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The National Recovery Administration

Barbara Alexander, Charles River Associates

This article outlines the history of the National Recovery Administration, one of the most important and controversial agencies in Roosevelt’s New Deal. It discusses the agency’s “codes of fair competition” under which antitrust law exemptions could be granted in exchange for adoption of minimum wages, problems some industries encountered in their subsequent attempts to fix prices under the codes, and the macroeconomic effects of the program.

The early New Deal suspension of antitrust law under the National Recovery Administration (NRA) is surely one of the oddest episodes in American economic history. In its two-year life, the NRA oversaw the development of so-called “codes of fair competition” covering the larger part of the business landscape.1 The NRA generally is thought to have represented a political exchange whereby business gave up some of its rights over employees in exchange for permission to form cartels.2 Typically, labor is taken to have gotten the better part of the bargain; the union movement having extended its new powers after the Supreme Court abolished the NRA in 1935, while the business community faced a newly aggressive FTC by the end of the 1930s. While this characterization may be true in broad outline, close examination of the NRA reveals that matters may be somewhat more complicated than is suggested by the interpretation of the program as a win for labor contrasted with a missed opportunity for business.

Recent evaluations of the NRA have wended their way back to themes sounded during the early nineteen thirties, in particular, interrelationships between the so-called “trade practice” or cartelization provisions of the program and the grant of enhanced bargaining power to trade unions.3 On the microeconomic side, allowing unions to bargain for industry-wide wages may have facilitated cartelization in some industries. Meanwhile, macroeconomists have suggested that the Act and its progeny, especially labor measures such as the National Labor Relations Act may bear more responsibility for the length and severity of the Great Depression than has been recognized heretofore. 4 If this thesis holds up to closer scrutiny, the era may come to be seen as a primary example of the potential macroeconomic costs of shifts in political and economic power.

Kickoff Campaign and Blanket Codes

The NRA began operations in a burst of “ballyhoo” during the summer of 1933. 5 The agency was formed upon passage of the National Industrial Recovery Act (NIRA) in mid-June. A kick-off campaign of parades and press events succeeded in getting over 2 million employers to sign a preliminary “blanket code” known as the “President’s Re-Employment Agreement.” Signatories of the PRA pledged to pay minimum wages ranging from around $12 to $15 per 40-hour week, depending on size of town. Some 16 million workers were covered, out of a non-farm labor force of some 25 million. “Share-the-work” provisions called for limits of 35 to 40 hours per week for most employees. 6

NRA Codes

Over the next year and a half, the blanket code was superseded by over 500 codes negotiated for individual industries. The NIRA provided that: “Upon the application to the President by one or more trade or industrial associations or groups, the President may approve a code or codes of fair competition for the trade or industry.” 7 The carrot held out to induce participation was enticing: “any code … and any action complying with the provisions thereof . . . shall be exempt from the provisions of the antitrust laws of the United States.” 8 Representatives of trade associations overran Washington, and by the time the NRA was abolished, hundreds of codes covering over three-quarters of private, non-farm employment had been approved.9 Code signatories were supposed to be allowed to use the NRA “Blue Eagle” as a symbol that “we do our part” only as long as they remained in compliance with code provisions.10

Disputes Arise

Almost 80 percent of the codes had provisions that were directed at establishment of price floors.11 The Act did not specifically authorize businesses to fix prices, and indeed it specified that ” . . .codes are not designed to promote monopolies.” 12 However, it is an understatement to say that there was never any consensus among firms, industries and NRA officials as to precisely what was to be allowed as part of an acceptable code. Arguments about exactly what the NIRA allowed, and how the NRA should implement the Act began during its drafting and continued unabated throughout its life. The arguments extended from the level of general principles to the smallest details of policy, unsurprising given the complete dependence of appropriate regulatory design on precise regulatory objectives, which here were embroiled in dispute from start to finish.

To choose just one out of many examples of such disputes: There was a debate within the NRA as to whether “code authorities” (industry governing bodies) should be allowed to use industry-wide or “representative” cost data to define a price floor based on “lowest reasonable cost.” Most economists would understand this type of rule as a device that would facilitate monopoly pricing. However, a charitable interpretation of the views of administration proponents is that they had some sort of “soft competition” in mind. That is, they wished to develop and allow the use of mechanisms that would extend to more fragmented industries a type of peaceful coexistence more commonly associated with oligopoly. Those NRA supporters of the representative-cost-based price floor imagined that a range of prices would emerge if such a floor were to be set, whereas detractors believed that “the minimum would become the maximum,” that is, the floor would simply be a cartel price, constraining competition across all firms in an industry.13

Price Floors

While a rule allowing emergency price floors based on “lowest reasonable cost” was eventually approved, there was no coherent NRA program behind it.14 Indeed, the NRA and code authorities often operated at cross-purposes. At the same time that some officials of the NRA arguably took actions to promote softened competition, some in industry tried to implement measures more likely to support hard-core cartels, even when they thereby reduced the chance of soft competition should collusion fail. For example, with the partial support of the NRA, many code authorities moved to standardize products, shutting off product differentiation as an arena of potential rivalry, in spite of its role as one of the strongest mechanisms that might soften price competition.15 Of course if one is looking to run a naked price-fixing scheme, it is helpful to eliminate product differentiation as an avenue for cost-raising, profit-eroding rivalry. An industry push for standardization can thus be seen as a way of supporting hard-core cartelization, while less enthusiasm on the part of some administration officials may have reflected an understanding, however intuitive, that socially more desirable soft competition required that avenues for product differentiation be left open.

National Recovery Review Board

According to some critical observers then and later, the codes did lead to an unsurprising sort of “golden age” of cartelization. The National Recovery Review Board, led by an outraged Clarence Darrow (of Scopes “monkey trial” fame) concluded in May of 1934 that “in certain industries monopolistic practices existed.” 16 While there are legitimate examples of every variety of cartelization occurring under the NRA, many contemporaneous and subsequent assessments of Darrow’s work dismiss the Board’s “analysis” as hopelessly biased. Thus although its conclusions are interesting as a matter of political economy, it is far from clear that the Board carried out any dispassionate inventory of conditions across industries, much less a real weighing of evidence.17

Compliance Crisis

In contrast to Darrow’s perspective, other commentators focus on the “compliance crisis” that erupted within a few months of passage of the NIRA.18 Many industries were faced with “chiselers” who refused to respect code pricing rules. Firms that attempted to uphold code prices in the face of defection lost both market share and respect for the NRA.

NRA state compliance offices had recorded over 30,000 “trade practice” complaints by early 1935.19 However, the compliance program was characterized by “a marked timidity on the part of NRA enforcement officials.” 20 This timidity was fatal to the program, since monopoly pricing can easily be more damaging than is the most bare-knuckled competition to a firm that attempts it without parallel action from its competitors. NRA hesitancy came about as a result of doubts about whether a vigorous enforcement effort would withstand constitutional challenge, a not-unrelated lack of support from the Department of Justice, public antipathy for enforcement actions aimed at forcing sellers to charge higher prices, and unabating internal NRA disputes about the advisability of the price-fixing core of the trade practice program.21 Consequently, by mid-1934, firms disinclined to respect code pricing rules were ignoring them. By that point then, contrary to the initial expectations of many code signatories, the new antitrust regime represented only permission to form voluntary cartelization agreements, not the advent of government-enforced cartels. Even there, participants had to be discreet, so as not to run afoul of the antimonopoly language of the Act.

It is still far from clear how much market power was conferred by the NRA’s loosening of antitrust constraints. Of course, modern observers of the alternating successes and failures of cartels such as OPEC will not be surprised that the NRA program led to mixed results. In the absence of government enforcement, the program simply amounted to de facto legalization of self-enforcing cartels. With respect to the ease of collusion, economic theory is clear only on the point that self-enforceability is an open question; self-interest may lead to either breakdown of agreements or success at sustaining them.

Conflicts between Large and Small Firms

Some part of the difficulties encountered by NRA cartels may have had roots in a progressive mandate to offer special protection to the “little guy.” The NIRA had specified that acceptable codes of fair competition must not “eliminate or oppress small enterprises,” 22 and that “any organization availing itself of the benefits of this title shall be truly representative of the trade or industry . . . Any organization violating … shall cease to be entitled to the benefits of this title.” 23 Majority rule provisions were exceedingly common in codes, and were most likely a reflection of this statutory mandate. The concern for small enterprise had strong progressive roots.24 Justice Brandeis’s well-known antipathy for large-scale enterprise and concentration of economic power reflected a widespread and long-standing debate about the legitimate goals of the American experiment.

In addition to evaluating monopolization under the codes, the Darrow board had been charged with assessing the impact of the NRA on small business. Its conclusion was that “in certain industries small enterprises were oppressed.” Again however, as with his review of monopolization, Darrow may have seen only what he was predisposed to see. A number of NRA “code histories” detail conflicts within industries in which small, higher-cost producers sought to use majority rule provisions to support pricing at levels above those desired by larger, lower-cost producers. In the absence of effective enforcement from the government, such prices were doomed to break down, triggering repeated price wars in some industries.25

By 1935, there was understandable bitterness about what many businesses viewed as the lost promise of the NRA. Undoubtedly, the bitterness was exacerbated by the fact that the NRA wanted higher wages while failing to deliver the tools needed for effective cartelization. However, it is not entirely clear that everyone in the business community felt that the labor provisions of the Act were undesirable.26

Labor and Employment Issues

By their nature, market economies give rise to surplus-eroding rivalry among those who would be better off collectively if they could only act in concert. NRA codes of fair competition, specifying agreements on pricing and terms of employment, arose from a perceived confluence of interests among representatives of “business,” “labor,” and “the public” in muting that rivalry. Many proponents of the NIRA held that competitive pressures on business had led to downward pressure on wages, which in turn caused low consumption, leading to greater pressure on business, and so on. Allowing workers to organize and bargain collectively, while their employers pledged to one another not to sell below cost, was identified as a way to arrest harmful deflationary forces. Knowledge that one’s rivals would also be forced to pay “code wages” had some potential for aiding cartel survival. Thus the rationale for NRA wage supports at the microeconomic level potentially dovetailed with the macroeconomic theory by which higher wages were held to support higher consumption and, in turn, higher prices.

Labor provisions of the NIRA appeared in Section 7: “. . . employees shall have the right to organize and bargain collectively through representatives of their own choosing … employers shall comply with the maximum hours of labor, minimum rates of pay, and other conditions of employment…” 27 Each “code of fair competition” had to include labor provisions acceptable to the National Recovery Administration, developed during a process of negotiations, hearings, and review. Thus in order to obtain the shield against antitrust prosecution for their “trade practices” offered by an approved code, significant concessions to workers had to be made.

The NRA is generally judged to have been a success for labor and a miserable failure for business. However, evaluation is complicated to the extent that labor could not have achieved gains with respect to collective bargaining rights over wages and working conditions, had those rights not been more or less willingly granted by employers operating under the belief that stabilization of labor costs would facilitate cartelization. The labor provisions may have indeed helped some industries as well as helping workers, and for firms in such industries, the NRA cannot have been judged a failure. Moreover, while some businesses may have found the Act beneficial, because labor cost stability or freedom to negotiate with rivals enhanced their ability to cooperate on price, it is not entirely obvious that workers as a class gained as much as is sometimes contended.

The NRA did help solidify new and important norms regarding child labor, maximum hours, and other conditions of employment; it will never be known if the same progress could have been made had not industry been more or less hornswoggled into giving ground, using the antitrust laws as bait. Whatever the long-term effects of the NRA on worker welfare, the short-term gains for labor associated with higher wages were questionable. While those workers who managed to stay employed throughout the nineteen thirties benefited from higher wages, to the extent that workers were also consumers, and often unemployed consumers at that, or even potential entrepreneurs, they may have been better off without the NRA.

The issue is far from settled. Ben Bernanke and Martin Parkinson examine the economic growth that occurred during the New Deal in spite of higher wages and suggest “part of the answer may be that the higher wages ‘paid for themselves’ through increased productivity of labor. Probably more important, though, is the observation that with imperfectly competitive product markets, output depends on aggregate demand as well as the real wage. Maybe Herbert Hoover and Henry Ford were right: Higher real wages may have paid for themselves in the broader sense that their positive effect on aggregate demand compensated for their tendency to raise cost.” 28 However, Christina Romer establishes a close connection between NRA programs and the failure of wages and prices to adjust to high unemployment levels. In her view, “By preventing the large negative deviations of output from trend in the mid-1930s from exerting deflationary pressure, [the NRA] prevented the economy’s self-correction mechanism from working.” 29

Aftermath of Supreme Court’s Ruling in Schecter Case

The Supreme Court struck down the NRA on May 27, 1935; the case was a dispute over violations of labor provisions of the “Live Poultry Code” allegedly perpetrated by the Schecter Poultry Corporation. The Court held the code to be invalid on grounds of “attempted delegation of legislative power and the attempted regulation of intrastate transactions which affect interstate commerce only indirectly.” 30 There were to be no more grand bargains between business and labor under the New Deal.

Riven by divergent agendas rooted in industry- and firm-specific technology and demand, “business” was never able to speak with even the tenuous degree of unity achieved by workers. Following the abortive attempt to get the government to enforce cartels, firms and industries went their own ways, using a variety of strategies to enhance their situations. A number of sectors did succeed in getting passage of “little NRAs” with mechanisms tailored to mute competition in their particular circumstances. These mechanisms included the Robinson-Patman Act, aimed at strengthening traditional retailers against the ability of chain stores to buy at lower prices, the Guffey Acts, in which high cost bituminous coal operators and coal miners sought protection from the competition of lower cost operators, and the Motor Carrier Act in which high cost incumbent truckers obtained protection against new entrants.31

On-going macroeconomic analysis suggests that the general public interest may have been poorly served by the experiment of the NRA. Like many macroeconomic theories, the validity of the underconsumption scenario that was put forth in support of the program depended on the strength and timing of the operation of its various mechanisms. Increasingly it appears that the NRA set off inflationary forces thought by some to be desirable at the time, but that in fact had depressing effects on demand for labor and on output. Pure monopolistic deadweight losses probably were less important than higher wage costs (although there has not been any close examination of inefficiencies that may have resulted from the NRA’s attempt to protect small higher-cost producers). The strength of any mitigating effects on aggregate demand remains to be established.

1 Leverett Lyon, P. Homan, L. Lorwin, G. Terborgh, C. Dearing, L. Marshall, The National Recovery Administration: An Analysis and Appraisal, Washington: Brooking Institution, 1935, p. 313, footnote 9.

2 See, for example, Charles Frederick Roos, NRA Economic Planning, Colorado Springs: Cowles Commission, 1935, p. 343.

3See, for example, Colin Gordon, New Deals: Business, Labor, and Politics in America, 1920-1935, New York: Cambridge University Press, 1993, especially chapter 5.

4Christina D. Romer, “Why Did Prices Rise in the 1930s?” Journal of Economic History 59, no. 1 (1999): 167-199; Michael Weinstein, Recovery and Redistribution under the NIRA, Amsterdam: North Holland, 1980, and Harold L. Cole and Lee E. Ohanian, “New Deal Policies and the Persistence of the Great Depression,” Working Paper 597, Federal Reserve Bank of Minneapolis, February 2001. But also see “Unemployment, Inflation and Wages in the American Depression: Are There Lessons for Europe?” Ben Bernanke and Martin Parkinson, American Economic Review: Papers and Proceedings 79, no. 2 (1989): 210-214.

5 See, for example, Donald Brand, Corporatism and the Rule of Law: A Study of the National Recovery Administration, Ithaca: Cornell University Press, 1988, p. 94.

6 See, for example, Roos, op. cit., pp. 77, 92.

7 Section 3(a) of The National Industrial Recovery Act, reprinted at p. 478 of Roos, op. Cit.

8 Section 5 of The National Industrial Recovery Act, reprinted at p. 483 of Roos, op. cit. Note though, that the legal status of actions taken during the NRA era was never clear; Roos points out that “…President Roosevelt signed an executive order on January 20, 1934, providing that any complainant of monopolistic practices … could press it before the Federal Trade Commission or request the assistance of the Department of Justice. And, on the same date, Donald Richberg issued a supplementary statement which said that the provisions of the anti-trust laws were still in effect and that the NRA would not tolerate monopolistic practices.” (Roos, op. cit. p. 376.)

9 Lyon, op. cit., p. 307, cited at p. 52 in Lee and Ohanian, op cit.

10 Roos, op. cit., p. 75; and Blackwell Smith, My Imprint on the Sands of Time: The Life of a New Dealer, Vantage Press, New York, p. 109.

11 Lyon, op. cit., p. 570.

12 Section 3 (a)(2) of The National Industrial Recovery Act, op. Cit.

13 Roos, op. cit., at pp. 254-259. Charles Roos comments that “Leon Henderson and Blackwell Smith, in particular, became intrigued with a notion that competition could be set up within limits and that in this way wide price variations tending to demoralize an industry could be prevented.”

14 Lyon, et al., op. cit., p. 605.

15 Smith, Assistant Counsel of the NRA (per Roos, op cit., p. 254), has the following to say about standardization: One of the more controversial subjects, which we didn’t get into too deeply, except to draw guidelines, was standardization.” Smith goes on to discuss the obvious need to standardize rail track gauges, plumbing fittings, and the like, but concludes, “Industry on the whole wanted more standardization than we could go with.” (Blackwell Smith, op. cit., pp. 106-7.) One must not go overboard looking for coherence among the various positions espoused by NRA administrators; along these lines it is worth remembering Smith’s statement some 60 years later: “Business’s reaction to my policy [Smith was speaking generally here of his collective proposals] to some extent was hostile. They wished that the codes were not as strict as I wanted them to be. Also, there was criticism from the liberal/labor side to the effect that the codes were more in favor of business than they should have been. I said, ‘We are guided by a squealometer. We tune policy until the squeals are the same pitch from both sides.'” (Smith, op. cit. p. 108.)

16 Quoted at p 378 of Roos, op. Cit.

17 Brand, op. cit. at pp. 159-60 cites in agreement extremely critical conclusions by Roos (op. cit. at p. 409) and Arthur Schlesinger, The Age of Roosevelt: The Coming of the New Deal, Boston: Houghton Mifflin, 1959, p. 133.

18 Roos acknowledges a breakdown by spring of 1934: “By March, 1934 something was urgently needed to encourage industry to observe code provisions; business support for the NRA had decreased materially and serious compliance difficulties had arisen.” (Roos, op. cit., at p. 318.) Brand dates the start of the compliance crisis much earlier, in the fall of 1933. (Brand, op. cit., p. 103.)

19 Lyon, op. cit., p. 264.

20 Lyon, op. cit., p. 268.

21 Lyon, op. cit., pp. 268-272. See also Peter H. Irons, The New Deal Lawyers, Princeton: Princeton University Press, 1982.

22 Section 3(a)(2) of The National Industrial Recovery Act, op. Cit.

23 Section 6(b) of The National Industrial Recovery Act, op. Cit.

24 Brand, op. Cit.

25 Barbara Alexander and Gary D. Libecap, “The Effect of Cost Heterogeneity in the Success and Failure of the New Deal’s Agricultural and Industrial Programs,” Explorations in Economic History, 37 (2000), pp. 370-400.

26 Gordon, op. Cit.

27 Section 7 of the National Industrial Recovery Act, reprinted at pp. 484-5 of Roos, op. Cit.

28 Bernanke and Parkinson, op. cit., p. 214.

29 Romer, op. cit., p. 197.

30 Supreme Court of the United States, Nos. 854 and 864, October term, 1934, (decision issued May 27, 1935). Reprinted in Roos, op. cit., p. 580.

31 Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence, 1966, Princeton: Princeton University Press, p. 249; Irons, op. cit., pp. 105-106, 248.

Citation: Alexander, Barbara. “National Recovery Administration”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/the-national-recovery-administration/

Sweden – Economic Growth and Structural Change, 1800-2000

Lennart Schön, Lund University

This article presents an overview of Swedish economic growth performance internationally and statistically and an account of major trends in Swedish economic development during the nineteenth and twentieth centuries.1

Modern economic growth in Sweden took off in the middle of the nineteenth century and in international comparative terms Sweden has been rather successful during the past 150 years. This is largely thanks to the transformation of the economy and society from agrarian to industrial. Sweden is a small economy that has been open to foreign influences and highly dependent upon the world economy. Thus, successive structural changes have put their imprint upon modern economic growth.

Swedish Growth in International Perspective

The century-long period from the 1870s to the 1970s comprises the most successful part of Swedish industrialization and growth. On a per capita basis the Japanese economy performed equally well (see Table 1). The neighboring Scandinavian countries also grew rapidly but at a somewhat slower rate than Sweden. Growth in the rest of industrial Europe and in the U.S. was clearly outpaced. Growth in the entire world economy, as measured by Maddison, was even slower.

Table 1 Annual Economic Growth Rates per Capita in Industrial Nations and the World Economy, 1871-2005

Year Sweden Rest of Nordic Countries Rest of Western Europe United States Japan World Economy
1871/1875-1971/1975 2.4 2.0 1.7 1.8 2.4 1.5
1971/1975-2001/2005 1.7 2.2 1.9 2.0 2.2 1.6

Note: Rest of Nordic countries = Denmark, Finland and Norway. Rest of Western Europe = Austria, Belgium, Britain, France, Germany, Italy, the Netherlands, and Switzerland.

Source: Maddison (2006); Krantz/Schön (forthcoming 2007); World Bank, World Development Indicator 2000; Groningen Growth and Development Centre, www.ggdc.com.

The Swedish advance in a global perspective is illustrated in Figure 1. In the mid-nineteenth century the Swedish average income level was close to the average global level (as measured by Maddison). In a European perspective Sweden was a rather poor country. By the 1970s, however, the Swedish income level was more than three times higher than the global average and among the highest in Europe.

Figure 1
Swedish GDP per Capita in Relation to World GDP per Capita, 1870-2004
(Nine year moving averages)
Swedish GDP per Capita in Relation to World GDP per Capita, 1870-2004
Sources: Maddison (2006); Krantz/Schön (forthcoming 2007).

Note. The annual variation in world production between Maddison’s benchmarks 1870, 1913 and 1950 is estimated from his supply of annual country series.

To some extent this was a catch-up story. Sweden was able to take advantage of technological and organizational advances made in Western Europe and North America. Furthermore, Scandinavian countries with resource bases such as Sweden and Finland had been rather disadvantaged as long as agriculture was the main source of income. The shift to industry expanded the resource base and industrial development – directed both to a growing domestic market but even more to a widening world market – became the main lever of growth from the late nineteenth century.

Catch-up is not the whole story, though. In many industrial areas Swedish companies took a position at the technological frontier from an early point in time. Thus, in certain sectors there was also forging ahead,2 quickening the pace of structural change in the industrializing economy. Furthermore, during a century of fairly rapid growth new conditions have arisen that have required profound adaptation and a renewal of entrepreneurial activity as well as of economic policies.

The slow down in Swedish growth from the 1970s may be considered in this perspective. While in most other countries growth from the 1970s fell only in relation to growth rates in the golden post-war ages, Swedish growth fell clearly below the historical long run growth trend. It also fell to a very low level internationally. The 1970s certainly meant the end to a number of successful growth trajectories in the industrial society. At the same time new growth forces appeared with the electronic revolution, as well as with the advance of a more service based economy. It may be the case that this structural change hit the Swedish economy harder than most other economies, at least of the industrial capitalist economies. Sweden was forced into a transformation of its industrial economy and of its political economy in the 1970s and the 1980s that was more profound than in most other Western economies.

A Statistical Overview, 1800-2000

Swedish economic development since 1800 may be divided into six periods with different growth trends, as well as different composition of growth forces.

Table 2 Annual Growth Rates in per Capita Production, Total Investments, Foreign Trade and Population in Sweden, 1800-2000

Period Per capita GDP Investments Foreign Trade Population
1800-1840 0.6 0.3 0.7 0.8
1840-1870 1.2 3.0 4.6 1.0
1870-1910 1.7 3.0 3.3 0.6
1910-1950 2.2 4.2 2.0 0.5
1950-1975 3.6 5.5 6.5 0.6
1975-2000 1.4 2.1 4.3 0.4
1800-2000 1.9 3.4 3.8 0.7

Source: Krantz/Schön (forthcoming 2007).

In the first decades of the nineteenth century the agricultural sector dominated and growth was slow in all aspects but in population. Still there was per capita growth, but to some extent this was a recovery from the low levels during the Napoleonic Wars. The acceleration during the next period around the mid-nineteenth century is marked in all aspects. Investments and foreign trade became very dynamic ingredients with the onset of industrialization. They were to remain so during the following periods as well. Up to the 1970s per capita growth rates increased for each successive period. In an international perspective it is most notable that per capita growth rates increased also in the interwar period, despite the slow down in foreign trade. The interwar period is crucial for the long run relative success of Swedish economic growth. The decisive culmination in the post-war period with high growth rates in investments and in foreign trade stands out as well, as the deceleration in all aspects in the late twentieth century.

An analysis in a traditional growth accounting framework gives a long term pattern with certain periodic similarities (see Table 3). Thus, total factor productivity growth has increased over time up to the 1970s, only to decrease to its long run level in the last decades. This deceleration in productivity growth may be looked upon either as a failure of the “Swedish Model” to accommodate new growth forces or as another case of the “productivity paradox” in lieu of the information technology revolution.3

Table 3 Total Factor Productivity (TFP) Growth and Relative Contribution of Capital, Labor and TFP to GDP Growth in Sweden, 1840-2000

Period TFP Growth Capital Labor TFP
1840-1870 0.4 55 27 18
1870-1910 0.7 50 18 32
1910-1950 1.0 39 24 37
1950-1975 2.1 45 7 48
1975-2000 1.0 44 1 55
1840-2000 1.1 45 16 39

Source: See Table 2.

In terms of contribution to overall growth, TFP has increased its share for every period. The TFP share was low in the 1840s but there was a very marked increase with the onset of modern industrialization from the 1870s. In relative terms TFP reached its highest level so far from the 1970s, thus indicating an increasing role of human capital, technology and knowledge in economic growth. The role of capital accumulation was markedly more pronounced in early industrialization with the build-up of a modern infrastructure and with urbanization, but still capital did retain much of its importance during the twentieth century. Thus its contribution to growth during the post-war Golden Ages was significant with very high levels of material investments. At the same time TFP growth culminated with positive structural shifts, as well as increased knowledge intensity complementary to the investments. Labor has in quantitative terms progressively reduced its role in economic growth. One should observe, however, the relatively large importance of labor in Swedish economic growth during the interwar period. This was largely due to demographic factors and to the employment situation that will be further commented upon.

In the first decades of the nineteenth century, growth was still led by the primary production of agriculture, accompanied by services and transport. Secondary production in manufacturing and building was, on the contrary, very stagnant. From the 1840s the industrial sector accelerated, increasingly supported by transport and communications, as well as by private services. The sectoral shift from agriculture to industry became more pronounced at the turn of the twentieth century when industry and transportation boomed, while agricultural growth decelerated into subsequent stagnation. In the post-war period the volume of services, both private and public, increased strongly, although still not outpacing industry. From the 1970s the focus shifted to private services and to transport and communications, indicating fundamental new prerequisites of growth.

Table 4 Growth Rates of Industrial Sectors, 1800-2000

Period Agriculture Industrial and Hand Transport and Communic. Building Private Services Public Services GDP
1800-1840 1.5 0.3 1.1 -0.1 1.4 1.5 1.3
1840-1870 2.1 3.7 1.8 2.4 2.7 0.8 2.3
1870-1910 1.0 5.0 3.9 1.3 2.7 1.0 2.3
1910-1950 0.0 3.5 4.9 1.4 2.2 2.2 2.7
1950-1975 0.4 5.1 4.4 3.8 4.3 4.0 4.3
1975-2000 -0.4 1.9 2.6 -0.8 2.2 0.2 1.8
1800-2000 0.9 3.8 3.7 1.8 2.7 1.7 2.6

Source: See Table 2.

Note: Private services are exclusive of dwelling services.

Growth and Transformation in the Agricultural Society of the Early Nineteenth Century

During the first half of the nineteenth century the agricultural sector and the rural society dominated the Swedish economy. Thus, more than three-quarters of the population were occupied in agriculture while roughly 90 percent lived in the countryside. Many non-agrarian activities such as the iron industry, the saw mill industry and many crafts as well as domestic, religious and military services were performed in rural areas. Although growth was slow, a number of structural and institutional changes occurred that paved the way for future modernization.

Most important was the transformation of agriculture. From the late eighteenth century commercialization of the primary sector intensified. Particularly during the Napoleonic Wars, the domestic market for food stuffs widened. The population increase in combination with the temporary decrease in imports stimulated enclosures and reclamation of land, the introduction of new crops and new methods and above all it stimulated a greater degree of market orientation. In the decades after the war the traditional Swedish trade deficit in grain even shifted to a trade surplus with an increasing exportation of oats, primarily to Britain.

Concomitant with the agricultural transformation were a number of infrastructural and institutional changes. Domestic transportation costs were reduced through investments in canals and roads. Trade of agricultural goods was liberalized, reducing transaction costs and integrating the domestic market even further. Trading companies became more effective in attracting agricultural surpluses for more distant markets. In support of the agricultural sector new means of information were introduced by, for example, agricultural societies that published periodicals on innovative methods and on market trends. Mortgage societies were established to supply agriculture with long term capital for investments that in turn intensified the commercialization of production.

All these elements meant a profound institutional change in the sense that the price mechanism became much more effective in directing human behavior. Furthermore, a greater interest in information and in the main instrument of information, namely literacy, was infused. Traditionally, popular literacy had been upheld by the church, mainly devoted to knowledge of the primary Lutheran texts. In the new economic environment, literacy was secularized and transformed into a more functional literacy marked by the advent of schools for public education in the 1840s.

The Breakthrough of Modern Economic Growth in the Mid-nineteenth Century

In the decades around the middle of the nineteenth century new dynamic forces appeared that accelerated growth. Most notably foreign trade expanded by leaps and bounds in the 1850s and 1860s. With new export sectors, industrial investments increased. Furthermore, railways became the most prominent component of a new infrastructure and with this construction a new component in Swedish growth was introduced, heavy capital imports.

The upswing in industrial growth in Western Europe during the 1850s, in combination with demand induced through the Crimean War, led to a particularly strong expansion in Swedish exports with sharp price increases for three staple goods – bar iron, wood and oats. The charcoal-based Swedish bar iron had been the traditional export good and had completely dominated Swedish exports until mid-nineteenth century. Bar iron met, however, increasingly strong competition from British and continental iron and steel industries and Swedish exports had stagnated in the first half of the nineteenth century. The upswing in international demand, following the diffusion of industrialization and railway construction, gave an impetus to the modernization of Swedish steel production in the following decades.

