a share of the nonagricultural labor force, union membership fell from its 1945 peak of 35 percent down to under 30 percent in the early 1970s. From there, decline became a general rout. In the 1970s, rising unemployment, increasing international competition, and the movement of industry to the nonunion South and to rural areas undermined the bargaining position of many American unions leaving them vulnerable to a renewed management offensive. Returning to pre-New Deal practices, some employers established new welfare and employee representation programs, hoping to lure worker away from unions (Heckscher, 1987; Jacoby, 1997). Others returned to pre-New Deal repression. By the early 1980s, union avoidance had become an industry. Anti-union consultants and lawyers openly counseled employers how to use labor law to evade unions. Findings of employers’ unfair labor practices in violation of the Wagner Act tripled in the 1970s; by the 1980s, the NLRB reinstated over 10,000 workers a year who were illegally discharged for union activity, nearly one for every twenty who voted for a union in an NLRB election (Weiler, 1983). By the 1990s, the unionization rate in the United States fell to under 14 percent, including only 9 percent of the private sector workers and 37 percent of those in the public sector. Unions now have minimal impact on wages or working conditions for most American workers.

Nowhere else have unions collapsed as in the United States. With a unionization rate dramatically below that of other countries, including Canada, the United States has achieved exceptional status (see Table 7). There remains great interest in unions among American workers; where employers do not resist, unions thrive. In the public sector and in some private employers where workers have free choice to join a union, they are as likely as they ever were, and as likely as workers anywhere. In the past, as after 1886 and in the 1920s, when American employers broke unions, they revived when a government committed to workplace democracy sheltered them from employer repression. If we see another such government, we may yet see another union revival.

Table 7
Union Membership Rates for the United States and Six Other Leading Industrial Economies, 1970 to 1990

1970 1980 1990
U.S.: Unionization Rate: All industries 30.0 24.7 17.6
U.S.: Unionization Rate: Manufacturing 41.0 35.0 22.0
U.S.: Unionization Rate: Financial services 5.0 4.0 2.0
Six Countries: Unionization Rate: All industries 37.1 39.7 35.3
Six Countries: Unionization Rate: Manufacturing 38.8 44.0 35.2
Five Countries: Unionization Rate: Financial services 23.9 23.8 24.0
Ratio: U.S./Six Countries: All industries 0.808 0.622 0.499
Ratio: U.S./Six Countries: Manufacturing 1.058 0.795 0.626
Ratio: U.S./Five Countries: Financial services 0.209 0.168 0.083

Note: The unionization rate reported is the number of union members out of 100 workers in the specified industry. The ratio shown is the unionization rate for the United States divided by the unionization rate for the other countries. The six countries are Canada, France, Germany, Italy, Japan, and the United Kingdom. Data on union membership in financial services in France are not available.

Source: Visser (1991): 110.

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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/