The saw mill industry was a really new export industry that grew dramatically in the 1850s and 1860s. Up until this time, the vast forests in Sweden had been regarded mainly as a fuel resource for the iron industry and for household heating and local residential construction. With sharp price increases on the Western European market from the 1840s and 1850s, the resources of the sparsely populated northern part of Sweden suddenly became valuable. A formidable explosion of saw mill construction at the mouths of the rivers along the northern coastline followed. Within a few decades Swedish merchants, as well as Norwegian, German, British and Dutch merchants, became saw mill owners running large-scale capitalist enterprises at the fringe of the European civilization.

Less dramatic but equally important was the sudden expansion of Swedish oat exports. The market for oats appeared mainly in Britain, where short-distance transportation in rapidly growing urban centers increased the fleet of horses. Swedish oats became an important energy resource during the decades around the mid-nineteenth century. In Sweden this had a special significance since oats could be cultivated on rather barren and marginal soils and Sweden was richly endowed with such soils. Thus, the market for oats with strongly increasing prices stimulated further the commercialization of agriculture and the diffusion of new methods. It was furthermore so since oats for the market were a substitute for local flax production – also thriving on barren soils – while domestic linen was increasingly supplanted by factory-produced cotton goods.

The Swedish economy was able to respond to the impetus from Western Europe during these decades, to diffuse the new influences in the economy and to integrate them in its development very successfully. The barriers to change seem to have been weak. This is partly explained by the prior transformation of agriculture and the evolution of market institutions in the rural economy. People reacted to the price mechanism. New social classes of commercial peasants, capitalists and wage laborers had emerged in an era of domestic market expansion, with increased regional specialization, and population increase.

The composition of export goods also contributed to the diffusion of participation and to the diffusion of export income. Iron, wood and oats meant both a regional and a social distribution. The value of prior marginal resources such as soils in the south and forests in the north was inflated. The technology was simple and labor intensive in industry, forestry, agriculture and transportation. The demand for unskilled labor increased strongly that was to put an imprint upon Swedish wage development in the second half of the nineteenth century. Commercial houses and industrial companies made profits but export income was distributed to many segments of the population.

The integration of the Swedish economy was further enforced through initiatives taken by the State. The parliament decision in the 1850s to construct the railway trunk lines meant, first, a more direct involvement by the State in the development of a modern infrastructure and, second, new principles of finance since the State had to rely upon capital imports. At the same time markets for goods, labor and capital were liberalized and integration both within Sweden and with the world market deepened. The Swedish adoption of the Gold Standard in 1873 put a final stamp on this institutional development.

A Second Industrial Revolution around 1900

In the late nineteenth century, particularly in the 1880s, international competition became fiercer for agriculture and early industrial branches. The integration of world markets led to falling prices and stagnation in the demand for Swedish staple goods such as iron, sawn wood and oats. Profits were squeezed and expansion thwarted. On the other hand there arose new markets. Increasing wages intensified mechanization both in agriculture and in industry. The demand increased for more sophisticated machinery equipment. At the same time consumer demand shifted towards better foodstuff – such as milk, butter and meat – and towards more fabricated industrial goods.

The decades around the turn of the twentieth century meant a profound structural change in the composition of Swedish industrial expansion that was crucial for long term growth. New and more sophisticated enterprises were founded and expanded particularly from the 1890s, in the upswing after the Baring Crisis.

The new enterprises were closely related to the so called Second Industrial Revolution in which scientific knowledge and more complex engineering skills were main components. The electrical motor became especially important in Sweden. A new development block was created around this innovation that combined engineering skills in companies such as ASEA (later ABB) with a large demand in energy-intensive processes and with the large supply of hydropower in Sweden.4 Financing the rapid development of this large block engaged commercial banks, knitting closer ties between financial capital and industry. The State, once again, engaged itself in infrastructural development in support of electrification, still resorting to heavy capital imports.

A number of innovative industries were founded in this period – all related to increased demand for mechanization and engineering skills. Companies such as AGA, ASEA, Ericsson, Separator (AlfaLaval) and SKF have been labeled “enterprises of genius” and all are represented with renowned inventors and innovators. This was, of course, not an entirely Swedish phenomenon. These branches developed simultaneously on the Continent, particularly in nearby Germany and in the U.S. Knowledge and innovative stimulus was diffused among these economies. The question is rather why this new development became so strong in Sweden so that new industries within a relatively short period of time were able to supplant old resource-based industries as main driving forces of industrialization.

Traditions of engineering skills were certainly important, developed in old heavy industrial branches such as iron and steel industries and stimulated further by State initiatives such as railway construction or, more directly, the founding of the Royal Institute of Technology. But apart from that the economic development in the second half of the nineteenth century fundamentally changed relative factor prices and the profitability of allocation of resources in different lines of production.

The relative increase in the wages of unskilled labor had been stimulated by the composition of early exports in Sweden. This was much reinforced by two components in the further development – emigration and capital imports.

Within approximately the same period, 1850-1910, the Swedish economy received a huge amount of capital mainly from Germany and France, while delivering an equally huge amount of labor to primarily the U.S. Thus, Swedish relative factor prices changed dramatically. Swedish interest rates remained at rather high levels compared to leading European countries until 1910, due to a continuous large demand for capital in Sweden, but relative wages rose persistently (see Table 5). As in the rest of Scandinavia, wage increases were much stronger than GDP growth in Sweden indicating a shift in income distribution in favor of labor, particularly in favor of unskilled labor, during this period of increased world market integration.

Table 5 Annual Increase in Real Wages of Unskilled Labor and Annual GDP Growth per Capita, 1870-1910

Country Annual real wage increase, 1870-1910 Annual GDP growth per capita, 1870-1910
Sweden 2.8 1.7
Denmark and Norway 2.6 1.3
France, Germany and Great Britain 1.1 1.2
United States 1.1 1.6

Sources: Wages from Williamson (1995); GDP growth see Table 1.

Relative profitability fell in traditional industries, which exploited rich natural resources and cheap labor, while more sophisticated industries were favored. But the causality runs both ways. Had this structural shift with the growth of new and more profitable industries not occurred, the Swedish economy would not have been able to sustain the wage increase.5

Accelerated Growth in the War-stricken Period, 1910-1950

The most notable feature of long term Swedish growth is the acceleration in growth rates during the period 1910-1950, which in Europe at large was full of problems and catastrophes.6 Thus, Swedish per capita production grew at 2.2 percent annually while growth in the rest of Scandinavia was somewhat below 2 percent and in the rest of Europe hovered at 1 percent. The Swedish acceleration was based mainly on three pillars.

First, the structure created at the end of the nineteenth century was very viable, with considerable long term growth potential. It consisted of new industries and new infrastructures that involved industrialists and financial capitalists, as well as public sector support. It also involved industries meeting a relatively strong demand in war times, as well as in the interwar period, both domestically and abroad.

Second, the First World War meant an immense financial bonus to the Swedish market. A huge export surplus at inflated prices during the war led to the domestication of the Swedish national debt. This in turn further capitalized the Swedish financial market, lowering interest rates and ameliorating sequential innovative activity in industry. A domestic money market arose that provided the State with new instruments for economic policy that were to become important for the implementation of the new social democratic “Keynesian” policies of the 1930s.

Third, demographic development favored the Swedish economy in this period. The share of the economically active age group 15-64 grew substantially. This was due partly to the fact that prior emigration had sized down cohorts that now would have become old age pensioners. Comparatively low mortality of young people during the 1910s, as well as an end to mass emigration further enhanced the share of the active population. Both the labor market and domestic demand was stimulated in particular during the 1930s when the household forming age group of 25-30 years increased.

The augmented labor supply would have increased unemployment had it not been combined with the richer supply of capital and innovative industrial development that met elastic demand both domestically and in Europe.

Thus, a richer supply of both capital and labor stimulated the domestic market in a period when international market integration deteriorated. Above all it stimulated the development of mass production of consumption goods based upon the innovations of the Second Industrial Revolution. Significant new enterprises that emanated from the interwar period were very much related to the new logic of the industrial society, such as Volvo, SAAB, Electrolux, Tetra Pak and IKEA.

The Golden Age of Growth, 1950-1975

The Swedish economy was clearly part of the European Golden Age of growth, although Swedish acceleration from the 1950s was less pronounced than in the rest of Western Europe, which to a much larger extent had been plagued by wars and crises.7 The Swedish post-war period was characterized primarily by two phenomena – the full fruition of development blocks based upon the great innovations of the late nineteenth century (the electrical motor and the combustion engine) and the cementation of the “Swedish Model” for the welfare state. These two phenomena were highly complementary.

The Swedish Model had basically two components. One was a greater public responsibility for social security and for the creation and preservation of human capital. This led to a rapid increase in the supply of public services in the realms of education, health and children’s day care as well as to increases in social security programs and in public savings for transfers to pensioners program. The consequence was high taxation. The other component was a regulation of labor and capital markets. This was the most ingenious part of the model, constructed to sustain growth in the industrial society and to increase equality in combination with the social security program and taxation.

The labor market program was the result of negotiations between trade unions and the employers’ organization. It was labeled “solidaristic wage policy” with two elements. One was to achieve equal wages for equal work, regardless of individual companies’ ability to pay. The other element was to raise the wage level in low paid areas and thus to compress the wage distribution. The aim of the program was actually to increase the speed in the structural rationalization of industries and to eliminate less productive companies and branches. Labor should be transferred to the most productive export-oriented sectors. At the same time income should be distributed more equally. A drawback of the solidaristic wage policy from an egalitarian point of view was that profits soared in the productive sectors since wage increases were held back. However, capital market regulations hindered the ability of high profits to be converted into very high incomes for shareholders. Profits were taxed very low if they were converted into further investments within the company (the timing in the use of the funds was controlled by the State in its stabilization policy) but taxed heavily if distributed to share holders. The result was that investments within existing profitable companies were supported and actually subsidized while the mobility of capital dwindled and the activity at the stock market fell.

As long as the export sectors grew, the program worked well.8 Companies founded in the late nineteenth century and in the interwar period developed into successful multinationals in engineering with machinery, auto industries and shipbuilding, as well as in resource-based industries of steel and paper. The expansion of the export sector was the main force behind the high growth rates and the productivity increases but the sector was strongly supported by public investments or publicly subsidized investments in infrastructure and residential construction.

Hence, during the Golden Age of growth the development blocks around electrification and motorization matured in a broad modernization of the society, where mass consumption and mass production was supported by social programs, by investment programs and by labor market policy.

Crisis and Restructuring from the 1970s

In the 1970s and early 1980s a number of industries – such as steel works, pulp and paper, shipbuilding, and mechanical engineering – ran into crisis. New global competition, changing consumer behavior and profound innovative renewal, especially in microelectronics, made some of the industrial pillars of the Swedish Model crumble. At the same time the disadvantages of the old model became more apparent. It put obstacles to flexibility and to entrepreneurial initiatives and it reduced individual incentives for mobility. Thus, while the Swedish Model did foster rationalization of existing industries well adapted to the post-war period, it did not support more profound transformation of the economy.

One should not exaggerate the obstacles to transformation, though. The Swedish economy was still very open in the market for goods and many services, and the pressure to transform increased rapidly. During the 1980s a far-reaching structural change within industry as well as in economic policy took place, engaging both private and public actors. Shipbuilding was almost completely discontinued, pulp industries were integrated into modernized paper works, the steel industry was concentrated and specialized, and the mechanical engineering was digitalized. New and more knowledge-intensive growth industries appeared in the 1980s, such as IT-based telecommunication, pharmaceutical industries, and biotechnology, as well as new service industries.

During the 1980s some of the constituent components of the Swedish model were weakened or eliminated. Centralized negotiations and solidaristic wage policy disappeared. Regulations in the capital market were dismantled under the pressure of increasing international capital flows simultaneously with a forceful revival of the stock market. The expansion of public sector services came to an end and the taxation system was reformed with a reduction of marginal tax rates. Thus, Swedish economic policy and welfare system became more adapted to the main European level that facilitated the Swedish application of membership and final entrance into the European Union in 1995.

It is also clear that the period from the 1970s to the early twenty-first century comprise two growth trends, before and after 1990 respectively. During the 1970s and 1980s, growth in Sweden was very slow and marked by the great structural problems that the Swedish economy had to cope with. The slow growth prior to 1990 does not signify stagnation in a real sense, but rather the transformation of industrial structures and the reformulation of economic policy, which did not immediately result in a speed up of growth but rather in imbalances and bottle necks that took years to eliminate. From the 1990s up to 2005 Swedish growth accelerated quite forcefully in comparison with most Western economies.9 Thus, the 1980s may be considered as a Swedish case of “the productivity paradox,” with innovative renewal but with a delayed acceleration of productivity and growth from the 1990s – although a delayed productivity effect of more profound transformation and radical innovative behavior is not paradoxical.

Table 6 Annual Growth Rates per Capita, 1971-2005

Period Sweden Rest of Nordic Countries Rest of Western Europe United States World Economy
1971/1975-1991/1995 1.2 2.1 1.8 1.6 1.4
1991/1995-2001/2005 2.4 2.5 1.7 2.1 2.1

Sources: See Table 1.

The recent acceleration in growth may also indicate that some of the basic traits from early industrialization still pertain to the Swedish economy – an international attitude in a small open economy fosters transformation and adaptation of human skills to new circumstances as a major force behind long term growth.

References

Abramovitz, Moses. “Catching Up, Forging Ahead and Falling Behind.” Journal of Economic History 46, no. 2 (1986): 385-406.

Dahmén, Erik. “Development Blocks in Industrial Economics.” Scandinavian Economic History Review 36 (1988): 3-14.

David, Paul A. “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox.” American Economic Review 80, no. 2 (1980): 355-61.

Eichengreen, Barry. “Institutions and Economic Growth: Europe after World War II.” In Economic Growth in Europe since 1945, edited by Nicholas Crafts and Gianni Toniolo. New York: Cambridge University Press, 1996.

Krantz, Olle and Lennart Schön. Swedish Historical National Accounts, 1800-2000. Lund: Almqvist and Wiksell International (forthcoming, 2007).

Maddison, Angus. The World Economy, Volumes 1 and 2. Paris: OECD (2006).

Schön, Lennart. “Development Blocks and Transformation Pressure in a Macro-Economic Perspective: A Model of Long-Cyclical Change.” Skandinaviska Enskilda Banken Quarterly Review 20, no. 3-4 (1991): 67-76.

Schön, Lennart. “External and Internal Factors in Swedish Industrialization.” Scandinavian Economic History Review 45, no. 3 (1997): 209-223.

Schön, Lennart. En modern svensk ekonomisk historia: Tillväxt och omvandling under två sekel (A Modern Swedish Economic History: Growth and Transformation in Two Centuries). Stockholm: SNS (2000).

Schön, Lennart. “Total Factor Productivity in Swedish Manufacturing in the Period 1870-2000.” In Exploring Economic Growth: Essays in Measurement and Analysis: A Festschrift for Riitta Hjerppe on Her Sixtieth Birthday, edited by S. Heikkinen and J.L. van Zanden. Amsterdam: Aksant, 2004.

Schön, Lennart. “Swedish Industrialization 1870-1930 and the Heckscher-Ohlin Theory.” In Eli Heckscher, International Trade, and Economic History, edited by Ronald Findlay et al. Cambridge, MA: MIT Press (2006).

Svennilson, Ingvar. Growth and Stagnation in the European Economy. Geneva: United Nations Economic Commission for Europe, 1954.

Temin, Peter. “The Golden Age of European Growth Reconsidered.” European Review of Economic History 6, no. 1 (2002): 3-22.

Williamson, Jeffrey G. “The Evolution of Global Labor Markets since 1830: Background Evidence and Hypotheses.” Explorations in Economic History 32, no. 2 (1995): 141-96.

Citation: Schön, Lennart. “Sweden – Economic Growth and Structural Change, 1800-2000”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/sweden-economic-growth-and-structural-change-1800-2000/

The National Recovery Administration

Barbara Alexander, Charles River Associates

This article outlines the history of the National Recovery Administration, one of the most important and controversial agencies in Roosevelt’s New Deal. It discusses the agency’s “codes of fair competition” under which antitrust law exemptions could be granted in exchange for adoption of minimum wages, problems some industries encountered in their subsequent attempts to fix prices under the codes, and the macroeconomic effects of the program.

The early New Deal suspension of antitrust law under the National Recovery Administration (NRA) is surely one of the oddest episodes in American economic history. In its two-year life, the NRA oversaw the development of so-called “codes of fair competition” covering the larger part of the business landscape.1 The NRA generally is thought to have represented a political exchange whereby business gave up some of its rights over employees in exchange for permission to form cartels.2 Typically, labor is taken to have gotten the better part of the bargain; the union movement having extended its new powers after the Supreme Court abolished the NRA in 1935, while the business community faced a newly aggressive FTC by the end of the 1930s. While this characterization may be true in broad outline, close examination of the NRA reveals that matters may be somewhat more complicated than is suggested by the interpretation of the program as a win for labor contrasted with a missed opportunity for business.

Recent evaluations of the NRA have wended their way back to themes sounded during the early nineteen thirties, in particular, interrelationships between the so-called “trade practice” or cartelization provisions of the program and the grant of enhanced bargaining power to trade unions.3 On the microeconomic side, allowing unions to bargain for industry-wide wages may have facilitated cartelization in some industries. Meanwhile, macroeconomists have suggested that the Act and its progeny, especially labor measures such as the National Labor Relations Act may bear more responsibility for the length and severity of the Great Depression than has been recognized heretofore.4 If this thesis holds up to closer scrutiny, the era may come to be seen as a primary example of the potential macroeconomic costs of shifts in political and economic power.

Kickoff Campaign and Blanket Codes

The NRA began operations in a burst of “ballyhoo” during the summer of 1933.5 The agency was formed upon passage of the National Industrial Recovery Act (NIRA) in mid-June. A kick-off campaign of parades and press events succeeded in getting over 2 million employers to sign a preliminary “blanket code” known as the “President’s Re-Employment Agreement.” Signatories of the PRA pledged to pay minimum wages ranging from around $12 to $15 per 40-hour week, depending on size of town. Some 16 million workers were covered, out of a non-farm labor force of some 25 million. “Share-the-work” provisions called for limits of 35 to 40 hours per week for most employees.6

NRA Codes

Over the next year and a half, the blanket code was superseded by over 500 codes negotiated for individual industries. The NIRA provided that: “Upon the application to the President by one or more trade or industrial associations or groups, the President may approve a code or codes of fair competition for the trade or industry.”7 The carrot held out to induce participation was enticing: “any code … and any action complying with the provisions thereof . . . shall be exempt from the provisions of the antitrust laws of the United States.”8 Representatives of trade associations overran Washington, and by the time the NRA was abolished, hundreds of codes covering over three-quarters of private, non-farm employment had been approved.9 Code signatories were supposed to be allowed to use the NRA “Blue Eagle” as a symbol that “we do our part” only as long as they remained in compliance with code provisions.10

Disputes Arise

Almost 80 percent of the codes had provisions that were directed at establishment of price floors.11 The Act did not specifically authorize businesses to fix prices, and indeed it specified that ” . . .codes are not designed to promote monopolies.”12 However, it is an understatement to say that there was never any consensus among firms, industries and NRA officials as to precisely what was to be allowed as part of an acceptable code. Arguments about exactly what the NIRA allowed, and how the NRA should implement the Act began during its drafting and continued unabated throughout its life. The arguments extended from the level of general principles to the smallest details of policy, unsurprising given the complete dependence of appropriate regulatory design on precise regulatory objectives, which here were embroiled in dispute from start to finish.

To choose just one out of many examples of such disputes: There was a debate within the NRA as to whether “code authorities” (industry governing bodies) should be allowed to use industry-wide or “representative” cost data to define a price floor based on “lowest reasonable cost.” Most economists would understand this type of rule as a device that would facilitate monopoly pricing. However, a charitable interpretation of the views of administration proponents is that they had some sort of “soft competition” in mind. That is, they wished to develop and allow the use of mechanisms that would extend to more fragmented industries a type of peaceful coexistence more commonly associated with oligopoly. Those NRA supporters of the representative-cost-based price floor imagined that a range of prices would emerge if such a floor were to be set, whereas detractors believed that “the minimum would become the maximum,” that is, the floor would simply be a cartel price, constraining competition across all firms in an industry.13

Price Floors

While a rule allowing emergency price floors based on “lowest reasonable cost” was eventually approved, there was no coherent NRA program behind it.14 Indeed, the NRA and code authorities often operated at cross-purposes. At the same time that some officials of the NRA arguably took actions to promote softened competition, some in industry tried to implement measures more likely to support hard-core cartels, even when they thereby reduced the chance of soft competition should collusion fail. For example, with the partial support of the NRA, many code authorities moved to standardize products, shutting off product differentiation as an arena of potential rivalry, in spite of its role as one of the strongest mechanisms that might soften price competition.15 Of course if one is looking to run a naked price-fixing scheme, it is helpful to eliminate product differentiation as an avenue for cost-raising, profit-eroding rivalry. An industry push for standardization can thus be seen as a way of supporting hard-core cartelization, while less enthusiasm on the part of some administration officials may have reflected an understanding, however intuitive, that socially more desirable soft competition required that avenues for product differentiation be left open.

National Recovery Review Board

According to some critical observers then and later, the codes did lead to an unsurprising sort of “golden age” of cartelization. The National Recovery Review Board, led by an outraged Clarence Darrow (of Scopes “monkey trial” fame) concluded in May of 1934 that “in certain industries monopolistic practices existed.”16 While there are legitimate examples of every variety of cartelization occurring under the NRA, many contemporaneous and subsequent assessments of Darrow’s work dismiss the Board’s “analysis” as hopelessly biased. Thus although its conclusions are interesting as a matter of political economy, it is far from clear that the Board carried out any dispassionate inventory of conditions across industries, much less a real weighing of evidence.17

Compliance Crisis

In contrast to Darrow’s perspective, other commentators focus on the “compliance crisis” that erupted within a few months of passage of the NIRA.18 Many industries were faced with “chiselers” who refused to respect code pricing rules. Firms that attempted to uphold code prices in the face of defection lost both market share and respect for the NRA.

NRA state compliance offices had recorded over 30,000 “trade practice” complaints by early 1935.19 However, the compliance program was characterized by “a marked timidity on the part of NRA enforcement officials.”20 This timidity was fatal to the program, since monopoly pricing can easily be more damaging than is the most bare-knuckled competition to a firm that attempts it without parallel action from its competitors. NRA hesitancy came about as a result of doubts about whether a vigorous enforcement effort would withstand constitutional challenge, a not-unrelated lack of support from the Department of Justice, public antipathy for enforcement actions aimed at forcing sellers to charge higher prices, and unabating internal NRA disputes about the advisability of the price-fixing core of the trade practice program.21 Consequently, by mid-1934, firms disinclined to respect code pricing rules were ignoring them. By that point then, contrary to the initial expectations of many code signatories, the new antitrust regime represented only permission to form voluntary cartelization agreements, not the advent of government-enforced cartels. Even there, participants had to be discreet, so as not to run afoul of the antimonopoly language of the Act.

It is still far from clear how much market power was conferred by the NRA’s loosening of antitrust constraints. Of course, modern observers of the alternating successes and failures of cartels such as OPEC will not be surprised that the NRA program led to mixed results. In the absence of government enforcement, the program simply amounted to de facto legalization of self-enforcing cartels. With respect to the ease of collusion, economic theory is clear only on the point that self-enforceability is an open question; self-interest may lead to either breakdown of agreements or success at sustaining them.

Conflicts between Large and Small Firms

Some part of the difficulties encountered by NRA cartels may have had roots in a progressive mandate to offer special protection to the “little guy.” The NIRA had specified that acceptable codes of fair competition must not “eliminate or oppress small enterprises,”22 and that “any organization availing itself of the benefits of this title shall be truly representative of the trade or industry . . . Any organization violating … shall cease to be entitled to the benefits of this title.”23 Majority rule provisions were exceedingly common in codes, and were most likely a reflection of this statutory mandate. The concern for small enterprise had strong progressive roots.24 Justice Brandeis’s well-known antipathy for large-scale enterprise and concentration of economic power reflected a widespread and long-standing debate about the legitimate goals of the American experiment.

In addition to evaluating monopolization under the codes, the Darrow board had been charged with assessing the impact of the NRA on small business. Its conclusion was that “in certain industries small enterprises were oppressed.” Again however, as with his review of monopolization, Darrow may have seen only what he was predisposed to see. A number of NRA “code histories” detail conflicts within industries in which small, higher-cost producers sought to use majority rule provisions to support pricing at levels above those desired by larger, lower-cost producers. In the absence of effective enforcement from the government, such prices were doomed to break down, triggering repeated price wars in some industries.25

By 1935, there was understandable bitterness about what many businesses viewed as the lost promise of the NRA. Undoubtedly, the bitterness was exacerbated by the fact that the NRA wanted higher wages while failing to deliver the tools needed for effective cartelization. However, it is not entirely clear that everyone in the business community felt that the labor provisions of the Act were undesirable.26

Labor and Employment Issues

By their nature, market economies give rise to surplus-eroding rivalry among those who would be better off collectively if they could only act in concert. NRA codes of fair competition, specifying agreements on pricing and terms of employment, arose from a perceived confluence of interests among representatives of “business,” “labor,” and “the public” in muting that rivalry. Many proponents of the NIRA held that competitive pressures on business had led to downward pressure on wages, which in turn caused low consumption, leading to greater pressure on business, and so on. Allowing workers to organize and bargain collectively, while their employers pledged to one another not to sell below cost, was identified as a way to arrest harmful deflationary forces. Knowledge that one’s rivals would also be forced to pay “code wages” had some potential for aiding cartel survival. Thus the rationale for NRA wage supports at the microeconomic level potentially dovetailed with the macroeconomic theory by which higher wages were held to support higher consumption and, in turn, higher prices.

Labor provisions of the NIRA appeared in Section 7: “. . . employees shall have the right to organize and bargain collectively through representatives of their own choosing … employers shall comply with the maximum hours of labor, minimum rates of pay, and other conditions of employment…” 27 Each “code of fair competition” had to include labor provisions acceptable to the National Recovery Administration, developed during a process of negotiations, hearings, and review. Thus in order to obtain the shield against antitrust prosecution for their “trade practices” offered by an approved code, significant concessions to workers had to be made.

The NRA is generally judged to have been a success for labor and a miserable failure for business. However, evaluation is complicated to the extent that labor could not have achieved gains with respect to collective bargaining rights over wages and working conditions, had those rights not been more or less willingly granted by employers operating under the belief that stabilization of labor costs would facilitate cartelization. The labor provisions may have indeed helped some industries as well as helping workers, and for firms in such industries, the NRA cannot have been judged a failure. Moreover, while some businesses may have found the Act beneficial, because labor cost stability or freedom to negotiate with rivals enhanced their ability to cooperate on price, it is not entirely obvious that workers as a class gained as much as is sometimes contended.

The NRA did help solidify new and important norms regarding child labor, maximum hours, and other conditions of employment; it will never be known if the same progress could have been made had not industry been more or less hornswoggled into giving ground, using the antitrust laws as bait. Whatever the long-term effects of the NRA on worker welfare, the short-term gains for labor associated with higher wages were questionable. While those workers who managed to stay employed throughout the nineteen thirties benefited from higher wages, to the extent that workers were also consumers, and often unemployed consumers at that, or even potential entrepreneurs, they may have been better off without the NRA.

The issue is far from settled. Ben Bernanke and Martin Parkinson examine the economic growth that occurred during the New Deal in spite of higher wages and suggest “part of the answer may be that the higher wages ‘paid for themselves’ through increased productivity of labor. Probably more important, though, is the observation that with imperfectly competitive product markets, output depends on aggregate demand as well as the real wage. Maybe Herbert Hoover and Henry Ford were right: Higher real wages may have paid for themselves in the broader sense that their positive effect on aggregate demand compensated for their tendency to raise cost.”28 However, Christina Romer establishes a close connection between NRA programs and the failure of wages and prices to adjust to high unemployment levels. In her view, “By preventing the large negative deviations of output from trend in the mid-1930s from exerting deflationary pressure, [the NRA] prevented the economy’s self-correction mechanism from working.” 29

Aftermath of Supreme Court’s Ruling in Schecter Case

The Supreme Court struck down the NRA on May 27, 1935; the case was a dispute over violations of labor provisions of the “Live Poultry Code” allegedly perpetrated by the Schecter Poultry Corporation. The Court held the code to be invalid on grounds of “attempted delegation of legislative power and the attempted regulation of intrastate transactions which affect interstate commerce only indirectly.”30 There were to be no more grand bargains between business and labor under the New Deal.

Riven by divergent agendas rooted in industry- and firm-specific technology and demand, “business” was never able to speak with even the tenuous degree of unity achieved by workers. Following the abortive attempt to get the government to enforce cartels, firms and industries went their own ways, using a variety of strategies to enhance their situations. A number of sectors did succeed in getting passage of “little NRAs” with mechanisms tailored to mute competition in their particular circumstances. These mechanisms included the Robinson-Patman Act, aimed at strengthening traditional retailers against the ability of chain stores to buy at lower prices, the Guffey Acts, in which high cost bituminous coal operators and coal miners sought protection from the competition of lower cost operators, and the Motor Carrier Act in which high cost incumbent truckers obtained protection against new entrants.31

On-going macroeconomic analysis suggests that the general public interest may have been poorly served by the experiment of the NRA. Like many macroeconomic theories, the validity of the underconsumption scenario that was put forth in support of the program depended on the strength and timing of the operation of its various mechanisms. Increasingly it appears that the NRA set off inflationary forces thought by some to be desirable at the time, but that in fact had depressing effects on demand for labor and on output. Pure monopolistic deadweight losses probably were less important than higher wage costs (although there has not been any close examination of inefficiencies that may have resulted from the NRA’s attempt to protect small higher-cost producers). The strength of any mitigating effects on aggregate demand remains to be established.

1 Leverett Lyon, P. Homan, L. Lorwin, G. Terborgh, C. Dearing, L. Marshall, The National Recovery Administration: An Analysis and Appraisal, Washington: Brooking Institution, 1935, p. 313, footnote 9.

2 See, for example, Charles Frederick Roos, NRA Economic Planning, Colorado Springs: Cowles Commission, 1935, p. 343.

3See, for example, Colin Gordon, New Deals: Business, Labor, and Politics in America, 1920-1935, New York: Cambridge University Press, 1993, especially chapter 5.

4Christina D. Romer, “Why Did Prices Rise in the 1930s?” Journal of Economic History 59, no. 1 (1999): 167-199; Michael Weinstein, Recovery and Redistribution under the NIRA, Amsterdam: North Holland, 1980, and Harold L. Cole and Lee E. Ohanian, “New Deal Policies and the Persistence of the Great Depression,” Working Paper 597, Federal Reserve Bank of Minneapolis, February 2001. But also see “Unemployment, Inflation and Wages in the American Depression: Are There Lessons for Europe?” Ben Bernanke and Martin Parkinson, American Economic Review: Papers and Proceedings 79, no. 2 (1989): 210-214.

5 See, for example, Donald Brand, Corporatism and the Rule of Law: A Study of the National Recovery Administration, Ithaca: Cornell University Press, 1988, p. 94.

6 See, for example, Roos, op. cit., pp. 77, 92.

7 Section 3(a) of The National Industrial Recovery Act, reprinted at p. 478 of Roos, op. Cit.

8 Section 5 of The National Industrial Recovery Act, reprinted at p. 483 of Roos, op. cit. Note though, that the legal status of actions taken during the NRA era was never clear; Roos points out that “…President Roosevelt signed an executive order on January 20, 1934, providing that any complainant of monopolistic practices … could press it before the Federal Trade Commission or request the assistance of the Department of Justice. And, on the same date, Donald Richberg issued a supplementary statement which said that the provisions of the anti-trust laws were still in effect and that the NRA would not tolerate monopolistic practices.” (Roos, op. cit. p. 376.)

9 Lyon, op. cit., p. 307, cited at p. 52 in Lee and Ohanian, op cit.

10 Roos, op. cit., p. 75; and Blackwell Smith, My Imprint on the Sands of Time: The Life of a New Dealer, Vantage Press, New York, p. 109.

11 Lyon, op. cit., p. 570.

12 Section 3 (a)(2) of The National Industrial Recovery Act, op. Cit.

13 Roos, op. cit., at pp. 254-259. Charles Roos comments that “Leon Henderson and Blackwell Smith, in particular, became intrigued with a notion that competition could be set up within limits and that in this way wide price variations tending to demoralize an industry could be prevented.”

14 Lyon, et al., op. cit., p. 605.

15 Smith, Assistant Counsel of the NRA (per Roos, op cit., p. 254), has the following to say about standardization: One of the more controversial subjects, which we didn’t get into too deeply, except to draw guidelines, was standardization.” Smith goes on to discuss the obvious need to standardize rail track gauges, plumbing fittings, and the like, but concludes, “Industry on the whole wanted more standardization than we could go with.” (Blackwell Smith, op. cit., pp. 106-7.) One must not go overboard looking for coherence among the various positions espoused by NRA administrators; along these lines it is worth remembering Smith’s statement some 60 years later: “Business’s reaction to my policy [Smith was speaking generally here of his collective proposals] to some extent was hostile. They wished that the codes were not as strict as I wanted them to be. Also, there was criticism from the liberal/labor side to the effect that the codes were more in favor of business than they should have been. I said, ‘We are guided by a squealometer. We tune policy until the squeals are the same pitch from both sides.'” (Smith, op. cit. p. 108.)

16 Quoted at p 378 of Roos, op. Cit.

17 Brand, op. cit. at pp. 159-60 cites in agreement extremely critical conclusions by Roos (op. cit. at p. 409) and Arthur Schlesinger, The Age of Roosevelt: The Coming of the New Deal, Boston: Houghton Mifflin, 1959, p. 133.

18 Roos acknowledges a breakdown by spring of 1934: “By March, 1934 something was urgently needed to encourage industry to observe code provisions; business support for the NRA had decreased materially and serious compliance difficulties had arisen.” (Roos, op. cit., at p. 318.) Brand dates the start of the compliance crisis much earlier, in the fall of 1933. (Brand, op. cit., p. 103.)

19 Lyon, op. cit., p. 264.

20 Lyon, op. cit., p. 268.

21 Lyon, op. cit., pp. 268-272. See also Peter H. Irons, The New Deal Lawyers, Princeton: Princeton University Press, 1982.

22 Section 3(a)(2) of The National Industrial Recovery Act, op. Cit.

23 Section 6(b) of The National Industrial Recovery Act, op. Cit.

24 Brand, op. Cit.

25 Barbara Alexander and Gary D. Libecap, “The Effect of Cost Heterogeneity in the Success and Failure of the New Deal’s Agricultural and Industrial Programs,” Explorations in Economic History, 37 (2000), pp. 370-400.

26 Gordon, op. Cit.

27 Section 7 of the National Industrial Recovery Act, reprinted at pp. 484-5 of Roos, op. Cit.

28 Bernanke and Parkinson, op. cit., p. 214.

29 Romer, op. cit., p. 197.

30 Supreme Court of the United States, Nos. 854 and 864, October term, 1934, (decision issued May 27, 1935). Reprinted in Roos, op. cit., p. 580.

31 Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence, 1966, Princeton: Princeton University Press, p.

Citation: Alexander, Barbara. “National Recovery Administration”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/the-national-recovery-administration/

Japanese Industrialization and Economic Growth

Carl Mosk, University of Victoria

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

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

The proto-industrial base

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

Investment-led growth

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

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

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

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

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

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

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

Dualism

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

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

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

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

Why Japan?

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

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

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

Tokugawa political economy: daimyo and shogun

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

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

Readiness to emulate the West

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

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

Fukoku Kyohei

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

Central government reforms in education, finance and transportation

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

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

Diffusion of best-practice agriculture

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

Balanced growth

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

Geographic economies of scale in the Tokaido belt

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

Organizational economies of scale — zaibatsu

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

Electrification

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

Emergence of the dualistic economy

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

Clashing urban/rural and landlord/tenant interests

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

Japan’s military expansion

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

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

Postwar occupation: economic and institutional restructuring

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

Improvement in the social capability for economic growth

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

Japan and the postwar international order

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

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

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

MITI

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

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

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

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

Ultimate causes of the Japanese economic “miracle”

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

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

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

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

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

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

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

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

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

With this in mind consider Table 1.

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

Panel A: Income and Structure of National Output

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

(Ma)

Manufacturing,

Construction & Facilitating Sectors [b]

Relative Labor Productivity

A/N

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

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

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

Demand Growth

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

Panel C: Infrastructure and Human Development

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

Index

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Islamic Economics: What It Is and How It Developed

M. Umer Chapra, Islamic Research and Training Institute

Islamic economics has been having a revival over the last few decades. However, it is still in a preliminary stage of development. In contrast with this, conventional economics has become a well-developed and sophisticated discipline after going through a long and rigorous process of development over more than a century. Is a new discipline in economics needed? If so, what is Islamic economics, how does it differ from conventional economics, and what contributions has it made over the centuries? This article tries to briefly answer these questions.

It is universally recognized that resources are scarce compared with the claims on them. However, it is also simultaneously recognized by practically all civilizations that the well-being of all human beings needs to be ensured. Given the scarcity of resources, the well-being of all may remain an unrealized dream if the scarce resources are not utilized efficiently and equitably. For this purpose, every society needs to develop an effective strategy, which is consciously or unconsciously conditioned by its worldview. If the worldview is flawed, the strategy may not be able to help the society actualize the well-being of all. Prevailing worldviews may be classified for the sake of ease into two board theoretical constructs (1) secular and materialist, and (2) spiritual and humanitarian.

The Role of the Worldview

Secular and materialist worldviews attach maximum importance to the material aspect of human well-being and tend generally to ignore the importance of the spiritual aspect. They often argue that maximum material well-being can be best realized if individuals are given unhindered freedom to pursue their self-interest and to maximize their want satisfaction in keeping with their own tastes and preferences.[1] In their extreme form they do not recognize any role for Divine guidance in human life and place full trust in the ability of human beings to chalk out a proper strategy with the help of their reason. In such a worldview there is little role for values or government intervention in the efficient and equitable allocation and distribution of resources. When asked about how social interest would be served when everyone has unlimited freedom to pursue his/her self-interest, the reply is that market forces will themselves ensure this because competition will keep self-interest under check.

In contrast with this, religious worldviews give attention to both the material as well as the spiritual aspects of human well-being. They do not necessarily reject the role of reason in human development. They, however, recognize the limitations of reason and wish to complement it by revelation. They do not also reject the need for individual freedom or the role that the serving of self-interest can play in human development They, however, emphasize that both freedom and the pursuit of self-interest need to be toned down by moral values and good governance to ensure that everyone’s well-being is realized and that social harmony and family integrity are not hurt in the process of everyone serving his/her self-interest.

Material and Spiritual Needs

Even though none of the major worldviews prevailing around the world is totally materialist and hedonist, there are, nevertheless, significant differences among them in terms of the emphasis they place on material or spiritual goals and the role of moral values and government intervention in ordering human affairs. While material goals concentrate primarily on goods and services that contribute to physical comfort and well-being, spiritual goals include nearness to God, peace of mind, inner happiness, honesty, justice, mutual care and cooperation, family and social harmony, and the absence of crime and anomie. These may not be quantifiable, but are, nevertheless, crucial for realizing human well-being. Resources being limited, excessive emphasis on the material ingredients of well-being may lead to a neglect of spiritual ingredients. The greater the difference in emphasis, the greater may be the difference in the economic disciplines of these societies. Feyerabend (1993) frankly recognized this in the introduction to the Chinese edition of his thought-provoking book, Against Method, by stating that “First world science is only one science among many; by claiming to be more it ceases to be an instrument of research and turns into a (political) pressure group” (p.3, parentheses are in the original).

The Enlightenment Worldview and Conventional Economics

There is a great deal that is common between the worldviews of most major religions, particularly those of Judaism, Christianity and Islam. This is because, according to Islam, there is a continuity and similarity in the value systems of all Revealed religions to the extent to which the Message has not been lost or distorted over the ages. The Qur’an clearly states that: “Nothing has been said to you [Muhammad] that was not said to the Messengers before you” (Al-Qur’an, 41:43). If conventional economics had continued to develop in the image of the Judeo-Christian worldview, as it did before the Enlightenment Movement of the seventeenth and eighteenth centuries, there may not have been any significant difference between conventional and Islamic economics. However, after the Enlightenment Movement, all intellectual disciplines in Europe became influenced by its secular, value-neutral, materialist and social-Darwinist worldview, even though this did not succeed fully. All economists did not necessarily become materialist or social-Darwinist in their individual lives and many of them continued to be attached to their religious worldviews. Koopmans (1969) has rightly observed that “scratch an economist and you will find a moralist underneath.” Therefore, while theoretically conventional economics adopted the secular and value neutral orientation of the Enlightenment worldview and failed to recognize the role of value judgments and good governance in the efficient and equitable allocation and distribution of resources, in practice this did not take place fully. The pre-Enlightenment tradition never disappeared completely (see Baeck, 1994, p. 11).

There is no doubt that, in spite of its secular and materialist worldview, the market system led to a long period of prosperity in the Western market-oriented economies. However, this unprecedented prosperity did not lead to the elimination of poverty or the fulfillment of everyone’s needs in conformity with the Judeo-Christian value system even in the wealthiest countries. Inequalities of income and wealth have also continued to persist and there has also been a substantial degree of economic instability and unemployment which have added to the miseries of the poor. This indicates that both efficiency and equity have remained elusive in spite of rapid development and phenomenal rise in wealth.

Consequently there has been persistent criticism of economics by a number of well-meaning scholars, including Thomas Carlyle (Past and Present, 1843), John Ruskin (Unto this Last, 1862) and Charles Dickens (Hard Times, 1854-55) in England, and Henry George (Progress and Poverty, 1879) in America. They ridiculed the dominant doctrine of laissez-faire with its emphasis on self-interest. Thomas Carlyle called economics a “dismal science” and rejected the idea that free and uncontrolled private interests will work in harmony and further the public welfare (see Jay and Jay, 1986). Henry George condemned the resulting contrast between wealth and poverty and wrote: “So long as all the increased wealth which modern progress brings goes but to build great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent” (1955, p. 10).

In addition to failing to fulfill the basic needs of a large number of people and increasing inequalities of income and wealth, modern economic development has been associated with the disintegration of the family and a failure to bring peace of mind and inner happiness (Easterlin 2001, 1995 and 1974; Oswald, 1997; Blanchflower and Oswald, 2000; Diener and Oshi, 2000; and Kenny, 1999). Due to these problems and others the laissez-faire approach lost ground, particularly after the Great Depression of the 1930s as a result of the Keynesian revolution and the socialist onslaught. However, most observers have concluded that government intervention alone cannot by itself remove all socio-economic ills. It is also necessary to motivate individuals to do what is right and abstain from doing what is wrong. This is where the moral uplift of society can be helpful. Without it, more and more difficult and costly regulations are needed. Nobel-laureate Amartya Sen has, therefore, rightly argued that “the distancing of economics from ethics has impoverished welfare economics and also weakened the basis of a good deal of descriptive and predictive economics” and that economics “can be made more productive by paying greater and more explicit attention to ethical considerations that shaped human behaviour and judgment” (1987, pp. 78-79). Hausman and McPherson also conclude in their survey article “Economics and Contemporary Moral Philosophy” that “An economy that is engaged actively and self-critically with the moral aspects of its subject matter cannot help but be more interesting, more illuminating and, ultimately, more useful than the one that tries not to be” (1993, p. 723).

Islamic Economics – and How It Differs from Conventional Economics

While conventional economics is now in the process of returning to its pre-Enlightenment roots, Islamic economics never got entangled in a secular and materialist worldview. It is based on a religious worldview which strikes at the roots of secularism and value neutrality. To ensure the true well-being of all individuals, irrespective of their sex, age, race, religion or wealth, Islamic economics does not seek to abolish private property, as was done by communism, nor does it prevent individuals from serving their self-interest. It recognizes the role of the market in the efficient allocation of resources, but does not find competition to be sufficient to safeguard social interest. It tries to promote human brotherhood, socio-economic justice and the well-being of all through an integrated role of moral values, market mechanism, families, society, and ‘good governance.’ This is because of the great emphasis in Islam on human brotherhood and socio-economic justice.

The Integrated Role of the Market, Families, Society, and Government

The market is not the only institution where people interact in human society. They also interact in the family, the society and the government and their interaction in all these institutions is closely interrelated. There is no doubt that the serving of self-interest does help raise efficiency in the market place. However, if self-interest is overemphasized and there are no moral restraints on individual behavior, other institutions may not work effectively – families may disintegrate, the society may be uncaring, and the government may be corrupt, partisan, and self-centered. Mutual sacrifice is necessary for keeping the families glued together. Since the human being is the most important input of not only the market, but also of the family, the society and the government, and the family is the source of this input, nothing may work if families disintegrate and are unable to provide loving care to children. This is likely to happen if both the husband and wife try to serve just their own self-interest and are not attuned to the making of sacrifices that the proper care and upbringing of children demands. Lack of willingness to make such sacrifice can lead to a decline in the quality of the human input to all other institutions, including the market, the society and the government. It may also lead to a fall in fertility rates below the replacement level, making it difficult for society not only to sustain its development but also its social security system.

The Role of Moral Values

While conventional economics generally considers the behavior and tastes and preferences of individuals as given, Islamic economics does not do so. It places great emphasis on individual and social reform through moral uplift. This is the purpose for which all God’s messengers, including Abraham, Moses, Jesus, and Muhammad, came to this world. Moral uplift aims at the change in human behavior, tastes and preferences and, thereby, it complements the price mechanism in promoting general well-being. Before even entering the market place and being exposed to the price filter, consumers are expected to pass their claims through the moral filter. This will help filter out conspicuous consumption and all wasteful and unnecessary claims on resources. The price mechanism can then take over and reduce the claims on resources even further to lead to the market equilibrium. The two filters can together make it possible to have optimum economy in the use of resources, which is necessary to satisfy the material as well as spiritual needs of all human beings, to reduce the concentration of wealth in a few hands, and to raise savings, which are needed to promote greater investment and employment. Without complementing the market system with morally-based value judgments, we may end up perpetuating inequities in spite of our good intentions through what Solo calls inaction, non-choice and drifting (Solo, 1981, p. 38)

From the above discussion, one may easily notice the similarities and differences between the two disciplines. While the subject matter of both is the allocation and distribution of resources and both emphasize the fulfillment of material needs, there is an equal emphasis in Islamic economics on the fulfillment of spiritual needs. While both recognize the important role of market mechanism in the allocation and distribution of resources, Islamic economics argues that the market may not by itself be able to fulfill even the material needs of all human beings. This is because it can promote excessive use of scarce resources by the rich at the expense of the poor if there is undue emphasis on the serving of self-interest. Sacrifice is involved in fulfilling our obligations towards others and excessive emphasis on the serving of self-interest does not have the potential of motivating people to make the needed sacrifice. This, however, raises the crucial question of why a rational person would sacrifice his self-interest for the sake of others?

The Importance of the Hereafter

This is where the concepts of the innate goodness of human beings and of the Hereafter come in – concepts which conventional economics ignores but on which Islam and other major religions place a great deal of emphasis. Because of their innate goodness, human beings do not necessarily always try to serve their self-interest. They are also altruistic and are willing to make sacrifices for the well-being of others. In addition, the concept of the Hereafter does not confine self-interest to just this world. It rather extends it beyond this world to life after death. We may be able to serve our self-interest in this world by being selfish, dishonest, uncaring, and negligent of our obligations towards our families, other human beings, animals, and the environment. However, we cannot serve our self-interest in the Hereafter except by fulfilling all these obligations.

Thus, the serving of self-interest receives a long-run perspective in Islam and other religions by taking into account both this world and the next. This serves to provide a motivating mechanism for sacrifice for the well-being of others that conventional economics fails to provide. The innate goodness of human beings along with the long-run perspective given to self-interest has the potential of inducing a person to be not only efficient but also equitable and caring. Consequently, the three crucial concepts of conventional economics – rational economic man, positivism, and laissez-faire – were not able to gain intellectual blessing in their conventional economics sense from any of the outstanding scholars who represent the mainstream of Islamic thought.

Rational Economic Man

While there is hardly anyone opposed to the need for rationality in human behavior, there are differences of opinion in defining rationality (Sen, 1987, pp. 11-14). However, once rationality has been defined in terms of overall individual as well as social well-being, then rational behavior could only be that which helps us realize this goal. Conventional economics does not define rationality in this way. It equates rationality with the serving of self-interest through the maximization of wealth and want satisfaction, The drive of self-interest is considered to be the “moral equivalent of the force of gravity in nature” (Myers, 1983, p. 4). Within this framework society is conceptualized as a mere collection of individuals united through ties of self-interest.

The concept of ‘rational economic man’ in this social-Darwinist, utilitarian, and material sense of serving self–interest could not find a foothold in Islamic economics. ‘Rationality’ in Islamic economics does not get confined to the serving of one’s self-interest in this world alone; it also gets extended to the Hereafter through the faithful compliance with moral values that help rein self-interest to promote social interest. Al-Mawardi (d. 1058) considered it necessary, like all other Muslim scholars, to rein individual tastes and preferences through moral values (1955, pp. 118-20). Ibn Khaldun (d.1406) emphasized that moral orientation helps remove mutual rivalry and envy, strengthens social solidarity, and creates an inclination towards righteousness (n.d., p.158).

Positivism

Similarly, positivism in the conventional economics sense of being “entirely neutral between ends” (Robbins, 1935, p. 240) or “independent of any particular ethical position or normative judgment” (Friedman, 1953) did not find a place in Muslim intellectual thinking. Since all resources at the disposal of human beings are a trust from God, and human beings are accountable before Him, there is no other option but to use them in keeping with the terms of trust. These terms are defined by beliefs and moral values. Human brotherhood, one of the central objectives of Islam, would be a meaningless jargon if it were not reinforced by justice in the allocation and distribution of resources.

Pareto Optimum

Without justice, it would be difficult to realize even development. Muslim scholars have emphasized this throughout history. Development Economics has also started emphasizing its importance, more so in the last few decades.[2] Abu Yusuf (d. 798) argued that: “Rendering justice to those wronged and eradicating injustice, raises tax revenue, accelerates development of the country, and brings blessings in addition to reward in the Hereafter” (1933/34, p. 111: see also pp. 3-17). Al-Mawardi argued that comprehensive justice “inculcates mutual love and affection, obedience to the law, development of the country, expansion of wealth, growth of progeny, and security of the sovereign” (1955, p. 27). Ibn Taymiyyah (d. 1328) emphasized that “justice towards everything and everyone is an imperative for everyone, and injustice is prohibited to everything and everyone. Injustice is absolutely not permissible irrespective of whether it is to a Muslim or a non-Muslim or even to an unjust person” (1961-63, Vol. 18, p. 166).

Justice and the well-being of all may be difficult to realize without a sacrifice on the part of the well-to-do. The concept of Pareto optimum does not, therefore, fit into the paradigm of Islamic economics. This is because Pareto optimum does not recognize any solution as optimum if it requires a sacrifice on the part of a few (rich) for raising the well-being of the many (poor). Such a position is in clear conflict with moral values, the raison d’être of which is the well-being of all. Hence, this concept did not arise in Islamic economics. In fact, Islam makes it a religious obligation of Muslims to make a sacrifice for the poor and the needy, by paying Zakat at the rate of 2.5 percent of their net worth. This is in addition to the taxes that they pay to the governments as in other countries.

The Role of State

Moral values may not be effective if they are not observed by all. They need to be enforced. It is the duty of the state to restrain all socially harmful behavior[3] including injustice, fraud, cheating, transgression against other people’s person, honor and property, and the non-fulfillment of contracts and other obligations through proper upbringing, incentives and deterrents, appropriate regulations, and an effective and impartial judiciary. The Qur’an can only provide norms. It cannot by itself enforce them. The state has to ensure this. That is why the Prophet Muhammad said: “God restrains through the sovereign more than what He restrains through the Qur’an” (cited by al-Mawardi, 1955, p. 121). This emphasis on the role of the state has been reflected in the writings of all leading Muslim scholars throughout history.[4] Al-Mawardi emphasized that an effective government (Sultan Qahir) is indispensable for preventing injustice and wrongdoing (1960, p. 5). Say’s Law could not, therefore, become a meaningful proposition in Islamic economics.

How far is the state expected to go in the fulfillment of its role? What is it that the state is expected to do? This has been spelled out by a number of scholars in the literature on what has come to be termed as “Mirrors for Princes.”[5] None of them visualized regimentation or the owning and operating of a substantial part of the economy by the state. Several classical Muslim scholars, including al-Dimashqi (d. after 1175) and Ibn Khaldun, clearly expressed their disapproval of the state becoming directly involved in the economy (Al-Dimashqi, 1977, pp. 12 and 61; Ibn Khaldun, pp. 281-83). According to Ibn Khaldun, the state should not acquire the character of a monolithic or despotic state resorting to a high degree of regimentation (ibid., p. 188). It should not feel that, because it has authority, it can do anything it likes (ibid, p. 306). It should be welfare-oriented, moderate in its spending, respect the property rights of the people, and avoid onerous taxation (ibid, p. 296). This implies that what these scholars visualized as the role of government is what has now been generally referred to as ‘good governance’.

Some of the Contributions Made by Islamic Economics

The above discussion should not lead one to an impression that the two disciplines are entirely different. One of the reasons for this is that the subject matter of both disciplines is the same, allocation and distribution of scarce resources. Another reason is that all conventional economists have never been value neutral. They have made value judgments in conformity with their beliefs. As indicated earlier, even the paradigm of conventional economics has been changing – the role of good governance has now become well recognized and the injection of a moral dimension has also become emphasized by a number of prominent economists. Moreover, Islamic economists have benefited a great deal from the tools of analysis developed by neoclassical, Keynesian, social, humanistic and institutional economics as well as other social sciences, and will continue to do so in the future.

The Fallacy of the ‘Great Gap’ Theory

A number of economic concepts developed in Islamic economics long before they did in conventional economics. These cover a number of areas including interdisciplinary approach; property rights; division of labor and specialization; the importance of saving and investment for development; the role that both demand and supply play in the determination of prices and the factors that influence demand and supply; the roles of money, exchange, and the market mechanism; characteristics of money, counterfeiting, currency debasement, and Gresham’s law; the development of checks, letters of credit and banking; labor supply and population; the role of the state, justice, peace, and stability in development; and principles of taxation.I t is not possible to provide comprehensive coverage of all the contributions Muslim scholars have made to economics. Only some of their contributions will be highlighted below to remove the concept of the “Great Gap” of “over 500 years” that exists in the history of conventional economic thought as a result of the incorrect conclusion by Joseph Schumpeter in History of Economic Analysis (1954), that the intervening period between the Greeks and the Scholastics was sterile and unproductive.[6] This concept has become well embedded in the conventional economics literature as may be seen from the reference to this even by the Nobel-laureate, Douglass North, in his December 1993 Nobel lecture (1994, p. 365). Consequently, as Todd Lowry has rightly observed, “the character and sophistication of Arabian writings has been ignored” (See his ‘Foreword’ in Ghazanfar, 2003, p. xi).

The reality, however, is that the Muslim civilization, which benefited greatly from the Chinese, Indian, Sassanian and Byzantine civilizations, itself made rich contributions to intellectual activity, including socio-economic thought, during the ‘Great Gap’ period, and thereby played a part in kindling the flame of the European Enlightenment Movement. Even the Scholastics themselves were greatly influenced by the contributions made by Muslim scholars. The names of Ibn Sina (Avicenna, d. 1037), Ibn Rushd (Averroes, d. 1198) and Maimonides (d. 1204, a Jewish philosopher, scientist, and physician who flourished in Muslim Spain) appear on almost every page of the thirteenth-century summa (treatises written by scholastic philosophers) (Pifer, 1978, p. 356).

Multidisciplinary Approach for Development

One of the most important contributions of Islamic economics, in addition to the above paradigm discussion, was the adoption of a multidisciplinary dynamic approach. Muslim scholars did not focus their attention primarily on economic variables. They considered overall human well-being to be the end product of interaction over a long period of time between a number of economic, moral, social, political, demographic and historical factors in such a way that none of them is able to make an optimum contribution without the support of the others. Justice occupied a pivotal place in this whole framework because of its crucial importance in the Islamic worldview There was an acute realization that justice is indispensable for development and that, in the absence of justice, there will be decline and disintegration.

The contributions made by different scholars over the centuries seem to have reached their consummation in Ibn Khaldun’s Maquddimah, which literally means ‘introduction,’ and constitutes the first volume of a seven-volume history, briefly called Kitab al-‘Ibar or the Book of Lessons [of History].[7] Ibn Khaldun lived at a time (1332-1406) when the Muslim civilization was in the process of decline. He wished to see a reversal of this tide, and, as a social scientist, he was well aware that such a reversal could not be envisaged without first drawing lessons (‘ibar) from history to determine the factors that had led the Muslim civilization to bloom out of humble beginnings and to decline thereafter. He was, therefore, not interested in knowing just what happened. He wanted to know the how and why of what happened. He wanted to introduce a cause and effect relationship into the discussion of historical phenomena. The Muqaddimah is the result of this desire. It tries to derive the principles that govern the rise and fall of a ruling dynasty, state (dawlah) or civilization (‘umran).

Since the centre of Ibn Khaldun’s analysis is the human being, he sees the rise and fall of dynasties or civilizations to be closely dependent on the well-being or misery of the people. The well-being of the people is in turn not dependent just on economic variables, as conventional economics has emphasized until recently, but also on the closely interrelated role of moral, psychological, social, economic, political, demographic and historical factors. One of these factors acts as the trigger mechanism. The others may, or may not, react in the same way. If the others do not react in the same direction, then the decay in one sector may not spread to the others and either the decaying sector may be reformed or the decline of the civilization may be much slower. If, however, the other sectors react in the same direction as the trigger mechanism, the decay will gain momentum through an interrelated chain reaction such that it becomes difficult over time to identify the cause from the effect. He, thus, seems to have had a clear vision of how all the different factors operate in an interrelated and dynamic manner over a long period to promote the development or decline of a society.

He did not, thus, adopt the neoclassical economist’s simplification of confining himself to primarily short-term static analysis of only markets by assuming unrealistically that all other factors remain constant. Even in the short-run, everything may be in a state of flux through a chain reaction to the various changes constantly taking place in human society, even though these may be so small as to be imperceptible. Therefore, even though economists may adopt the ceteris paribus assumption for ease of analysis, Ibn Khaldun’s multidisciplinary dynamics can be more helpful in formulating socio-economic policies that help improve the overall performance of a society. Neoclassical economics is unable to do this because, as North has rightly asked, “How can one prescribe policies when one does not understand how economies develop?” He, therefore, considers neoclassical economics to be “an inappropriate tool to analyze and prescribe policies that will induce development” (North, 1994, p. 549).

However, this is not all that Islamic economics has done. Muslim scholars, including Abu Yusuf (d. 798), al-Mawardi (d. 1058), Ibn Hazm (d. 1064), al-Sarakhsi (d. 1090), al-Tusi (d. 1093), al-Ghazali (d. 1111), al-Dimashqi (d. after 1175), Ibn Rushd (d. 1187), Ibn Taymiyyah (d.1328), Ibn al-Ukhuwwah (d. 1329), Ibn al-Qayyim (d. 1350), al-Shatibi (d. 1388), Ibn Khaldun (d. 1406), al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762) made a number of valuable contributions to economic theory. Their insight into some economic concepts was so deep that a number of the theories propounded by them could undoubtedly be considered the forerunners of some more sophisticated modern formulations of these theories.[8]

Division of Labor, Specialization, Trade, Exchange and Money and Banking

A number of scholars emphasized the necessity of division of labor for economic development long before this happened in conventional economics. For example, al-Sarakhsi (d. 1090) said: “the farmer needs the work of the weaver to get clothing for himself, and the weaver needs the work of the farmer to get his food and the cotton from which the cloth is made …, and thus everyone of them helps the other by his work…” (1978, Vol. 30, p. 264). Al-Dimashqi, writing about a century later, elaborates further by saying: “No individual can, because of the shortness of his life span, burden himself with all industries. If he does, he may not be able to master the skills of all of them from the first to the last. Industries are all interdependent. Construction needs the carpenter and the carpenter needs the ironsmith and the ironsmith needs the miner, and all these industries need premises. People are, therefore, necessitated by force of circumstances to be clustered in cities to help each other in fulfilling their mutual needs” (1977, p. 20-21).

Ibn Khaldun ruled out the feasibility or desirability of self-sufficiency, and emphasized the need for division of labor and specialization by indicating that: “It is well-known and well-established that individual human beings are not by themselves capable of satisfying all their individual economic needs. They must all cooperate for this purpose. The needs that can be satisfied by a group of them through mutual cooperation are many times greater than what individuals are capable of satisfying by themselves” (p. 360). In this respect he was perhaps the forerunner of the theory of comparative advantage, the credit for which is generally given in conventional economics to David Ricardo who formulated it in 1817.

The discussion of division of labor and specialization, in turn, led to an emphasis on trade and exchange, the existence of well-regulated and properly functioning markets through their effective regulation and supervision (hisbah), and money as a stable and reliable measure, medium of exchange and store of value. However, because of bimetallism (gold and silver coins circulating together) which then prevailed, and the different supply and demand conditions that the two metals faced, the rate of exchange between the two full-bodied coins fluctuated. This was further complicated by debasement of currencies by governments in the later centuries to tide over their fiscal problems. This had, according to Ibn Taymiyyah (d. 1328) (1961-63, Vol. 29, p. 649), and later on al-Maqrizi (d. 1442) and al-Asadi (d. 1450), the effect of bad coins driving good coins out of circulation (al-Misri, 1981, pp. 54 and 66), a phenomenon which was recognized and referred to in the West in the sixteenth century as Gresham’s Law. Since debasement of currencies is in sheer violation of the Islamic emphasis on honesty and integrity in all measures of value, fraudulent practices in the issue of coins in the fourteenth century and afterwards elicited a great deal of literature on monetary theory and policy. The Muslims, according to Baeck, should, therefore, be considered forerunners and critical incubators of the debasement literature of the fourteenth and fifteenth centuries (Baeck, 1994, p. 114).

To finance their expanding domestic and international trade, the Muslim world also developed a financial system, which was able to mobilize the “entire reservoir of monetary resources of the mediaeval Islamic world” for financing agriculture, crafts, manufacturing and long-distance trade (Udovitch, 1970, pp. 180 and 261). Financiers were known as sarrafs. By the time of Abbasid Caliph al-Muqtadir (908-32), they had started performing most of the basic functions of modern banks (Fischel, 1992). They had their markets, something akin to the Wall Street in New York and Lombard Street in London, and fulfilled all the banking needs of commerce, agriculture and industry (Duri, 1986, p. 898). This promoted the use of checks (sakk) and letters of credit (hawala). The English word check comes from the Arabic term sakk.

Demand and Supply

A number of Muslim scholars seem to have clearly understood the role of both demand and supply in the determination of prices. For example, Ibn Taymiyyah (d. 1328) wrote: “The rise or fall of prices may not necessarily be due to injustice by some people. They may also be due to the shortage of output or the import of commodities in demand. If the demand for a commodity increases and the supply of what is demanded declines, the price rises. If, however, the demand falls and the supply increases, the price falls” (1961-3, Vol. 8, p. 523).

Even before Ibn Taymiyyah, al-Jahiz (d. 869) wrote nearly five centuries earlier that: “Anything available in the market is cheap because of its availability [supply] and dear by its lack of availability if there is need [demand] for it” (1983, p. 13), and that “anything the supply of which increases, becomes cheap except intelligence, which becomes dearer when it increases” (ibid., p. 13).

Ibn Khaldun went even further by emphasizing that both an increase in demand or a fall in supply leads to a rise in prices, while a decline in demand or a rise in supply contributes to a fall in prices (pp. 393 and 396). He believed that while continuation of ‘excessively low’ prices hurts the craftsmen and traders and drives them out of the market, the continuation of ‘excessively high’ prices hurts the consumers. ‘Moderate’ prices in between the two extremes were, therefore, desirable, because they would not only allow the traders a socially-acceptable level of return but also lead to the clearance of the markets by promoting sales and thereby generating a given turnover and prosperity (ibid, p. 398). Nevertheless, low prices were desirable for necessities because they provide relief to the poor who constitute the majority of the population (ibid, p. 398). If one were to use modem terminology, one could say that Ibn Khaldun found a stable price level with a relatively low cost of living to be preferable, from the point of view of both growth and equity in comparison with bouts of inflation and deflation. The former hurts equity while the latter reduces incentive and efficiency. Low prices for necessities should not, however, be attained through the fixing of prices by the state; this destroys the incentive for production (ibid, pp. 279-83).

The factors which determined demand were, according to Ibn Khaldun, income, price level, the size of the population, government spending, the habits and customs of the people, and the general development and prosperity of the society (ibid, pp.398-404). The factors which determined supply were demand (ibid, pp. 400 and 403), order and stability (pp. 306-08), the relative rate of profit (ibid, pp. 395 and 398), the extent of human effort (p. 381), the size of the labor force as well as their knowledge and skill (pp. 363 and 399-400), peace and security (pp. 394-95 and 396), and the technical background and development of the whole society (pp. 399-403). All these constituted important elements of his theory of production. If the price falls and leads to a loss, capital is eroded, the incentive to supply declines, leading to a recession. Trade and crafts also consequently suffer (p. 398).

This is highly significant because the role of both demand and supply in the determination of value was not well understood in the West until the late nineteenth and the early twentieth centuries. Pre-classical English economists like William Petty (1623-87), Richard Cantillon (1680-1734), James Steuart (1712-80), and even Adam Smith (1723-90), the founder of the Classical School, generally stressed only the role of the cost of production, and particularly of labor, in the determination of value. The first use in English writings of the notions of both demand and supply was perhaps in 1767 (Thweatt, 1983). Nevertheless, it was not until the second decade of the nineteenth century that the role of both demand and supply in the determination of market prices began to be fully appreciated (Groenewegen, 1973). While Ibn Khaldun had been way ahead of conventional economists, he probably did not have any idea of demand and supply schedules, elasticities of demand and supply and most important of all, equilibrium price, which plays a crucial role in modern economic discussions.

Public Finance

Taxation

Long before Adam Smith (d. 1790), who is famous, among other things, for his canons of taxation (equality, certainty, convenience of payment, and economy in collection) (see Smith, 1937, pp. 777-79), the development of these canons can be traced in the writings of pre-Islamic as well as Muslim scholars, particularly the need for the tax system to be just and not oppressive. Caliphs Umar (d. 644), Ali (d. 661) and Umar ibn Abd al-Aziz (d. 720), stressed that taxes should be collected with justice and leniency and should not be beyond the ability of the people to bear. Tax collectors should not under any circumstances deprive the people of the necessities of life (Abu Yusuf, 1933/34, pp. 14, 16 and 86). Abu Yusuf, adviser to Caliph Harun al-Rashid (786-809), argued that a just tax system would lead not only to an increase in revenues but also to the development of the country (Abu Yusuf, 1933/34, p. 111; see also pp. 14, 16, 60, 85, 105-19 and 125). Al-Mawardi also argued that the tax system should do justice to both the taxpayer and the treasury – “taking more was iniquitous with respect to the rights of the people, while taking less was unfair with respect to the right of the public treasury” (1960, p. 209; see also pp. 142-56 and 215).[9]

Ibn Khaldun stressed the principles of taxation very forcefully in the Muqaddimah. He quoted from a letter written by Tahir ibn al-Husayn, Caliph al-Ma’mun’s general, advising his son, ‘Abdullah ibn Tahir, Governor of al-Raqqah (Syria): “So distribute [taxes] among all people making them general, not exempting anyone because of his nobility or wealth and not exempting even your own officials or courtiers or followers. And do not levy on anyone a tax which is beyond his capacity to pay” (p. 308).[10] In this particular passage, he stressed the principles of equity and neutrality, while in other places he also stressed the principles of convenience and productivity.

The effect of taxation on incentives and productivity was so clearly visualized by Ibn Khaldun that he seems to have grasped the concept of optimum taxation. He anticipated the gist of the Laffer Curve, nearly six hundred years before Arthur Laffer, in two full chapters of the Muqaddimah.[11] At the end of the first chapter, he concluded that “the most important factor making for business prosperity is to lighten as much as possible the burden of taxation on businessmen, in order to encourage enterprise by ensuring greater profits [after taxes]” (p. 280). This he explained by stating that “when taxes and imposts are light, the people have the incentive to be more active. Business therefore expands, bringing greater satisfaction to the people because of low taxes …, and tax revenues also rise, being the sum total of all assessments” (p. 279). He went on to say that as time passes the needs of the state increase and rates of taxation rise to increase the yield. If this rise is gradual people become accustomed to it, but ultimately there is an adverse impact on incentives. Business activity is discouraged and declines, and so does the yield of taxation (pp. 280-81). A prosperous economy at the beginning of the dynasty, thus, yields higher tax revenue from lower tax rates while a depressed economy at the end of the dynasty, yields smaller tax revenue from higher rates (p. 279). He explained the reasons for this by stating: “Know that acting unjustly with respect to people’s wealth, reduces their will to earn and acquire wealth … and if the will to earn goes, they stop working. The greater the oppression, the greater the effect on their effort to earn … and, if people abstain from earning and stop working, the markets will stagnate and the condition of people will worsen” (pp. 286-87); tax revenues will also decline (p. 362). He, therefore, advocated justice in taxation (p. 308).

Public Expenditure

For Ibn Khaldun the state was also an important factor of production. By its spending it promotes production and by its taxation it discourages production (pp. 279-81). Since the government constitutes the greatest market for goods and services, and is a major source of all development (pp. 286 and 403), a decrease in its spending leads to not only a slackening of business activity and a decline in profits but also a decline in tax revenue (p. 286). The more the government spends, the better it may be for the economy (p. 286).[12] Higher spending enables the government to do the things that are needed to support the population and to ensure law and order and political stability (pp. 306 and 308). Without order and political stability, the producers have no incentive to produce. He stated that “the only reason [for the accelerated development of cities] is that the government is near them and pours its money into them, like the water [of a river] that makes green everything around it, and irrigates the soil adjacent to it, while in the distance everything remains dry” (p. 369).

Ibn Khaldun also analyzed the effect of government expenditure on the economy and is, in this respect, a forerunner of Keynes. He stated: “A decrease in government spending leads to a decline in tax revenues. The reason for this is that the state represents the greatest market for the world and the source of civilization. If the ruler hoards tax revenues, or if these are lost, and he does not spend them as they should be, the amount available with his courtiers and supporters would decrease, as would also the amount that reaches through them to their employees and dependents [the multiplier effect]. Their total spending would, therefore, decline. Since they constitute a significant part of the population and their spending constitutes a substantial part of the market, business will slacken and the profits of businessmen will decline, leading also to a decline in tax revenues … Wealth tends to circulate between the people and the ruler, from him to them and from them to him. Therefore, if the ruler withholds it from spending, the people would become deprived of it” (p. 286).

Economic Mismanagement and Famine

Ibn Khaldun established the causal link between bad government and high grain prices by indicating that in the later stage of the dynasty, when public administration becomes corrupt and inefficient, and resorts to coercion and oppressive taxation, incentive is adversely affected and the farmers refrain from cultivating the land. Grain production and reserves fail to keep pace with the rising population. The absence of reserves causes supply shortages in the event of a famine and leads to price escalation (pp. 301-02).

Al-Maqrizi (d. 1442) who, as muhtasib (market supervisor), had intimate knowledge of the economic conditions during his times, applied Ibn Khaldun’s analysis in his book (1956) to determine the reasons for the economic crisis of Egypt during the period 1403-06. He identified that the political administration had become very weak and corrupt during the Circassian period. Public officials were appointed on the basis of bribery rather than ability.[13] To recover the bribes, officials resorted to oppressive taxation. The incentive to work and produce was adversely affected and output declined. The crisis was further intensified by debasement of the currency through the excessive issue of copper fulus, or fiat money, to cover state budgetary deficits. All these factors joined hands with the famine to lead to a high degree of inflation, misery of the poor, and impoverishment of the country.

Hence, al-Maqrizi laid bare the socio-political determinants of the prevailing ‘system crisis’ by taking into account a number of variables like corruption, bad government policies, and weak administration. All of these together played a role in worsening the impact of the famine, which could otherwise have been handled effectively without a significant adverse impact on the population. This is clearly a forerunner of Sen’s entitlement theory, which holds the economic mismanagement of illegitimate governments to be responsible for the poor people’s misery during famines and other natural disasters (Sen, 1981). What al-Maqrizi wrote of the Circassian Mamluks was also true of the later Ottoman period (See Meyer, 1989).

Stages of Development

Ibn Khaldun stated the stages of development through which every society passes, moving from the primitive Bedouin stage to the rise of village, towns and urban centers with an effective government, development of agriculture, industry and sciences, and the impact of values and environment on this development ( Muqaddimah, pp. 35, 41-44, 87-95, 120-48, 172-76). Walliyullah[14] (d. 1762) later analyzed the development of society through four different stages from primitive existence to a well-developed community with khilafah (morally-based welfare state), which tries to ensure the spiritual as well as material well-being of the people. Like Ibn Khaldun, he considered political authority to be indispensable for human well-being. To be able to serve as a source of well-being for all and not of burden and decay, it must have the characteristics of the khilafah. He applied this analysis in various writings to the conditions prevailing during his life-time. He found that the luxurious life style of the rulers, along with their exhausting military campaigns, the increasing corruption and inefficiency of the civil service, and huge stipends to a vast retinue of unproductive courtiers, led them to the imposition of oppressive taxes on farmers, traders and craftsmen, who constituted the main productive section of the population. These people had, therefore, lost interest in their occupations, output had slowed down, state financial resources had declined, and the country had become impoverished (Waliyullah, 1992, Vol. I, pp. 119-52). Thus, in step with Ibn Khaldun and other Muslim scholars, al-Maqrizi and Waliyullah combined moral, political, social and economic factors to explain the economic phenomena of their times and the rise and fall of their societies.

Muslim Intellectual Decline

Unfortunately, the rich theoretical contribution made by Muslim scholars up until Ibn Khaldun did not get fertilized and irrigated by later scholars to lead to the development of Islamic economics, except by a few isolated scholars like al-Maqrizi, al-Dawwani (d. 1501), and Waliyullah. Their contributions were, however, only in specific areas and did not lead to a further development of Ibn Khaldun’s model of socio-economic and political dynamics. Islamic economics did not, therefore, develop as a separate intellectual discipline in conformity with the Islamic paradigm along the theoretical foundations and method laid down by Ibn Khaldun and his predecessors. It continued to remain an integral part of the social and moral philosophy of Islam.

One may ask here why the rich intellectual contributions made by Muslim scholars did not continue after Ibn Khaldun. The reason may be that, as indicated earlier, Ibn Khaldun lived at a time when the political and socio-economic decline of the Muslim world was underway.[15] He was perhaps “the sole point of light in his quarter of the firmament” (Toynbee, 1935, Vol. 3, p. 321). According to Ibn Khaldun himself, sciences progress only when a society is itself progressing (p. 434). This theory is clearly upheld by Muslim history. Sciences progressed rapidly in the Muslim world for four centuries from the middle of the eighth century to the middle of the twelfth century and continued to do so at a substantially decelerated pace for at least two more centuries, tapering off gradually thereafter (Sarton 1927, Vol. 1 and Book 1 of Vol. 2). Once in a while there did appear a brilliant star on an otherwise unexciting firmament. Economics was no exception. It also continued to be in a state of limbo in the Muslim world. No worthwhile contributions were made after Ibn Khaldun.

The trigger mechanism for this decline was, according to Ibn Khaldun, the failure of political authority to provide good governance. Political illegitimacy, which started after the end of khilafah in 661 gradually led to increased corruption and the use of state resources for private benefit at the neglect of education and other nation-building functions of the state. This gradually triggered the decline of all other sectors of the society and economy.[16]

The rapidly rising Western civilization took over the torch of knowledge from the declining Muslim world and has kept it burning with even greater brightness. All sciences, including the social sciences, have made phenomenal progress. Conventional economics became a separate academic discipline after the publication of Alfred Marshall’s great treatise, Principles of Economics, in 1890 (Schumpeter, 1954, p.21),[17] and has continued to develop since then at a remarkable speed. With such a great achievement to its credit, there is no psychological need to allow the ‘Great Gap’ thesis to persist. It would help promote better understanding of Muslim civilization in the West if textbooks started giving credit to Muslim scholars. They were “the torchbearers of ancient learning during the medieval period” and “it was from them that the Renaissance was sparked and the Enlightenment kindled” (Todd Lowry in his ‘Foreword’ in Ghazanfar, 2003, p. xi). Watt has been frank enough to admit that, “the influence of Islam on Western Christendom is greater than is usually realized” and that, “an important task for Western Europeans, as we move into the era of the one world, is … to acknowledge fully our debt to the Arab and Islamic world” (Watt, 1972, p. 84).

Conventional economics, however, took a wrong turn after the Enlightenment Movement by stripping itself of the moral basis of society emphasized by Aristotelian and Judeo-Christian philosophies. This deprived it of the role that moral values and good governance can play in helping society raise both efficiency and equity in the allocation and distribution of scarce resources needed for promoting the well-being of all. However, this has been changing. The role of good governance has already been recognized and that of moral values is gradually penetrating the economics orthodoxy. Islamic economics is also reviving now after the independence of Muslim countries from foreign domination. It is likely that the two disciplines will converge and become one after a period of time. This will be in keeping with the teachings of the Qur’an, which clearly states that mankind was created as one but became divided as a result of their differences and transgression against each other (10:19, 2:213 and 3: 19). This reunification [globalization, as it is new called], if reinforced by justice and mutual care, should help promote peaceful coexistence and enable mankind to realize the well-being of all, a goal the realization of which we are all anxiously looking forward to.

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[1] This is the liberal version of the secular and materialist worldviews. There is also the totalitarian version which does not have faith in the individuals’ ability to manage private property in a way that would ensure social well-being. Hence its prescription is to curb individual freedom and to transfer all means of production and decision making to a totalitarian state. Since this form of the secular and materialist worldview failed to realize human well-being and has been overthrown practically everywhere, it is not discussed in this paper.

[2] The literature on economic development is full of assertions that improvement in income distribution is in direct conflict with economic growth. For a summary of these views, see Cline, 1973, Chapter 2. This has, however, changed and there is hardly any development economist now who argues that injustice can help promote development.

[3] North has used the term ‘nasty’ for all such behavior. See the chapter “Ideology and Free Rider,” in North, 1981.

[4] Some of these scholars include Abu Yusuf (d. 798), al-Mawardi (d. 1058), Abu Ya’la (d. 1065), Nazam al-Mulk (d.1092), al-Ghazali (d. 1111), Ibn Taymiyyah (d. 1328), Ibn Khaldun (d. 1406), Shah Walliyullah (d. 1762), Jamaluddin al-Afghani (d. 1897), Muhammad ‘Abduh (d. 1905), Muhammad Iqbal (d. 1938), Hasan al-Banna (d. 1949), Sayyid Mawdudi (d. 1979), and Baqir al-Sadr (d. 1980).

[5] Some of these authors include al-Katib (d. 749), Ibn al-Muqaffa (d. 756) al-Nu‘man (d. 974), al-Mawardi (d. 1058), Kai Ka’us (d. 1082), Nizam al-Mulk (d. 1092), al-Ghazali (d. 1111), al-Turtushi (d. 1127). (For details, see Essid, 1995, pp.19-41.)

[6] For the fallacy of the Great Gap thesis, see Mirakhor (1987) and Ghazanfar (2003), particularly the “Foreword” by Todd Lowry and the “Introduction” by Ghazanfar.

[7] The full name of the book (given in the bibliography) may be freely translated as “The Book of Lessons and the Record of Cause and Effect in the History of Arabs, Persians and Berbers and their Powerful Contemporaries.” Several different editions of the Muqaddimah are now available in Arabic. The one I have used is that published in Cairo by al-Maktabah al-Tijarriyah al-Kubra without any indication of the year of publication. It has the advantage of showing all vowel marks, which makes the reading relatively easier. The Muqaddimah was translated into English in three volumes by Franz Rosenthal. Its first edition was published in 1958 and the second edition in 1967. Selections from the Muqaddimah by Charles Issawi were published in 1950 under the title, An Arab Philosophy of History: Selections from the Prolegomena of Ibn Khaldun of Tunis (1332-1406).

A considerable volume of literature is now available on Ibn Khaldun. This includes Spengler, 1964; Boulakia, 1971; Mirakhor, 1987; and Chapra, 2000.

[8] For some of these contributions, see Spengler, 1964; DeSmogyi, 1965; Mirakhor, 1987; Siddiqi, 1992; Essid, 1995; Islahi, 1996; Chapra, 2000; and Ghazanfar, 2003.

[9] For a more detailed discussion of taxation by various Muslim scholars, see the section on “Literature on Mirrors for Princes” in Essid, 1995, pp. 19-41.

[10] This letter is a significant development over the letter of Abu Yusuf to Caliph Harun al-Rashid (1933/34, pp. 3-17). It is more comprehensive and covers a larger number of topics.

[11] These are “On tax revenues and the reason for their being low and high” (pp. 279-80) and “Injustice ruins development” (pp. 286-410).

[12] Bear in mind the fact that this was stated at the time when commodity money, which it is not possible for the government to ‘create,’ was used, and fiduciary money, had not become the rule of the day.

[13] This was during the Slave (Mamluk) Dynasty in Egypt, which is divided into two periods. The first period was that of the Bahri (or Turkish) Mamluks (1250-1382), who have generally received praise in the chronicles of their contemporaries. The second period was that of the Burji Mamluks (Circassians, 1382-1517). This period was beset by a series of severe economic crises. (For details see Allouche, 1994.)

[14] Shah Walliyullah al-Dihlawi, popularly known as Walliyullah, was born in 1703, four years before the death of the Mughal Emperor, Aurangzeb (1658-1707). Aurangzeb’s rule, spanning a period of forty-nine years, was followed by a great deal of political instability – ten different changes in rulers during Walliyullah’s life-span of 59 years – leading ultimately to the weakening and decline of the Mughal Empire.

[15] For a brief account of the general decline and disintegration of the Muslim world during the fourteenth century, see Muhsin Mahdi, 1964, pp. 17-26.

[16] For a discussion of the causes of Muslim decline, see Chapra, 2000, pp. 173-252.

[17] According to Blaug (1985), economics became an academic discipline in the 1880s (p. 3).

Citation: Chapra, M. “Islamic Economics: What It Is and How It Developed”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/islamic-economics-what-it-is-and-how-it-developed/

The Roots of American Industrialization, 1790-1860

David R. Meyer, Brown University

The Puzzle of Industrialization

In a society which is predominantly agricultural, how is it possible for industrialization to gain a foothold? One view is that the demand of farm households for manufactures spurs industrialization, but such an outcome is not guaranteed. What if farm households can meet their own food requirements, and they choose to supply some of their needs for manufactures by engaging in small-scale craft production in the home? They might supplement this production with limited purchases of goods from local craftworkers and purchases of luxuries from other countries. This local economy would be relatively self-sufficient, and there is no apparent impetus to alter it significantly through industrialization, that is, the growth of workshop and factory production for larger markets. Others would claim that limited gains might come from specialization, once demand passed some small threshold. Finally, it has been argued that if the farmers are impoverished, some of them would be available for manufacturing and this would provide an incentive to industrialize. However, this argument begs the question as to who would purchase the manufactures. One possibility is that non-farm rural dwellers, such as trade people, innkeepers, and professionals, as well as a small urban population, might provide an impetus to limited industrialization.

The problem with the “impoverished agriculture” theory

The industrialization of the eastern United States from 1790 to 1860 raises similar conundrums. For a long time, scholars thought that the agriculture was mostly poor quality. Thus, the farm labor force left agriculture for workshops, such as those which produced shoes, or for factories, such as the cotton textile mills of New England. These manufactures provided employment for women and children, who otherwise had limited productive possibilities because the farms were not economical. Yet, the market for manufactures remained mostly in the East prior to 1860. Consequently, it is unclear who would have purchased the products to support the growth of manufactures before 1820, as well as to undergird the large-scale industrialization of the East during the two decades following 1840. Even if the impoverished-agriculture explanation of the East’s industrialization is rejected, we are still left with the curiosity that as late as 1840, about eighty percent of the population lived in rural areas, though some of them were in nonfarm occupations.

In brief, the puzzle of eastern industrialization between 1790 and 1860 can be resolved – the East had a prosperous agriculture. Farmers supplied low-cost agricultural products to rural and urban dwellers, and this population demanded manufactures, which were supplied by vigorous local and subregional manufacturing sectors. Some entrepreneurs shifted into production for larger market areas, and this transformation occurred especially in sectors such as shoes, selected light manufactures produced in Connecticut (such as buttons, tinware, and wooden clocks), and cotton textiles. Transportation improvements exerted little impact on these agricultural and industrial developments, primarily because the lowly wagon served effectively as a transport medium and much of the East’s most prosperous areas were accessible to cheap waterway transportation. The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, and the satellites of each (together, each metropolis and its satellites is called a metropolitan industrial complex), became leading manufacturing centers, and other industrial centers emerged in prosperous agricultural areas distant from these complexes. The East industrialized first, and, subsequently, the Midwest began an agricultural and industrial growth process which was underway by the 1840s. Together, the East and the Midwest constituted the American Manufacturing Belt, which was formed by the 1870s, whereas the South failed to industrialize commensurately.

Synergy between Agriculture and Manufacturing

The solution to the puzzle of how industrialization can occur in a predominantly agricultural economy recognizes the possibility of synergy between agriculture and manufacturing. During the first three decades following 1790, prosperous agricultural areas emerged in the eastern United States. Initially, these areas were concentrated near the small metropolises of Boston, New York, and Philadelphia, and in river valleys such as the Connecticut Valley in Connecticut and Massachusetts, the Hudson and Mohawk Valleys in New York, the Delaware Valley bordering Pennsylvania and New Jersey, and the Susquehanna Valley in eastern Pennsylvania. These agricultural areas had access to cheap, convenient transport which could be used to reach markets; the farms supplied the growing urban populations in the cities and some of the products were exported. Furthermore, the farmers supplied the nearby, growing non-farm populations in the villages and small towns who provided goods and services to farmers. These non-farm consumers included retailers, small mill owners, teamsters, craftspeople, and professionals (clergy, physicians, and lawyers).

Across every decade from 1800 to 1860, the number of farm laborers grew, thus testifying to the robustness of eastern agriculture (see Table 1). And, this increase occurred in the face of an expanding manufacturing sector, as increasing numbers of rural dwellers left the farms to work in the factories, especially after 1840. Even New England, the region which presumably was the epitome of declining agriculture, witnessed a rise in the number of farm laborers all the way up to 1840, and, as of 1860, the drop off from the peak was small. Massachusetts and Connecticut, which had vigorous small workshops and increasing numbers of small factories before 1840, followed by a surge in manufacturing after 1840, matched the trajectory of farm laborers in New England as a whole. The numbers in these two states peaked in 1840 and fell off only modestly over the next twenty years. The Middle Atlantic region witnessed an uninterrupted rise in the number of farm laborers over the sixty-year period. New York and Pennsylvania, the largest states, followed slightly different paths. In New York, the number of farm laborers peaked around 1840 and then stabilized near that level for the next two decades, whereas in Pennsylvania the number of farm laborers rose in an uninterrupted fashion.

Table 1
Number of Farm Laborers by Region and Selected States, 1800-1860

Year 1800 1810 1820 1830 1840 1850 1860
New England 228,100 257,700 303,400 353,800 389,100 367,400 348,100
Massachusetts 73,200 72,500 73,400 78,500 87,900 80,800 77,700
Connecticut 50,400 49,300 51,500 55,900 57,000 51,400 51,800
Middle Atlantic 375,700 471,400 571,700 715,000 852,800 910,400 966,600
New York 111,800 170,100 256,000 356,300 456,000 437,100 449,100
Pennsylvania 112,600 141,000 164,900 195,200 239,000 296,300 329,000
East 831,900 986,800 1,178,500 1,422,600 1,631,000 1,645,200 1,662,800

Source: Thomas Weiss, “U.S. Labor Force Estimates and Economic Growth, 1800-1860,”American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis (Chicago, IL: University of Chicago Press, 1992), table 1A.9, p. 51.

The farmers, retailers, professionals, and others in these prosperous agricultural areas accumulated capital which became available for other economic sectors, and manufacturing was one of the most important to receive this capital. Entrepreneurs who owned small workshops and factories obtained capital to turn out a wide range of goods such as boards, boxes, utensils, building hardware, furniture, and wagons, which were in demand in the agricultural areas. And, some of these workshops and factories enlarged their market areas to a subregion as they gained production efficiencies; but, this did not account for all industrial development. Selected manufactures such as shoes, tinware, buttons, and cotton textiles were widely demanded by urban and rural residents of prosperous agricultural areas and by residents of the large cities. These products were high value relative to their weight; thus, the cost to ship them long distances was low. Astute entrepreneurs devised production methods and marketing approaches to sell these goods in large market areas, including New England and the Middle Atlantic regions of the East.

Manufactures Which Were Produced for Large Market Areas

Shoes and Tinware

Small workshops turned out shoes. Massachusetts entrepreneurs devised an integrated shoe production complex based on a division of labor among shops, and they established a marketing arm of wholesalers, principally in Boston, who sold the shoes throughout New England, to the Middle Atlantic, and to the South (particularly, to slave plantations). Businesses in Connecticut drew on the extensive capital accumulated by the well-to-do rural and urban dwellers of that state and moved into tinware, plated ware, buttons, and wooden clocks. These products, like shoes, also were manufactured in small workshops, but a division of labor among shops was less important than the organization of production within shops. Firms producing each good tended to agglomerate in a small subregion of the state. These clusters arose because entrepreneurs shared information about production techniques and specialized skills which they developed, and this knowledge was communicated as workers moved among shops. Initially, a marketing system of peddlers emerged in the tinware sector, and they sold the goods, first throughout Connecticut, and then they extended their travels to the rest of New England and to the Middle Atlantic. Workshops which made other types of light, high-value goods soon took advantage of the peddler distribution system to enlarge their market areas. At first, these peddlers operated part-time during the year, but as the supply of goods increased and market demand grew, peddlers operated for longer periods of the year and they traveled farther.

Cotton Textiles

Cotton textile manufacturing was an industry built on low-wage, especially female, labor; presumably, this industry offered opportunities in areas where farmers were unsuccessful. Yet, similar to the other manufactures which enlarged their market areas to the entire East before 1820, cotton textile production emerged in prosperous agricultural areas. That is not surprising, because this industry required substantial capital, technical skills, and, initially, nearby markets. These requirements were met in rich farming areas, which also could draw on wealthy merchants in large cities who contributed capital and provided sale outlets beyond nearby markets as output grew. The production processes in cotton textile manufacturing, however, diverged from the approaches to making shoes and small metal and wooden products. From the start, production processes included textile machinery, which initially consisted of spinning machines to make yarn, and later (after 1815), weaving machines and other mechanical equipment were added. Highly skilled mechanics were required to build the machines and to maintain them. The greater capital requirements for cotton mills, compared to shoes and small goods’ manufactures in Connecticut, meant that merchant wholesalers and wealthy retailers, professionals, mill owners, and others, were important underwriters of the factories.

Starting in the 1790s, New England, and, especially, Rhode Island, housed the leaders in early cotton textile manufacturing. Providence merchants funded some of the first successful cotton spinning mills, and they drew on the talents of Samuel Slater, an immigrant British machinist. He trained many of the first important textile mechanics, and investors in various parts of Rhode Island, Connecticut, Massachusetts, New Hampshire, and New York hired them to build mills. Between 1815 and 1820, power-loom weaving began to be commercially feasible, and this effort was led by firms in Rhode Island and, especially, in Massachusetts. Boston merchants, starting with the Boston Manufacturing Company at Waltham, devised a business plan which targeted large-scale, integrated cotton textile manufacturing, with a marketing/sales arm housed in a separate firm. They enlarged their effort significantly after 1820, and much of the impetus to the growth of the cotton textile industry came from the success entrepreneurs had in lowering the cost of production.

The Impact of Transportation Improvements

Following 1820, government and private sources invested substantial sums in canals, and after 1835, railroad investment increased rapidly. Canals required huge volumes of low-value commodities in order to pay operating expenses, cover interest on the bonds which were issued for construction, and retire the bonds at maturity. These conditions were only met in the richest agricultural and resource (lumbering and coal mining, for example) areas traversed by the Erie and Champlain Canals in New York and the coal canals in eastern Pennsylvania and New Jersey. The vast majority of the other canals failed to yield benefits for agriculture and industry, and most were costly debacles. Early railroads mainly carried passengers, especially within fifty to one hundred miles of the largest cities – Boston, New York, Philadelphia, and Baltimore. Industrial products were not carried in large volumes until after 1850; consequently, railroads built before that time had little impact on industrialization in the East.

Canals and railroads had minor impacts on agricultural and industrial development because the lowly wagon provided withering competition. Wagons offered flexible, direct connections between origins and destinations, without the need to transship goods, as was the case with canals and railroads; these modes required wagons at their end points. Within a distance of about fifty miles, the cost of wagon transport was competitive with alternative transport modes, so long as the commodities were high value relative to their weight. And, infrequent transport of these goods could occur over distances of as much as one hundred miles. This applied to many manufactures, and agricultural commodities could be raised to high value by processing prior to shipment. Thus, wheat was turned into flour, corn and other grains were fed to cattle and pigs and these were processed into beef and pork prior to shipment, and milk was converted into butter and cheese. Most of the richest agricultural and industrial areas of the East were less than one hundred miles from the largest cities or these areas were near low-cost waterway transport along rivers, bays, and the Atlantic Coast. Therefore, canals and railroads in these areas had difficulty competing for freight, and outside these areas the limited production generated little demand for long distant transport services.

Agricultural Prosperity Continues

After 1820, eastern farmers seized the increasing market opportunities in the prosperous rural areas as nonfarm processing expanded and village and small town populations demanded greater amounts of farm products. The large number of farmers who were concentrated around the rapidly growing metropolises (Boston, New York, Philadelphia, and Baltimore) and near urban agglomerations such as Albany-Troy, New York, developed increasing specialization in urban market goods such as fluid milk, fresh vegetables, fruit, butter, and hay (for horse transport). Farmers farther away responded to competition by shifting into products which could be transported long distances to market, including wheat into flour, cattle which walked to market, or pigs which were converted into pork. During the winter these farms sent butter, and cheese was a specialty which could be lucrative for long periods of the year when temperatures were cool.

These changes swept across the East, and, after 1840, farmers increasingly adjusted their production to compete with cheap wheat, cattle, and pork arriving over the Erie Canal from the Midwest. Wheat growing became less profitable, and specialized agriculture expanded, such as potatoes, barley, and hops in central New York and cigar tobacco in the Connecticut Valley. Farmers near the largest cities intensified their specialization in urban market products, and as the railroads expanded, fluid milk was shipped longer distances to these cities. Farmers in less accessible areas and on poor agricultural land which was infertile or too hilly, became less competitive. If these farmers and their children stayed, their incomes declined relative to others in the East, but if they moved to the Midwest or to the burgeoning industrial cities of the East, they had the chance of participating in the rising prosperity.

Metropolitan Industrial Complexes

The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, led the industrial expansion after 1820, because they were the greatest concentrated markets, they had the most capital, and their wholesalers provided access to subregional and regional markets outside the metropolises. By 1840, each of them was surrounded by industrial satellites – manufacturing centers in close proximity to, and economically integrated with, the metropolis. Together, these metropolises and their satellites formed metropolitan industrial complexes, which accounted for almost one-quarter of the nation’s manufacturing (see Table 2). For example, metropolises and satellites included Boston and Lowell, New York and Paterson (New Jersey), Philadelphia and Reading (Pennsylvania), and Baltimore and Wilmington (Delaware), which also was a satellite of Philadelphia. Among the four leading metropolises, New York and Philadelphia housed, by far, the largest share of the nation’s manufacturing workers, and their satellites had large numbers of industrial workers. Yet, Boston’s satellites contained the greatest concentration of industrial workers in the nation, with almost seven percent of the national total. The New York, Philadelphia, and Boston metropolitan industrial complexes each had approximately the same share of the nation’s manufacturing workers. These complexes housed a disproportionate share of the nation’s commerce-serving manufactures such as printing-publishing and paper and of local, regional, and national market manufactures such as glass, drugs and paints, textiles, musical instruments, furniture, hardware, and machinery.

Table 2
Manufacturing Employment in the Metropolitan Industrial Complexes
of New York, Philadelphia, Boston, and Baltimore
as a Percentage of National Manufacturing Employment in 1840

Metropolis Satellites Complex
New York 4.1% 3.4% 7.4%
Philadelphia 3.9 2.9 6.7
Boston 0.5 6.6 7.1
Baltimore 2.0 0.2 2.3
Four Complexes 10.5 13.1 23.5

Note: Metropolitan county is defined as the metropolis for each complex and “outside” comprises nearby counties; those included in each complex were the following. New York: metropolis (New York, Kings, Queens, Richmond); outside (Connecticut: Fairfield; New York: Westchester, Putnam, Rockland, Orange; New Jersey: Bergen, Essex, Hudson, Middlesex, Morris, Passaic, Somerset). Philadelphia: metropolis (Philadelphia); outside (Pennsylvania: Bucks, Chester, Delaware, Montgomery; New Jersey: Burlington, Gloucester, Mercer; Delaware: New Castle). Boston: metropolis (Suffolk); outside (Essex, Middlesex, Norfolk, Plymouth). Baltimore: metropolis (Baltimore); outside (Anne Arundel, Harford).

Source: U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841).

Also, by 1840, prosperous agricultural areas farther from these complexes, such as the Connecticut Valley in New England, the Hudson Valley, the Erie Canal Corridor across New York state, and southeastern Pennsylvania, housed significant amounts of manufacturing in urban places. At the intersection of the Hudson and Mohawk rivers, the Albany-Troy agglomeration contained one of the largest concentrations of manufacturing outside the metropolitan complexes. And, industrial towns such as Utica, Syracuse, Rochester, and Buffalo were strung along the Erie Canal Corridor. Many of the manufactures (such as furniture, wagons, and machinery) served subregional markets in the areas of prosperous agriculture, but some places also developed specialization in manufactures (textiles and hardware) for larger regional and interregional market areas (the East as a whole). The Connecticut Valley, for example, housed many firms which produced cotton textiles, hardware, and cutlery.

Manufactures for Eastern and National Markets

Shoes

In several industrial sectors whose firms had expanded before 1820 to regional, and even, multiregional markets, in the East, firms intensified their penetration of eastern markets and reached to markets in the rapidly growing Midwest between 1820 and 1860. In eastern Massachusetts, a production complex of shoe firms innovated methods of organizing output within and among firms, and they developed a wide array of specialized tools and components to increase productivity and to lower manufacturing costs. In addition, a formidable wholesaling, marketing, and distribution complex, headed by Boston wholesalers, pushed the ever-growing volume of shoes into sales channels which reached throughout the nation. Machinery did not come into use until the 1850s, and, by 1860, Massachusetts accounted for half of the value of the nation’s shoe production.

Cotton Textiles

In contrast, machinery constituted an important factor of production which drove down the price of cotton textile goods, substantially enlarging the quantity consumers demanded. Before 1820, most of the machinery innovations improved the spinning process for making yarn, and in the five years following 1815, innovations in mechanized weaving generated an initial substantial drop in the cost of production as the first integrated spinning-weaving mills emerged. During the next decade and a half the price of cotton goods collapsed by over fifty percent as large integrated spinning-weaving mills became the norm for the production of most cotton goods. Therefore, by the mid-1830s vast volumes of cotton goods were pouring out of textile mills, and a sophisticated set of specialized wholesaling firms, mostly concentrated in Boston, and secondarily, in New York and Philadelphia, channeled these items into the national market.

Prior to 1820, the cotton textile industry was organized into three cores. The Providence core dominated and the Boston core occupied second place; both of these were based mostly on mechanized spinning. A third core in the city of Philadelphia was based on hand spinning and weaving. Within about fifteen years after 1820, the Boston core soared to a commanding position in cotton textile production as a group of Boston merchants and their allies relentlessly replicated their business plan at various sites in New England, including at Lowell, Chicopee, and Taunton in Massachusetts, at Nashua, Manchester, and Dover in New Hampshire, and at Saco in Maine. The Providence core continued to grow, but its investors did not seem to fully grasp the strategic, multi-faceted business plan which the Boston merchants implemented. Similarly, investors in an emerging core within about fifty to seventy-five miles of New York City in the Hudson Valley and northern New Jersey likewise did not seem to fully understand the Boston merchants’ plan, and these New York City area firms never reached the scale of the firms of the Boston Core. The Philadelphia core enlarged to nearby areas southwest of the city and in Delaware, but these firms stayed small, and the Philadelphia firms created a small-scale, flexible production system which turned out specialized goods, not the mass-market commodity textiles of the other cores.

Capital Investment in Cotton Textiles

The distribution of capital investment in cotton textiles across the regions and states of the East between 1820 and 1860 capture the changing prominence of the cores of cotton textile production (see Table 3). The New England and the Middle Atlantic regions contained approximately similar shares (almost half each) of the nation’s capital investment. However, during the 1820s the cotton textile industry restructured to a form which was maintained for the next three decades. New England’s share of capital investment surged to about seventy percent, and it maintained that share until 1860, whereas the Middle Atlantic region’s share fell to around twenty percent by 1840 and remained near that until 1860. The rest of the nation, primarily the South, reached about ten percent of total capital investment around 1840 and continued at that level for the next two decades. Massachusetts became the leading cotton textile state by 1831 and Rhode Island, the early leader, gradually slipped to a level of about ten percent by the 1850s; New Hampshire and Pennsylvania housed approximately similar shares as Rhode Island by that time.

Table 3
Capital Invested in Cotton Textiles
by Region and State as a Percentage of the Nation
1820-1860

Region/state 1820 1831 1840 1850 1860
New England 49.6% 69.8% 68.4% 72.3% 70.3%
Maine 1.6 1.9 2.7 4.5 6.1
New Hampshire 5.6 13.1 10.8 14.7 12.8
Vermont 1.0 0.7 0.2 0.3 0.3
Massachusetts 14.3 31.7 34.1 38.2 34.2
Connecticut 11.6 7.0 6.2 5.7 6.7
Rhode Island 15.4 15.4 14.3 9.0 10.2
Middle Atlantic 46.2 29.5 22.7 17.3 19.0
New York 18.8 9.0 9.6 5.6 5.5
New Jersey 4.7 5.0 3.4 2.0 1.3
Pennsylvania 6.3 9.3 6.5 6.1 9.3
Delaware 4.0 0.9 0.6 0.6 0.6
Maryland 12.4 5.3 2.6 3.0 2.3
Rest of nation 4.3 0.7 9.0 10.4 10.7
Nation 100.0% 100.0% 100.0% 100.0% 100.0%
Total capital (thousands) $10,783 $40,613 $51,102 $74,501 $98,585

Sources: David J. Jeremy, Transatlantic Industrial Revolution: The Diffusion of Textile Technologies Between Britain and America, 1790-1830s (Cambridge, MA: MIT Press, 1981), appendix D, table D.1, p. 276; U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841); U.S. Bureau of the Census, Report on the Manufactures of the United States at the Tenth Census, 1880 (Washington, D.C.: Government Printing Office, 1883).

Connecticut’s Industries

In Connecticut, industrialists built on their successful production and sales prior to 1820 and expanded into a wider array of products which they sold in the East and South, and, after 1840, they acquired more sales in the Midwest. This success was not based on a mythical “Yankee ingenuity,” which, typically, has been framed in terms of character. Instead, this ingenuity rested on fundamental assets: a highly educated population linked through wide-ranging social networks which communicated information about technology, labor opportunities, and markets; and the abundant supplies of capital in the state supported the entrepreneurs. The peddler distribution system provided efficient sales channels into the mid-1830s, but, after that, firms took advantage of more traditional wholesaling channels. In some sectors, such as the brass industry, firms followed the example of the large Boston-core textile firms, and the brass companies founded their own wholesale distribution agencies in Boston and New York City. The achievements of Connecticut’s firms were evident by 1850. As a share of the nation’s value of production, they accounted for virtually all of the clocks, pins, and suspenders, close to half of the buttons and rubber goods, and about one-third of the brass foundry products, Britannia and plated ware, and hardware.

Difficulty of Duplicating Eastern Methods in the Midwest

The East industrialized first, based on a prosperous agricultural and industrialization process, as some of its entrepreneurs shifted into the national market manufactures of shoes, cotton textiles, and diverse goods turned out in Connecticut. These industrialists made this shift prior to 1820, and they enhanced their dominance of these products during the subsequent two decades. Manufacturers in the Midwest did not have sufficient intraregional markets to begin producing these goods before 1840; therefore, they could not compete in these national market manufactures. Eastern firms had developed technologies and organizations of production and created sales channels which could not be readily duplicated, and these light, high-value goods were transported cheaply to the Midwest. When midwestern industrialists faced choices about which manufactures to enter, the eastern light, high-value goods were being sold in the Midwest at prices which were so low that it was too risky for midwestern firms to attempt to compete. Instead, these firms moved into a wide range of local and regional market manufactures which also existed in the East, but which cost too much to transport to the Midwest. These goods included lumber and food products (e.g., flour and whiskey), bricks, chemicals, machinery, and wagons.

The American Manufacturing Belt

The Midwest Joins the American Manufacturing Belt after 1860

Between 1840 and 1860, Midwestern manufacturers made strides in building an industrial infrastructure, and they were positioned to join with the East to constitute the American Manufacturing Belt, the great concentration of manufacturing which would sprawl from the East Coast to the edge of the Great Plains. This Belt became mostly set within a decade or so after 1860, because technologies and organizations of production and of sales channels had lowered costs across a wide array of manufactures, and improvements in transportation (such as an integrated railroad system) and communication (such as the telegraph) reduced distribution costs. Thus, increasing shares of industrial production were sold in interregional markets.

Lack of Industrialization in the South

Although the South had prosperous farms, it failed to build a deep and broad industrial infrastructure prior to 1860, because much of its economy rested on a slave agricultural system. In this economy, investments were heavily concentrated in slaves rather than in an urban and industrial infrastructure. Local and regional demand remained low across much of the South, because slaves were not able to freely express their consumption demands and population densities remained low, except in a few agricultural areas. Thus, the market thresholds for many manufactures were not met, and, if thresholds were met, the demand was insufficient to support more than a few factories. By the 1870s, when the South had recovered from the Civil War and its economy was reconstructed, eastern and midwestern industrialists had built strong positions in many manufactures. And, as new industries emerged, the northern manufacturers had the technological and organizational infrastructure and distribution channels to capture dominance in the new industries.

In a similar fashion, the Great Plains, the Southwest, and the West were settled too late for their industrialists to be major producers of national market goods. Manufacturers in these regions focused on local and regional market manufactures. Some low wage industries (such as textiles) began to move to the South in significant numbers after 1900, and the emergence of industries based on high technology after 1950 led to new manufacturing concentrations which rested on different technologies. Nonetheless, the American Manufacturing Belt housed the majority of the nation’s industry until the middle of the twentieth century.

This essay is based on David R. Meyer, The Roots of American Industrialization, Baltimore: Johns Hopkins University Press, 2003.

Additional Readings

Atack, Jeremy, and Fred Bateman. To Their Own Soil: Agriculture in the Antebellum North. Ames, IA: Iowa State University Press, 1987.

Baker, Andrew H., and Holly V. Izard. “New England Farmers and the Marketplace, 1780-1865: A Case Study.” Agricultural History 65 (1991): 29-52.

Barker, Theo, and Dorian Gerhold. The Rise and Rise of Road Transport, 1700-1990. New York: Cambridge University Press, 1995.

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

Brown, Richard D. Knowledge is Power: The Diffusion of Information in Early America, 1700-1865. New York: Oxford University Press, 1989.

Clark, Christopher. The Roots of Rural Capitalism: Western Massachusetts, 1780-1860. Ithaca, NY: Cornell University Press, 1990.

Dalzell, Robert F., Jr. Enterprising Elite: The Boston Associates and the World They Made. Cambridge, MA: Harvard University Press, 1987.

Durrenberger, Joseph A. Turnpikes: A Study of the Toll Road Movement in the Middle Atlantic States and Maryland. Cos Cob, CT: John E. Edwards, 1968.

Field, Alexander J. “On the Unimportance of Machinery.” Explorations in Economic History 22 (1985): 378-401.

Fishlow, Albert. American Railroads and the Transformation of the Ante-Bellum Economy. Cambridge, MA: Harvard University Press, 1965.

Fishlow, Albert. “Antebellum Interregional Trade Reconsidered.” American Economic Review 54 (1964): 352-64.

Goodrich, Carter, ed. Canals and American Economic Development. New York: Columbia University Press, 1961.

Gross, Robert A. “Culture and Cultivation: Agriculture and Society in Thoreau’s Concord.” Journal of American History 69 (1982): 42-61.

Hoke, Donald R. Ingenious Yankees: The Rise of the American System of Manufactures in the Private Sector. New York: Columbia University Press, 1990.

Hounshell, David A. From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States. Baltimore: Johns Hopkins University Press, 1984.

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Hours of Work in U.S. History

Robert Whaples, Wake Forest University

In the 1800s, many Americans worked seventy hours or more per week and the length of the workweek became an important political issue. Since then the workweek’s length has decreased considerably. This article presents estimates of the length of the historical workweek in the U.S., describes the history of the shorter-hours “movement,” and examines the forces that drove the workweek’s decline over time.

Estimates of the Length of the Workweek

Measuring the length of the workweek (or workday or workyear) is a difficult task, full of ambiguities concerning what constitutes work and who is to be considered a worker. Estimating the length of the historical workweek is even more troublesome. Before the Civil War most Americans were employed in agriculture and most of these were self-employed. Like self-employed workers in other fields, they saw no reason to record the amount of time they spent working. Often the distinction between work time and leisure time was blurry. Therefore, estimates of the length of the typical workweek before the mid-1800s are very imprecise.

The Colonial Period

Based on the amount of work performed — for example, crops raised per worker — Carr (1992) concludes that in the seventeenth-century Chesapeake region, “for at least six months of the year, an eight to ten-hour day of hard labor was necessary.” This does not account for other required tasks, which probably took about three hours per day. This workday was considerably longer than for English laborers, who at the time probably averaged closer to six hours of heavy labor each day.

The Nineteenth Century

Some observers believe that most American workers adopted the practice of working from “first light to dark” — filling all their free hours with work — throughout the colonial period and into the nineteenth century. Others are skeptical of such claims and argue that work hours increased during the nineteenth century — especially its first half. Gallman (1975) calculates “changes in implicit hours of work per agricultural worker” and estimates that hours increased 11 to 18 percent from 1800 to 1850. Fogel and Engerman (1977) argue that agricultural hours in the North increased before the Civil War due to the shift into time-intensive dairy and livestock. Weiss and Craig (1993) find evidence suggesting that agricultural workers also increased their hours of work between 1860 and 1870. Finally, Margo (2000) estimates that “on an economy-wide basis, it is probable that annual hours of work rose over the (nineteenth) century, by around 10 percent.” He credits this rise to the shift out of agriculture, a decline in the seasonality of labor demand and reductions in annual periods of nonemployment. On the other hand, it is clear that working hours declined substantially for one important group. Ransom and Sutch (1977) and Ng and Virts (1989) estimate that annual labor hours per capita fell 26 to 35 percent among African-Americans with the end of slavery.

Manufacturing Hours before 1890

Our most reliable estimates of the workweek come from manufacturing, since most employers required that manufacturing workers remain at work during precisely specified hours. The Census of Manufactures began to collect this information in 1880 but earlier estimates are available. Much of what is known about average work hours in the nineteenth century comes from two surveys of manufacturing hours taken by the federal government. The first survey, known as the Weeks Report, was prepared by Joseph Weeks as part of the Census of 1880. The second was prepared in 1893 by Commissioner of Labor Carroll D. Wright, for the Senate Committee on Finance, chaired by Nelson Aldrich. It is commonly called the Aldrich Report. Both of these sources, however, have been criticized as flawed due to problems such as sample selection bias (firms whose records survived may not have been typical) and unrepresentative regional and industrial coverage. In addition, the two series differ in their estimates of the average length of the workweek by as much as four hours. These estimates are reported in Table 1. Despite the previously mentioned problems, it seems reasonable to accept two important conclusions based on these data — the length of the typical manufacturing workweek in the 1800s was very long by modern standards and it declined significantly between 1830 and 1890.

Table 1
Estimated Average Weekly Hours Worked in Manufacturing, 1830-1890

Year Weeks Report Aldrich Report
1830 69.1
1840 67.1 68.4
1850 65.5 69.0
1860 62.0 66.0
1870 61.1 63.0
1880 60.7 61.8
1890 60.0

Sources: U.S. Department of Interior (1883), U.S. Senate (1893)
Note: Atack and Bateman (1992), using data from census manuscripts, estimate average weekly hours to be 60.1 in 1880 — very close to Weeks’ contemporary estimate. They also find that the summer workweek was about 1.5 hours longer than the winter workweek.

Hours of Work during the Twentieth Century

Because of changing definitions and data sources there does not exist a consistent series of workweek estimates covering the entire twentieth century. Table 2 presents six sets of estimates of weekly hours. Despite differences among the series, there is a fairly consistent pattern, with weekly hours falling considerably during the first third of the century and much more slowly thereafter. In particular, hours fell strongly during the years surrounding World War I, so that by 1919 the eight-hour day (with six workdays per week) had been won. Hours fell sharply at the beginning of the Great Depression, especially in manufacturing, then rebounded somewhat and peaked during World War II. After World War II, the length of the workweek stabilized around forty hours. Owen’s nonstudent-male series shows little trend after World War II, but the other series show a slow, but steady, decline in the length of the average workweek. Greis’s two series are based on the average length of the workyear and adjust for paid vacations, holidays and other time-off. The last column is based on information reported by individuals in the decennial censuses and in the Current Population Survey of 1988. It may be the most accurate and representative series, as it is based entirely on the responses of individuals rather than employers.

Table 2
Estimated Average Weekly Hours Worked, 1900-1988

Year Census of Manu-facturing JonesManu-

facturing

OwenNonstudent Males GreisManu-

facturing

GreisAll Workers Census/CPS All Workers
1900 59.6* 55.0 58.5
1904 57.9 53.6 57.1
1909 56.8 (57.3) 53.1 55.7
1914 55.1 (55.5) 50.1 54.0
1919 50.8 (51.2) 46.1 50.0
1924 51.1* 48.8 48.8
1929 50.6 48.0 48.7
1934 34.4 40.6
1940 37.6 42.5 43.3
1944 44.2 46.9
1947 39.2 42.4 43.4 44.7
1950 38.7 41.1 42.7
1953 38.6 41.5 43.2 44.0
1958 37.8* 40.9 42.0 43.4
1960 41.0 40.9
1963 41.6 43.2 43.2
1968 41.7 41.2 42.0
1970 41.1 40.3
1973 40.6 41.0
1978 41.3* 39.7 39.1
1980 39.8
1988 39.2

Sources: Whaples (1990a), Jones (1963), Owen (1976, 1988), and Greis (1984). The last column is based on the author’s calculations using Coleman and Pencavel’s data from Table 4 (below).
* = these estimates are from one year earlier than the year listed.
(The figures in parentheses in the first column are unofficial estimates but are probably more precise, as they better estimate the hours of workers in industries with very long workweeks.)

Hours in Other Industrial Sectors

Table 3 compares the length of the workweek in manufacturing to that in other industries for which there is available information. (Unfortunately, data from the agricultural and service sectors are unavailable until late in this period.) The figures in Table 3 show that the length of the workweek was generally shorter in the other industries — sometimes considerably shorter. For example, in 1910 anthracite coalminers’ workweeks were about forty percent shorter than the average workweek among manufacturing workers. All of the series show an overall downward trend.

Table 3
Estimated Average Weekly Hours Worked, Other Industries

Year Manufacturing Construction Railroads Bituminous Coal Anthracite Coal
1850s about 66 about 66
1870s about 62 about 60
1890 60.0 51.3
1900 59.6 50.3 52.3 42.8 35.8
1910 57.3 45.2 51.5 38.9 43.3
1920 51.2 43.8 46.8 39.3 43.2
1930 50.6 42.9 33.3 37.0
1940 37.6 42.5 27.8 27.2
1955 38.5 37.1 32.4 31.4

Sources: Douglas (1930), Jones (1963), Licht (1983), and Tables 1 and 2.
Note: The manufacturing figures for the 1850s and 1870s are approximations based on averaging numbers from the Weeks and Aldrich reports from Table 1. The early estimates for the railroad industry are also approximations.

Recent Trends by Race and Gender

Some analysts, such as Schor (1992) have argued that the workweek increased substantially in the last half of the twentieth century. Few economists accept this conclusion, arguing that it is based on the use of faulty data (public opinion surveys) and unexplained methods of “correcting” more reliable sources. Schor’s conclusions are contradicted by numerous studies. Table 4 presents Coleman and Pencavel’s (1993a, 1993b) estimates of the average workweek of employed people — disaggregated by race and gender. For all four groups the average length of the workweek has dropped since 1950. Although median weekly hours were virtually constant for men, the upper tail of the hours distribution fell for those with little schooling and rose for the well-educated. In addition, Coleman and Pencavel also find that work hours declined for young and older men (especially black men), but changed little for white men in their prime working years. Women with relatively little schooling were working fewer hours in the 1980s than in 1940, while the reverse is true of well-educated women.

Table 4
Estimated Average Weekly Hours Worked, by Race and Gender, 1940-1988

Year White Men Black Men White Women Black Women
1940 44.1 44.5 40.6 42.2
1950 43.4 42.8 41.0 40.3
1960 43.3 40.4 36.8 34.7
1970 43.1 40.2 36.1 35.9
1980 42.9 39.6 35.9 36.5
1988 42.4 39.6 35.5 37.2

Source: Coleman and Pencavel (1993a, 1993b)

Broader Trends in Time Use, 1880 to 2040

In 1880 a typical male household head had very little leisure time — only about 1.8 hours per day over the course of a year. However, as Fogel’s (2000) estimates in Table 5 show, between 1880 and 1995 the amount of work per day fell nearly in half, allowing leisure time to more than triple. Because of the decline in the length of the workweek and the declining portion of a lifetime that is spent in paid work (due largely to lengthening periods of education and retirement) the fraction of the typical American’s lifetime devoted to work has become remarkably small. Based on these trends Fogel estimates that four decades from now less than one-fourth of our discretionary time (time not needed for sleep, meals, and hygiene) will be devoted to paid work — over three-fourths will be available for doing what we wish.

Table 5
Division of the Day for the Average Male Household Head over the Course of a Year, 1880 and 1995

Activity 1880 1995
Sleep 8 8
Meals and hygiene 2 2
Chores 2 2
Travel to and from work 1 1
Work 8.5 4.7
Illness .7 .5
Left over for leisure activities 1.8 5.8

Source: Fogel (2000)

Table 6
Estimated Trend in the Lifetime Distribution of Discretionary Time, 1880-2040

Activity 1880 1995 2040
Lifetime Discretionary Hours 225,900 298,500 321,900
Lifetime Work Hours 182,100 122,400 75,900
Lifetime Leisure Hours 43,800 176,100 246,000

Source: Fogel (2000)
Notes: Discretionary hours exclude hours used for sleep, meals and hygiene. Work hours include paid work, travel to and from work, and household chores.

Postwar International Comparisons

While hours of work have decreased slowly in the U.S. since the end of World War II, they have decreased more rapidly in Western Europe. Greis (1984) calculates that annual hours worked per employee fell from 1908 to 1704 in the U.S. between 1950 and 1979, a 10.7 percent decrease. This compares to a 21.8 percent decrease across a group of twelve Western European countries, where the average fell from 2170 hours to 1698 hours between 1950 and 1979. Perhaps the most precise way of measuring work hours is to have individuals fill out diaries on their day-to-day and hour-to-hour time use. Table 7 presents an international comparison of average work hours both inside and outside of the workplace, by adult men and women — averaging those who are employed with those who are not. (Juster and Stafford (1991) caution, however, that making these comparisons requires a good deal of guesswork.) These numbers show a significant drop in total work per week in the U.S. between 1965 and 1981. They also show that total work by men and women is very similar, although it is divided differently. Total work hours in the U.S. were fairly similar to those in Japan, but greater than in Denmark, while less than in the USSR.

Table 7
Weekly Work Time in Four Countries, Based on Time Diaries, 1960s-1980s

Activity US USSR (Pskov)
Men Women Men Women
1965 1981 1965 1981 1965 1981 1965 1981
Total Work 63.1 57.8 60.9 54.4 64.4 65.7 75.3 66.3
Market Work 51.6 44.0 18.9 23.9 54.6 53.8 43.8 39.3
Commuting 4.8 3.5 1.6 2.0 4.9 5.2 3.7 3.4
Housework 11.5 13.8 41.8 30.5 9.8 11.9 31.5 27.0
Activity Japan Denmark
Men Women Men Women
1965 1985 1965 1985 1964 1987 1964 1987
Total Work 60.5 55.5 64.7 55.6 45.4 46.2 43.4 43.9
Market Work 57.7 52.0 33.2 24.6 41.7 33.4 13.3 20.8
Commuting 3.6 4.5 1.0 1.2 n.a n.a n.a n.a
Housework 2.8 3.5 31.5 31.0 3.7 12.8 30.1 23.1

Source: Juster and Stafford (1991)

The Shorter Hours “Movement” in the U.S.

The Colonial Period

Captain John Smith, after mapping New England’s coast, came away convinced that three days’ work per week would satisfy any settler. Far from becoming a land of leisure, however, the abundant resources of British America and the ideology of its settlers, brought forth high levels of work. Many colonial Americans held the opinion that prosperity could be taken as a sign of God’s pleasure with the individual, viewed work as inherently good and saw idleness as the devil’s workshop. Rodgers (1978) argues that this work ethic spread and eventually reigned supreme in colonial America. The ethic was consistent with the American experience, since high returns to effort meant that hard work often yielded significant increases in wealth. In Virginia, authorities also transplanted the Statue of Artificers, which obliged all Englishmen (except the gentry) to engage in productive activity from sunrise to sunset. Likewise, a 1670 Massachusetts law demanded a minimum ten-hour workday, but it is unlikely that these laws had any impact on the behavior of most free workers.

The Revolutionary War Period

Roediger and Foner (1989) contend that the Revolutionary War era brought a series of changes that undermined support for sun-to-sun work. The era’s republican ideology emphasized that workers needed free time, away from work, to participate in democracy. Simultaneously, the development of merchant capitalism meant that there were, for the first time, a significant number of wageworkers. Roediger and Foner argue that reducing labor costs was crucial to the profitability of these workers’ employers, who reduced costs by squeezing more work from their employees — reducing time for meals, drink and rest and sometimes even rigging the workplace’s official clock. Incensed by their employers’ practice of paying a flat daily wage during the long summer shift and resorting to piece rates during short winter days, Philadelphia’s carpenters mounted America’s first ten-hour-day strike in May 1791. (The strike was unsuccessful.)

1820s: The Shorter Hours Movement Begins

Changes in the organization of work, with the continued rise of merchant capitalists, the transition from the artisanal shop to the early factory, and an intensified work pace had become widespread by about 1825. These changes produced the first extensive, aggressive movement among workers for shorter hours, as the ten-hour movement blossomed in New York City, Philadelphia and Boston. Rallying around the ten-hour banner, workers formed the first city-central labor union in the U.S., the first labor newspaper, and the first workingmen’s political party — all in Philadelphia — in the late 1820s.

Early Debates over Shorter Hours

Although the length of the workday is largely an economic decision arrived at by the interaction of the supply and demand for labor, advocates of shorter hours and foes of shorter hours have often argued the issue on moral grounds. In the early 1800s, advocates argued that shorter work hours improved workers’ health, allowed them time for self-improvement and relieved unemployment. Detractors countered that workers would abuse leisure time (especially in saloons) and that long, dedicated hours of work were the path to success, which should not be blocked for the great number of ambitious workers.

1840s: Early Agitation for Government Intervention

When Samuel Slater built the first textile mills in the U.S., “workers labored from sun up to sun down in summer and during the darkness of both morning and evening in the winter. These hours ? only attracted attention when they exceeded the common working day of twelve hours,” according to Ware (1931). During the 1830s, an increased work pace, tighter supervision, and the addition of about fifteen minutes to the work day (partly due to the introduction of artificial lighting during winter months), plus the growth of a core of more permanent industrial workers, fueled a campaign for a shorter workweek among mill workers in Lowell, Massachusetts, whose workweek averaged about 74 hours. This agitation was led by Sarah Bagley and the New England Female Labor Reform Association, which, beginning in 1845, petitioned the state legislature to intervene in the determination of hours. The petitions were followed by America’s first-ever examination of labor conditions by a governmental investigating committee. The Massachusetts legislature proved to be very unsympathetic to the workers’ demands, but similar complaints led to the passage of laws in New Hampshire (1847) and Pennsylvania (1848), declaring ten hours to be the legal length of the working day. However, these laws also specified that a contract freely entered into by employee and employer could set any length for the workweek. Hence, these laws had little impact. Legislation passed by the federal government had a more direct, though limited effect. On March 31, 1840, President Martin Van Buren issued an executive order mandating a ten-hour day for all federal employees engaged in manual work.

1860s: Grand Eight Hours Leagues

As the length of the workweek gradually declined, political agitation for shorter hours seems to have waned for the next two decades. However, immediately after the Civil War reductions in the length of the workweek reemerged as an important issue for organized labor. The new goal was an eight-hour day. Roediger (1986) argues that many of the new ideas about shorter hours grew out of the abolitionists’ critique of slavery — that long hours, like slavery, stunted aggregate demand in the economy. The leading proponent of this idea, Ira Steward, argued that decreasing the length of the workweek would raise the standard of living of workers by raising their desired consumption levels as their leisure expanded, and by ending unemployment. The hub of the newly launched movement was Boston and Grand Eight Hours Leagues sprang up around the country in 1865 and 1866. The leaders of the movement called the meeting of the first national organization to unite workers of different trades, the National Labor Union, which met in Baltimore in 1867. In response to this movement, eight states adopted general eight-hour laws, but again the laws allowed employer and employee to mutually consent to workdays longer than the “legal day.” Many critics saw these laws and this agitation as a hoax, because few workers actually desired to work only eight hours per day at their original hourly pay rate. The passage of the state laws did foment action by workers — especially in Chicago where parades, a general strike, rioting and martial law ensued. In only a few places did work hours fall after the passage of these laws. Many become disillusioned with the idea of using the government to promote shorter hours and by the late 1860s, efforts to push for a universal eight-hour day had been put on the back burner.

The First Enforceable Hours Laws

Despite this lull in shorter-hours agitation, in 1874, Massachusetts passed the nation’s first enforceable ten-hour law. It covered only female workers and became fully effective by 1879. This legislation was fairly late by European standards. Britain had passed its first effective Factory Act, setting maximum hours for almost half of its very young textile workers, in 1833.

1886: Year of Dashed Hopes

In the early 1880s organized labor in the U.S. was fairly weak. In 1884, the short-lived Federation of Organized Trades and Labor Unions (FOTLU) fired a “shot in the dark.” During its final meeting, before dissolving, the Federation “ordained” May 1, 1886 as the date on which workers would cease working beyond eight hours per day. Meanwhile, the Knights of Labor, which had begun as a secret fraternal society and evolved a labor union, began to gain strength. It appears that many nonunionized workers, especially the unskilled, came to see in the Knights a chance to obtain a better deal from their employers, perhaps even to obtain the eight-hour day. FOTLU’s call for workers to simply walk off the job after eight hours beginning on May 1, plus the activities of socialist and anarchist labor organizers and politicians, and the apparent strength of the Knights combined to attract members in record numbers. The Knights mushroomed and its new membership demanded that their local leaders support them in attaining the eight-hour day. Many smelled victory in the air — the movement to win the eight-hour day became frenzied and the goal became “almost a religious crusade” (Grob, 1961).

The Knights’ leader, Terence Powderly, thought that the push for a May 1 general strike for eight-hours was “rash, short-sighted and lacking in system” and “must prove abortive” (Powderly, 1890). He offered no effective alternative plan but instead tried to block the mass action, issuing a “secret circular” condemning the use of strikes. Powderly reasoned that low incomes forced workmen to accept long hours. Workers didn’t want shorter hours unless their daily pay was maintained, but employers were unwilling and/or unable to offer this. Powderly’s rival, labor leader Samuel Gompers, agreed that “the movement of ’86 did not have the advantage of favorable conditions” (Gompers, 1925). Nelson (1986) points to divisions among workers, which probably had much to do with the failure in 1886 of the drive for the eight-hour day. Some insisted on eight hours with ten hours’ pay, but others were willing to accept eight hours with eight hours’ pay,

Haymarket Square Bombing

The eight-hour push of 1886 was, in Norman Ware’s words, “a flop” (Ware, 1929). Lack of will and organization among workers was undoubtedly important, but its collapse was aided by violence that marred strikes and political rallies in Chicago and Milwaukee. The 1886 drive for eight-hours literally blew up in organized labor’s face. At Haymarket Square in Chicago an anarchist bomb killed fifteen policemen during an eight-hour rally, and in Milwaukee’s Bay View suburb nine strikers were killed as police tried to disperse roving pickets. The public backlash and fear of revolution damned the eight-hour organizers along with the radicals and dampened the drive toward eight hours — although it is estimated that the strikes of May 1886 shortened the workweek for about 200,000 industrial workers, especially in New York City and Cincinnati.

The AFL’s Strategy

After the demise of the Knights of Labor, the American Federation of Labor (AFL) became the strongest labor union in the U.S. It held shorter hours as a high priority. The inside cover of its Proceedings carried two slogans in large type: “Eight hours for work, eight hours for rest, eight hours for what we will” and “Whether you work by the piece or work by the day, decreasing the hours increases the pay.” (The latter slogan was coined by Ira Steward’s wife, Mary.) In the aftermath of 1886, the American Federation of Labor adopted a new strategy of selecting each year one industry in which it would attempt to win the eight-hour day, after laying solid plans, organizing, and building up a strike fund war chest by taxing nonstriking unions. The United Brotherhood of Carpenters and Joiners was selected first and May 1, 1890 was set as a day of national strikes. It is estimated that nearly 100,000 workers gained the eight-hour day as a result of these strikes in 1890. However, other unions turned down the opportunity to follow the carpenters’ example and the tactic was abandoned. Instead, the length of the workweek continued to erode during this period, sometimes as the result of a successful local strike, more often as the result of broader economic forces.

The Spread of Hours Legislation

Massachusetts’ first hours law in 1874 set sixty hours per week as the legal maximum for women, in 1892 this was cut to 58, in 1908 to 56, and in 1911 to 54. By 1900, 26 percent of states had maximum hours laws covering women, children and, in some, adult men (generally only those in hazardous industries). The percentage of states with maximum hours laws climbed to 58 percent in 1910, 76 percent in 1920, and 84 percent in 1930. Steinberg (1982) calculates that the percent of employees covered climbed from 4 percent nationally in 1900, to 7 percent in 1910, and 12 percent in 1920 and 1930. In addition, these laws became more restrictive with the average legal standard falling from a maximum of 59.3 hours per week in 1900 to 56.7 in 1920. According to her calculations, in 1900 about 16 percent of the workers covered by these laws were adult men, 49 percent were adult women and the rest were minors.

Court Rulings

The banner years for maximum hours legislation were right around 1910. This may have been partly a reaction to the Supreme Court’s ruling upholding female-hours legislation in the Muller vs. Oregon case (1908). The Court’s rulings were not always completely consistent during this period, however. In 1898 the Court upheld a maximum eight-hour day for workmen in the hazardous industries of mining and smelting in Utah in Holden vs. Hardy. In Lochner vs. New York (1905), it rejected as unconstitutional New York’s ten-hour day for bakers, which was also adopted (at least nominally) out of concerns for safety. The defendant showed that mortality rates in baking were only slightly above average, and lower than those for many unregulated occupations, arguing that this was special interest legislation, designed to favor unionized bakers. Several state courts, on the other hand, supported laws regulating the hours of men in only marginally hazardous work. By 1917, in Bunting vs. Oregon, the Supreme Court seemingly overturned the logic of the Lochner decision, supporting a state law that required overtime payment for all men working long hours. The general presumption during this period was that the courts would allow regulation of labor concerning women and children, who were thought to be incapable of bargaining on an equal footing with employers and in special need of protection. Men were allowed freedom of contract unless it could be proven that regulating their hours served a higher good for the population at large.

New Arguments about Shorter Hours

During the first decades of the twentieth century, arguments favoring shorter hours moved away from Steward’s line that shorter hours increased pay and reduced unemployment to arguments that shorter hours were good for employers because they made workers more productive. A new cadre of social scientists began to offer evidence that long hours produced health-threatening, productivity-reducing fatigue. This line of reasoning, advanced in the court brief of Louis Brandeis and Josephine Goldmark, was crucial in the Supreme Court’s decision to support state regulation of women’s hours in Muller vs. Oregon. Goldmark’s book, Fatigue and Efficiency (1912) was a landmark. In addition, data relating to hours and output among British and American war workers during World War I helped convince some that long hours could be counterproductive. Businessmen, however, frequently attacked the shorter hours movement as merely a ploy to raise wages, since workers were generally willing to work overtime at higher wage rates.

Federal Legislation in the 1910s

In 1912 the Federal Public Works Act was passed, which provided that every contract to which the U.S. government was a party must contain an eight-hour day clause. Three year later LaFollette’s Bill established maximum hours for maritime workers. These were preludes to the most important shorter-hours law enacted by Congress during this period — 1916’s Adamson Act, which was passed to counter a threatened nationwide strike, granted rail workers the basic eight hour day. (The law set eight hours as the basic workday and required higher overtime pay for longer hours.)

World War I and Its Aftermath

Labor markets became very tight during World War I as the demand for workers soared and the unemployment rate plunged. These forces put workers in a strong bargaining position, which they used to obtain shorter work schedules. The move to shorter hours was also pushed by the federal government, which gave unprecedented support to unionization. The federal government began to intervene in labor disputes for the first time, and the National War Labor Board “almost invariably awarded the basic eight-hour day when the question of hours was at issue” in labor disputes (Cahill, 1932). At the end of the war everyone wondered if organized labor would maintain its newfound power and the crucial test case was the steel industry. Blast furnace workers generally put in 84-hour workweeks. These abnormally long hours were the subject of much denunciation and a major issue in a strike that began in September 1919. The strike failed (and organized labor’s power receded during the 1920s), but four years later US Steel reduced its workday from twelve to eight hours. The move came after much arm-twisting by President Harding but its timing may be explained by immigration restrictions and the loss of immigrant workers who were willing to accept such long hours (Shiells, 1990).

The Move to a Five-day Workweek

During the 1920s agitation for shorter workdays largely disappeared, now that the workweek had fallen to about 50 hours. However, pressure arose to grant half-holidays on Saturday or Saturday off — especially in industries whose workers were predominantly Jewish. By 1927 at least 262 large establishments had adopted the five-day week, while only 32 had it by 1920. The most notable action was Henry Ford’s decision to adopt the five-day week in 1926. Ford employed more than half of the nation’s approximately 400,000 workers with five-day weeks. However, Ford’s motives were questioned by many employers who argued that productivity gains from reducing hours ceased beyond about forty-eight hours per week. Even the reformist American Labor Legislation Review greeted the call for a five-day workweek with lukewarm interest.

Changing Attitudes in the 1920s

Hunnicutt (1988) argues that during the 1920s businessmen and economists began to see shorter hours as a threat to future economic growth. With the development of advertising — the “gospel of consumption” — a new vision of progress was proposed to American workers. It replaced the goal of leisure time with a list of things to buy and business began to persuade workers that more work brought more tangible rewards. Many workers began to oppose further decreases in the length of the workweek. Hunnicutt concludes that a new work ethic arose as Americans threw off the psychology of scarcity for one of abundance.

Hours’ Reduction during the Great Depression

Then the Great Depression hit the American economy. By 1932 about half of American employers had shortened hours. Rather than slash workers’ real wages, employers opted to lay-off many workers (the unemployment rate hit 25 percent) and tried to protect the ones they kept on by the sharing of work among them. President Hoover’s Commission for Work Sharing pushed voluntary hours reductions and estimated that they had saved three to five million jobs. Major employers like Sears, GM, and Standard Oil scaled down their workweeks and Kellogg’s and the Akron tire industry pioneered the six-hour day. Amid these developments, the AFL called for a federally-mandated thirty-hour workweek.

The Black-Connery 30-Hours Bill and the NIRA

The movement for shorter hours as a depression-fighting work-sharing measure built such a seemingly irresistible momentum that by 1933 observers predicting that the “30-hour week was within a month of becoming federal law” (Hunnicutt, 1988). During the period after the 1932 election but before Franklin Roosevelt’s inauguration, Congressional hearings on thirty hours began, and less than one month into FDR’s first term, the Senate passed, 53 to 30, a thirty-hour bill authored by Hugo Black. The bill was sponsored in the House by William Connery. Roosevelt originally supported the Black-Connery proposals, but soon backed off, uneasy with a provision forbidding importation of goods produced by workers whose weeks were longer than thirty hours, and convinced by arguments of business that trying to legislate fewer hours might have disastrous results. Instead, FDR backed the National Industrial Recovery Act (NIRA). Hunnicutt argues that an implicit deal was struck in the NIRA. Labor leaders were persuaded by NIRA Section 7a’s provisions — which guaranteed union organization and collective bargaining — to support the NIRA rather than the Black-Connery Thirty-Hour Bill. Business, with the threat of thirty hours hanging over its head, fell raggedly into line. (Most historians cite other factors as the key to the NIRA’s passage. See Barbara Alexander’s article on the NIRA in this encyclopedia.) When specific industry codes were drawn up by the NIRA-created National Recovery Administration (NRA), shorter hours were deemphasized. Despite a plan by NRA Administrator Hugh Johnson to make blanket provisions for a thirty-five hour workweek in all industry codes, by late August 1933, the momentum toward the thirty-hour week had dissipated. About half of employees covered by NRA codes had their hours set at forty per week and nearly 40 percent had workweeks longer than forty hours.

The FSLA: Federal Overtime Law

Hunnicutt argues that the entire New Deal can be seen as an attempt to keep shorter-hours advocates at bay. After the Supreme Court struck down the NRA, Roosevelt responded to continued demands for thirty hours with the Works Progress Administration, the Wagner Act, Social Security, and, finally, the Fair Labor Standards Acts, which set a federal minimum wage and decreed that overtime beyond forty hours per week would be paid at one-and-a-half times the base rate in covered industries.

The Demise of the Shorter Hours’ Movement

As the Great Depression ended, average weekly work hours slowly climbed from their low reached in 1934. During World War II hours reached a level almost as high as at the end of World War I. With the postwar return of weekly work hours to the forty-hour level the shorter hours movement effectively ended. Occasionally organized labor’s leaders announced that they would renew the push for shorter hours, but they found that most workers didn’t desire a shorter workweek.

The Case of Kellogg’s

Offsetting isolated examples of hours reductions after World War II, there were noteworthy cases of backsliding. Hunnicutt (1996) has studied the case of Kellogg’s in great detail. In 1946, 87% of women and 71% of men working at Kellogg’s voted to return to the six-hour day, with the end of the war. Over the course of the next decade, however, the tide turned. By 1957 most departments had opted to switch to 8-hour shifts, so that only about one-quarter of the work force, mostly women, retained a six-hour shift. Finally, in 1985, the last department voted to adopt an 8-hour workday. Workers, especially male workers, began to favor additional money more than the extra two hours per day of free time. In interviews they explained that they needed the extra money to buy a wide range of consumer items and to keep up with the neighbors. Several men told about the friction that resulted when men spent too much time around the house: “The wives didn’t like the men underfoot all day.” “The wife always found something for me to do if I hung around.” “We got into a lot of fights.” During the 1950s, the threat of unemployment evaporated and the moral condemnation for being a “work hog” no longer made sense. In addition, the rise of quasi-fixed employment costs (such as health insurance) induced management to push workers toward a longer workday.

The Current Situation

As the twentieth century ended there was nothing resembling a shorter hours “movement.” The length of the workweek continues to fall for most groups — but at a glacial pace. Some Americans complain about a lack of free time but the vast majority seem content with an average workweek of roughly forty hours — channeling almost all of their growing wages into higher incomes rather than increased leisure time.

Causes of the Decline in the Length of the Workweek

Supply, Demand and Hours of Work

The length of the workweek, like other labor market outcomes, is determined by the interaction of the supply and demand for labor. Employers are torn by conflicting pressures. Holding everything else constant, they would like employees to work long hours because this means that they can utilize their equipment more fully and offset any fixed costs from hiring each worker (such as the cost of health insurance — common today, but not a consideration a century ago). On the other hand, longer hours can bring reduced productivity due to worker fatigue and can bring worker demands for higher hourly wages to compensate for putting in long hours. If they set the workweek too high, workers may quit and few workers will be willing to work for them at a competitive wage rate. Thus, workers implicitly choose among a variety of jobs — some offering shorter hours and lower earnings, others offering longer hours and higher earnings.

Economic Growth and the Long-Term Reduction of Work Hours

Historically employers and employees often agreed on very long workweeks because the economy was not very productive (by today’s standards) and people had to work long hours to earn enough money to feed, clothe and house their families. The long-term decline in the length of the workweek, in this view, has primarily been due to increased economic productivity, which has yielded higher wages for workers. Workers responded to this rise in potential income by “buying” more leisure time, as well as by buying more goods and services. In a recent survey, a sizeable majority of economic historians agreed with this view. Over eighty percent accepted the proposition that “the reduction in the length of the workweek in American manufacturing before the Great Depression was primarily due to economic growth and the increased wages it brought” (Whaples, 1995). Other broad forces probably played only a secondary role. For example, roughly two-thirds of economic historians surveyed rejected the proposition that the efforts of labor unions were the primary cause of the drop in work hours before the Great Depression.

Winning the Eight-Hour Day in the Era of World War I

The swift reduction of the workweek in the period around World War I has been extensively analyzed by Whaples (1990b). His findings support the consensus that economic growth was the key to reduced work hours. Whaples links factors such as wages, labor legislation, union power, ethnicity, city size, leisure opportunities, age structure, wealth and homeownership, health, education, alternative employment opportunities, industrial concentration, seasonality of employment, and technological considerations to changes in the average workweek in 274 cities and 118 industries. He finds that the rapid economic expansion of the World War I period, which pushed up real wages by more than 18 percent between 1914 and 1919, explains about half of the drop in the length of the workweek. The reduction of immigration during the war was important, as it deprived employers of a group of workers who were willing to put in long hours, explaining about one-fifth of the hours decline. The rapid electrification of manufacturing seems also to have played an important role in reducing the workweek. Increased unionization explains about one-seventh of the reduction, and federal and state legislation and policies that mandated reduced workweeks also had a noticeable role.

Cross-sectional Patterns from 1919

In 1919 the average workweek varied tremendously, emphasizing the point that not all workers desired the same workweek. The workweek exceeded 69 hours in the iron blast furnace, cottonseed oil, and sugar beet industries, but fell below 45 hours in industries such as hats and caps, fur goods, and women’s clothing. Cities’ averages also differed dramatically. In a few Midwestern steel mill towns average workweeks exceeded 60 hours. In a wide range of low-wage Southern cities they reached the high 50s, but in high-wage Western ports, like Seattle, the workweek fell below 45 hours.

Whaples (1990a) finds that among the most important city-level determinants of the workweek during this period were the availability of a pool of agricultural workers, the capital-labor ratio, horsepower per worker, and the amount of employment in large establishments. Hours rose as each of these increased. Eastern European immigrants worked significantly longer than others, as did people in industries whose output varied considerably from season to season. High unionization and strike levels reduced hours to a small degree. The average female employee worked about six and a half fewer hours per week in 1919 than did the average male employee. In city-level comparisons, state maximum hours laws appear to have had little affect on average work hours, once the influences of other factors have been taken into account. One possibility is that these laws were passed only after economic forces lowered the length of the workweek. Overall, in cities where wages were one percent higher, hours were about -0.13 to -0.05 percent lower. Again, this suggests that during the era of declining hours, workers were willing to use higher wages to “buy” shorter hours.

Annotated Bibliography

Perhaps the most comprehensive survey of the shorter hours movement in the U.S. is David Roediger and Philip Foner’s Our Own Time: A History of American Labor and the Working Day (1989). It contends that “the length of the working day has been the central issue for the American labor movement during its most vigorous periods of activity, uniting workers along lines of craft, gender, and ethnicity.” Critics argue that its central premise is flawed because workers have often been divided about the optimal length of the workweek. It explains the point of view of organized labor and recounts numerous historically important events and arguments, but does not attempt to examine in detail the broader economic forces that determined the length of the workweek. An earlier useful comprehensive work is Marion Cahill’s Shorter Hours: A Study of the Movement since the Civil War (1932).

Benjamin Hunnicutt’s Work Without End: Abandoning Shorter Hours for the Right to Work (1988) focuses on the period from 1920 to 1940 and traces the political, intellectual, and social “dialogues” that changed the American concept of progress from dreams of more leisure to an “obsession” with the importance of work and wage-earning. This work’s detailed analysis and insights are valuable, but it draws many of its inferences from what intellectuals said about shorter hours, rather than spending time on the actual decision makers — workers and employers. Hunnicutt’s Kellogg’s Six-Hour Day (1996), is important because it does exactly this — interviewing employees and examining the motives and decisions of a prominent employer. Unfortunately, it shows that one must carefully interpret what workers say on the subject, as they are prone to reinterpret their own pasts so that their choices can be more readily rationalized. (See EH.NET’s review: http://eh.net/book_reviews/kelloggs-six-hour-day/.)

Economists have given surprisingly little attention to the determinants of the workweek. The most comprehensive treatment is Robert Whaples’ “The Shortening of the American Work Week” (1990), which surveys estimates of the length of the workweek, the shorter hours movement, and economic theories about the length of the workweek. Its core is an extensive statistical examination of the determinants of the workweek in the period around World War I.

References

Atack, Jeremy and Fred Bateman. “How Long Was the Workday in 1880?” Journal of Economic History 52, no. 1 (1992): 129-160.

Cahill, Marion Cotter. Shorter Hours: A Study of the Movement since the Civil War. New York: Columbia University Press, 1932.

Carr, Lois Green. “Emigration and the Standard of Living: The Seventeenth Century Chesapeake.” Journal of Economic History 52, no. 2 (1992): 271-291.

Coleman, Mary T. and John Pencavel. “Changes in Work Hours of Male Employees, 1940-1988.” Industrial and Labor Relations Review 46, no. 2 (1993a): 262-283.

Coleman, Mary T. and John Pencavel. “Trends in Market Work Behavior of Women since 1940.” Industrial and Labor Relations Review 46, no. 4 (1993b): 653-676.

Douglas, Paul. Real Wages in the United States, 1890-1926. Boston: Houghton, 1930.

Fogel, Robert. The Fourth Great Awakening and the Future of Egalitarianism. Chicago: University of Chicago Press, 2000.

Fogel, Robert and Stanley Engerman. Time on the Cross: The Economics of American Negro Slavery. Boston: Little, Brown, 1974.

Gallman, Robert. “The Agricultural Sector and the Pace of Economic Growth: U.S. Experience in the Nineteenth Century.” In Essays in Nineteenth-Century Economic History: The Old Northwest, edited by David Klingaman and Richard Vedder. Athens, OH: Ohio University Press, 1975.

Goldmark, Josephine. Fatigue and Efficiency. New York: Charities Publication Committee, 1912.

Gompers, Samuel. Seventy Years of Life and Labor: An Autobiography. New York: Dutton, 1925.

Greis, Theresa Diss. The Decline of Annual Hours Worked in the United States, since 1947. Manpower and Human Resources Studies, no. 10, Wharton School, University of Pennsylvania, 1984.

Grob, Gerald. Workers and Utopia: A Study of Ideological Conflict in the American Labor Movement, 1865-1900. Evanston: Northwestern University Press, 1961.

Hunnicutt, Benjamin Kline. Work Without End: Abandoning Shorter Hours for the Right to Work. Philadelphia: Temple University Press, 1988.

Hunnicutt, Benjamin Kline. Kellogg’s Six-Hour Day. Philadelphia: Temple University Press, 1996.

Jones, Ethel. “New Estimates of Hours of Work per Week and Hourly Earnings, 1900-1957.” Review of Economics and Statistics 45, no. 4 (1963): 374-385.

Juster, F. Thomas and Frank P. Stafford. “The Allocation of Time: Empirical Findings, Behavioral Models, and Problems of Measurement.” Journal of Economic Literature 29, no. 2 (1991): 471-522.

Licht, Walter. Working for the Railroad: The Organization of Work in the Nineteenth Century. Princeton: Princeton University Press, 1983.

Margo, Robert. “The Labor Force in the Nineteenth Century.” In The Cambridge Economic History of the United States, Volume II, The Long Nineteenth Century, edited by Stanley Engerman and Robert Gallman, 207-243. New York: Cambridge University Press, 2000.

Nelson, Bruce. “‘We Can’t Get Them to Do Aggressive Work’: Chicago’s Anarchists and the Eight-Hour Movement.” International Labor and Working Class History 29 (1986).

Ng, Kenneth and Nancy Virts. “The Value of Freedom.” Journal of Economic History 49, no. 4 (1989): 958-965.

Owen, John. “Workweeks and Leisure: An Analysis of Trends, 1948-1975.” Monthly Labor Review 99 (1976).

Owen, John. “Work-time Reduction in the United States and Western Europe.” Monthly Labor Review 111 (1988).

Powderly, Terence. Thirty Years of Labor, 1859-1889. Columbus: Excelsior, 1890.

Ransom, Roger and Richard Sutch. One Kind of Freedom: The Economic Consequences of Emancipation. New York: Cambridge University Press, 1977.

Rodgers, Daniel. The Work Ethic in Industrial America, 1850-1920. Chicago: University of Chicago Press, 1978.

Roediger, David. “Ira Steward and the Antislavery Origins of American Eight-Hour Theory.” Labor History 27 (1986).

Roediger, David and Philip Foner. Our Own Time: A History of American Labor and the Working Day. New York: Verso, 1989.

Schor, Juliet B. The Overworked American: The Unexpected Decline in Leisure. New York: Basic Books, 1992.

Shiells, Martha Ellen, “Collective Choice of Working Conditions: Hours in British and U.S. Iron and Steel, 1890-1923.” Journal of Economic History 50, no. 2 (1990): 379-392.

Steinberg, Ronnie. Wages and Hours: Labor and Reform in Twentieth-Century America. New Brunswick, NJ: Rutgers University Press, 1982.

United States, Department of Interior, Census Office. Report on the Statistics of Wages in Manufacturing Industries, by Joseph Weeks, 1880 Census, Vol. 20. Washington: GPO, 1883.

United States Senate. Senate Report 1394, Fifty-Second Congress, Second Session. “Wholesale Prices, Wages, and Transportation.” Washington: GPO, 1893.

Ware, Caroline. The Early New England Cotton Manufacture: A Study of Industrial Beginnings. Boston: Houghton-Mifflin, 1931.

Ware, Norman. The Labor Movement in the United States, 1860-1895. New York: Appleton, 1929.

Weiss, Thomas and Lee Craig. “Agricultural Productivity Growth during the Decade of the Civil War.” Journal of Economic History 53, no. 3 (1993): 527-548.

Whaples, Robert. “The Shortening of the American Work Week: An Economic and Historical Analysis of Its Context, Causes, and Consequences.” Ph.D. dissertation, University of Pennsylvania, 1990a.

Whaples, Robert. “Winning the Eight-Hour Day, 1909-1919.” Journal of Economic History 50, no. 2 (1990b): 393-406.

Whaples, Robert. “Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions.” Journal of Economic History 55, no. 1 (1995): 139-154.

Citation: Whaples, Robert. “Hours of Work in U.S. History”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/hours-of-work-in-u-s-history/

Economic History of Hong Kong

Catherine R. Schenk, University of Glasgow

Hong Kong’s economic and political history has been primarily determined by its geographical location. The territory of Hong Kong is comprised of two main islands (Hong Kong Island and Lantau Island) and a mainland hinterland. It thus forms a natural geographic port for Guangdong province in Southeast China. In a sense, there is considerable continuity in Hong Kong’s position in the international economy since its origins were as a commercial entrepot for China’s regional and global trade, and this is still a role it plays today. From a relatively unpopulated territory at the beginning of the nineteenth century, Hong Kong grew to become one of the most important international financial centers in the world. Hong Kong also underwent a rapid and successful process of industrialization from the 1950s that captured the imagination of economists and historians in the 1980s and 1990s.

Hong Kong from 1842 to 1949

After being ceded by China to the British under the Treaty of Nanking in 1842, the colony of Hong Kong quickly became a regional center for financial and commercial services based particularly around the Hongkong and Shanghai Bank and merchant companies such as Jardine Matheson. In 1841 there were only 7500 Chinese inhabitants of Hong Kong and a handful of foreigners, but by 1859 the Chinese community was over 85,000 supplemented by about 1600 foreigners. The economy was closely linked to commercial activity, dominated by shipping, banking and merchant companies. Gradually there was increasing diversification to services and retail outlets to meet the needs of the local population, and also shipbuilding and maintenance linked to the presence of the British naval and merchant shipping. There was some industrial expansion in the nineteenth century; notably sugar refining, cement and ice factories among the foreign sector, alongside smaller-scale local workshop manufactures. The mainland territory of Hong Kong was ceded to British rule by two further treaties in this period; Kowloon in 1860 and the New Territories in 1898.

Hong Kong was profoundly affected by the disastrous events in Mainland China in the inter-war period. After overthrow of the dynastic system in 1911, the Kuomintang (KMT) took a decade to pull together a republican nation-state. The Great Depression and fluctuations in the international price of silver then disrupted China’s economic relations with the rest of the world in the 1930s. From 1937, China descended into the Sino-Japanese War. Two years after the end of World War II, the civil war between the KMT and Chinese Communist Party pushed China into a downward economic spiral. During this period, Hong Kong suffered from the slowdown in world trade and in China’s trade in particular. However, problems on the mainland also diverted business and entrepreneurs from Shanghai and other cities to the relative safety and stability of the British colonial port of Hong Kong.

Post-War Industrialization

After the establishment of the People’s Republic of China (PRC) in 1949, the mainland began a process of isolation from the international economy, partly for ideological reasons and partly because of Cold War embargos on trade imposed first by the United States in 1949 and then by the United Nations in 1951. Nevertheless, Hong Kong was vital to the international economic links that the PRC continued in order to pursue industrialization and support grain imports. Even during the period of self-sufficiency in the 1960s, Hong Kong’s imports of food and water from the PRC were a vital source of foreign exchange revenue that ensured Hong Kong’s usefulness to the mainland. In turn, cheap food helped to restrain rises in the cost of living in Hong Kong thus helping to keep wages low during the period of labor-intensive industrialization.

The industrialization of Hong Kong is usually dated from the embargoes of the 1950s. Certainly, Hong Kong’s prosperity could no longer depend on the China trade in this decade. However, as seen above, industry emerged in the nineteenth century and it began to expand in the interwar period. Nevertheless, industrialization accelerated after 1945 with the inflow of refugees, entrepreneurs and capital fleeing the civil war on the mainland. The most prominent example is immigrants from Shanghai who created the cotton spinning industry in the colony. Hong Kong’s industry was founded in the textile sector in the 1950s before gradually diversifying in the 1960s to clothing, electronics, plastics and other labor-intensive production mainly for export.

The economic development of Hong Kong is unusual in a variety of respects. First, industrialization was accompanied by increasing numbers of small and medium-sized enterprises (SME) rather than consolidation. In 1955, 91 percent of manufacturing establishments employed fewer than one hundred workers, a proportion that increased to 96.5 percent by 1975. Factories employing fewer than one hundred workers accounted for 42 percent of Hong Kong’s domestic exports to the U.K. in 1968, amounting to HK$1.2 billion. At the end of 2002, SMEs still amounted to 98 percent of enterprises, providing 60 percent of total private employment.

Second, until the late 1960s, the government did not engage in active industrial planning. This was partly because the government was preoccupied with social spending on housing large flows of immigrants, and partly because of an ideological sympathy for free market forces. This means that Hong Kong fits outside the usual models of Asian economic development based on state-led industrialization (Japan, South Korea, Singapore, Taiwan) or domination of foreign firms (Singapore) or large firms with close relations to the state (Japan, South Korea). Low taxes, lax employment laws, absence of government debt, and free trade are all pillars of the Hong Kong experience of economic development.

In fact, of course, the reality was very different from the myth of complete laissez-faire. The government’s programs of public housing, land reclamation, and infrastructure investment were ambitious. New industrial towns were built to house immigrants, provide employment and aid industry. The government subsidized industry indirectly through this public housing, which restrained rises in the cost of living that would have threatened Hong Kong’s labor-cost advantage in manufacturing. The government also pursued an ambitious public education program, creating over 300,000 new primary school places between 1954 and 1961. By 1966, 99.8% of school-age children were attending primary school, although free universal primary school was not provided until 1971. Secondary school provision was expanded in the 1970s, and from 1978 the government offered compulsory free education for all children up to the age of 15. The hand of government was much lighter on international trade and finance. Exchange controls were limited to a few imposed by the U.K., and there were no controls on international flows of capital. Government expenditure even fell from 7.5% of GDP in the 1960s to 6.5% in the 1970s. In the same decades, British government spending as a percent of GDP rose from 17% to 20%.

From the mid-1950s Hong Kong’s rapid success as a textile and garment exporter generated trade friction that resulted in voluntary export restraints in a series of treaties with the U.K. beginning in 1959. Despite these agreements, Hong Kong’s exporters continued to exploit their flexibility and adaptability to increase production and find new markets. Indeed, exports increased from 54% of GDP in the 1960s to 64% in the 1970s. Figure 1 shows the annual changes in the growth of real GDP per capita. In the period from 1962 until the onset of the oil crisis in 1973, the average growth rate was 6.5% per year. From 1976 to 1996 GDP grew at an average of 5.6% per year. There were negative shocks in 1967-68 as a result of local disturbances from the onset of the Cultural Revolution in the PRC, and again in 1973 to 1975 from the global oil crisis. In the early 1980s there was another negative shock related to politics, as the terms of Hong Kong’s return to PRC control in 1997 were formalized.

 Annual percentage change of per capita GDP 1962-2001

Reintegration with China, 1978-1997

The Open Door Policy of the PRC announced by Deng Xiao-ping at the end of 1978 marked a new era for Hong Kong’s economy. With the newly vigorous engagement of China in international trade and investment, Hong Kong’s integration with the mainland accelerated as it regained its traditional role as that country’s main provider of commercial and financial services. From 1978 to 1997, visible trade between Hong Kong and the PRC grew at an average rate of 28% per annum. At the same time, Hong Kong firms began to move their labor-intensive activities to the mainland to take advantage of cheaper labor. The integration of Hong Kong with the Pearl River delta in Guangdong is the most striking aspect of these trade and investment links. At the end of 1997, the cumulative value of Hong Kong’s direct investment in Guangdong was estimated at US$48 billion, accounting for almost 80% of the total foreign direct investment there. Hong Kong companies and joint ventures in Guangdong province employed about five million people. Most of these businesses were labor-intensive assembly for export, but from 1997 onward there has been increased investment in financial services, tourism and retail trade.

While manufacturing was moved out of the colony during the 1980s and 1990s, there was a surge in the service sector. This transformation of the structure of Hong Kong’s economy from manufacturing to services was dramatic. Most remarkably it was accomplished without faltering growth rates overall, and with an average unemployment rate of only 2.5% from 1982 to 1997. Figure 2 shows that the value of manufacturing peaked in 1992 before beginning an absolute decline. In contrast, the value of commercial and financial services soared. This is reflected in the contribution of services and manufacturing to GDP shown in Figure 3. Employment in the service sector rose from 52% to 80% of the labor force from 1981 to 2000 while manufacturing employment fell from 39% to 10% in the same period.

 GDP by economic activity at current prices  Contribution to Hong Kong's GDP at factor prices

Asian Financial Crisis, 1997-2002

The terms for the return of Hong Kong to Chinese rule in July 1997 carefully protected the territory’s separate economic characteristics, which have been so beneficial to the Chinese economy. Under the Basic Law, a “one country-two systems” policy was formulated which left Hong Kong monetarily and economically separate from the mainland with exchange and trade controls remaining in place as well as restrictions on the movement of people. Hong Kong was hit hard by the Asian Financial Crisis that struck the region in mid-1997, just at the time of the handover of the colony back to Chinese administrative control. The crisis prompted a collapse in share prices and the property market that affected the ability of many borrowers to repay bank loans. Unlike most Asian countries, Hong Kong Special Administrative Region and mainland China maintained their currencies’ exchange rates with the U.S. dollar rather than devaluing. Along with the Sudden Acute Respiratory Syndrome (SARS) threat in 2002, the Asian Financial Crisis pushed Hong Kong into a new era of recession with a rise in unemployment (6% on average from 1998-2003) and absolute declines in output and prices. The longer-term impact of the crisis has been to increase the intensity and importance of Hong Kong’s trade and investment links with the PRC. Since the PRC did not fare as badly from the regional crisis, the economic prospects for Hong Kong have been tied more closely to the increasingly prosperous mainland.

Suggestions for Further Reading

For a general history of Hong Kong from the nineteenth century, see S. Tsang, A Modern History of Hong Kong, London: IB Tauris, 2004. For accounts of Hong Kong’s economic history see, D.R. Meyer, Hong Kong as a Global Metropolis, Cambridge: Cambridge University Press, 2000; C.R. Schenk, Hong Kong as an International Financial Centre: Emergence and Development, 1945-65, London: Routledge, 2001; and Y-P Ho, Trade, Industrial Restructuring and Development in Hong Kong, London: Macmillan, 1992. Useful statistics and summaries of recent developments are available on the website of the Hong Kong Monetary Authority www.info.gov.hk/hkma.

Citation: Schenk, Catherine. “Economic History of Hong Kong”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/economic-history-of-hong-kong/

The Freedmen’s Bureau

William Troost, University of British Columbia

The Bureau of Refugees, Freedmen, and Abandoned Lands, more commonly know as the Freedmen’s Bureau, was a federal agency established to help Southern blacks transition from their lives as slaves to free individuals. The challenges of this transformation were enormous as the Civil War devastated the region – leaving farmland dilapidated and massive amounts of capital destroyed. Additionally, the entire social order of the region was disturbed as slave owners and former slaves were forced to interact with one another in completely new ways. The Freedmen’s Bureau was an unprecedented foray by the federal government into the sphere of social welfare during a critical period of American history. This article briefly describes this unique agency, its colorful history, and many functions that the bureau performed during its brief existence.

The Beginning of the Bureau

In March 1863, the American Freedmen’s Inquiry Commission was set up to investigate “the measures which may best contribute to the protection and improvement of the recently emancipated freedmen of the United States, and to their self-defense and self-support.”1 The commission debated various methods and activities to alleviate the current condition of freedmen and aid their transition to free individuals. Basic aid activities to alleviate physical suffering and provide legal justice, education, and land redistribution were commonly mentioned in these meetings and hearings. This inquiry commission examined many issues and came up with some ideas that would eventually become the foundation for the eventual Freedmen’s Bureau Law. In 1864, the commission issued their final report which laid out the basic philosophy that would guide the actions of the Freedmen’s Bureau.

“The sum of our recommendations is this: Offer the freedmen temporary aid and counsel until they become a little accustomed to their new sphere of life; secure to them, by law, their just rights of person and property; relieve them, by a fair and equal administration of justice, from the depressing influence of disgraceful prejudice; above all, guard them against the virtual restoration of slavery in any form, and let them take care of themselves. If we do this, the future of the African race in this country will be conducive to its prosperity and associated with its well-being. There will be nothing connected with it to excite regret to inspire apprehension.”2

When the Congress finally got down to the business of writing a bill to aid the transition of the freedmen they tried to integrate many of the American Freedmen’s Inquiry Commission’s recommendations. Originally the agency set up to aid in this transition was to be named the Bureau of Emancipation. However, when the bill came up for a vote on March 1, 1864 the name was changed to the Bureau of Refugees, Freedmen, and Abandoned Lands. This change was due in large part to objections that the bill was exclusionary and aimed solely towards the aid of blacks. This name changed was aimed at enlarging support for the bill.

The House and the Senate argued about the powers and place that the bureau should reside within the government. Those in the House wanted the agency placed within the War Department, concluding that the power used to free the slaves would be best to aid them in their transition. Oppositely, in the Senate Charles Sumner’s Committee on Slavery and Freedom wanted the bureau placed within the Department of the Treasury – as it had the power to tax and had possession of confiscated lands. Sumner felt that they “should not be separated from their best source of livelihood.”3 After a year of debate, finally a compromise was agreed to that entrusted the Freedmen’s Bureau with the administration of confiscated lands while placing the bureau within the Department of War. Thus, On March 3, 1865, with the stroke of a pen, Abraham Lincoln signed into existence the Bureau of Refugees, Freedmen, and Abandoned Lands. Selected to head of the new bureau was General Otis Oliver Howard – commonly known as the Christian General. Howard had strong ties with the philanthropic community and forged strong ties with freedmen’s aid organizations.

The Freedmen’s Bureau was active in a variety of aid functions. Eric Foner writes it was “an experiment in social policy that did not belong to the America of its day”.4 The bureau did important work in many key areas and had many functions that even today are not considered the responsibility of the national government.

Relief Services

A key function of the bureau, especially in the beginning, was to provide temporary relief for the suffering of destitute freedmen. The bureau provided rations for those most in need due to the abandonment of plantations, poor crop yields, and unemployment. This aid was taken advantage of by a staggering number of both freedmen and refugees. A ration was defined as enough corn meal, flour, and sugar sufficient to feed a person for one week. In “the first 15 months following the war, the Bureau issued over 13 million rations, two thirds to blacks.”5 The size of this aid was staggering and while it was deemed a great necessity, it also fostered tremendous anxiety for both General Howard and the general population – mainly that it would cause idleness. Because of these worries, General Howard ordered that this form of relief be discontinued in the fall of 1866.

Health Care

In a similar vein the bureau also provided medical care to the recently freed slaves. The health situation of freedmen at the conclusion of the Civil War was atrocious. Frequent pandemics of cholera, poor sanitation, and outbreaks of smallpox killed scores of freedmen. Because the freed population lacked the financial assets to purchase private healthcare and were denied care in many other cases, the bureau played a valuable role.

“Since hospitals and doctors could not be relied on to provide adequate health care for freedmen, individual bureau agents on occasion responded innovatively to black distress. During epidemics, Pine Bluff and Little Rock agents relocated freedpersons to less contagion-ridden places. When blacks could not be moved, agents imposed quarantines to prevent the spread of disease. General Order Number 8…prohibited new residents from congregating in towns. The order also mandated weekly inspections of freedmen’s homes to check for filth and overcrowding.”6

In addition to preventing and containing outbreaks, the bureau also engaged more directly in health care. Being placed in the War Department, the bureau was also able to assume operations of hospitals established by the Army during the war. After the war it expanded the system to areas previously not under military control. Observing that freedmen were not receiving an adequate quality of health services, the bureau established dispensaries providing basic medical care and drugs free of charge, or at a nominal cost. The Bureau “managed in the early years of Reconstruction to treat an estimated half million suffering freedmen, as well as a smaller but significant number of whites.”7

Land Redistribution

Perhaps the most well-known function of the bureau was one that never came to fruition. During the course of the Civil War, the U.S. Army took control of a good deal of land that had been confiscated or abandoned by the Confederacy. From the time of emancipation there were rumors that confiscated lands would be provided to the recently freed slaves. This land would enable the blacks to be economically self-sufficient and provide protection from their former owners. In January 1865, General Sherman issued Special Field Orders, No. 15, which set aside the Sea Islands and lands from South Carolina to Florida for blacks to settle. According to his order, each family would receive forty acres of land and the loan of horses and mules from the Army. Similar to General Sherman’s order, the promise of land was incorporated into the bureau bill. Quickly the bureau helped blacks settle some of the abandoned lands and “by June 1865, roughly 10,000 families of freed people, with the assistance of the Freedmen’s Bureau, had taken up more than 400,000 acres.”8

While the promise of “forty acres and a mule” excited the freedmen, the widespread implementation of this policy was quickly thwarted. In the summer of 1865, President Andrew Johnson issued special pardons restoring the property of many Confederates – throwing into question the status of abandoned lands. In response, General Howard, the Commissioner of the Freedmen’s Bureau, issued Circular 13 which told agents to conserve forty-acre tracts of land for the freedmen – as he claimed presidential pardons conflicted with the laws establishing the bureau. However, Johnson quickly instructed Howard to rescind his circular and send out a new circular ordering the restoration to pardoned owners of all land except those tracts already sold. These actions by the President were devastating, as freedmen were evicted from lands that they had long occupied and improved. Johnson’s actions took away what many felt was the freedmen’s best chance at economic protection and self-sufficiency.

Judicial Functions

While the land distribution of the new agency was thwarted, the bureau was able to perform many duties. Bureau agents had judicial authority in the South attempting to secure equal justice from the state and local governments for both blacks and white Unionists. Local agents individually adjudicated a wide variety of disputes. In some circumstances the bureau established courts where freedmen could bring forth their complaints. After the local courts regained their jurisdiction, bureau agents kept an eye on local courts retaining the authority to overturn decisions that were discriminatory towards blacks. In May 1865, the Commissioner of the bureau issued a circular “authorizing assistant commissioners to exercise jurisdiction in cases where blacks were not allowed to testify.”9

In addition to these judicial functions, the bureau also helped provide legal services in the domestic sphere. Agents helped legitimize slave marriages and presided over freedmen marriage ceremonies in areas where black marriages were obstructed. Beginning in 1866, the bureau became responsible for filing the claims of black soldiers for back pay, pensions, and bounties. The claims division remained in operation until the end of the bureau’s existence. During a time when many of the states tried to strip rights away from blacks, the bureau was essential in providing freedmen redress and access to more equitable judicial decisions and services.

Labor Relations

Another important function of the bureau was to help draw up work contracts to help facilitate the hiring of freedmen. The abolition of slavery created economic confusion and stagnation as many planters had a difficult time finding labor to work their fields. Additionally, many blacks were anxious and unsure about working for former slave owners. “Into this chaos stepped the Freedmen’s Bureau as an intermediary.”10 The bureau helped planters and freedmen draft contracts on mutually agreeable terms – negotiating several hundred thousand contracts. Once agreed upon, the agency tried to make sure both planter and worker lived up to their part of the agreement. In essence, the bureau “would undertake the role of umpire.”11

Of the bureau’s many activities this was one of its most controversial. Both planters and freedmen complained about the insistence on labor contracts. Planters complained that labor contracts forbade the use of corporal punishment used in the past. They resented the limits on their activities and felt the restrictions of the contracts limited the productivity of their workers. On the other hand, freedmen complained that the contract structures were too restrictive and didn’t allow them to move freely. In essence, the bureau had an impossible task – trying to get the freedmen to return to work for former slave owners while preserving their rights and limiting abuse. The Freedmen’s Bureau’s judicial functions were of great help in enforcing these contracts in a fair manner making both parties live up to their end of the bargain. While historians have split over whether the bureau favored planters or the freedmen, Ralph Shlomowitz in his detailed analysis of bureau-assisted labor contracts found that contracts were determined by the free interplay of market forces.12 First, he finds contracts brokered by the bureau were extremely detailed to an extent that would not make sense in the absence of compliance. Second, contrary to popular belief he finds the share of crops received by labor was highly variable. In areas of higher quality land the share awarded to labor was less than in areas with lower land quality.

Educational Efforts

Prior to the Civil War it had been policy in the sixteen slave states to fine, whip, or imprison those who gave instruction to blacks or mulattos. In many states the punishments for teaching a person of color were quite severe. These laws severely restricted the educational opportunity of blacks – especially access to formal schooling. As a result, when given their freedom, many former slaves lacked the literacy skills necessary to protect themselves from discrimination and exploitation, and pursue many personal activities. This lack of literacy created great problems for blacks in a free labor system. Freedmen were repeatedly taken advantage of as they were often unable to read or draft contracts. Additionally, individuals lacked the ability to read newspapers and trade manuals, or worship by reading the Bible. Thus, when emancipated there was a great demand for freedmen schools.

General Howard quickly realized that education was perhaps the most important endeavor that the bureau could undertake. However, the financial resources and the few functions that the bureau was authorized to undertake limited the extent to which it was able to assist. Much of the early work in schooling was done by a number of benevolent and religious Northern societies. While initially the direct aid of the bureau was limited, it provided an essential role in organizing and coordinating these organizations in their efforts. The agency also allowed the use of many buildings in the Army’s possession and the bureau helped transport a trove of teachers from the North – commonly referred to as yankee school marms.

While the limits of the original Freedmen’s Bureau bill hamstrung the efforts of agents, subsequent bills changed the situation as the purse strings and functions of the bureau in the area of education were rapidly expanded. This shift in attention followed the lead of General Howard whose “stated goal was to close one after another of the original bureau divisions while the educational work was increased with all possible energy.”13 Among the provisions of the second bureau bill were: the appropriation of salaries for State Superintendents of Education, the repair and rental of school buildings, the ability to use military taxes to pay teachers’ salaries, and the establishment of the education division as a separate entity in the bureau.

These new resources were used to great success as enrollments at bureau-financed schools grew quickly, new schools were constructed in a variety of areas, and the quality and curriculum of the schools was significantly improved. The Freedmen’s Bureau was very successful in establishing a vast network of schools to help educate the freedmen. In retrospect this was a Herculean task for the federal government to accomplish. In a region where it was illegal to teach blacks how to read or write just a few years prior, the bureau was able to help establish nearly 1,600 day schools educating over 100,000 blacks at a time. The number of bureau-aided day and night schools in operation grew to a maximum of 1,737 in March 1870, employing 2,799 teachers, and instructing 103,396 pupils. In addition, 1,034 Sabbath schools were aided by the bureau that employed 4,988 teachers and instructed 85,557 pupils.

Matching the Integrated Public Use Sample of the 1870 Census and a constructed data set on bureau school location, one can examine the reach and prevalence of bureau-aided schools.14 Table 1 presents the summary statistics of various school concentration measures and educational outcomes for individual blacks 10-15 years old.

The variable “Freedmen’s Bureau School” equals one if there was at least one bureau-aided school in the individual’s county. The data reveals that 63.6 percent of blacks lived in counties with at least one bureau school. This shows the bureau was quite effective in reaching a large segment of the black population – as nearly two thirds of blacks living in the states of the ex-Confederacy had at least some minimal exposure to these schools. While the schools were widespread, it appears their concentration was somewhat low. For individuals living in a county with at least one bureau-aided school, the concentration of bureau-aided schools was 0.3165 per 30 square miles, or 0.4630 bureau aided-schools per 1,000 blacks.

Although the concentration of schools was somewhat low it appears they had a large impact on the educational outcomes of southern blacks. Ten to fifteen year olds living in a county with at least one bureau-aided school had literacy rates that were 6.1 percentage points higher. This appears to have been driven by the bureau increasing access to formal education for black children in these counties as school attendance rates were 7.5 percentage points higher than in counties without such schools.

Andrew Johnson and the Freedmen’s Bureau

Only eleven days after signing the bureau into existence, Abraham Lincoln was struck down by John Wilkes Booth. Taking his place in office was Andrew Johnson, a former Democratic Senator from Tennessee. Despite Johnson’s Southern roots, hopes were high that Congress and the new President could work closer together than the previous administration. President Lincoln and Congress had championed vastly different policies for Reconstruction. Lincoln preferred the term “Restoration” instead of “Reconstruction,” as he felt it was constitutionally impossible for a state to succeed.15 Lincoln championed the quick integration of the South into the Union and believed it could best be accomplished under the direction of the executive branch. Oppositely, Republicans in Congress led by Charles Sumner and Thaddeus Stevens felt the Confederate states had actually seceded and relinquished their constitutional rights. The Republicans in Congress advocated strict conditions for re-entry into the Union and programs aimed at reshaping society.

The ascension of Johnson to the presidency gave hope to Congress that they would have an ally in the White House in terms of Reconstruction philosophy. According to Howard Nash, the “Radicals were delighted….to have Vice President Andrew Johnson, who they had good reason to suppose was one of their number, elevated to the presidency.”16 In the months before and immediately after taking office, Johnson repeatedly talked about the need to punish rebels in the South. After Lincoln’s death Johnson became more impassioned in his speeches. In late April 1865 Johnson told an Indiana delegation “Treason must be made odious…traitors must be punished and impoverished…their social power must be destroyed.”17 If anything, many feared that Johnson may stray too far from the Presidential Reconstruction offered by Lincoln and be overly harsh in his treatment of the South.

Immediately after taking office Johnson honored Lincoln’s choice to head the bureau by appointing General Oliver Otis Howard as commissioner of the bureau. While this action raised hopes in Congress they would be able to work with the new administration, Johnson quickly switched course. After his selection of Howard, President Johnson and the “Radical” Republicans would scarcely agree on anything during the remainder of his term. On May 29, 1865, Johnson issued a proclamation that conferred amnesty, pardon, and the restoration of property rights for almost all Confederate soldiers who took an oath pledging loyalty to the Union. Johnson later came out in support of the black codes of the South, which tried to bring blacks back to a position of near slavery and argued that the Confederate states should be accepted back into the Union without the condition of ratifying and adopting the Fourteenth Amendment in their state constitutions.

The original bill signed by Lincoln established the bureau during and for a period of one year after the Civil War. The language of the bill was somewhat ambiguous, and with the surrender of Confederate forces military conflict had ceased. This led people to debate when the bureau would be discontinued. Consensus seemed to imply that if another bill wasn’t brought forth that the bureau would be discontinued in early 1866. In response Congress quickly got to work on a new Freedmen’s Bureau bill.

While Congress started work on a new bill, President Johnson tried to gain support for the view that the need for the bureau had come to an end. Ulysses S. Grant was called upon by the President to make a whirlwind tour of the South, and report on the present situation. The route set up was exceptionally brief and skewed to those areas best under control. Accordingly, his report said that the Freedmen’s Bureau had done good work and it appeared as though the freedmen were now able to fend for themselves without the help of the federal government.

In contrast, Carl Schurz made a long tour of the South only a few months after Grant and found the freedmen in a much different situation. In many areas the bureau was viewed as the only restraint to the most insidious of treatment of blacks. As Q.A. Gilmore stated in the report,

“For reasons already suggested I believe that the restoration of civil power that would take the control of this question out of the hands of the United States authorities (whether exercised through the military authorities or through the Freedmen’s Bureau) would, instead of removing existing evils, be almost certain to augment them.”18

While the first bill was adequate in many ways, it was rather weak in a few areas. In particular, the bill didn’t have any appropriations for officers of the bureau or direct funds earmarked for the establishment of schools. General Howard and many of his officers reported on the great need for the bureau and pushed for its existence indefinitely or at least until the freedmen were in a less vulnerable position. After listening to the reports and the recommendations of General Howard, a new bill was crafted by Senator Lyman Trumbull, a moderate Republican. The new bill proposed the bureau should remain in existence until abolished by law, provide more explicit aid to education and land to the freedmen, and protect the civil rights of blacks. The bill passed in both the Senate and House and was sent to Andrew Johnson, who promptly vetoed the measure. In his response to the Senate, Johnson wrote “there can be no necessity for the enlargement of the powers of the bureau for which provision is made in the bill.”19

While the President’s message was definitive, the veto came as a shock to many in Congress. President Johnson had been consulted prior to its passage and assured General Howard and Senator Trumbull that he would support the bill. In response to the President’s opposition, the Senate and House passed a bill that addressed some of the complaints that Johnson had with the bill, including limiting the length of the bill to two more years. Even after this watering down of the bill, it was once again vetoed. However, the new bill garnered enough support to override President Johnson’s veto. The veto of the bill and the subsequent override officially established a policy of open hostility between the legislative and executive branch. Prior to the Johnson administration, overriding a veto was extremely rare – as it had only occurred six times up until this time.20 However, after the passage of this bill it became mere commonplace for the remainder of Johnson’s term, as Congress would overturn fifteen vetoes during the less than four years Johnson was in office.

End of the Bureau

While work in the educational division picked up after the passage of the second bill, many of the other activities of the bureau were winding down. On July 25, 1868 a bill was signed into law requiring the withdrawal of most bureau officers from the states, and to stop the functions of the bureau except those that were related to education and claims. Although the educational activities of the bureau were to continue for an indefinite period of time, most state superintendent of education offices had closed by the middle of 1870. On November 30, 1870 Rev. Alvord resigned his post as General Superintendent of Education.21 While some small activities of the bureau continued after his resignation, these activities were scaled back greatly and largely consisted of correspondence. Finally due to lack of appropriations the activities of the bureau ceased in March 1871.

The expiration of the bureau was somewhat anti-climatic. A number of representatives wanted to establish a permanent bureau or organization for blacks, so that they could regulate their relations with the national and state governments.22 However, this concept was too radical to get passed by enough of a margin to override a veto. There was also talk of moving many of its functions into other parts of the government. However, over time the appropriations began to dwindle and the urgency to work out a proposal for transfer withered away in a manner similar to the bureau.

References

Alston, Lee J. and Joseph P. Ferrie. “Paternalism in Agricultural Labor Contracts in the U.S. South: Implications for the Growth of the Welfare State.” American Economic Review 83, no. 4 (1993): 852-76.

American Freedmen’s Inquiry Commission. Records of the American Freedmen’s Inquiry Commission, Final Report, Senate Executive Document 53, 38th Congress, 1st Session, Serial 1176, 1864.

Cimbala, Paul and Randall Miller. The Freedmen’s Bureau and Reconstruction: Reconsiderations. New York: Fordham University Press, 1999.

Congressional Research Service, http://clerk.house.gov/art_history/house_history/vetoes.html

Finley, Randy. From Slavery to Uncertain Freedom: The Freedmen’s Bureau in Arkansas, 1865-1869. Fayetteville: University of Arkansas Press, 1996.

Johnson, Andrew. “Message of the President: Returning Bill (S.60),” Pg. 3, 39th Congress, 1st Session, Executive Document No. 25, February 19, 1866.

McFeely, William S. Yankee Stepfather: General O.O. Howard and the Freedmen. New York: W.W. Norton, 1994.

Milton, George Fort. The Age of Hate: Andrew Johnson and the Radicals. New York: Coward-McCann, 1930.

Nash, Howard P. Andrew Johnson: Congress and Reconstruction. Rutherford, NJ: Fairleigh Dickinson University Press, 1972.

Parker, Marjorie H. “Some Educational Activities of the Freedmen’s Bureau.” Journal of Negro Education 23, no. 1 (1954): 9-21.

Q.A. Gillmore to Carl Schurz, July 27, 1865, Documents Accompanying the Report of Major General Carl Schurz, Hilton Head, SC.

Ruggles, Steven, Matthew Sobek, Trent Alexander, Catherine A. Fitch, Ronald Goeken, Patricia Kelly Hall, Miriam King, and Chad Ronnander. Integrated Public Use Microdata Series: Version 3.0 [Machine-readable database]. Minneapolis, MN: Minnesota Population Center [producer and distributor], 2004.

Shlomowitz, Ralph. “The Transition from Slave to Freedman Labor Arrangements in Southern Agriculture, 1865-1870.” Journal of Economic History 39, no. 1 (1979): 333-36.

Shlomowitz, Ralph, “The Origins of Southern Sharecropping,” Agricultural History 53, no. 3 (1979): 557-75.

Simpson, Brooks D. “Ulysses S. Grant and the Freedmen’s Bureau.” In The Freedmen’s Bureau and Reconstruction: Reconsiderations, edited by Paul A. Cimbala and Randall M. Miller. New York: Fordham University Press, 1999.

Citation: Troost, William. “Freedmen’s Bureau”. EH.Net Encyclopedia, edited by Robert Whaples. June 5, 2008. URL http://eh.net/encyclopedia/the-freedmens-bureau/

Fraternal Sickness Insurance

Herb Emery, University of Calgary

Introduction

During the nineteenth and early-twentieth century, lost income due to illness was one of the greatest risks to a wage earner’s household’s standard of living (Horrell and Oxley 2000, Hoffman 2001). Prior to the introduction of state health insurance in England in 1911, similar “patchworks of protection” — that included fraternal organizations, trade unions and workplace-based mutual benefit associations, commercial insurance contracts and discretionary charity — were available to workers in England and North America. Within the patchwork the largest source of illness-related income protection was through Friendly Societies; voluntary organizations such as fraternal orders and trade unions that provided stipulated amounts of “relief” for members who were sick and unable to work. Conditions have changed since the 1920s. Health care for family members, not loss of the family head’s income, has become the chief cost of sickness. Government social programs and commercial group plans have become the principal sources of disability insurance and health insurance. Friendly societies have largely discontinued their sick benefits. Most of them, moreover, have had declining memberships in growing populations.

Overview

This article

  • Explains the types of fraternal orders that existed in the late nineteenth and early twentieth centuries and the types of insurance they offered.
  • Provides estimates of the share of the adult male population that participated in fraternal self-help organizations – over 40 percent in the UK and almost as high in the US – and describes the characteristics of these society’s members.
  • Explains how friendly societies worked to provide sickness insurance as a reasonable price by overcoming the adverse selection and moral hazard problems, while facing problems of risk diversification.
  • Discusses the decline of fraternal sickness insurance after the turn of the twentieth century.
    • Concludes that fraternal lodges were financially sound despite claims that they were weakened by unsoundly pricing sickness insurance.
    • Examines the impact of competition from other insurers – including group insurance, government programs, labor unions, and company-sponsored sick-benefits societies.
    • Examines the impact of broader social and economic changes.
    • Concludes that fraternal sickness insurance was in greatest demand among young men and that its decline is tied mainly to the ageing of fraternal membership.
  • Closes by examining historians’ assessments of the importance and adequacy of fraternal sickness insurance.
  • Includes a lengthy bibliography of sources on fraternal sickness insurance.

Some Details and Definitions Pertaining to Fraternal Sickness Insurance

Fraternal orders were affiliated societies, or societies with branches. The branches were known by various names such as lodges, courts, tents, and hives. Fraternal orders emphasized benefits to their members rather than service to the community. They used secret passwords, rituals, and benefits to attract, bond, and hold members and distinguish themselves from members of rival orders.

Fraternal orders fell into three groups from an insurance perspective. The Masonic order and the Elks comprised the no-benefit group. Lodges in these orders often aided their members on a discretionary basis; that is where members were determined to be in “need” of assistance. They did not provide stipulated stated) insurance benefits (or relief).

econd group, the friendly societies, provided stipulated sick and funeral benefits to their members. The Independent Order of Odd Fellows, the Knights of Pythias, the Improved Order of Red Men, the Loyal Order of Moose, the Fraternal Order of Eagles, the Ancient Order of Foresters and the Foresters of America were the largest orders in this group.

A third group, the life-insurance orders, provided stipulated life-insurance, endowment, and annuity benefits to their members. The Maccabees, the Royal Arcanum, the Independent Order of Foresters, the Woodmen of the World, the Modern Woodmen of America, the Ancient Order of United Workmen, and the Catholic Order of Foresters were major orders in this group. In historical usage, the term “fraternal insurance” meant life insurance, but not sickness and funeral (burial) insurance.

The boundaries between the categories blur on close examination. Certain friendly societies, such as the Knights of Pythias and the Improved Order of Red Men, offered optional life-insurance at extra cost through their centrally-administered endowment branches. Certain insurance orders, such as the Independent Order of Foresters, offered optional sick and funeral benefits at extra cost through centrally-administered separate sickness and funeral funds. In other cases, the members of a society had privileged access to third-party insurance. The Canadian Odd Fellows Relief Association, for example, was entirely separate from the IOOF, but sold life policies exclusively to Odd Fellows.

Friendly Societies and Sickness Insurance

From the late eighteenth and early nineteenth centuries, friendly societies were often local lodges with no affiliations to other lodges. Over time, larger national and sometimes international orders that consisted of local lodges affiliated under jurisdictional grand lodges and national or international supreme bodies displaced the purely local lodge.1 The Ancient Order of Foresters was one of England’s larger affiliated Orders and it had subordinate Courts and jurisdictions in North America. The first Independent Order of Odd Fellows (IOOF) subordinate lodge in North America opened in Baltimore in 1819 under the jurisdiction of the British IOOF Manchester Unity. In the 1840s, the North American Odd Fellows seceded from the IOOFMU and founded the IOOF Sovereign Grand Lodge (SGL) that had jurisdiction over state and province level Grand Lodge jurisdictions in North America.

Membership Estimates

For the United Kingdom near the peak of the self-help movement in the 1890s, estimates of participation in friendly societies and trade unions for insurance against the costs of sickness and/or burial range from as many as 20 percent of the population (Horrell and Oxley 2000), to 41.2 percent of adult males (Johnson 1985) to one-half or more of adult males and as many as two-thirds of workingmen (Riley 1997). Estimates for participation in self-help organizations in North America are somewhat lower but they suggest a similar importance of friendly societies for insuring households against the costs of sickness and burial. Beito (1999) argues that a conservative estimate of participation in fraternal self-help organizations in the United States would have one of three adult males as a member in 1920, “including a large segment of the working class.” Millis (1937) reports that 30 per cent of Illinois wage-earners had market insurance for the disability risk in 1919 where fraternal organizations were the principal source of market insurance.

Characteristics of Friendly Society Members

Studies of British friendly societies suggest that friendly society membership was the “badge of the skilled worker” and made no appeal whatever to the “grey, faceless, lower third” of the working class (Johnson 1985, Hopkins 1995, Riley 1997). The major friendly societies in North America found their market for insurance among white, protestant males who came from upper-working-class and lower-middle-class backgrounds. Not surprisingly, the composition of local lodge memberships bore a resemblance to that of the local working population. Most Odd Fellows in Canada and the United States, however, were higher-paid workers, shop keepers, clerks, and farmers (Emery and Emery 1999). As Theodore Ross, the SGL’s grand secretary, noted in 1890, American Odd Fellows came from “the great middle, industrial classes almost exclusively.” Similarly, studies for Lynn, Massachusetts and Missouri found a heavy working-class representation among IOOF lodge memberships (Cumbler, 1979, p.46; Thelen, 1986, p. 165). In Missouri the social-class composition of Odd Fellows was similar to those for the Knights of Pythias and three life-insurance orders (the Ancient Order of United Workmen, the Maccabees, and the Modern Woodmen of the World). Beito’s (2000) work suggests that while the poor, non-whites and immigrants were not usually members of the larger fraternal orders’ memberships, they had their own mutual aid organizations.

Friendly Insurance: Modest Benefits at Low Cost

Friendly society sick benefits exemplified classic features of working-class insurance: a low cost and a small, fixed benefit amount equal to part of the wages of a worker with average wages. By contrast, commercial policies for middle-class clients offered insurance in variable amounts up to full-income replacement, at a cost beyond the reach of most workers. The affiliated orders established Constitutions which standardized rules and arrangements for sick benefit provision. For most of the friendly societies, local lodges or courts paid the sick claims of its members. Subject to requirements of higher bodies, the local lodge set the amounts of its weekly benefit, joining fees, and membership dues. The affiliation of lodges across locations also resulted in members having portable sickness insurance. If a member moved from one location to another, he could transfer his membership from one lodge to another within the organization.

Claiming Benefits

To claim benefits in the IOOF, a member had to provide his lodge with notice of sickness or disability within a week of its commencement. On receiving notice of a brother’s illness, the member of the visiting committee was to visit the brother within twenty-four hours to render him aid and confirm his sickness. Subsequently, the lodge visitors reported weekly on the brother’s condition until he recovered.

Strengths of Friendly Society’s Insurance: Low Overhead, Effective Monitoring

The local lodge or court system of the affiliated friendly societies like the IOOF and the Ancient Order of Foresters had important strengths for the sickness-insurance market. First, it had low overhead costs. Lodge members, not paid agents, recruited clients. Nominally-paid or unpaid lodge officers did the administrative work. Second, the intrusive methods of monitoring within the lodge system helped friendly societies to respond effectively to two classic problems in sickness insurance: adverse selection and moral hazard.

Overcoming the Adverse Selection Problem

An adverse selection of customers for sickness insurers refers to the fact that when the insurance is priced to reflect the average risk of a specified population, unhealthy persons (above average risk of sickness) have more incentive than healthy persons to purchase sickness insurance. Adverse selection in fraternal memberships was potentially a large problem as many orders had membership dues that were not scaled according to age despite the reality that the risk of sickness increased with age. To keep claims and costs manageable, an insurer needs ways to screen out poor risks. To this end, many organizations scaled initiation fees by the age of an initiate to discourage applications from older males, who had above-average sickness risk. In other cases, fraternal lodges or courts scaled the membership dues by the age at which the member was initiated. In addition, lodge-approved physicians often examined the physical conditions and health histories of applicants for membership. Lodge committees investigated the “moral character” of applicants.

Overcoming the Moral Hazard Problem

Sickness insurers also faced the problem of moral hazard (malingering) — an insured person has an incentive to claim to be disabled when he is not and an incentive to not take due care in avoiding injury or illness. The moral hazard problem was small for accident insurance as disability from accident is definite as to time and cause, and external symptoms are usually self-evident (Osborn, 1958). Disability from sickness, by contrast, is subjective and variable in definition. Friendly societies defined sickness, or disability, as the inability to work at one’s usual occupation. Relatively minor complaints disabled some individuals, while serious complaints failed to incapacitate others. The very possession of sickness insurance may have increased a worker’s willingness to consider himself disabled. The friendly society benefit contract dealt with this problem in several ways. First, by having one to two week waiting periods, and much less than full earnings replacement, self-help benefits required the disabled member to co-insure the loss which reduces the incentive to make a claim. In many fraternal orders, members receiving benefits could not drink or gamble and in some cases were not allowed to be away from their residence after dark. The activities of the lodge visiting committee helped to ward off false claims. In addition, fraternal ideology emphasized a member’s moral responsibility for not making a false claim and for reporting on brothers who were falsely claiming benefits.

Problem with Lack of Risk Diversification

On the negative side, the fraternal-lodge system made little provision for risk diversification. In the IOOF, the Knights of Pythias and the Ancient Order of Foresters, each subordinate lodge (or Court) was responsible for the sick claims of its members. Thus in principle, a high local rate of sick claims in a given year could shock a lodge’s financial condition. Certain commercial practices might have reduced the problem. For example, a grand lodge could have pooled the risks from all lodges in a central fund. Alternatively, it could have initiated a scheme of reinsurance, whereby each lodge assumed a portion of the claims in other lodges. Yet any centralization stood to weaken a friendly society’s management of adverse selection and the moral hazard. The behaviour of lodge members was observed to be a function of the structure of the benefit system. In 1908, for example, when the IOOF, Manchester Unity, in New South Wales, Australia established central funds for sick and funeral benefits, the effect was to turn the lodges into “mere collection agencies.” Participation in lodge affairs fell off, and members developed a more selfish attitude to claims. “When the lodges administered sick pay,” Green and Cromwell observed, “the members knew who was paying — it was the members themselves. But once ‘head office’ took over, the illusion that someone else was paying made its entry” (Green and Cromwell, 1984, pp. 59-60).

Commercial Insurers Couldn’t Match Friendly Societies in the Working-Class Sickness Insurance Market

On balance friendly societies provided an efficient delivery of working-class sickness insurance that commercial insurers could not match. Without the intrusive screening methods and low overhead of the decentralized lodge system, commercial insurers could not as easily solve the problems of moral hazard and adverse selection. “The assurance of a stipulated sum during sickness,” the president of the Prudential Insurance Company conceded in 1909, “can only safely be transacted ? by fraternal organizations having a perfect knowledge of and complete supervision over the individual members.”2

The Decline of Fraternal Sickness Insurance

By the 1890s, friendly societies in North America were withdrawing from the sickness insurance field. The IOOF imposed limits on the length of time that full sick benefits had to be paid, and one or two week waiting periods before the payment of claims began. In 1894, the Knights of Pythias eliminated their constitutional requirement that all subordinate lodges be required to pay stated sick benefits. By the 1920s, the IOOF followed the Knights of Pythias and eliminated its compulsory requirement for the payment of stipulated sick benefits. In England, where friendly societies opposed government pension and insurance schemes in the 1890s, they did not stand in the way of the introduction of Old Age Pensions in 1908 and compulsory state health insurance in 1911. Thus, the decline of fraternal sickness insurance pre-dates the Depression of the 1930s and for many organizations dates from at least the 1890s.

Unsound Pricing Practices?

Why did sickness insurance provided by friendly societies decline? Perhaps friendly society sickness insurance was a casualty of unsound pricing practices in the presence of ageing memberships. To illustrate this argument, consider the IOOF benefit contract. On the one hand, the incidence and duration of sickness claims increased with a member’s age. On the other hand, most IOOF lodges set quarterly dues at a flat rate, rather than by the member’s age, or the member’s age at joining. As the IOOF lodge benefit arrangement was essentially insurance benefits provided on a pay-as-you-go basis (current revenues are used to meet current expenditures), this posed little problem during a lodge’s early years when its members were young and had low sick-claim rates. Over time, however, the members aged and their claim rates showed a rising trend. When revenues from level dues became insufficient to cover claims, the argument goes, the lodge’s insurance provision collapsed. Thus fraternal-insurance provision was essentially a failed, experimental phase in the development of sickness and health insurance.

Lodges Were Financially Sound Despite Non-Actuarial Pricing

By contrast with the above scenario, evidence for British Columbia showed that the IOOF lodges were financially sound, despite their non-actuarial pricing practices (Emery 1996). Typically a lodge accumulated assets during its first years of operation, when its members were young and had below-average sickness risk. In later years, as its membership aged and the cost of claims exceeded income from members’ dues and fees, income from investments made up the difference. Consequently none of British Columbia’s twenty lodge closures before 1929 resulted from the bankruptcy of lodge assets. Similarly none of the British Columbia lodges had a significant probability of ruin from high claims in a particular year.

Non-payment of dues also helped lodge finances. A member became ineligible for benefits if he fell behind in his dues. If he fell far enough behind on his dues, his lodge could suspend him from membership or declare him “ceased” (dropped from membership). A member’s unpaid dues continued to accumulate after suspension. Thus a suspended member had to pay the full, accumulated amount (or a maximum sum, if his grand lodge set one), to get reinstated. Lodges did not pay sick claims to members who were in arrears.

Turnover of Membership Explains How They Remained Financially Sound

When members did not pay their dues owing to be reinstated, their exit from membership relieved lodge financial pressures. Most men joined fraternal lodges when they were under age 35 and for the members who quit, they typically did so before age 40.3 Thus, a substantial proportion of initiates into fraternal memberships did not remain in the membership long enough for their rising risk of illness after age 40 to pose a problem for lodge finances. On average, they belonged when they were most likely net payers and quit before they were net recipients. These features of the substantial turnover in fraternal memberships helps to explain how fraternal lodges were actually going concerns when official actuarial valuations of lodge finances and reserves inevitably showed that the lodges had actuarial deficits at the prevailing levels of dues. These valuations assessed the adequacy of accumulated reserves and dues revenues expected over the remaining lifetimes of the membership at the time of the valuation for meeting the expected benefits of the membership over the remainder of the members’ lifetimes. The assumption that all current members would remain in the membership until death always resulted in valuations that showed the sick benefits were inadequately, if not hazardously, priced. The fact that many members were not lifetime members meant that the pricing was not so hazardous.

Competition from Other Insurers

If poor finances cannot explain the decline of friendly society sickness benefits, then perhaps increasing competition from government and commercial insurance arrangements can explain the decline. Trends for competition do not provide strong support for this explanation for the decline of friendly society sickness-insurance. Competition for friendly societies came from commercial-group plans, government workmen’s compensation programs, trade unions and industrial unions, company-sponsored mutual benefit societies, and other fraternal orders that provided life insurance, or non-stipulated (discretionary) relief.

Group Insurance

Group insurance used the employer’s mass-purchasing power to provide low-cost insurance without a medical examination (Ilse, 1953, chapter 1). Often the employer paid the premium. Otherwise employees paid part of the cost through payroll deductions, a practice that kept the insurer’s overhead costs low. The insurance company made the group-plan contract with the employer, who then issued certificates to individuals in the plan. Group plans compared favourably with IOOF benefits in terms of cost and the amount of the benefit. They also gave a viable commercial solution to the problems of adverse selection and moral hazard.

During the 1920s, however, group plans were available to few workers. In the United States, they missed men who were self-employed or employed in firms with less than fifty workers. The employee’s coverage ceased if he left the company. It also stopped if either the insurer or the employer did not renew the contract at the end of its standard one-year term. When coverage ceased, the employee might find himself too old or unhealthy to obtain insurance elsewhere. More importantly, the challenge of commercial-group insurance was just beginning during the 1920s. By 1929 Americans and Canadians in group plans were less numerous than the number of Odd Fellows alone.

Government Programs

Government programs such as compulsory sickness insurance dated from 1883 in Germany and 1911 in Britain. Between 1914 and 1920, eight state commissions, two national conferences, and several state legislatures attended to the issue in the United States (see Armstrong, 1932, Beito 2000, Hoffman 2001). Despite these initiatives, no American or Canadian government — national, state, or provincial — adopted compulsory sickness insurance until the 1940s (Osborn, 1958, chapter 4; Ilse, 1953, chapter 8).

Workmen’s compensation was another matter. During the years 1911-25, forty-two of the forty-eight American states and six of Canada’s nine provinces passed workmen’s compensation laws (Weis, 1935; Leacy, 1983). Nevertheless, half of all state laws in 1917, and a fifth of them in 1932, applied only to persons in hazardous occupations. None of the various state laws covered employees of interstate railways. In twenty-four states, the law exempted small businesses; in five it exempted public employees. In some states the law was so hedged with restrictions that the scale of benefits was uncertain. Although comprehensive by American standards, Ontario’s law omitted persons in farming, wholesale and retail establishments, and domestic service (Guest, 1980).

Overall, government programs provided negligible competition for friendly society sick benefits during the 1920s. No state or province provided for compulsory sickness insurance. Workmen’s compensation laws were commonplace, but missed important parts of the workforce. More importantly, industrial accidents accounted for just ten percent of all disability (Armstrong, 1932, pp. 284ff; Osborn, 1958, chapter 1).

Labor Unions

Labor unions traditionally used benefits to attract members and hold the loyalty of existing members. During the 1890s miners’ unions in the American west and British Columbia reportedly devoted more time to mutual aid than to collective bargaining (Derickson, 1988, chapter 3). By 1907 nineteen unions, accounting for 25 per cent of organized labor in the United States, offered sick benefits (Rubinow, 1913, chapter 18). During the 1920s, however, the friendly society competition from unions followed a declining trend. After years of steady growth, for example, the membership of American trade unions dropped by 32 per cent between 1920 and 1929.4 Similarly, the membership of Canadian trade unions fell by 23 per cent between 1919 and 1926. In an unprecedented development in 1926, the street railway workers’ union in Newburgh, New York, obtained commercial group-sickness coverage through a collective bargaining agreement with the employer (Ilse, 1953, ch. 13). Although rare during the 1920s, this marked the start of collective bargaining for sick benefits rather than direct union provision.

Company-sponsored Sick-Benefit Societies

Company-sponsored sick-benefit societies, often known as Mutual Benefit Associations, originated in a tradition of corporate paternalism during the 1870s (Brandes, 1976; Brody, 1980; Zahavi, 1988; McCallum, 1990). The United States had more than 500 such societies by 1908. Typically these societies obtained most or all of their funds from employee dues, not company funds, ostensibly to encourage the workers to be self-reliant.

Participation was voluntary in 85 per cent of 461 American societies surveyed on the eve of the First World War. Eligibility for membership commonly required a waiting period (a minimum period of permanent employment). A major disadvantage, compared to fraternal order sickness benefits, was that coverage ceased when the employee left the firm. In the amount and cost of the benefit (benefits of $5 to 6 per week for up to thirteen weeks for annual dues of $2.50 to $6 per year) the societies were similar to fraternal lodges.

The institutions were part of a larger program of corporate welfarism that had developed during the First World War in conditions of labor scarcity, labor unrest, rising union membership, and government management of capital-labor relations. At the war’s end, however, the economy slumped, the supply of labor became abundant, unions became cooperative and were losing members, and wartime government-economic management ended. In the new circumstances, the pressure on businessmen to promote welfare programs abated, and the membership of company-sponsored sick-benefit societies entered a flat trend.5 By 1929 the societies were still a minority phenomenon. They existed in 30 percent of large firms (250 or more employees), but in just 4.5 percent of small firms, which accounted for half the industrial work force (Jacoby, 1985, ch.6).

Competition from Insurance Orders

Friendly societies (orders with sick and funeral benefits) also competed with the insurance orders (orders with life and/or annuity benefits in small amounts) that offered an optional sick benefit. The Maccabees, Woodmen of the World, Independent Order of Foresters, and the Royal Arcanum were some main rivals in the insurance-order group for the friendly societies.

The insurance-order sick benefit had several features of commercial insurance and compared poorly with the friendly-society benefit. In many cases, these orders paid sick claims from a centrally-administered “sick and funeral fund,” not local lodge funds. They financed sick claims by requiring monthly premiums, paid in advance, not quarterly dues. Their central authority could cancel the member’s sickness insurance by giving him notice; in the IOOF, by contrast, the member retained his coverage as long as his dues were paid up. A member could draw benefits for a maximum of twenty-six weeks in the Maccabees and a maximum of twelve weeks in the IOF. During the 1920s, competition from fraternal life insurance orders showed a flat or declining trend. In terms of membership size, the largest friendly society, the IOOF, gained ground on all competitors in the insurance-order group.

Broader Economic and Social Trends in the 1920s

Another popular explanation for the decline of friendly society sick benefits is one of “changing times” where friendly societies provided an outdated social arrangement. Here fraternal orders were multiple-function organizations that offered their members a variety of social and indirect economic benefits, as well as insurance. Thus in principle, the declining trend for IOOF sickness insurance could have been a by-product of social changes during the 1920s that were undermining the popularity of fraternal lodges (Dumenil, 1984; Brody, 1980; Carnes, 1989; Charles, 1993; Clawson, 1989; Rotundo, 1989; Burley, 1994; Tucker, 1990). For example, the fraternal-lodge meeting faced competition from new forms of entertainment (radio, cinema, automobile travel). The development of installment buying and consumerism undermined fraternal culture and working-class institutional life. Trends in sex relations sapped the appeal of all-male social activities and fraternal ritual of lodge meetings. The rising popularity of luncheon-club organizations (Kiwanis, Lions, Kinsmen) expressed a popular shift to a community-service orientation, as opposed to the fraternal tradition of services to members. The luncheon clubs also exemplified a popular shift to class-specific organizations, at the expense of fraternal orders, which had a cross-class appeal. Finally, with the waning popularity of lodge meetings, lodge nights became less useful occasions for making business contacts.

Rising Health-Care Costs

The decade also gave rise to two important insurance-related developments. The one, described above, was the diffusion of commercial-group plans for income-replacement insurance. The other was the emergence of health-care services as the principal cost of sickness (Starr, 1982). In 1914 lost wages had been between two and four times the medical costs of a worker’s sickness, or about equal if one included the worker’s family. During the 1920’s, however, the medical costs soared, by 20 per cent for families with less than $1,200 income and 85 per cent for families with incomes between $1,200 and $2,500. The medical costs were highly variable as well as rising. Effectively, a serious hospitalized illness could consume a third to a half of a family’s annual income.

External Changes and Competition Don’t Explain the Decline of Fraternal Sickness Insurance Well

Changes during the 1920s, however, provide a poor explanation for the declining trend for the friendly-society sick benefit in North America. First, the timing was wrong. On the one hand, the declining trend dated from the 1890s, not the 1920s. On the other hand, key developments during the decade were at an early stage. By 1929 commercial-group insurance was established, but not widespread. Similarly, health insurance scarcely existed, despite the rising trend for the health-care costs. As Starr explains, health insurance presented an extreme problem of moral hazard that insurers did not solve until the 1930s.6 Second, we lack a theory to explain why the waning of interest in lodge meetings would have caused a declining trend for the sick benefit. Finally, the “changing times” explanation, on its own, incorrectly portrays the sick benefit as a static product that became less relevant in an exogenously changing society and economy.

Young Men Value Sickness Insurance

If external pressure did not cause the decline of the friendly society sick benefits, then why did friendly society sickness insurance decline? Emery and Emery (1999) argue that the sick benefit was primarily in demand amongst men who lacked alternatives to market insurance. For example, at the start of their working lives, male breadwinners had no older children to earn secondary incomes (family insurance). They also lacked savings to cover the disability risk (self-insurance). Thus men joined the Odd Fellows when they were “young”. They then quit after a few years as family and self-insurance alternatives to market insurance opened up to them. Further, as the friendly society sick benefit was a form of precautionary saving, demand for it would have declined as a household accumulated wealth.

Aging Membership and the Declining Demand for Sickness Insurance

Over time, fraternal memberships were ageing as rates of initiation slowed and suspensions from membership continued on at steady rates. Initiates and suspended members were disproportionately from the lower age groups in the memberships thus slower membership growth in the friendly societies represented ageing memberships. In this context of the demand for the sick benefit over the life-cycle, ageing fraternal memberships became less attached to the sick benefit. Thus, as the memberships aged, their collective preferences changed. Older members had priorities and objectives other than sickness insurance.

Friendly Societies and Compulsory State Insurance

Despite the similarity of organizations and the high rates of participation in them in the late nineteenth and early twentieth centuries, the role of voluntary self-help organizations like the friendly societies, diverged on either side of the Atlantic. In England, the “administrative machinery” of friendly societies was the vehicle for introducing and delivering compulsory government sickness/health insurance under the Approved Societies system that prevailed from 1911 to 1944 at which time the government centralized the provision of health insurance (Gosden 1973). In North America the friendly society sickness insurance arrangement declined from at least the 1890s despite growing memberships in the organizations up to the 1920s. While the friendly society sickness insurance declined, government showed little activity in the health/sickness insurance field. Only through the 1930s did commercial and non-profit group health and hospital insurance plans and government social programs rise to primacy in the sickness and health insurance field.7

Critics of Friendly Societies’ Voluntary Self-Help

Critics of voluntary self-help arrangements for insuring the costs of sickness argue that voluntary self-help was a failed system and its obvious short-comings and financial difficulties were the impetus for government involvement in social insurance arrangements. (Smiles 1876, Moffrey 1910, Peebles 1936, Gosden 1961, Gilbert 1965, Hopkins 1995, Horrell and Oxley 2000, Hoffman 2001). Horrell and Oxley (2000) argue that friendly society benefits were too paltry to offer true relief. Hopkins (1995) argues that for those workers who could afford it, self-help through friendly society membership worked well but too much of the working population remained outside the safety net due to low incomes. At best, the critics applaud the intent of individuals taking the initiative to protect themselves and for friendly societies in pioneering the preparation of actuarial data on morbidity and sickness duration that aided commercial insurers in insuring the sickness risk in a financially sound way.

Positive Assessments of Friendly Societies’ Roles

In contrast, Beito (2000) presents a positive assessment of fraternal mutual aid in the United States, and hence working-class self-help, for dealing with the economic consequences of poor health. Beito argues that fraternal societies in America extended social welfare service, such as insurance, to the poor (notably immigrants and blacks) and working class Americans who otherwise would not have had access to such coverage. Far from being an inadequate form of safety net, fraternal mutual aid sustained needy Americans from cradle to grave and over time, extended the range of benefits provided to include hospitals and homes for the aged as the needs in society arose. Beito suggests that changing cultural attitudes and the expanding scale and scope of a paternalistic welfare state undermined an efficient and viable fraternal social insurance arrangement.

Government’s Role in “Crowding Out” Self-Help

Similarly, Green and Cromwell (1984) argue that state paternalism crowded out efficient fraternal methods of social insurance in Australia. Hopkins (1995) suggests that while friendly societies were effective for aiding a sizable portion of the working class, working class self-help “had been weighed in the balance and found wanting” since it failed to provide income protection for the working classes as a whole. Hopkins concludes that compulsory state aid inevitably had to replace voluntary self-help to “spread the net over the abyss” to protect the poorest of the working class. Similar to Beito’s view, Hopkins suggests that equity considerations were the reason for undermining otherwise efficient voluntary self-help arrangements. Beveridge (1948) expresses dismay over the crowding out of friendly societies as social insurers in England following the centralization of compulsory government health insurance arrangements in 1944.

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Footnotes

1 See Gosden (1961), Hopkins (1995) and Riley (1997) for excellent discussions of the evolution of friendly societies in England.

2 Cited in Starr (1982, p. 242). British industrial-life companies did not offer sickness insurance until 1911, when government allowed them qualify as approved societies under the National Health Act. In acting as approved societies, their motive was not to write sickness insurance, but rather to protect their interest in burial insurance. See Beveridge, 1948, p. 81; Gilbert, 1966, p. 323.

3 Emery and Emery (1999). Riley (1997) shows that British men in their twenties were the majority of initiates and members who exited did so within “a few years of joining”.

4 Data for unions are from Wolman, 1936, pp. 16, 239 and Leacy, 1983, series E175. By 1931 just 10 per cent of non-agricultural workers in the United States were unionized, down from 19 per cent in 1919 (Bernstein, 1960, chapter 2). Unions affiliated with the American Federation of Labor accounted for approximately 80 per cent of the total membership of American labor unions (Wolman, p.7). The reported AFL membership statistics are high. Unions paid per capita tax on more than their actual paid-up memberships for prestige and to maintain their voting strength at AFL meetings. In 1929, the United Mine Workers, an extreme case, reported 400,000 members, but probably had just 262,000 members, including 169,000 paid-up members and 93,000 “exonerated” members (kept on the books because they were unemployed or on strike).

5 Brandes (1976, chapter 10) places their membership at 749,000 in 1916 and 825,000 in 1931.

6 The probable costs of health-care claims were hard to predict (Starr, 1982, pp. 290-1). As with income-replacement insurance, sickness was not a well-defined condition. In addition, the treatment costs were within the insured’s control. They also were within the control of the physician and hospital, both of which could profit from additional services and raise prices as the patient’s ability to pay increased.

7 Employer-purchased/provided group plans came to be the most common source of the health insurance coverage in the United States (Applebaum, 1961; Follmann, 1965; Davis, 1989). In Canada, provincial government health insurance plans, with universal coverage, replaced the work-place based arrangements in the 1960s.

Citation: Emery, Herb. “Fraternal Sickness Insurance”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL http://eh.net/encyclopedia/fraternal-sickness-insurance/